Which of the following event leads to demand-pull inflation?
A An improvement in technology.
B A rise in expected future profit.
C A rise in wages.
D A rise in interest rates.
The correct answer and explanation is:
The correct answer is B. A rise in expected future profit.
Explanation:
Demand-pull inflation occurs when the aggregate demand (the total demand for goods and services in the economy) exceeds aggregate supply, leading to upward pressure on prices. A rise in expected future profits can increase business investment and consumer spending, both of which are key drivers of aggregate demand. Here’s how:
- Increased Business Investment: When firms expect higher future profits, they are more likely to invest in expanding their production capacities, hiring more workers, and acquiring new resources. This increase in investment stimulates demand for goods and services throughout the economy, particularly in sectors that rely on capital goods.
- Increased Consumer Spending: If consumers anticipate that the future economy will perform well and that their own incomes or wealth will rise, they may increase their spending in the present. This heightened demand pushes the overall demand curve to the right, which is the hallmark of demand-pull inflation.
Unlike cost-push inflation, which arises from increased costs of production (like higher wages or raw material prices), demand-pull inflation is driven by an increase in demand across the economy. The rise in expected future profit can lead businesses and consumers to spend more, thus increasing the total demand for goods and services.
In contrast, the other options:
- A. An improvement in technology typically reduces costs and can shift the supply curve to the right, reducing prices, rather than increasing demand.
- C. A rise in wages can contribute to cost-push inflation if businesses pass on the higher costs to consumers, but it doesn’t directly affect aggregate demand in the same way.
- D. A rise in interest rates generally reduces demand by making borrowing more expensive, which is more likely to reduce inflationary pressures rather than cause demand-pull inflation.