Real-factor demand-pull inflation can be caused by:

A. Increase in investment
B. Decrease in consumer demand
C. Decrease in imports given the exports
D. Decrease in exports given the imports
E. Decrease in government expenditure without change in tax revenue

Choose the correct answer from the options given below:

Correct option is C

Demand-pull inflation occurs when aggregate demand in an economy exceeds aggregate supply, leading to a rise in the general price level. When we focus on real-factor demand-pull, we are referring to those real economic activities that increase demand, such as consumption, investment, exports, and government spending — not merely nominal or monetary changes.

• A. Increase in investment
  Correct – When businesses increase investment (such as in machinery, buildings, or infrastructure), it raises aggregate demand, thus causing demand-pull inflation.

• C. Decrease in imports given the exports
  Correct – When imports fall but exports remain the same, net exports (X – M) increase, adding to aggregate demand, which can lead to demand-pull inflation.

Both of these contribute to increased aggregate demand, and hence they cause real-factor demand-pull inflation.

Information Booster:

• Demand-pull inflation happens when demand exceeds supply in the economy.

• Investment increases production activity and raises demand for resources, causing prices to rise.

• Less imports with constant exports means more goods are being consumed from within the country, increasing demand for domestic products.

• Both investment and reduced imports lead to higher aggregate demand, creating inflationary pressure.

• This type of inflation is called real-factor demand-pull inflation because it comes from real economic activities, not just money supply.

• It usually occurs during times of economic growth or expansion.

• Controlling inflation requires managing demand through fiscal or monetary policies.

Additional Knowledge:

• B. Decrease in consumer demand
  Incorrect – A decrease in consumer demand leads to lower aggregate demand, which would reduce inflationary pressure, not cause it.

• D. Decrease in exports given the imports
  Incorrect – If exports fall, the country earns less, reducing aggregate demand. This is deflationary, not inflationary.

• E. Decrease in government expenditure without change in tax revenue
  Incorrect – Reduced government spending also reduces aggregate demand, leading to lower inflation, or even deflation.