Which statement describes demand-pull inflation?

Which statement describes demand-pull inflation?

• A. Import prices fall
• B. Costs rise due to raw materials
• C. Demand is too high, so prices increase.
• D. Government spending cuts

Answer: (C)

Demand-pull inflation happens when the overall demand for goods and services in an economy is higher than what the economy can produce at current prices. When demand is too high, producers can raise prices to balance the excess demand, leading to a higher price level across the economy. This is exactly what the statement describes: demand is too high, so prices increase. By contrast, falling import prices would usually ease inflation, rising costs from raw materials reflect a cost-push effect pushing prices up for that reason, and government spending cuts tend to reduce demand rather than create inflation.

Demand-pull inflation happens when the overall demand for goods and services in an economy is higher than what the economy can produce at current prices. When demand is too high, producers can raise prices to balance the excess demand, leading to a higher price level across the economy. This is exactly what the statement describes: demand is too high, so prices increase. By contrast, falling import prices would usually ease inflation, rising costs from raw materials reflect a cost-push effect pushing prices up for that reason, and government spending cuts tend to reduce demand rather than create inflation.