gs1medium

A rise in general level of prices may be caused by

  1. 1.an increase in the money supply
  2. 2.a decrease in the aggregate level of output
  3. 3.an increase in the effective demand

Select the correct answer using the code given below:

  1. A.1 only
  2. B.1 and 2 only
  3. C.2 and 3 only
  4. 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

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