Demand-pull inflation is associated with: decreasing total spending (demand). increasing total spending (demand). decreasing costs of production (supply). increasing costs of production (supply).
The Correct Answer and Explanation is:
Correct Answer: Increasing total spending (demand).
Explanation:
Demand-pull inflation occurs when the overall demand for goods and services in an economy exceeds the economy’s productive capacity. This type of inflation is driven by an increase in total spending by consumers, businesses, and the government, which pushes prices upward.
When demand in the economy grows faster than the supply of goods and services, producers struggle to meet the increased demand. As a result, they raise prices. This scenario typically happens during periods of economic expansion when consumer confidence is high, unemployment is low, and incomes are rising. With more disposable income and access to credit, consumers are more likely to spend, causing aggregate demand to rise.
Several factors can contribute to increasing total spending. These include tax cuts, lower interest rates, increased government spending, or rising exports. For example, when the central bank lowers interest rates, borrowing becomes cheaper, encouraging consumers and businesses to take loans and spend more. Similarly, if the government increases spending on infrastructure projects, it injects more money into the economy, leading to greater demand for materials, labor, and related services.
Unlike cost-push inflation, which is caused by rising production costs such as wages and raw materials, demand-pull inflation is rooted in strong consumer demand. It is often considered a sign of a healthy, growing economy but can become problematic if left unchecked. Persistent demand-pull inflation can erode purchasing power and reduce the value of money, leading to a need for monetary policy intervention such as increasing interest rates.
In summary, demand-pull inflation is associated with increasing total spending. It reflects a situation where demand outpaces supply, leading to upward pressure on prices across the economy.
