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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
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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.
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Statement analysis

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