Which inflation occurs when demand is greater than supply and inflation results?

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Multiple Choice

Which inflation occurs when demand is greater than supply and inflation results?

Demand-pull inflation occurs when overall demand for goods and services outstrips the economy’s ability to produce them at current prices, and that excess demand drags prices up. When spending is strong and capacity is limited, firms raise prices to balance demand with available supply, pushing the price level higher. This is the classic mechanism: too much demand chasing too few goods. It differs from cost-push inflation, which stems from rising production costs pushing prices up, and from disinflation, which is a slowing in the rate of inflation rather than an inflation caused by demand pressures. In the scenario described, demand outpacing supply leads to demand-pull inflation.

Demand-pull inflation occurs when overall demand for goods and services outstrips the economy’s ability to produce them at current prices, and that excess demand drags prices up. When spending is strong and capacity is limited, firms raise prices to balance demand with available supply, pushing the price level higher. This is the classic mechanism: too much demand chasing too few goods. It differs from cost-push inflation, which stems from rising production costs pushing prices up, and from disinflation, which is a slowing in the rate of inflation rather than an inflation caused by demand pressures. In the scenario described, demand outpacing supply leads to demand-pull inflation.

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