In macroeconomics, which of the following is a main cause of inflation consistent with demand-pull inflation?

• A. A decrease in aggregate demand that reduces the overall price level
• B. An increase in aggregate demand that pushes output above potential GDP
• C. A decrease in the money supply that raises interest rates and reduces spending
• D. An increase in labor productivity that shifts short-run aggregate supply to the right

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of demand-pull inflation. Demand-pull inflation occurs when aggregate demand in an economy increases faster than aggregate supply, leading to upward pressure on the overall price level.
2. Step 2: Identify the role of aggregate demand (AD) and aggregate supply (AS) in the price level. When AD increases and exceeds the economy's potential output (potential GDP), it creates excess demand, pushing prices up.
3. Step 3: Analyze each option in terms of its effect on aggregate demand and supply: - A decrease in aggregate demand lowers the price level, so it does not cause demand-pull inflation. - An increase in aggregate demand pushing output above potential GDP fits the demand-pull inflation scenario. - A decrease in money supply reduces spending and demand, lowering inflation pressure. - An increase in labor productivity shifts short-run aggregate supply right, which tends to lower prices, not raise them.
4. Step 4: Conclude that the main cause of demand-pull inflation is an increase in aggregate demand that pushes output above potential GDP, as this creates excess demand and upward pressure on prices.
5. Step 5: Summarize that demand-pull inflation is driven by demand-side factors, specifically an increase in aggregate demand relative to aggregate supply, rather than supply-side improvements or decreases in demand.