Demand-pull inflation can be as a result of___________

Step 1: Analyze the question The question asks which factor can cause demand-pull inflation.

Step 2: The concept Demand-pull inflation happens when total demand (aggregate demand) in the economy grows faster than the economy's ability to supply goods and services. It is often described as "too much money chasing too few goods." Its causes include:

• An increase in the money supply
• Government deficit spending (financed by printing money or borrowing from the central bank)
• Increased consumer spending or bank credit
• Increased exports or foreign demand

Cost-push inflation, by contrast, comes from rising production costs (wages, raw materials, import duties on inputs, and so on) pushing prices up from the supply side.

Step 3: Evaluate the options

• A. Increase in the cost of production: This is the classic cause of cost-push inflation, so it is not correct.
• B. Excessive supply of foodstuff: A larger supply tends to lower prices, so it does not cause inflation.
• C. Deficit financing by the government: The government spends more than it earns and covers the gap by borrowing or creating money. This raises the money supply and purchasing power, which increases aggregate demand and pulls prices up. This is a demand-pull cause.
• D. Increase in import duties: Duties raise the cost of imported goods and inputs, which is a cost-push factor.

Step 4: Answer The correct option is C. Deficit financing by the government.

Tip: Ask yourself whether the cause adds to spending/money in circulation (demand-pull) or adds to production costs (cost-push). Remember: Demand-pull = money and spending up. Cost-push = costs up.