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 codes given below.

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

Explanation

All options are correct

• An increase in the money supply: When there is more money in the economy, people have more money to spend. This increased demand can push up prices.
• A decrease in the aggregate level of output: If the total output of goods and services in the economy falls (due to factors like reduced production or supply chain disruptions), but demand remains the same, there will be upward pressure on prices due to scarcity of goods and services.
• An increase in effective demand: When aggregate demand (the total demand for goods and services in the economy) rises without a corresponding increase in supply, it leads to higher prices. This is known as demand-pull inflation.

Answer: (d) 1, 2 and 3; Difficulty Level: Easy