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    Question

    Which of the following is likely to cause inflation?

    A Increase in money supply Correct Answer Incorrect Answer
    B Increase in money supply and fall in production Correct Answer Incorrect Answer
    C Fall of production Correct Answer Incorrect Answer
    D Decrease in money supply and fall in production Correct Answer Incorrect Answer
    E Fall of consumption Correct Answer Incorrect Answer

    Solution

    Inflation is defined as a situation where there is sustained, unchecked increase in the general price level and a fall in the purchasing power of money. Thus, inflation is a condition of price rise. The reason for price rise can be classified under two main heads (1) Increase in demand (2) Reduced supply (led by fall in production) Increasing the money supply faster than the growth in real output will cause inflation. The reason is that there is more money chasing the same number of goods. Therefore, the increase in monetary demand causes firms to put up prices. If the money supply increases at the same rate as real output, then prices will stay the same.

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