Which one of the following situations can lead to inflation?
[amp_mcq option1=”Rapid growth of aggregate demand outweighing supply” option2=”Sluggish growth of aggregate demand” option3=”Reduction in the money supply” option4=”Higher levels of unemployment” correct=”option1″]
This question was previously asked in
UPSC CDS-1 – 2023
– Rapid growth of aggregate demand relative to supply creates upward pressure on prices.
– Sluggish demand growth typically leads to disinflation or deflation.
– Reduction in money supply is a monetary policy tool usually used to *combat* inflation by reducing aggregate demand.
– Higher levels of unemployment are usually associated with slack in the economy and low demand, which reduces inflationary pressure.