RAS question
Demand-pull inflation is caused by:
Correct answer: (A) Excess aggregate demand over aggregate supply.
Demand-pull inflation is caused when aggregate demand exceeds aggregate supply, so prices are pulled up by excess demand for available output.
Explanation
Demand-pull inflation begins on the demand side of the economy. It is a situation where aggregate demand exceeds aggregate supply, pulling prices upward. The CBSE macroeconomics material supports this through its treatment of excess demand: when aggregate demand is for output greater than the full-employment level, an inflationary gap emerges. Since real output cannot rise beyond full employment, the extra demand shows up as a rise in the price level. That is why demand-pull inflation is best understood as an aggregate-demand-induced rise in prices, often captured by the phrase "too much money chasing too few goods".
Why the other options are wrong
- (B) An increase in production costs explains cost-push inflation because prices rise from higher input or production costs, not from aggregate demand exceeding supply.
- (C) A decrease in production is a supply-side contraction; it may reduce available output, but it is not the demand-pull mechanism of excess aggregate demand over aggregate supply.
- (D) Government price controls are policy interventions that typically restrain or suppress prices rather than create demand-led pressure on the price level.
Concept
This tests the macroeconomics distinction between demand-pull and cost-push inflation. It recurs in RAS because inflation questions often ask candidates to identify whether the pressure originates in aggregate demand, supply, costs, or policy controls.