Which of the following best explains why inflation may occur when demand far outweighs supply?

• A. The government sets lower prices to control demand.
• B. Supply increases automatically to match demand, preventing inflation.
• C. Prices increase because consumers compete for limited goods.
• D. Prices decrease as producers try to attract more buyers.

Answer: (C)

Verified step by step guidance

1. Understand the basic concept of inflation: Inflation occurs when the general price level of goods and services rises over time.
2. Recognize the relationship between demand and supply: When demand significantly exceeds supply, there is more competition among consumers to purchase the limited goods available.
3. Analyze how this competition affects prices: Because more consumers want the goods than there are goods available, sellers can raise prices, leading to inflation.
4. Evaluate the incorrect options: Lowering prices by the government or automatic supply increases are not guaranteed or immediate responses, and prices decreasing would not explain inflation.
5. Conclude that the best explanation is that prices increase because consumers compete for limited goods, causing inflation.