Demand-pull inflation is likely to be caused by

Step 1: Analyze the question We need the cause of demand-pull inflation. This type of inflation happens when total spending (aggregate demand) grows faster than the economy's ability to supply goods and services. In simple terms, "too much money chasing too few goods."

Step 2: Explain the concept

• Demand-pull inflation: caused by increases in aggregate demand, for example more money supply, higher government spending, tax cuts, cheap credit, or higher consumer spending.
• Cost-push inflation: caused by rising production costs, such as wages, raw materials, or fuel.

Step 3: Evaluate each option

• A. Increase in the cost of factor inputs: This raises production costs and pushes prices up from the supply side. It is cost-push, not demand-pull.
• B. Increase in the income tax rate: Higher income tax reduces disposable income, so spending falls. This reduces demand and works against inflation.
• C. Increase in bank lending rate: Costlier loans reduce borrowing and spending. This is a tool for controlling inflation, not causing it.
• D. Increasingly large budget deficit: When the government spends more than it earns, it injects extra money into the economy, often financed by borrowing or printing money. This increases aggregate demand and pulls prices up. This fits demand-pull inflation.

Step 4: Answer The correct option is D.

Step 5: Exam tip Ask yourself: "Is this pushing spending up or costs up?"

• Spending/demand rising → demand-pull
• Costs of production rising → cost-push

Also remember that higher taxes and higher interest rates are anti-inflationary tools, so they are rarely the cause of demand-pull inflation.