Demand pull inflation refers to which of the following situations?

Demand pull inflation occurs when the demand for goods and services outpaces the economy's ability to produce them, leading to increased prices. This situation typically arises when consumers, businesses, and the government increase their spending, thereby driving up aggregate demand. As demand continues to rise and surpasses the prevailing supply, suppliers have the opportunity to raise their prices in response to the competition for limited goods and services.

The correct answer highlights that output cannot keep up with the aggregate demand. This imbalance between demand and supply is what fuels inflation in this scenario.

In contrast, other situations described do not align with the definition of demand pull inflation. For instance, when output greatly exceeds aggregate demand, it implies surplus production, which generally leads to falling prices instead of rising ones. A situation where prices are lowered across the board would indicate deflation or price stability rather than inflation. Lastly, if aggregate supply remains constant while demand increases, we would indeed see inflation; however, the focus on how output cannot keep up with increasing demand better encapsulates the concept of demand pull inflation.