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    Question

    Which of the factors leads to Demand-pull inflation

    I.        Strong consumer demand

    II.        Increase in money supply

    III.        When prices go up

    IV.        Technological innovation

    A Only I Correct Answer Incorrect Answer
    B Only II Correct Answer Incorrect Answer
    C All except III Correct Answer Incorrect Answer
    D All except II Correct Answer Incorrect Answer
    E All are correct Correct Answer Incorrect Answer

    Solution

    Demand-pull inflation is a period of inflation which arises from rapid growth in aggregate demand. Demand-pull inflation means: ü  Excess demand and ‘too much money chasing too few goods.’ ü  The economy is at full employment/full capacity. ü  The economy will be growing at a rate faster than the long-run trend rate. ü  A falling unemployment rate. If a government reduces taxes, households are left with more disposable income in their pockets. This, in turn, leads to increased consumer spending, thus increasing aggregate demand and eventually causing demand-pull inflation. Technological innovation also gives rise to demand in the market for a few goods which eventually carries demand pull inflation in an economy.

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