What is demand-pull inflation?

Demand-pull inflation occurs when overall demand for goods and services in an economy surpasses the available supply, leading to an increase in prices. This type of inflation is primarily driven by consumer demand; when consumers are willing and able to spend more, businesses respond by raising prices since they can't meet the heightened demand immediately. Factors contributing to increased consumer demand can include higher disposable incomes, increased consumer confidence, or expansionary monetary policies that lower interest rates and encourage borrowing and spending.

The other options describe different causes of inflation: increased costs of production relate to cost-push inflation, government spending can influence demand but isn't the sole factor causing demand-pull inflation, and shortages of raw materials typically lead to higher production costs rather than consumer-driven demand increases. Therefore, the proper characterization of demand-pull inflation is rooted in the relationship between consumer demand and market supply, making the second choice the correct answer.