What is a common cause of demand-pull inflation?

Demand-pull inflation occurs when the overall demand for goods and services in an economy exceeds the available supply, leading to an increase in prices. An increase in aggregate demand is a fundamental driver of this phenomenon. When consumers, businesses, and the government collectively demand more goods and services, it creates upward pressure on prices, especially if the economy is operating at or near full capacity. This demand can stem from various factors, such as increased consumer confidence, lower interest rates making borrowing cheaper, or fiscal policies that enhance government spending.

Understanding the concept of aggregate demand is crucial. It includes consumption spending, investment spending, government spending, and net exports. When any of these components rise significantly, it shifts the aggregate demand curve to the right. This shift indicates that more is being demanded at every price level, thereby contributing to demand-pull inflation as the supply cannot keep up.

Other options focus on scenarios that do not lead to increased demand. For instance, a decrease in consumer spending or a reduction in government spending would typically dampen demand, which does not contribute to inflationary pressures. Similarly, a rise in production costs is more associated with cost-push inflation, where prices increase due to higher costs of production rather than due to increased demand. Thus, the