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A situation in which there is “too much money chasing too few goods” is often described as demand-pull inflation. When demand increases faster than industry’s ability to satisfy that demand, prices will increase. During the Vietnam War, for example, government spending for military goods served to increase the purchasing power of many Americans since it was not accompanied by a tax increase. Meanwhile, factories that might have been producing consumer goods turned to the production of goods for use in the war. The result was an increase in the demand for goods and services at the very time that industry’s ability to satisfy that demand was being redirected. Since it was not possible to increase output to satisfy demand, prices rose.
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When do prices increase?
They increase when industry’s ability to satisfy demand is being redirected.
They increase when the purchasing power increase.
They increase when the demand for goods and services increase.
They increase when demand increases faster than industry’s ability to satisfy that demand.
