Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What is a major cause of inflation that results from an increase in consumer demand?

1. Cost push factors

2. Demand pull factors

3. Expectations theory

4. Monetary supply changes

The correct answer is: Demand pull factors

Inflation that arises from an increase in consumer demand is referred to as demand-pull inflation. This occurs when the demand for goods and services exceeds their supply, leading businesses to raise prices to balance demand with available supply. Several situations can trigger this type of inflation, such as increased consumer income, higher government spending, or even an unanticipated increase in demand due to market trends. In contrast, cost-push factors relate to rising production costs leading to increased prices. Expectations theory focuses on how individuals' expectations of future inflation can influence current prices and wage demands, but it does not directly stem from changes in consumer demand itself. Monetary supply changes refer to adjustments in the money supply by central banks which can create inflation, but again, this doesn’t specifically address the direct impact of increased consumer demand driving prices higher. Thus, demand-pull factors specifically identify the relationship between heightened consumer demand and inflation, making it the correct answer.