UPSC Prelims 2021 Q12: Indian Economy – National Income & Economic Growth
- (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
Answer: (a) 1, 2 and 4 only
Explanation
Demand-Pull Inflation: What Causes It?
Demand-pull inflation occurs when aggregate demand exceeds aggregate supply, pulling prices up. All demand-boosting factors qualify.
| Factor | Demand-Pull? | Why |
|---|---|---|
| 1. Expansionary policies | YES | Loose monetary policy (rate cuts, QE) and fiscal expansion boost demand. |
| 2. Fiscal stimulus | YES | Government spending injects demand into the economy. |
| 3. Inflation-indexed wages | NO - Cost-push | Wage indexation raises production costs, causing COST-PUSH inflation (wage-price spiral), not demand-pull. |
| 4. Higher purchasing power | YES | More disposable income raises consumption demand. |
| 5. Rising interest rates | NO - Contractionary | Higher rates SUPPRESS demand by making borrowing costly, reducing consumption and investment. |
Only factors 1, 2 and 4 cause demand-pull inflation. Answer: (a).
Answer: (a) 1, 2 and 4 only.
Why each option is right or wrong
- (a) CORRECT. Only 1 (expansionary policies), 2 (fiscal stimulus) and 4 (higher purchasing power) cause demand-pull inflation. Wage indexation (cost-push) and rising rates (contractionary) do not.
- (b) Incorrect. Wage indexation is cost-push, not demand-pull. Rising rates REDUCE demand.
- (c) Incorrect. Wage indexation and rising rates are wrong causes.
- (d) Incorrect. All five is wrong - rate hikes are contractionary and wage indexation is cost-push.
Key point
Demand-pull inflation = aggregate demand > aggregate supply. Caused by expansionary fiscal/monetary policy, stimulus, higher purchasing power. NOT by wage indexation (cost-push) or rate hikes (contractionary).
Remember
Demand-pull inflation is caused by (1) expansionary policies, (2) fiscal stimulus, and (4) higher purchasing power - all of which raise aggregate demand. Wage indexation (3) causes cost-push inflation, and rising interest rates (5) SUPPRESS demand. Answer: 1, 2 and 4 only.
Common mistakes
- Confusing demand-pull with cost-push inflation. Demand-pull = too much money chasing few goods. Cost-push = higher input costs (wages, oil) pushing prices up.
- Thinking wage rise always causes demand-pull. Wage indexation causes cost-push (wage-price spiral); real wage rises can cause demand-pull.
- Missing that rising interest rates SUPPRESS demand - they cannot cause demand-pull inflation.
Exam tip
Demand-pull vs Cost-push: Demand-pull = expansionary policies, stimulus, purchasing power up. Cost-push = wage indexation, oil shocks, supply disruption. India's 2010-11 inflation was mainly food-supply cost-push; 2021-22 US inflation was demand-pull from stimulus.
Sources
- NCERT Class XII Macroeconomics - Chapter on Inflation
- RBI Bulletin - Inflation Dynamics in India