Which of the following best describes the difference between demand-pull inflation and cost-push inflation?

• A. Demand-pull inflation results from higher production costs, whereas cost-push inflation is due to increased consumer demand.
• B. Demand-pull inflation occurs when aggregate supply increases, while cost-push inflation occurs when aggregate demand decreases.
• C. Demand-pull inflation is caused by an increase in aggregate demand, while cost-push inflation is caused by a decrease in aggregate supply due to rising production costs.
• D. Both demand-pull and cost-push inflation are caused by decreases in aggregate demand.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the definitions of demand-pull and cost-push inflation. Demand-pull inflation occurs when aggregate demand in the economy increases faster than aggregate supply, leading to higher prices.
2. Step 2: Recognize that cost-push inflation happens when the costs of production rise (such as wages or raw materials), causing aggregate supply to decrease, which also leads to higher prices.
3. Step 3: Identify the key difference: demand-pull inflation is driven by an increase in aggregate demand, while cost-push inflation is driven by a decrease in aggregate supply.
4. Step 4: Analyze the options given and match them with the correct economic concepts: demand-pull inflation corresponds to increased aggregate demand, and cost-push inflation corresponds to decreased aggregate supply due to rising production costs.
5. Step 5: Conclude that the correct description is the one stating that demand-pull inflation is caused by an increase in aggregate demand, and cost-push inflation is caused by a decrease in aggregate supply due to rising production costs.