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:
Explanation
Inflation is the general rise in prices of goods and services within a particular economy wherein, the purchasing power of consumers decreases, and the value of the cash holdings erode. Inflation measures the average price change in a basket of commodities and services over time. Some causes of inflation include increase in demand, reduction in supply, demand-supply gap, excess circulation of money, increase in input costs, devaluation of currency, rise in wages, etc.
Statement 1 is correct: When the money supply in the economy increases the purchasing power of people increases leading to increased demand for goods and services. If this demand surpasses the supply the prices rise causing demand-pull inflation. Example: Post-COVID monetary easing by central banks led to global inflationary trends.
Statement 2 is correct: If the economy’s overall production of goods and services falls (aggregate supply decreases) and demand remains the same or increases then the prices will be pushed upward causing inflation. This can happen due to factors like supply chain disruptions, natural disasters, or decreased productivity.
Statement 3 is correct: "Effective demand" refers to demand that is backed by the ability to pay. If there’s an increase in demand for goods and services (due to factors like rising incomes, consumer confidence, or government spending) and supply doesn’t increase at the same rate then theprices will rise.