What is the main cause of demand-pull inflation?

Demand-pull inflation occurs when the overall demand for goods and services in an economy exceeds the available supply. This situation often arises during times of economic growth, when consumers and businesses are confident about their financial future and are willing to spend more. As demand surpasses supply, prices begin to rise since consumers are competing for the limited goods and services available.

In contrast, increased costs of production can lead to cost-push inflation, where rising production expenses result in a decrease in supply, causing prices to increase. Decreased supply of goods and services alone contributes to inflationary pressures, but primarily through a cost-push mechanism. Regulation changes in the market can affect prices or supply, but they do not directly lead to the fundamental scenario of excess demand driving prices up. Thus, the correct understanding of demand-pull inflation rests on the concept of demand exceeding supply, which aligns with the selected option.