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 codes given below.
Explanation
Expansionary policies: Expansionary policies like increased government spending or lower interest rates can stimulate economic activity and consumer spending. This can lead to excess demand that outstrips supply, causing prices to rise.
Fiscal stimulus: Similar to expansionary policies, fiscal stimulus through government spending injections can create an inflationary gap if it's excessive.
Higher purchasing power: Higher purchasing power can contribute to demand-pull inflation. If people have more money to spend due to factors like wage increases or wealth accumulation, it can lead to increased demand for goods and services.
Inflation-indexing wages: While inflation-indexing wages can contribute to a wage-price spiral in some cases, it's not necessarily a direct cause of demand-pull inflation. It can be a consequence of inflation rather than a primary driver.
Rising interest rates: Rising interest rates generally act as a tool to cool down an economy and reduce inflation. They make borrowing more expensive and encourage saving, thereby reducing the money supply and aggregate demand.
Therefore, the correct code is 1, 2, and 4.
