Chapter 33, Problem 7MCQ

To determine

The correct option for demand-pull inflation.

Answer to Problem 7MCQ

From the available options, the correct option is an increase in aggregate demand.

Explanation of Solution

When aggregate supply decreases or remains the same but aggregate demand would increase, this type of inflation is demand-pull inflation. It is not particular that there is always a decrease in aggregate supply as it can remain constant too. In this inflation, the price will go up due to an increase in demand as the supply of goods and services is not sufficient to meet those demands.

When there is an increase in wages then it is a situation that can cause cost-push inflation, not demand-pull inflation but it does not mean that people have very little money.

And, the central bank uses the contractionary monetary policy to control inflation which restricts liquidity.

Therefore, the correct option is d (an increase in aggregate demand) and all other options are incorrect.

Economics Concept Introduction

Introduction: Price level is the average current price of goods and services in the economy that are produced in a particular interval. When supply decreases or remains constant with the increase in aggregate demand, this is demand-pull inflation.