SQA National 5 Economics Practice Exam

The cause of inflation identified in the correct answer involves demand-pull factors, which occur when the demand for goods and services in an economy outpaces their supply. This situation can arise from various scenarios, such as increased consumer spending, government expenditure, or foreign demand for domestic products. When demand exceeds supply, sellers can raise their prices, leading to an overall increase in price levels, which is what inflation reflects.

Understanding why demand-pull factors specifically contribute to inflation is crucial. When consumers and businesses are confident in the economy, they tend to spend more. If this increased demand is not matched by an increase in supply—due to production constraints, resource limitations, or other factors—prices will go up. This reinforcement of the demand leads to cyclical inflationary pressures, affecting various aspects of the economy.

In contrast, increases in interest rates are generally implemented to combat inflation by making borrowing more expensive and encouraging saving rather than spending. Supply chain disruptions can indeed affect inflation but typically contribute to cost-push inflation, where the costs of production rise and consequently drive up prices. A reduction in consumer spending tends to lessen demand, which would likely exert downward pressure on prices rather than contribute to inflation. Thus, the recognition of demand-pull factors as a primary