UPSC Prelims 2021 · Question 12 of 97
UPSC Prelims 2021 question on Demand Pull Inflation
- ExamUPSC CSE
- Year2021
- PaperGeneral Studies Paper I
- SubjectIndian Economy
- TopicInflation
- DifficultyMedium
- TypeStatement
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.
Show answer
Answer: A. 1, 2 and 4 only
Verdict
Correct statements: 1, 2 and 4 → Option (a).
Analysis
Demand-Pull Inflation occurs when aggregate demand outgrows aggregate supply — 'too much money chasing too few goods'.
Statement by statement
Statement 1 — CORRECT: Expansionary fiscal and monetary policies (increase in government expenditure / tax cuts / easier credit) raise aggregate demand and cause demand-pull inflation.
Statement 2 — CORRECT: Fiscal stimulus is a part of expansionary policy. By way of tax rebates, incentives and increased government spending, it stimulates private-sector activity, job creation and demand — thus causing demand-pull inflation.
Statement 3 — INCORRECT: Inflation-indexing of wages means wages move with inflation. The effective change in real wages is zero, so purchasing power does not increase. Hence indexing does NOT cause demand-pull inflation.
Statement 4 — CORRECT: Higher purchasing power means more money chasing goods, which raises aggregate demand and causes demand-pull inflation.
Statement 5 — INCORRECT: Rising interest rates make borrowing costlier and reduce consumption and investment, dampening aggregate demand. They do NOT cause demand-pull inflation — they curb it.