A rise in the general level of prices may be caused by:1. An increase in the money supply2. A decrease in the aggregate level of output3. An increase in the effective demandSelect the correct answer using the codes given below:
✓ Correct answer: d) 1, 2 and 3
ExplanationInflation is the general rise in prices of goods and services within a particular economy wherein, the purchas- ing power of consumers decreases, and the value of the cash holdings erode.Inflation measures the average price change in a basket of commodities and services over time.Some causes of inflation include increase in demand, reduction in supply, de- mand-supply gap, excess circulation of money, increase in input costs, devaluation of currency, rise in wages, etc.Statement 1 is correct: When the money supply in the economy increases the purchasing power of people increases leading to in- creased demand for goods and services.If this demand surpasses the supply the prices rise causing demand-pull inflation.Exam- ple: Post-COVID monetary easing by central banks led to global inflationary trends.Statement 2 is correct : If the economy’s overall production of goods and services falls (aggregate supply decreases) and demand remains the same or increases then the prices will be pushed upward causing inflation.This can happen due to factors like supply chain disruptions, natura
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