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Q22 (IAS/2021) Economy › Money, Banking & Inflation › Inflation concepts Official Key

With reference to Indian economy, demand-pull inflation can be caused/increased by which of the following? 1. Expansionary policies 2. Fiscal stimulus 3. Inflation-indexing wages 4. Higher purchasing power 5. Rising interest rates Select the correct answer using the code given below.

Result
Your answer: —  ·  Correct: A
Explanation

The correct answer is Option 1 (1, 2 and 4 only). Demand-pull inflation occurs when aggregate demand outpaces aggregate supply ("too much money chasing too few goods").

  • Expansionary policies (1) and Fiscal stimulus (2): These involve increased government spending or tax cuts, injecting liquidity into the economy and boosting consumer demand.
  • Higher purchasing power (4): When consumers have more disposable income, their demand for goods and services increases, driving prices upward.

Why other points are incorrect:

  • Inflation-indexing wages (3): This is generally considered a consequence of inflation or a factor in cost-push inflation (wage-price spiral), rather than an initial cause of demand-pull inflation.
  • Rising interest rates (5): This is a contractionary measure used by the RBI to curb inflation by making borrowing expensive and reducing money supply, thereby decreasing demand.

Thus, only factors 1, 2, and 4 directly contribute to increasing demand-pull inflation.

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Q. With reference to Indian economy, demand-pull inflation can be caused/increased by which of the following? 1. Expansionary policies 2. Fi…
At a glance
Origin: Books + Current Affairs Fairness: High fairness Books / CA: 8/10 · 2/10

This is a high-fairness 'Concept Application' question solvable via fundamental macroeconomics. It relies less on rote memorization of lists and more on understanding the directional flow of variables (e.g., Interest Rates ↑ = Demand ↓). The key lies in identifying the 'Anti-dote' (Rising Interest Rates) hidden among the 'Poisons' (Causes).

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
Can expansionary policies cause or increase demand-pull inflation in the Indian economy?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > There are mainly two causes of inflation: > p. 112
Presence: 5/5
“• 1. Demand Pull Inflation: Demand-pull inflation occurs when there is an increase in aggregate demand, categorized by the four sectors of the economy: households, private, governments and foreign buyers. When these four sectors concurrently want to purchase more output than the economy can produce, then it leads to increase in prices. This excessive demand, also referred to as "too much money chasing too few goods", usually occurs in an expanding economy. Demand pull inflation may be caused due to over expansion of the money supply, government reducing tax and spending more etc.• 2. Cost Push or Supply Shock Inflation: Cost-push inflation basically means that prices have been "pushed up" by increase in costs of any of the four factors of production (labour, capital, land or entrepreneurship) or there is a supply shortage which allows the producer to raise prices.”
Why this source?
  • Defines demand-pull inflation as arising from an increase in aggregate demand across sectors.
  • Explicitly links over-expansion of the money supply, tax reductions and higher government spending to demand-pull inflation.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > a) Demand-Pull Inflation > p. 63
Presence: 5/5
“(a) Demand-Pull Inflation • It is caused by an increase in aggregate demand and consumption due to 'n (i) increased private and government spending, (ii) lower rate of savings by households, (iii) depreciation in local exchange rate, (iv) reduction in taxes and (v) increase in money supply and bank credit. • This leads to increased disposable income in the hands of households, thereby resulting a. in increase in the aggregate demand with no change in aggregate supply”
Why this source?
  • Lists increased private and government spending, reduction in taxes, and higher money supply/bank credit as direct causes of demand-pull inflation.
  • Explains the mechanism: higher disposable income → higher aggregate demand with unchanged aggregate supply → price rise.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Impact of "Monetization of Deficit" > p. 165
Presence: 4/5
“• Helps in increasing aggregate demand in the economy thereby resulting in economic growth• Results in increase in debt on Government thereby impacting overall macro-economic stability and may result in ratings downgrade• Increases inflation due to increased money supply• Increased money supply may result in depreciation of rupee which can lead to flight of capital from the country• RBI can be seen as losing control over its monetary policy• As such there is no issue if it is done once in exceptional circumstances but in India the problem is once it is done, then it will lure future governments of an easy route of financing their deficit "Deficit Financing": It generally means that Govt. is having deficit (as expenses are more than receipts) which can be financed from different sources like from market borrowing or borrowing from abroad or there can also be the case that Govt may ask RBI to finance its deficit by printing more money. (So, in deficit financing there can be various options to finance Govt.'s deficit and one of the options could be from RBI by printing cash)”
Why this source?
  • Describes monetization of deficit (printing money to finance government deficit) as increasing aggregate demand and money supply.
  • Connects such monetization to increased inflation and potential loss of monetary policy control.
Statement 2
Can fiscal stimulus cause or increase demand-pull inflation in the Indian economy?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > There are mainly two causes of inflation: > p. 112
Presence: 5/5
“• 1. Demand Pull Inflation: Demand-pull inflation occurs when there is an increase in aggregate demand, categorized by the four sectors of the economy: households, private, governments and foreign buyers. When these four sectors concurrently want to purchase more output than the economy can produce, then it leads to increase in prices. This excessive demand, also referred to as "too much money chasing too few goods", usually occurs in an expanding economy. Demand pull inflation may be caused due to over expansion of the money supply, government reducing tax and spending more etc.• 2. Cost Push or Supply Shock Inflation: Cost-push inflation basically means that prices have been "pushed up" by increase in costs of any of the four factors of production (labour, capital, land or entrepreneurship) or there is a supply shortage which allows the producer to raise prices.”
Why this source?
  • Defines demand-pull inflation as arising from an increase in aggregate demand across sectors.
  • Explicitly lists government reducing taxes and spending more as causes of demand-pull inflation.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > CHAPTER SUMMARY > p. 77
Presence: 5/5
“• Demand-Pull inflation caused by increased private and government spending, lower rate of savings by households, depreciation in local exchange rate, reduction in taxes and increase in money supply and bank credit - increased disposable income - increase in the aggregate demand. • Cost-Push inflation (supply shock) inflation caused by growing cost of factors of production of goods and services, increase in indirect taxes, increase in import prices, higher cost of capital, interest rates, etc. EXAMPLE Previous Years' Preliminary Examination Questions EXAMPLE Previous Press”
Why this source?
  • States that demand-pull inflation is caused by increased government spending and tax reductions.
  • Connects higher disposable income and increased aggregate demand to price rises.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Impact of "Monetization of Deficit" > p. 165
Presence: 5/5
“• Helps in increasing aggregate demand in the economy thereby resulting in economic growth• Results in increase in debt on Government thereby impacting overall macro-economic stability and may result in ratings downgrade• Increases inflation due to increased money supply• Increased money supply may result in depreciation of rupee which can lead to flight of capital from the country• RBI can be seen as losing control over its monetary policy• As such there is no issue if it is done once in exceptional circumstances but in India the problem is once it is done, then it will lure future governments of an easy route of financing their deficit "Deficit Financing": It generally means that Govt. is having deficit (as expenses are more than receipts) which can be financed from different sources like from market borrowing or borrowing from abroad or there can also be the case that Govt may ask RBI to finance its deficit by printing more money. (So, in deficit financing there can be various options to finance Govt.'s deficit and one of the options could be from RBI by printing cash)”
Why this source?
  • Explains that monetization/deficit financing raises aggregate demand via increased money supply.
  • Links increased money supply from financing deficits to higher inflation.
Statement 3
Can inflation-indexing of wages cause or increase demand-pull inflation in the Indian economy?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > There are mainly two causes of inflation: > p. 112
Presence: 4/5
“• 1. Demand Pull Inflation: Demand-pull inflation occurs when there is an increase in aggregate demand, categorized by the four sectors of the economy: households, private, governments and foreign buyers. When these four sectors concurrently want to purchase more output than the economy can produce, then it leads to increase in prices. This excessive demand, also referred to as "too much money chasing too few goods", usually occurs in an expanding economy. Demand pull inflation may be caused due to over expansion of the money supply, government reducing tax and spending more etc.• 2. Cost Push or Supply Shock Inflation: Cost-push inflation basically means that prices have been "pushed up" by increase in costs of any of the four factors of production (labour, capital, land or entrepreneurship) or there is a supply shortage which allows the producer to raise prices.”
Why this source?
  • Defines demand-pull inflation as resulting from an increase in aggregate demand across sectors.
  • Lists policy actions (money supply expansion, tax cuts, higher government spending) that raise aggregate demand and cause demand-pull inflation — establishing the causal channel from higher spending to inflation.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > a) Demand-Pull Inflation > p. 63
Presence: 3/5
“(a) Demand-Pull Inflation • It is caused by an increase in aggregate demand and consumption due to 'n (i) increased private and government spending, (ii) lower rate of savings by households, (iii) depreciation in local exchange rate, (iv) reduction in taxes and (v) increase in money supply and bank credit. • This leads to increased disposable income in the hands of households, thereby resulting a. in increase in the aggregate demand with no change in aggregate supply”
Why this source?
  • States that increased disposable income and consumption lead to higher aggregate demand.
  • Links higher aggregate demand directly to demand-pull inflation, providing the income→demand→inflation pathway relevant to wage changes.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > CHAPTER SUMMARY > p. 77
Presence: 3/5
“• Demand-Pull inflation caused by increased private and government spending, lower rate of savings by households, depreciation in local exchange rate, reduction in taxes and increase in money supply and bank credit - increased disposable income - increase in the aggregate demand. • Cost-Push inflation (supply shock) inflation caused by growing cost of factors of production of goods and services, increase in indirect taxes, increase in import prices, higher cost of capital, interest rates, etc. EXAMPLE Previous Years' Preliminary Examination Questions EXAMPLE Previous Press”
Why this source?
  • Lists increased disposable income and bank credit as causes of demand-pull inflation, reinforcing that higher incomes boost aggregate demand.
  • Supports the interpretation that measures which raise incomes (e.g., wage adjustments) can feed into demand-driven price rises.
Statement 4
Can higher (increased) purchasing power cause or increase demand-pull inflation in the Indian economy?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > CHAPTER SUMMARY > p. 77
Presence: 5/5
“• Demand-Pull inflation caused by increased private and government spending, lower rate of savings by households, depreciation in local exchange rate, reduction in taxes and increase in money supply and bank credit - increased disposable income - increase in the aggregate demand. • Cost-Push inflation (supply shock) inflation caused by growing cost of factors of production of goods and services, increase in indirect taxes, increase in import prices, higher cost of capital, interest rates, etc. EXAMPLE Previous Years' Preliminary Examination Questions EXAMPLE Previous Press”
Why this source?
  • Explicitly links increased private and government spending, tax reductions and increased money/bank credit to higher disposable income.
  • Connects higher disposable income to a rise in aggregate demand, the core driver of demand-pull inflation.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > Adverse Effects of Deficit Financing > p. 113
Presence: 5/5
“• Leads to inflation: Deficit financing may lead to inflation. Due to deficit financing, money 1. supply increases and the purchasing power of the people also increases, which increases the aggregate demand, and the prices also increase. 2. It puts an adverse effect on saving and investment. 3. It may lead to rise in the level of inequality. 4. It may create a deficit in balance of payments due to price rise, which may lead to exports 5. becoming uncompetitive in the global market”
Why this source?
  • Directly states that deficit financing increases money supply and the purchasing power of people.
  • Shows the causal chain: higher purchasing power → increased aggregate demand → price rises (inflation).
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > There are mainly two causes of inflation: > p. 112
Presence: 4/5
“• 1. Demand Pull Inflation: Demand-pull inflation occurs when there is an increase in aggregate demand, categorized by the four sectors of the economy: households, private, governments and foreign buyers. When these four sectors concurrently want to purchase more output than the economy can produce, then it leads to increase in prices. This excessive demand, also referred to as "too much money chasing too few goods", usually occurs in an expanding economy. Demand pull inflation may be caused due to over expansion of the money supply, government reducing tax and spending more etc.• 2. Cost Push or Supply Shock Inflation: Cost-push inflation basically means that prices have been "pushed up" by increase in costs of any of the four factors of production (labour, capital, land or entrepreneurship) or there is a supply shortage which allows the producer to raise prices.”
Why this source?
  • Defines demand-pull inflation as arising from an increase in aggregate demand when demand exceeds productive capacity.
  • Lists over-expansion of money supply, tax cuts and higher government spending as causes—mechanisms that raise purchasing power.
Statement 5
Can rising interest rates cause or increase demand-pull inflation in the Indian economy?
Origin: Web / Current Affairs Fairness: CA heavy Web-answerable

Web source
Presence: 5/5
"When the economy grows too fast and prices rise too quickly, they may do the opposite: spend less, raise taxes, or increase interest rates to prevent overheating and inflation."
Why this source?
  • Explains that raising interest rates is a tool used to prevent overheating and inflation, implying higher rates counteract demand-driven inflation.
  • Links monetary tightening directly to reducing inflationary pressure from excess demand.
Web source
Presence: 4/5
"Rising interest rates have driven borrowing costs well above nominal growth rates in many EMDEs, particularly those with ... Global inflation is projected to continue receding only gradually, as demand softens."
Why this source?
  • States that rising interest rates have raised borrowing costs well above growth in many EMDEs, which is associated with demand softening.
  • Connects tighter monetary policy (higher rates) with receding global inflation as demand softens.
Web source
Presence: 4/5
"Rising interest rates have led to softer credit growth in Bangladesh. In Nepal, bank credit expansion has remained low, due in part to subdued demand,"
Why this source?
  • Provides an example where rising interest rates led to softer credit growth, indicating reduced demand.
  • Links lower credit expansion to subdued demand, which would work against demand-pull inflation.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > a) Demand-Pull Inflation > p. 63
Strength: 5/5
“(a) Demand-Pull Inflation • It is caused by an increase in aggregate demand and consumption due to 'n (i) increased private and government spending, (ii) lower rate of savings by households, (iii) depreciation in local exchange rate, (iv) reduction in taxes and (v) increase in money supply and bank credit. • This leads to increased disposable income in the hands of households, thereby resulting a. in increase in the aggregate demand with no change in aggregate supply”
Why relevant

Gives an explicit list of standard causes of demand-pull inflation (increased private/government spending, lower household savings, depreciation, tax cuts, increase in money supply and bank credit).

How to extend

A student could note that rising interest rates are not listed here and so would check whether higher rates mechanically lead to any of these listed drivers (e.g., increase money supply or disposable income) using basic monetary transmission knowledge.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > CHAPTER SUMMARY > p. 77
Strength: 5/5
“• Demand-Pull inflation caused by increased private and government spending, lower rate of savings by households, depreciation in local exchange rate, reduction in taxes and increase in money supply and bank credit - increased disposable income - increase in the aggregate demand. • Cost-Push inflation (supply shock) inflation caused by growing cost of factors of production of goods and services, increase in indirect taxes, increase in import prices, higher cost of capital, interest rates, etc. EXAMPLE Previous Years' Preliminary Examination Questions EXAMPLE Previous Press”
Why relevant

Contrasts demand-pull with cost-push and explicitly associates 'higher cost of capital, interest rates, etc.' with cost-push inflation rather than demand-pull.

How to extend

One could extend this by using the standard idea that higher interest rates raise production costs (cost-push) and then ask whether any secondary effects could instead raise aggregate demand.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.31 Previous Years Questions > p. 122
Strength: 3/5
“With reference to Indian economy, demand-pull inflation can be caused / increased by which of the following? [2021] • (i) Expansionary policies• (ii) Fiscal stimulus• (iii) Inflation-indexing wages• (iv) Higher purchasing power• (v) Rising interest rates Select the correct answer using the code given below. • (a) (i), (ii) & (iv) only• (b) (iii), (iv) & (v) only• (c) (i), (ii), (iii) & (v) only• (d) All of the above”
Why relevant

Presents an exam-style list that includes 'rising interest rates' among candidate causes to be evaluated for demand-pull inflation, implying the issue is debated or commonly queried.

How to extend

A student might use this to justify testing whether rising rates fit the causal patterns in authoritative lists (e.g., by checking if rising rates increase disposable income or money supply in India).

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > a) Demand Side Factors/Causes for Inflation > p. 70
Strength: 4/5
“(a) Demand Side Factors/Causes for Inflation • Due to rise in non-developmental Government expenditure. • Due to increase in deficit financing, i.e. financing the deficits by borrowing funds from ğ. the banking system.”
Why relevant

Identifies deficit financing via borrowing from the banking system as a demand-side cause (i.e., expansion of bank credit increases demand).

How to extend

One could contrast this mechanism with the usual effect of rising market interest rates on bank borrowing/credit to assess whether higher rates would raise or dampen bank credit and thus demand.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > The Committee (in its report in 2014) recommended for focusing on only one objective, i.e. INFLATION TARGETING. > p. 73
Strength: 3/5
“Why Inflation Targeting is needed in India - As per the report, it is required because: • Real interest rates have remained negative during most of the post-global crisis period. • External competitiveness is getting eroded due to continuous higher levels of inflation. \bullet Due to inflation, there has been a large import of Gold due to its increasing demand and it has \bullet resulted in widening of the Current Account Deficit. • Continuous weakening of exchange rate has occurred due to persisting high inflation.”
Why relevant

Notes the role of interest rates in policy discussions (inflation targeting) and reports that real rates have been negative, linking interest-rate stance with inflation outcomes.

How to extend

A student could combine this with the basic fact that central bank rate changes are used to control inflation to consider whether rising rates are more likely a response to, or a cause of, demand pressures.

Pattern takeaway: UPSC frequently mixes 'Causes' with 'Cures' in the same list to test alertness. Rising interest rates are a standard tool to *fight* inflation, yet they are listed here as a potential cause. The pattern is to identify the variable that moves in the *opposite* direction to the others.
How you should have studied
  1. [THE VERDICT]: Sitter. Solvable purely by eliminating Statement 5 (Rising Interest Rates curb inflation). Source: NCERT Macroeconomics / Vivek Singh Ch. 2.
  2. [THE CONCEPTUAL TRIGGER]: Determinants of Inflation (Demand-Pull vs. Cost-Push) and the Monetary Policy Transmission mechanism.
  3. [THE HORIZONTAL EXPANSION]: Memorize the distinct drivers: 1. Cost-Push: Supply shocks, hoarding, rising crude prices, higher indirect taxes. 2. Structural: Infrastructural bottlenecks. 3. Related Concepts: Skewflation (price rise in few commodities), Stagflation (Inflation + Stagnation), Core Inflation (minus food/fuel), GDP Deflator.
  4. [THE STRATEGIC METACOGNITION]: Do not just read definitions. Apply the 'Arrow Test' to every variable: If X increases, does Money Supply/Purchasing Power go UP or DOWN? If UP → Demand Pull. If DOWN → Disinflationary.
Concept hooks from this question
📌 Adjacent topic to master
S1
👉 Demand‑pull vs Cost‑push inflation
💡 The insight

Distinguishes inflation driven by excess aggregate demand from inflation driven by supply-side cost shocks, essential to judge the effect of expansionary policy.

High-yield for UPSC: helps classify questions on inflation causes and choose appropriate policy responses; links macro growth, unemployment, and monetary/fiscal policy debates. Mastery enables direct answers on whether policies are demand- or supply-driven.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > CHAPTER SUMMARY > p. 76
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > There are mainly two causes of inflation: > p. 112
🔗 Anchor: "Can expansionary policies cause or increase demand-pull inflation in the Indian ..."
📌 Adjacent topic to master
S1
👉 Monetary expansion and aggregate demand
💡 The insight

Growth in money supply and bank credit raises disposable income and aggregate demand, a core channel for demand-pull inflation.

Crucial for questions on RBI policy, inflation targeting and transmission mechanism of monetary policy; explains how liquidity conditions can translate into price rises and affects answers on policy trade-offs.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > There are mainly two causes of inflation: > p. 112
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Impact of "Monetization of Deficit" > p. 165
🔗 Anchor: "Can expansionary policies cause or increase demand-pull inflation in the Indian ..."
📌 Adjacent topic to master
S1
👉 Deficit financing and monetization of the deficit
💡 The insight

Financing government deficits through borrowing from the central bank or printing money increases money supply and can raise demand-led inflation.

Important for fiscal-monetary interaction questions; helps evaluate risks of easy fiscal financing (inflation, rupee depreciation, loss of policy credibility) and frames answers on sustainable public finance.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > a) Demand Side Factors/Causes for Inflation > p. 70
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Impact of "Monetization of Deficit" > p. 165
🔗 Anchor: "Can expansionary policies cause or increase demand-pull inflation in the Indian ..."
📌 Adjacent topic to master
S2
👉 Demand-pull vs Cost-push inflation
💡 The insight

Distinguishes inflation caused by excess aggregate demand from inflation caused by rising production costs or supply shocks.

High-yield for policy questions and macroeconomic analysis: helps answer why similar price rises call for different policy responses (fiscal/monetary vs supply-side). Connects to growth, unemployment, and stagflation topics and enables evaluation-type questions on appropriate interventions.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > There are mainly two causes of inflation: > p. 112
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > CHAPTER SUMMARY > p. 77
🔗 Anchor: "Can fiscal stimulus cause or increase demand-pull inflation in the Indian econom..."
📌 Adjacent topic to master
S2
👉 Fiscal stimulus channels (spending, tax cuts, money supply)
💡 The insight

Fiscal stimulus works through increased government spending, tax reductions and associated rises in disposable income that boost aggregate demand.

Crucial for questions on fiscal policy design and macro stabilization: explains transmission from policy action to aggregate demand and inflation, links to fiscal deficit, monetary policy coordination, and short-run vs long-run effects.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 16: Terminology > 16 Terminology > p. 461
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > CHAPTER SUMMARY > p. 77
🔗 Anchor: "Can fiscal stimulus cause or increase demand-pull inflation in the Indian econom..."
📌 Adjacent topic to master
S2
👉 Deficit financing and monetization effects
💡 The insight

Financing government deficits via central bank (monetization) or banking system increases money supply and can raise aggregate demand and inflation.

Important for public finance and macro prudence topics: shows risks of monetizing deficits, impact on inflation and exchange rates, and relevance to fiscal-monetary coordination and sovereign ratings — useful for policy critique and cause-effect questions.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > a) Demand Side Factors/Causes for Inflation > p. 70
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Impact of "Monetization of Deficit" > p. 165
🔗 Anchor: "Can fiscal stimulus cause or increase demand-pull inflation in the Indian econom..."
📌 Adjacent topic to master
S3
👉 Demand-pull inflation — core causal mechanism
💡 The insight

Demand-pull inflation arises when aggregate demand exceeds the economy's capacity to supply, causing general price rises.

High-yield for UPSC because many policy questions hinge on whether shocks are demand- or supply-driven; links macro policy (fiscal/monetary) to price outcomes and aids in diagnosing policy responses (tighten demand vs. boost supply).

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > There are mainly two causes of inflation: > p. 112
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > CAUSE OF INFLATION > p. 69
🔗 Anchor: "Can inflation-indexing of wages cause or increase demand-pull inflation in the I..."
🌑 The Hidden Trap

The 'Wage-Price Spiral'. While Statement 3 (Indexing wages) was not part of the correct answer for 'Demand Pull' in this specific elimination context, it is the core mechanism of 'Built-in Inflation'. Expect a future question distinguishing between 'Imported Inflation' (Rupee depreciation) and 'Structural Inflation' (Supply chain bottlenecks).

⚡ Elimination Cheat Code

The 'Cure vs. Cause' Logic. Ask yourself: 'What does the RBI do when inflation is high?' They *raise* interest rates. Therefore, rising interest rates are the *remedy*, not the *malady*. Statement 5 is logically impossible as a cause. Eliminate options with 5 (B, C, D) → Answer is A.

🔗 Mains Connection

Mains GS3 (Inclusive Growth): Inflation is often termed a 'Regressive Tax' because it hurts the poor (with lower purchasing power) more than the rich. Connect this to the debate on the RBI's Monetary Policy Committee (MPC) prioritizing inflation targeting over growth.

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SIMILAR QUESTIONS

IAS · 2022 · Q92 Relevance score: 1.82

With reference to the Indian economy, consider the following statements : 1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee. 2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness. 3. An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER. Which of the above statements are correct ?

CDS-II · 2013 · Q68 Relevance score: 0.79

Which of the following factors is/are responsible for recent rapid slowdown of Indian economy despite recovering from . the global financial crisis ? 1. The boost to demand given by monetary and fiscal stimulus following the crisis was large 2. Starting in 2011-12, corporate and infrastructure investment started slowing both as a result of investment bottlenecks as well as the tighter monetary policy Select the correct answer using the code given below :

IAS · 2017 · Q77 Relevance score: -0.87

Which of the following has/have occurred in India after its liberalization of economic policies in 1991 ? 1. Share of agriculture in GDP increased enormously. 2. Share of India's exports in world trade increased. 3. FDI inflows increased. 4. India's foreign exchange reserves increased enormously. Select the correct answer using the codes given below :

CDS-II · 2023 · Q111 Relevance score: -1.14

The Wholesale Price Inflation has increased in India during 2021 - 2022 due to which of the following factors? 1. Sharp increase in international prices of crude oil 2. Decrease in economic activity post-Covid 3. Disruption of global supply chain 4. High freight cost Select the correct answer using the code given below:

IAS · 2022 · Q95 Relevance score: -1.48

With reference to the Indian economy, what are the advantages of "Inflation-Indexed Bonds (IIBs)" ? 1. Government can reduce the coupon rates on its borrowing by way of IIBs. 2. IIBs provide protection to the investors from uncertainty regarding inflation. 3. The interest received as well as capital gains on IIBs are not taxable. Which of the statements given above are correct ?