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

• A. A decrease in the overall price level caused by falling consumer spending
• B. An increase in unemployment caused by reduced hiring across the economy
• C. A decrease in the money supply that reduces nominal spending
• D. An increase in aggregate demand that pushes output above potential GDP

Answer: (D)

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 exceeds aggregate supply, leading to upward pressure on prices.
2. Step 2: Identify the key factors that increase aggregate demand, such as higher consumer spending, increased investment, government expenditure, or net exports.
3. Step 3: Recognize that when aggregate demand rises above the economy's potential output (potential GDP), firms respond by raising prices because the economy is operating beyond its sustainable capacity.
4. Step 4: Contrast demand-pull inflation with other scenarios: a decrease in the overall price level or money supply would typically reduce inflation, and increased unemployment usually signals lower demand, not higher.
5. Step 5: Conclude that the main cause of demand-pull inflation is an increase in aggregate demand pushing output above potential GDP, which aligns with the correct answer provided.