A rise in the general level of prices may be caused by:
- an increase in the money supply
- a decrease in the aggregate level of output
- an increase in the effective demand
Select the correct answer using the codes given below.
Detailed Explanation:
✅ Statement 1 – Correct: An increase in money supply without corresponding increase in output leads to more money chasing fewer goods, causing demand-pull inflation as per the Quantity Theory of Money.
✅ Statement 2 – Correct: A decrease in aggregate output/supply while demand remains constant creates excess demand, pushing prices upward through supply-side inflation.
✅ Statement 3 – Correct: An increase in effective demand (purchasing power-backed demand) beyond the economy's productive capacity causes demand-pull inflation.
Question 2 of 2 Causes and Effects of Inflation
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