With reference to the Indian economy, demand-pull inflation can be caused/ increased by which of the following?
- Expansionary policies
- Fiscal stimulus
- Inflation-indexing wages
- Higher purchasing power
- Rising interest rates
Select the correct answer using the code given below.
- 1, 2 and 4 only
- 3, 4 and 5 only
- 1, 2, 3 and 5 only
- 1, 2, 3, 4 and 5
Explanation
Expansionary policies are correct
- Demand-pull inflation is the upward pressure on prices that follows a shortage in supply, where too much money is chasing too few goods.
- Expansionary monetary or fiscal policies aim to increase aggregate demand by lowering interest rates or increasing government spending. This can boost consumer and business spending, leading to higher demand for goods and services. As demand outstrips supply, it results in demand-pull inflation.
Fiscal stimulus is correct
- Fiscal stimulus involves increasing government spending or reducing taxes to boost economic activity.
- This increases disposable income and encourages spending, which can lead to higher aggregate demand and, consequently, demand-pull inflation.
Inflation-indexing wages is not correct
- Inflation-indexing wages means adjusting wages based on the rate of inflation. This can lead to cost-push inflation rather than demand-pull inflation. Workers receive higher wages to compensate for rising prices, which can increase production costs and cause cost-push inflation, but it does not directly impact demand-pull inflation.
Higher purchasing power is correct
- Higher purchasing power means that consumers have more money to spend, which increases aggregate demand. As demand rises relative to supply, it can lead to demand-pull inflation.
Rising interest rates is not correct
- Rising interest rates generally reduce borrowing and spending by consumers and businesses. This tends to decrease aggregate demand rather than increase it.
