With reference to Indian economy, demand-pull inflation can be caused/increased by which of the following?
- Expansionary policies
- Fiscal stimulus
- Inflation-indexing wages
- Higher purchasing power
- Rising interest rates
Select the correct answer using the code given below.
1, 2 and 4 only
3, 4 and 5 only
1, 2, 3 and 5 only
1, 2, 3, 4 and 5
Answer is Wrong!
Answer is Right!
This question was previously asked in
UPSC IAS – 2021
1. Expansionary policies (monetary or fiscal) increase the money supply or government spending/reduce taxes, leading to higher aggregate demand.
2. Fiscal stimulus is a type of expansionary fiscal policy specifically aimed at boosting demand.
4. Higher purchasing power means consumers and businesses have more ability and willingness to spend, directly increasing aggregate demand.
3. Inflation-indexing wages can contribute to persistent inflation by maintaining demand and fueling a wage-price spiral, but it’s often discussed in the context of cost-push or inertial inflation as well. However, maintaining purchasing power supports demand.
5. Rising interest rates reduce borrowing and spending, thus decreasing aggregate demand, which is the opposite of what causes demand-pull inflation.
Given the options, {1, 2, 4} represent the most direct and clear drivers of demand-pull inflation. Statement 3 is debatable in its primary classification but does support demand. Statement 5 directly reduces demand.