With reference to Indian economy, demand-pull inflation can be caused/increased by which of the following? 1. Expansionary policies 2. Fiscal stimulus 3. I

1. A. 1, 2 and 4 only
2. B. 3, 4 and 5 only
3. C. 1, 2, 3 and 5 only
4. D. 1, 2, 3, 4 and 5

Answer: A

Explanation

Demand Pull Inflation- This type of inflation is caused by increase in demand and when the demand in the economy outgrows the supply in the economy. This kind of inflation can be described by “too much money chasing too few goods”. One of the reasons for demand pull inflation can be the increase in money supply, by way of increased salary, increased government expenditure etc. First statement- expansionary policies whether it is fiscal or monetary. Expansionary fiscal policy is defined as an increase in government expenditures and/or a decrease in taxes. Expansionary monetary policy increases the supply of money in an economy by making credit supply easily available. so expansionary policy can cause demand pull inflation in the economy. Hence, statement 1 is Correct. Second statement- Fiscal stimulus- it is the part of expansionary policies of the government. It is used by the government to stimulate the economy by way of tax rebates, various incentives, stimulate private sector economic activities thus job creation, etc. So it can also lead to Demand Pull Inflation in the economy. Hence, statement 2 is Correct. Third statement- Inflation-indexing wages, wages in the economy is linked to the inflation which means wage moves as inflation changes in the economy. Such indexing is provided to reduce the effect of inflation on wages. For example- a worker is getting 100 rs as a wage and inflation in the economy increases to 5%, so wage of the worker increases by 5% i.e. 105. So effective change in the wages is zero and it does not increase/decrease purchasing power. So, it can not lead to demand pull inflation in the economy. Hence, statement 3 is not correct. Higher purchasing power- If purchasing power increases in the economy (for example previously a household has an income of 100 rs and out of that 50 rs is spending, if the spending capacity of this household increases to 60 rs then it can demand more goods/services in the economy.) and it can lead to demand pull inflation in the economy. Hence, statement 4 is correct. Rising interest rates- It decreases the money supply in the economy. This may result in credit crunch in the economy. It is costlier to borrow money in the economy and it leads to decreased money supply. So, it can not cause demand pull inflation in the economy. Hence, statement 5 is not correct.