Demand Pull Inflation

Demand-pull inflation occurs when the aggregate demand in an economy exceeds the aggregate supply, resulting in an overall increase in prices. It is caused by various factors that increase the demand for goods and services in the economy.

Components of Demand Pull Inflation

There are several components of demand pull inflation that contribute to the overall increase in prices. These include:

1. Increase in Government Expenditure
- An increase in government expenditure, without a corresponding change in tax rates, can lead to an increase in the overall demand for goods and services. This is because the government is a major consumer in the economy, and its increased spending increases the overall demand for goods and services.

2. Upward Shift of Investment Function
- An upward shift of the investment function refers to an increase in investment spending by businesses. When businesses invest more, it leads to an increase in the demand for capital goods and intermediate goods, which in turn increases overall aggregate demand.

3. Rise in Money Wage Rate
- A rise in the money wage rate refers to an increase in the wages paid to workers. When wages increase, workers have more disposable income, which leads to an increase in their purchasing power. This increased purchasing power leads to an increase in the demand for goods and services, thus contributing to demand-pull inflation.

The Correct Answer

The correct answer is option 'C' - A downward shift in the savings function. A downward shift in the savings function does not directly contribute to demand-pull inflation. In fact, an increase in savings would reduce the overall aggregate demand in the economy, as individuals are saving more and spending less. This would act as a dampening effect on inflationary pressures.

Conclusion

In summary, demand-pull inflation is caused by factors that increase the overall demand for goods and services in the economy. These include an increase in government expenditure, an upward shift of the investment function, and a rise in money wage rates. However, a downward shift in the savings function does not contribute to demand-pull inflation.