What is demand-pull inflation?

What is demand-pull inflation?

• A. A decrease in overall demand for goods
• B. Inflation due to increased supply
• C. When demand exceeds supply, driving prices up
• D. Stagnation of prices despite high demand

Answer: (C)

Demand-pull inflation occurs when the overall demand for goods and services in an economy exceeds the available supply. This imbalance results in increased competition for the limited goods, causing producers to raise prices to balance the demand with supply levels. As consumers are willing to pay more for the goods they desire, suppliers increase their prices, leading to inflation. The scenario described in option C captures this phenomenon accurately, as it illustrates the core concept of demand exceeding supply, which is the fundamental driver of demand-pull inflation. This situation often occurs in a growing economy where consumers have more disposable income, leading to heightened demand across various sectors. In contrast, other options do not align with the definition of demand-pull inflation. A decrease in overall demand contradicts the principle since inflation arises from high demand, not low. Inflation due to increased supply describes a different economic situation, known as cost-push inflation, where rising production costs lead to higher prices, not excess demand. Lastly, stagnation of prices despite high demand indicates a lack of response in price levels, which is not characteristic of demand-pull inflation, where rising demand is expected to drive prices up.

Demand-pull inflation occurs when the overall demand for goods and services in an economy exceeds the available supply. This imbalance results in increased competition for the limited goods, causing producers to raise prices to balance the demand with supply levels. As consumers are willing to pay more for the goods they desire, suppliers increase their prices, leading to inflation.

The scenario described in option C captures this phenomenon accurately, as it illustrates the core concept of demand exceeding supply, which is the fundamental driver of demand-pull inflation. This situation often occurs in a growing economy where consumers have more disposable income, leading to heightened demand across various sectors.

In contrast, other options do not align with the definition of demand-pull inflation. A decrease in overall demand contradicts the principle since inflation arises from high demand, not low. Inflation due to increased supply describes a different economic situation, known as cost-push inflation, where rising production costs lead to higher prices, not excess demand. Lastly, stagnation of prices despite high demand indicates a lack of response in price levels, which is not characteristic of demand-pull inflation, where rising demand is expected to drive prices up.