Q32.
A rise in general level of prices may be caused by 1. An increase in the money supply 2. A decrease in the aggregate level of output 3. An increase in the effective demand Select the correct answer using the codes given below:
Answer
D
Explanation
All three can cause a rise in the general price level. An increase in money supply will cause inflation (quantity theory of money). A decrease in aggregate output leads to supply-side inflation. An increase in effective demand (demand-pull inflation) also raises prices.