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 code given below.
Answer & explanation
Answer: (a) 1, 2 and 4 only
Demand-pull inflation happens when total demand outruns what the economy can supply. Expansionary policy, a fiscal stimulus and higher purchasing power all raise demand. Indexing wages to inflation works through costs, and rising interest rates reduce demand, so 3 and 5 do not fit.
- ✓ 1. Expansionary monetary or fiscal policy puts more money and spending into the economy, lifting aggregate demand.
- ✓ 2. A fiscal stimulus (more government spending or tax cuts) directly raises aggregate demand; if firms cannot raise output fast enough, prices rise.
- ✗ 3. Linking wages to inflation raises firms' labour costs and feeds a wage-price spiral, which is usually classed as cost-push, not demand-pull, inflation.
- ✓ 4. When people have more purchasing power they buy more, and demand racing ahead of supply pulls prices up.
- ✗ 5. Higher interest rates make borrowing dearer and reduce money supply, so they dampen demand; central banks raise rates to fight inflation.
Remember · Demand-pull: too much money chasing too few goods (stimulus, easy money, higher incomes). Cost-push: rising input costs such as wages or oil.
📘 Read it in NCERT: Class 12 Introductory Macroeconomics, Ch 5 (practise this chapter) · Class 12 Introductory Macroeconomics, Ch 3 (practise this chapter)
Sources
- NCERT Class 12 · Introductory Macroeconomics, Chapter 5 “This is because when government increases spending or cuts taxes, aggregate demand increases. Firms may not be able to produce higher quantities that are being demanded at the ongoing prices. Prices will, therefore, have to rise.”
- NCERT Class 12 · Introductory Macroeconomics, Chapter 3 “By increasing the bank rate, loans taken by commercial banks become more expensive; this reduces the reserves held by the commercial bank and hence decreases money supply.”
Question and answer: UPSC's official GS Paper I (2021, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). ·