demand pull inflation is likely to be caused by?

Step 1: Analyze the question The question asks what is likely to cause demand-pull inflation.

Step 2: Explain the concept Demand-pull inflation happens when aggregate demand grows faster than aggregate supply. In simple terms, "too much money chasing too few goods." It is usually caused by:

• Increased government spending (especially when financed by borrowing or printing money)
• Increased money supply
• Reduced taxes (more disposable income)
• Lower interest rates (cheaper borrowing)
• Increased exports or consumer confidence

By contrast, cost-push inflation comes from rising production costs, such as wages, raw materials, or energy.

Step 3: Evaluate each option

• A. An increase in the cost of factor inputs: This raises production costs and shifts supply to the left. It is a cause of cost-push inflation, not demand-pull.
• B. Increase in the income tax rate: This reduces disposable income, so spending and demand fall. It tends to reduce inflationary pressure.
• C. Increase in bank lending rates: Borrowing becomes more expensive, so consumption and investment fall. This also reduces demand, which is a tool for fighting inflation.
• D. Increasingly large budget deficit: The government spends more than it earns. This injects extra money into the economy, especially if financed by borrowing from the central bank or printing money. Total demand rises, which pushes prices up. This fits demand-pull inflation.

Step 4: Answer The correct option is D.

Exam tip: Ask yourself whether the factor raises spending (demand) or raises production costs (supply). If it boosts spending, think demand-pull. If it raises costs for producers, think cost-push. Also remember that higher taxes and higher interest rates are anti-inflation tools, so they cannot be the cause of demand-pull inflation.