Q. Which among the following can be a reason for demand-pull inflation?
Select the correct answer using the code given below:
Q. Which among the following can be a reason for demand-pull inflation?
Select the correct answer using the code given below:
The correct option is B 2 and 4 only
Explanation:
Based on Aggregate Supply and Aggregate Demand, inflation is divided into two types:
1. Demand-Pull Inflation
This type of inflation is caused due to an increase in aggregate demand in the economy. Major reasons to support the statement are stated below:
- Increased money supply or an expanding economy — When customers are confident, they spend more and take on more debt. As a result, demand continues to rise, resulting in increasing prices.
- Asset inflation or an increase in foreign exchange reserves- A sudden increase in exports causes the currencies involved to depreciate.
- Government expenditure, or government deficit financing — When the government spends more freely, prices rise.
- Due to fiscal stimulus
- Increased borrowing
- Investment (due to a reduction in the rate of interest or optimism in business sentiments)
- Depreciation of rupee
2. Cost-push inflation:
Inflation generated by an increase in the price of inputs such as labour, raw materials, and so on is known as cost-push inflation.
- As the price of the factors of production rises, the supply of these commodities decreases. While demand remains constant, commodity prices grow, resulting in an increase in the overall price level. This is in essence cost-push inflation. The rise in fuel prices and food prices (due to a poor monsoonal session) can lead to inflation.
- Apart from rising input prices, other factors such as natural disasters or natural resource depletion, monopoly, government regulation, or government intervention could all contribute to supply-side inflation. Generally, cost-push inflation may occur in the case of an inelastic demand curve where the demand cannot be easily adjusted according to rising prices.
Note: Here, it should be noted that the high volatility of food prices is also due to lack of irrigational facilities and inadequate post-harvest storage infrastructure. So, it can also be classified as structural inflation.
Explanation:
Based on Aggregate Supply and Aggregate Demand, inflation is divided into two types:
1. Demand-Pull Inflation
This type of inflation is caused due to an increase in aggregate demand in the economy. Major reasons to support the statement are stated below:
- Increased money supply or an expanding economy — When customers are confident, they spend more and take on more debt. As a result, demand continues to rise, resulting in increasing prices.
- Asset inflation or an increase in foreign exchange reserves- A sudden increase in exports causes the currencies involved to depreciate.
- Government expenditure, or government deficit financing — When the government spends more freely, prices rise.
- Due to fiscal stimulus
- Increased borrowing
- Investment (due to a reduction in the rate of interest or optimism in business sentiments)
- Depreciation of rupee
2. Cost-push inflation:
Inflation generated by an increase in the price of inputs such as labour, raw materials, and so on is known as cost-push inflation.
- As the price of the factors of production rises, the supply of these commodities decreases. While demand remains constant, commodity prices grow, resulting in an increase in the overall price level. This is in essence cost-push inflation. The rise in fuel prices and food prices (due to a poor monsoonal session) can lead to inflation.
- Apart from rising input prices, other factors such as natural disasters or natural resource depletion, monopoly, government regulation, or government intervention could all contribute to supply-side inflation. Generally, cost-push inflation may occur in the case of an inelastic demand curve where the demand cannot be easily adjusted according to rising prices.
Note: Here, it should be noted that the high volatility of food prices is also due to lack of irrigational facilities and inadequate post-harvest storage infrastructure. So, it can also be classified as structural inflation.
