Increase in the money supply would cause demand-pull inflation.
<u>Explanation:</u>
Demand-pull inflation is driven by an increase in money surplus. It occurs when the aggregate demand for a good or service exceeds the aggregate supply. It starts with increased consumer demand by reducing the overall supply or increasing the price of this offer.
Suppliers raise prices because they know consumers will pay. This means that inflation increases as real as GDP increases and unemployment decreases as the economy moves along the Phillips curve. This is usually referred as “too much money chasing too few goods".
Demand- pull inflation is an economic situation that describes the effect of an imbalance in aggregate supply and demand. It occurs when there is too much money to be offered for few goods. In a given economy, when demand outweighs supply, price would go up. This type of economy can be caused by an expanding economy, increased government spending, or overseas growth.
Demand pull inflation could be solved over a period of time by a tight monetary and fiscal policy by the government and central bank. An increase in the interest rate on goods and services ensures that consumers would spend less on durable goods and housing. This could correct the demand -pull economy over time.
