Which factor can contribute to demand-pull inflation?

Demand-pull inflation occurs when the demand for goods and services exceeds their supply, leading to an increase in prices. The correct factor contributing to this phenomenon is excessive demand for limited goods and services. When consumers and businesses have a heightened desire to purchase more than what is available in the market, sellers can raise prices due to this imbalance. This is often exacerbated during periods of economic growth when consumer confidence is high, leading to increased spending, which further fuels demand-pull inflation.

In contrast, a decrease in the money supply tends to limit consumer spending, which would not contribute to inflation. Increased costs of labor and production relate more closely to cost-push inflation, where rising costs lead to higher prices rather than excess demand. Decreased competition could lead to higher prices but does not necessarily relate to demand outstripping supply, which is the core issue of demand-pull inflation. Thus, understanding the relationship between supply and demand dynamics is crucial for recognizing the causes of inflationary trends in the economy.