Which of the following is a cause of demand-pull inflation?

• A. An increase in aggregate demand caused by expansionary fiscal policy (e.g., higher government spending).
• B. A decrease in aggregate demand caused by higher taxes and lower government spending.
• C. An increase in aggregate supply caused by a fall in input prices, shifting short-run aggregate supply to the right.
• D. A recession that raises unemployment and reduces consumer spending.

Answer: (A)

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 prices.
2. Step 2: Identify what causes aggregate demand to increase. Aggregate demand can increase due to factors such as higher government spending, lower taxes, increased consumer confidence, or expansionary monetary policy.
3. Step 3: Analyze the options given. Expansionary fiscal policy, such as higher government spending, directly increases aggregate demand, which can cause demand-pull inflation.
4. Step 4: Contrast this with other options. A decrease in aggregate demand (due to higher taxes or lower government spending) would reduce inflationary pressure, not cause demand-pull inflation. Similarly, an increase in aggregate supply (due to lower input prices) shifts supply rightward, reducing inflation. A recession reduces demand and inflationary pressure.
5. Step 5: Conclude that the correct cause of demand-pull inflation is an increase in aggregate demand caused by expansionary fiscal policy, such as higher government spending.