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Economic Affairs Inflation

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Assertion (A): If market rate of interest falls, then the prices shall rise

Reason (R): Prices rise as a result of increase in the demand.

Both A and R are true and R is the correct explanation of A

Both A and R are true and R is not a correct explanation of A

A is true but R is false

A is false but R is true

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Explanation:

Market interest rates are likely to increase when bond investors believe that inflation will occur. As a result, bond investors will demand to earn higher interest rates. The investors fear that when their bond investment matures, they will be repaid with dollars of significantly less purchasing power.
Market interest rates are likely to decrease when there is a slowdown in economic activity. In other words, the loss of purchasing power due to inflation is reduced and therefore the risk of owning a bond is reduced.

Demand-pull inflation is caused by increases in aggregate demand due to increased private and government spending, etc. ... For example, a sudden decrease in the supply of oil, leading to increased oil prices, can cause cost-push inflation.