UPSC Prelims 2013 · Question 32 of 99

UPSC Prelims 2013 question on Price Rise Causes

A rise in general level of prices may be caused by

1. An increase in the money supply
2. A decrease in the aggregate level of output
3. An increase in the effective demand

Select the correct answer using the codes given below:

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Answer: D. 1, 2 and 3

Correct Answer: 1, 2 and 3

According to the official UPSC Answer Key for Prelims 2013 General Studies Paper, the correct option is 1, 2 and 3.

A rise in the general level of prices means inflation. Inflation can be caused by excess money supply, lower output, or higher effective demand.

1. Increase in the money supply — Correct

When money supply increases faster than the production of goods and services, people have more purchasing power.

This leads to “too much money chasing too few goods”, causing prices to rise.

This is a monetary cause of inflation.

2. Decrease in the aggregate level of output — Correct

If total output falls while demand remains the same, goods become relatively scarce.

This shortage pushes prices upward.

This is a supply-side issue and may lead to cost-push inflation.

3. Increase in the effective demand — Correct

Effective demand means demand backed by the ability to pay.

When consumers, businesses or the government demand more than what the economy can produce, prices rise.

This is called demand-pull inflation.

* Inflation is a sustained rise in the general price level.

* Demand-pull inflation occurs when aggregate demand exceeds aggregate supply.

* Cost-push inflation occurs due to rising input costs or supply shortages.

* Deflation means a general fall in the price level.

* Stagflation means high inflation along with slow growth and high unemployment.

* Core inflation excludes volatile food and fuel items, while headline inflation includes them.

Inflation may arise from higher money supply, lower output or higher effective demand, so all three statements are correct.

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