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:
Answer & explanation
Answer: (d) 1, 2 and 3
The general price level depends on how much money and demand are chasing the available goods. More money or more demand pushes prices up. Less output with the same demand does too. So all three can cause a general rise in prices.
- ✓ 1. A larger money supply adds to spending power. RBI research on Indian inflation finds that money supply growth, along with the output gap, explains a large part of the variation in inflation.
- ✓ 2. If total output falls while demand stays the same, the same money chases fewer goods. Buyers compete for the smaller supply, and the result is a supply-side rise in prices.
- ✓ 3. When aggregate demand is more than the output the economy can produce at full employment, there is excess demand. NCERT says this leads to a rise in prices.
Remember · Prices rise from the demand side (more money, more effective demand) and from the supply side (less output). Inflation is a mismatch between spending power and goods available.
📘 Read it in NCERT: Class 12 Introductory Macroeconomics, Ch 4 (practise this chapter)
Sources
- NCERT Class 12 · Introductory Macroeconomics, Chapter 4 “This situation is called the situation of excess demand. It leads to rise in prices in the long run.”
- RBI Bulletin (Reserve Bank of India), article on drivers of inflation in India ↗ “Demand factors such as money supply growth and output gap explained a large part of the variation in headline and food inflation”
Question: UPSC Civil Services (Preliminary) 2013, General Studies Paper I. Explanation: Minimalist IAS, checked 25 Oct 2026 (how we verify). ·
