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Demand pull inflation is likely to be caused by

...

Demand pull inflation is likely to be caused by

A.

An increase in the cost of factors inputs

B.

Increase in the income tax rate

C.

Increase in bank lending rates

D.

Increasingly large budget deficit

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Correct answer is A

There are five causes for demand-pull inflation:

  1. A growing economy: When consumers feel confident, they will spend more, take on more debt by borrowing more. This leads to a steady increase in demand, which means higher prices.  
  2. Asset inflation: a sudden rise in exports, which translates to an undervaluation of the involved currencies
  3. Government spending: When the government opens up its pocketbooks, it drives up prices. Military spending prices may go up when the government starts to buy more military equipment.
  4. Inflation expectations: forecasts and expectations of inflation, where companies increase their prices to go with the flow of the expected rise
  5. More money in the system: demand-pull inflation is produced by an excess in monetary growth or an expansion of the money supply. Too much money in an economic system with too few goods makes prices increase.

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