Causes of Rising Price Levels
Question
A rise in general level of prices may be caused by
Select the correct answer using the codes given below.
- 1.
an increase in the money supply
- 2.
a decrease in the aggregate level of output
- 3.
an increase in the effective demand
Options
1 only
1 and 2 only
2 and 3 only
1, 2 and 3
Explanation
All three factors can cause a general rise in price levels. (1) An increase in money supply without corresponding increase in goods/services leads to inflation (demand-pull inflation). (2) A decrease in aggregate output with same money supply means fewer goods chasing the same amount of money, causing prices to rise (cost-push inflation). (3) An increase in effective demand leads to higher prices if supply cannot match the increased demand (demand-pull inflation). All three mechanisms are established causes of inflation in economic theory. The comprehensive nature of inflation suggests multiple causative factors work together.
Answer: (d).
Question details
Year
2014
Paper
GS Paper 1
Question
Q82
Subject
Economy
Sub-topic
Inflation and Monetary Economics
Type
Statement-based
Difficulty
Medium
Nature
Static
Source hint
Economics - Inflation & Monetary Theory
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