With reference to the 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.

Correct option is A

• Demand-pull inflation emerges when the aggregate demands exceed the level of aggregate supply or full employment output. Consumers and investors seek to buy more than the total amount of output that can be produced. The demand- pull inflation may be caused by an increase in money supply. 

• This would also occur when aggregate demand increases either because of a rise in the marginal efficiency of capital or a rise in the propensity to consume. Expansionary fiscal policy is intended to increase the money supply in the economy using budgetary instruments to either raise spending or cut taxes. So, Expansionary fiscal policy can cause demand-pull inflation. Hence, statement 1 is correct. 

• A fiscal stimulus is a package comprising tax rebates and incentives. It is used by the government to stimulate the economy and prevent the country from a financial crisis. It increases money supply in the economy and is intended to increase the demand, job creation, et(c) So, it can also lead to the demand-pull inflation. Hence, statement 2 is also correct. 

• Inflation-indexing wages do not lead to demand-pull inflation because they are adjusted with inflation. They are provided to reduce the effect of inflation. Hence, statement 3 is incorrect. 

• Higher purchasing power can lead to demand-pull inflation, because consumers have a lot to spend and they can demand more goods/services. Hence, statement 4 is correct. 

• Rising interest rates reduce money supply in the economy, so, it cannot lead to demand-pull inflation. Hence, statement 5 is incorrect.

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