Demand-Pull Inflation from Rising Aggregate Demand

Steps:

• Identify demand-pull inflation as rising prices due to excess aggregate demand over supply.
• Recall that factors increasing aggregate demand (AD) cause this inflation type.
• Evaluate each option's impact on AD: surplus labor affects supply, government spending boosts AD, taxes reduce AD, net exports influence AD via trade.
• Select the option that directly increases AD.

Why B is correct:

• Higher government expenditure increases aggregate demand through the AD formula (AD = C + I + G + (X - M)), shifting the AD curve rightward and pulling up prices.

Why the others are wrong:

• A: A surplus of skilled labor increases aggregate supply, potentially causing deflationary pressure.
• C: Higher tax rates reduce disposable income and consumption, decreasing aggregate demand.
• D: Lower net exports reduce aggregate demand by subtracting from the AD components.

Final answer: B