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.
- (a) 1, 2 and 4 only ✓ UPSC's answer
- (b) 3, 4 and 5 only
- (c) 1, 2, 3 and 5 only
- (d) 1, 2, 3, 4 and 5
Why the answer is (a)
• Demand-pull inflation arises when aggregate demand outruns the economy's capacity to supply ("too much money chasing too few goods").
• Expansionary monetary policy (1), fiscal stimulus (2) and higher purchasing power (4) all add to aggregate demand and so cause or increase demand-pull inflation.
• Inflation-indexing wages (3) raises costs and feeds a wage–price spiral — that is cost-push, not demand-pull.
• Rising interest rates (5) dampen borrowing and spending, reducing demand-pull pressure.
• Hence 1, 2 and 4 only, option (a).
Why the other options are wrong
- (b) 3, 4 and 5 only
- Wage indexing is cost-push and rising rates reduce demand.
- (c) 1, 2, 3 and 5 only
- Wage indexing and rising rates do not fuel demand-pull; purchasing power does.
- (d) 1, 2, 3, 4 and 5
- Rising interest rates reduce demand-pull inflation.
Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2021, held on 10 October 2021. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.