Question

A general price rise can take place because of ___________.

• A. rise in aggregate demand
• B. failure of aggregate supply
• C. both of the above
• D. none of the above

Answer 1

The correct option is C both of the above

Inflation is an economic situation where the general price level in the economy for all the relevant goods has a constant appreciable rise over a considerable period of time. Inflation can take place because of the two of the following reasons:

(i) Rise in the aggregate demand: Aggregate Demand refers to the desired level of expenditure in the economy during an accounting year. It is what people wish to spend on the purchase of goods and services during an accounting year. If aggregate demand increases with constant supply in the economy, it leads to excess demand in the economy due to which the prices for all goods and services increase which leads to rise in the general price level.

(ii) Failure of aggregate supply: Aggregate supply refers to the desired level of output in the economy during an accounting year. It is through this output only that the producer sector generates income. If aggregate supply falls with constant demand in the economy, it leads to excess demand in the economy due to which the prices for all goods and services increase which leads to rise in the general price level.