With reference to the Indian economy, demand-pull inflation can be caused or increased by which of the following:
1.Expansionary policies
2.Fiscal stimulus
3.Inflation-indexing of wages
4.Higher purchasing power
5.Rising interest rates
Select the correct answer using the code given below:
Answer:
(a)
Core Books/NCERT
Expansionary Policies: Expansionary policies leads to an expansion of the money supply with too few goods to buy, which leads to increase in price. Hence, 1 is correct. Higher Purchasing Power: If in an economy, employment rises, more people go to work, they make more money and spend more money. However, if at a point of time, people are willing to spend more money while goods are limited, then competition among consumers drives the prices up. Hence, 4 is correct. Fiscal Stimulus: Policy tools often used to implement fiscal stimulus include lowering interest rates, increasing government spending, and quantitative easing. Often these fiscal stimulus lead to the increase of money supply in the economy. Hence, 2 is correct. Inflation indexing ensures lowest-paid workers a wage that keeps pace with the rising costs of goods and services, it does not lead to demand pull inflation. Hence, 3 is not correct. There is an inverse relationship between the interest rates and rate of inflation. So, when interest rates are high, the economy slows and inflation decreases. Hence, 5 is not correct. Therefore, option (a) is the correct answer.