ExpertEasy1 markMultiple Choice
AQA GCSE · Question 09 · How the economy works
Which of the following might increase demand-pull inflation?
Which of the following might increase demand-pull inflation?
Answer options:
A.
Decrease in raw material prices
B.
Decrease in wage rates
C.
Increase in government spending
D.
Increase in tax rates
How to approach this question
Recall the definition of demand-pull inflation: 'too much money chasing too few goods', caused by an increase in aggregate demand. Evaluate each option to see if it would increase aggregate demand (C+I+G+X-M).
Full Answer
C.Increase in government spending✓ Correct
The correct answer is C. An increase in government spending is a component of aggregate demand. If the economy is near full capacity, this extra spending will pull prices up.
Demand-pull inflation occurs when aggregate demand in an economy outpaces aggregate supply. It's caused by factors that increase aggregate demand. An increase in government spending (G) directly increases aggregate demand. The other options would tend to decrease inflation: lower raw material and wage costs reduce cost-push inflation, while higher taxes reduce consumer spending and thus aggregate demand.
Common mistakes
Confusing demand-pull inflation with cost-push inflation. Cost-push is about rising production costs (like raw materials or wages), while demand-pull is about excess demand.
Practice the full AQA GCSE Economics Paper 2
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