Demand-pull inflation occurs when aggregate demand in an economy outweighs aggregate supply, leading to an increase in the general price level. While an increase in money supply is a common cause, other factors can also boost aggregate demand without directly involving monetary expansion. We need to identify which option represents such a non-monetary factor.
C) the marginal efficiency of capital or the propensity to consume rises. An increase in the marginal efficiency of capital (expected profitability of new investments) encourages businesses to invest more, thereby increasing aggregate demand. A rise in the propensity to consume means households spend a larger fraction of their income, leading to higher consumption and thus higher aggregate demand. Both these factors can cause demand-pull inflation without an increase in the money supply.
The question asks for another common name for demand-pull inflation. We need to understand the fundamental cause of demand-pull inflation and then identify the option that best describes this cause.
Correct Option: A) excess-demand inflation. This term precisely describes the core mechanism of demand-pull inflation, which is an increase in prices due to aggregate demand exceeding aggregate supply in the economy.
The question asks about the primary cause of cost-push inflation. We need to understand the definition of cost-push inflation and then evaluate each option based on this understanding.
B) an increase in the cost or supply price of goods. This option directly describes the mechanism of cost-push inflation, where higher production costs lead to higher prices for consumers.
The question asks for an alternative name for cost-push inflation. We need to identify the economic theory or concept that aligns with the characteristics of cost-push inflation.
Correct Option: C) 'new inflation' theory
Cost-push inflation occurs when the overall price level rises due to increases in the cost of production. We need to identify which of the given options does NOT directly lead to an increase in production costs for firms.
Correct Option: D) An increase in the marginal propensity to consume
An increase in the marginal propensity to consume (MPC) leads to an increase in aggregate demand. When aggregate demand increases, it can lead to demand-pull inflation, where too much money chases too few goods. It does not directly increase the costs of production for firms, which is the hallmark of cost-push inflation.