Official Answer Key & Detailed Solution
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Correct Answer: Option (A) — 1, 2 and 4 only
Concept & Option Breakdown
Standard Reference Verified• Demand-pull inflation occurs when aggregate demand exceeds aggregate supply ('too much money chasing too few goods'). • Statement 1 is correct: Expansionary monetary and fiscal policies increase money supply and aggregate demand. • Statement 2 is correct: Fiscal stimulus directly injects purchasing power and boosts government and private consumption. • Statement 3 is incorrect: Inflation-indexing wages adjusts nominal wages to keep real wages constant; it is a compensatory mechanism rather than an initial driver of demand-pull inflation. • Statement 4 is correct: Higher disposable income and purchasing power increase consumer demand. • Statement 5 is incorrect: Rising interest rates make borrowing expensive and encourage saving, thereby dampening aggregate demand.
Eliminate Statement 5 immediately: Higher interest rates are a contractionary tool used to curb inflation, not cause it. Eliminating (b), (c), and (d) leaves (a) directly.
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