Which of the following is likely to be inflationary

1. Analyze the question We are asked which option is likely to cause inflation, meaning a general and sustained rise in the price level.

2. Explain the concept Inflation usually comes from two sources:

• Demand-pull inflation: too much money chasing too few goods, so total demand exceeds supply.
• Cost-push inflation: production costs (wages, raw materials, energy) rise, so producers raise prices.

Anything that raises people's spending power or producers' costs tends to be inflationary. Anything that reduces spending or money in circulation tends to be deflationary.

3. Step-by-step solution

• A. Taxes increase: People have less disposable income, so they spend less. Demand falls, which is anti-inflationary.
• B. Increase in unemployment: Fewer people earn incomes, so total spending falls. This is also not inflationary.
• C. Budget surplus: The government collects more than it spends, which takes money out of circulation. This is deflationary.
• D. Wages increase: Workers have more income and spend more, which raises demand (demand-pull). Firms also face higher labour costs and pass them on through higher prices (cost-push). This is inflationary.

4. Answer D. Wages increase

5. Exam tip Ask yourself: "Does this put more money in people's pockets or raise costs for producers?" If yes, it is inflationary. If it takes money out of the economy (higher taxes, budget surplus, unemployment), it is deflationary. Remember that wage increases without matching productivity increases fuel inflation.