Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Which of the following factors directly contributes to demand-pull inflation?

1. Increased consumer spending

2. Rising production costs

3. Higher minimum wage rates

4. Decreased import costs

The correct answer is: Increased consumer spending

Demand-pull inflation occurs when the overall demand for goods and services in an economy increases faster than the economy's ability to produce them. This leads to higher prices as consumers compete for the limited goods and services available. Increased consumer spending is a direct factor that contributes to demand-pull inflation. When consumers spend more, their demand for products and services rises. If this increase in demand exceeds supply, businesses may respond by raising prices. This is particularly true in an economy approaching or at full capacity, where resources are already being utilized effectively. Rising production costs, higher minimum wage rates, and decreased import costs are factors that may influence inflation, but they are more associated with cost-push inflation, which arises when overall production costs increase, leading to decreased supply and higher prices. In contrast, demand-pull inflation is specifically linked to heightened demand in the market. Thus, the correlation between increased consumer spending and demand-pull inflation is direct and well established in economic theory.