A rise in general level of prices may be caused byAn increase in the money supplyA decrease in the a

Q: What is UPSC Prelims?

UPSC Prelims is a competitive examination conducted in India. This question is from the 2013 UPSC Prelims Economy paper.

Q: How can I prepare for UPSC Prelims Economy?

To prepare for UPSC Prelims Economy, practice previous year questions (PYQs), understand concepts thoroughly, and solve mock tests regularly. This 2013 question covers Inflation – Types, Causes, Measurement & Control topic.

Q: What is the difficulty level of this question?

This UPSC Prelims 2013 Economy question has a easy difficulty level and is marked as an important question.

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You can find more UPSC Prelims previous year questions on AspirantMitraa. Browse by subject, topic, year, and difficulty level to practice effectively.

Question

A rise in general level of prices may be caused byAn increase in the money supplyA decrease in the aggregate level of outputAn increase in the effective demandSelect the correct answer using the codes given below:

Accepted Answer

Correct Answer: D — 1, 2 and 3Step-by-step Solution:All three factors can cause a rise in the general price level (inflation). This question is based on the fundamental framework of inflation causation:Statement 1 — Increase in money supply: This causes demand-pull/monetary inflation. The Quantity Theory of Money (MV = PQ) states that if money supply (M) increases while velocity (V) and output (Q) remain constant, prices (P) must rise. When more money chases the same quantity of goods, prices are bid up. This is 'too much money chasing too few goods.' Central banks' money creation (e.g., printing money to finance deficits) directly causes inflation. ✓Statement 2 — Decrease in aggregate output: This causes supply-side inflation (cost-push or structural). If the total output of goods and services in the economy falls (due to drought, supply chain disruption, raw material shortage, war) while demand remains constant, the existing money supply is now chasing fewer goods — prices rise. Agricultural supply shocks (droughts reducing food output) causing food price inflation in India is a classic example. ✓Statement 3 — Increase in effective demand: This causes demand-pull inflation. Effective demand (aggregate demand — total spending in the economy by consumers, businesses, government, and net exports) increasing without a corresponding increase in supply creates upward pressure on prices. Government fiscal stimulus, consumer credit boom, income increases all raise effective demand and can cause inflation when output cannot expand proportionally. ✓Key Concept: Inflation types and causes: (1) Demand-pull — excess aggregate demand over supply; caused by: money supply growth, government spending, tax cuts, consumer confidence; (2) Cost-push — rising input costs; caused by: oil price shocks, wage increases, raw material shortages, supply chain disruptions; (3) Built-in/Wage-price spiral — workers demand higher wages expecting inflation, businesses raise prices to cover wage costs, cyclical; (4) Structural — supply bottlenecks, agricultural monopolies, transport infrastructure deficiencies; (5) Imported inflation — rising import prices (currency depreciation, global commodity price rises). India's inflation challenge: food inflation (WPI food, CPI food) — driven by supply shocks + structural issues; core inflation (excluding food and fuel) reflects demand-side pressures; RBI targets CPI at 4% ± 2%.

A rise in general level of prices may be caused byAn increase in the money supplyA decrease in the aggregate level of outputAn increase in the effective demandSelect the correct answer using the codes given below:

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A rise in general level of prices may be caused byAn increase in the money supplyA decrease in the aggregate level of outputAn increase in the effective demandSelect the correct answer using the codes given below:

Master UPSC Prelims with Our Test Series

More Questions from Inflation – Types, Causes, Measurement & Control

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