Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Demand-pull inflation can be best described as:

1. Rising prices due to increased production costs

2. Inflation driven by excessive demand in an economy

3. Inflation resulting from supply chain disruptions

4. Inflation caused by high import costs

The correct answer is: Inflation driven by excessive demand in an economy

Demand-pull inflation is primarily characterized by a situation where aggregate demand in an economy surpasses aggregate supply, leading to an increase in general price levels. This typically occurs when there is a surge in consumer spending, government expenditure, or investment, which stimulates demand for goods and services. When demand exceeds supply, businesses cannot keep up with the increased consumption, resulting in higher prices as consumers compete for the limited available goods. This situation is often exacerbated in a growing economy where confidence leads to increased spending. The other options reference different types of inflation or causes of price increases. For instance, rising production costs, supply chain disruptions, and high import costs generally relate to cost-push inflation rather than demand-pull. Cost-push inflation arises when the costs of production increase, leading to higher prices independent of demand factors. Thus, while those factors can also influence inflation, they do not directly explain the mechanisms behind demand-pull inflation.