A rise in the 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.

QUESTION

Easy

Economy

Prelims 2013

A rise in the general level of prices may be caused by:

an increase in the money supply
a decrease in the aggregate level of output
an increase in the effective demand

Select the correct answer using the codes given below.

Select an option to attempt

Explanation

Statement 1 is correct: According to the quantity theory of money, if the money supply increases faster than output, it leads to more money chasing the same amount of goods, causing inflation.

Statement 2 is correct: When output decreases but demand remains the same, there is excess demand relative to supply, which can push prices up (cost-push inflation).

Statement 3 is correct: Effective demand refers to the total demand for goods and services at a given price level. If it increases beyond the economy's productive capacity, it causes demand-pull inflation.

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