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 code given below:
- A.1 only
- B.1 and 2 only
- C.2 and 3 only
- D.1, 2 and 3
▶ Answer & Explanation
Correct answer: D. 1, 2 and 3
Inflation, a sustained increase in the general price level, can be triggered by various factors. An increase in the money supply without a corresponding increase in goods and services leads to more money chasing fewer goods, driving up prices (monetary inflation). A decrease in aggregate output, such as due to supply chain disruptions or reduced production, means fewer goods are available, leading to higher prices if demand remains constant or increases (cost-push or supply-shock inflation). An increase in aggregate effective demand, if not met by a commensurate increase in supply, also pushes prices up (demand-pull inflation).
Source: UPSC gs1 2013