A rise in general level of prices may be caused by
1. An increase in the money supply
2. A decrease in the aggregate level of output
3. An increase in the effective demand
Select the correct answer using the codes given below:
This questions was previously asked in
UPSC CSP Previous Year Paper (2013)
1 and 2 only
Incorrect Answer2 and 3 only
Incorrect Answer1, 2 and 3
Correct AnswerExplanation:
Increase in general price level or inflation has two influencing factors Demand-pull inflation and Cost-push inflation.
Demand-pull inflation occurs when aggregate demand for goods and services in an economy rises more rapidly than an economy's productive capacity. One potential shock to aggregate demand might come from a central bank that rapidly increases the supply of money.
The decrease in aggregate level of output and increase in the effective demand also lead to inflation.
Cost-push inflation, on the other hand, occurs when prices of production process inputs increase.
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By: Abhipedia