Final answer:
Demand-pull inflation happens when increased demand in an economy outpaces supply, leading to higher prices for goods and services. Historical instances, such as post-war periods, often lead to such inflation. Economically, a shift to the right in aggregate demand near full employment will also cause inflation, as increased demand cannot be met with increased production.
Step-by-step explanation:
Demand-pull inflation occurs when there is an increase in demand for goods and services in an economy to the point where supply cannot keep up. The phrase 'too many dollars chasing too few goods' aptly describes this phenomenon. Post-war periods are classic examples where government spending is high yet production is focused on the war effort, leading to high demand and low supply in consumer markets. When price controls are lifted after the war, there is a rush of pent-up buying power, which further drives up prices and leads to inflation.
On the contrary, when the aggregate demand is low relative to supply, like during major recessions or the Great Depression, there is a decrease in inflation or even deflation. The AD/AS framework within macroeconomics also shows how inflationary pressures can arise when aggregated demand shifts to the right—indicating increased demand—while the economy is at or near full employment, causing only a rise in the price level due to the inability to increase production.