[Solved] With reference to the Indian economy, demand-pull inflation can be caused/ increased by which of the following? 1. Expansionary policies 2. Fiscal stimulus 3. inflation – indexing wages 4. Higher purchasing power 5. Rising interest rates Select the correct answer using the code given below

Q12. With reference to the Indian economy, demand-pull inflation can be caused/ increased by which of the following?

1. Expansionary policies

2. Fiscal stimulus

3. inflation – indexing wages

4. Higher purchasing power

5. Rising interest rates

Select the correct answer using the code given below

A. 1, 2 and 4 only

B. 3, 4 and 5 only

C. 1, 2, 3 and 5 only

D. 1, 2, 3, 4 and 5 only

Answer: A

• Demand-pull inflation refers to inflation in the economy brought by strong consumer demand wherein aggregate demand outweighs aggregate supply. Hence, the prices tend to go up. It is a phenomenon that is often described as too much money chasing too few goods.

Expansionary Policies:

• Expansionary policies, such as increased government spending or lower interest rates, can boost aggregate demand. When demand rises, it can lead to upward pressure on prices, contributing to inflation. Statement 1 is Correct.

Fiscal Stimulus:

• Fiscal stimulus involves government measures to stimulate economic activity, often through increased spending or tax cuts. Such policies can enhance consumer and business spending, driving up demand and potentially causing inflation. Statement 2 is Correct.

Inflation-Indexing Wages:

• Inflation-indexing wages means adjusting wages based on the inflation rate. If wages rise in line with inflation, it can lead to higher purchasing power for consumers. However, this factor is not directly related to demand-pull inflation. Statement 3 is Incorrect.

Higher Purchasing Power:

• Statement 4 is Correct: When consumers have more purchasing power (due to higher incomes or reduced prices), they tend to spend more. Increased consumer spending contributes to higher aggregate demand and can lead to demand-pull inflation.

Rising Interest Rates:

• Rising interest rates can have a dampening effect on consumer spending and investment. When borrowing costs increase, demand may decrease, which is not conducive to demand-pull inflation. Statement 5 is Incorrect.

• The demand-pull inflation is caused by:

• Consumption: An increase in consumption level pushes up the price of the certain product/commodity

• Exchange Rate: Depreciation of home currency will boost exports. Hence, aggregate demand increases.

• Government Spending: An increase in government spending will also enable the aggregate demand in an economy.

• Expectations: The very anticipation of inflation will lead to a rise in inflation.

• Monetary Growth: If too much money is chasing too few goods, inflation will rise.