What does the demand-pull theory suggest is a key driver of inflation?

The demand-pull theory posits that inflation occurs when the overall demand for goods and services in an economy exceeds the available supply. This elevated demand leads to upward pressure on prices as consumers are willing to pay more to obtain the limited goods and services. Essentially, when consumers have high levels of demand, businesses may respond by raising prices, contributing to inflation.

In contrast, increased production costs focus on the supply side of the economy. While higher costs for materials or labor can lead to higher prices, this concept aligns more closely with cost-push inflation rather than demand-pull inflation. Natural disasters that disrupt supply chains can also cause prices to rise, but again, this is related to supply issues rather than demand. Lastly, government policies, such as taxation and spending measures, can influence the overall economic environment but do not inherently explain the conditions outlined by the demand-pull theory, which centers specifically on consumer demand exceeding supply.