Differentiate between demand-pull inflation and cost-push inflation.

• A. Demand-pull inflation arises from higher production costs.
• B. Demand-pull inflation arises from decreased demand.
• C. Cost-push inflation arises from lower cost of inputs.
• D. Demand-pull inflation arises from excess aggregate demand; cost-push inflation arises from higher production costs shifting the short-run aggregate supply left.

Answer: (D)

The main idea is how inflation starts from demand conditions versus supply conditions. Demand-pull inflation happens when total spending in the economy exceeds what can be produced at current prices. With too much demand chasing too few goods, firms raise prices, and the aggregate-demand curve pulls up the overall price level. In contrast, cost-push inflation starts when production costs rise—like higher wages or more expensive inputs. That makes producing goods more expensive, so firms reduce supply at each price and the short-run aggregate supply curve shifts left. The result is a higher price level, sometimes with lower output.

The statement that best captures both ideas says demand-pull comes from excess aggregate demand, while cost-push comes from higher production costs shifting the short-run aggregate supply left. The other ideas mix up the directions or sources: inflation from higher production costs is cost-push, not demand-pull; inflation from decreased demand would not occur; and higher input costs—not lower—drive the leftward shift in SRAS.