📘 Q.11 IAS Prelims 2021— Economics (Demand-Pull Inflation)
🧷 Authentic Classroom Explanation by IAS Monk
📌The Question:
With reference to the Indian economy, demand-pull inflation can be caused / increased by which of the following?
- Expansionary policies
- Fiscal stimulus
- Inflation-indexing wages
- Higher purchasing power
- Rising interest rates
📌 Select the correct answer using the code given below:
(a) 1, 2 and 4 only
(b) 3, 4 and 5 only
(c) 1, 2, 3 and 5 only
(d) 1, 2, 3, 4 and 5
📌 Correct Answer: (a)
🧠 Classroom Explanation
🔹 Core Idea: Demand-Pull Inflation
Demand-pull inflation arises when aggregate demand in the economy exceeds aggregate supply.
It is often described as:
“Too much money chasing too few goods.”
Anything that boosts demand without a matching increase in supply can fuel this form of inflation.
🔍 Statement-wise Analysis
- Statement 1: Expansionary policies ✅
Expansionary fiscal policy (higher government spending / tax cuts) and monetary policy (easy credit, lower interest rates) increase money supply and demand.
👉 This directly raises aggregate demand.
✔️ Correct. - Statement 2: Fiscal stimulus ✅
Fiscal stimulus is a key tool of expansionary fiscal policy.
Measures like tax rebates, subsidies, higher public expenditure raise income and consumption demand.
✔️ Correct. - Statement 3: Inflation-indexing wages ❌
Inflation-indexed wages merely protect real wages, not increase them.
Purchasing power remains broadly unchanged.
👉 Hence, it does not generate additional demand.
❌ Incorrect. - Statement 4: Higher purchasing power ✅
When real purchasing power rises, households can demand more goods and services.
👉 This can push demand beyond supply capacity.
✔️ Correct. - Statement 5: Rising interest rates ❌
Higher interest rates discourage borrowing and spending.
This contracts demand rather than expanding it.
❌ Incorrect.
✅ Final Logic
Demand-pull inflation is driven by demand-boosting forces, not demand-restricting ones.
✔️ Correct set: 1, 2 and 4 only
🔍 Curiosity Raiser
Why do governments often tolerate mild demand-pull inflation during economic recovery phases?
🧘 IAS Monk Whisper
Inflation begins not in prices,
but in desire—
when demand runs faster than discipline.