Question 44 from UPSC CSE 2021 - Economics

Question

With reference to the 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 code given below.

Accepted Answer

Correct Option: A. 1, 2, and 4 only

Strategy: Focus on identifying factors that increase aggregate demand relative to aggregate supply, as this is the core mechanism of demand-pull inflation.

- **Identify contributors:** Recognize that expansionary policies, fiscal stimulus, and higher purchasing power boost demand and can cause demand-pull inflation.
- **Eliminate non-contributors:** Discard factors like inflation-indexing wages, which only neutralize income effects, and rising interest rates, which dampen demand.

Key Info: Demand-pull inflation describes a rise in the general price level driven by an increase in aggregate demand relative to aggregate supply. It is often summarized as "too much money chasing too few goods."

**Key causes include:**
- **Expansionary policies:** Monetary and fiscal policies designed to stimulate economic growth by increasing the money supply, government spending, or decreasing taxes, thereby boosting aggregate demand.
- **Fiscal stimulus:** Government actions such as increased public spending or tax cuts intended to boost economic activity, leading to higher consumption and investment.
- **Higher purchasing power:** When households and firms have more disposable income, consumption spending rises, increasing demand for goods and services, which can push prices upward if supply does not keep pace.

**Counter-examples:**
- **Inflation-indexing wages:** Adjusts wages in line with inflation, preserving real purchasing power but not inherently increasing aggregate demand, as it does not represent a net gain in disposable income.
- **Rising interest rates:** Makes borrowing costlier, discouraging spending and investment, reducing money supply and overall demand—thereby acting against demand-pull inflation.

In summary, only expansionary policies, fiscal stimulus, and higher purchasing power directly contribute to demand-pull inflation. Classic examples include periods of strong economic growth following fiscal stimulus packages or loose monetary policy, such as post-2008 or during situations of rapid government spending.

Answer

Option B: 3, 4, and 5 only

Answer

Option C: 1, 2, 3, and 5 only

Answer

Option D: 1, 2, 3, 4, and 5

With reference to the 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.

With reference to the 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.