What describes demand pull inflation?

• A. When there is too much demand in the economy. This means that there are too many people chasing too few goods. So this excess demand pulls the prices up.
• B. When prices fall due to reduced demand.
• C. When the government fixes prices artificially.
• D. When supply costs decline, leading to lower inflation.

Answer: (A)

Demand-pull inflation happens when overall demand for goods and services in the economy grows faster than the economy’s ability to produce them. With more people wanting to buy than there are goods and services available at current prices, producers raise prices, pulling the price level up. This situation often arises when incomes rise, consumer confidence is high, or government spending and exports boost total demand, especially when there isn’t much spare productive capacity to meet the extra demand. The result is a broad rise in prices across the economy, not a rise in just one item. By contrast, prices can fall if demand weakens (deflation) or if costs fall due to cheaper inputs (a supply-side factor), and government price controls can distort markets rather than describe a natural demand-driven rise in prices.