Question

Which of these is one of the causes of inflation?

• A. Increase in public expenditure
• B. Deficit financing
• C. Increase in administrative prices
• D. all the three

Answer 1

Answer: (D)

all the three

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. The causes behind inflation are:

(i) Increase in public expenditure: If public expenditure increases then the demand for all the goods and services in the economy will increase with no change in supply which will lead to excess demand and result in inflation.

(ii) Deficit financing: Deficit financing means filling the gap between government revenue and government expenditure in a government budget either by borrowing funds from central bank or by printing currency. In both the ways there is increase in the money supply in the economy which leads to inflation.

(iii) Increase in administrative prices: Administered prices are prices of goods set by the internal pricing structures of firms that take into account and factor cost rather than pricing through the market forces of supply and demand. Therefore, increase in such prices directs impacts the general price level of the economy which results in inflation.