UPSC Prelims 2013 · GS Paper I
Question 82: Economy and Social Development
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.
AnswerUPSC’s answer is (d).
The general price level rises when too much money chases too few goods. A larger money supply and a rise in effective demand both raise spending against the same supply (demand-pull). A fall in aggregate output reduces the goods available, so the same demand meets fewer goods and prices rise (supply-side inflation). Each of the three can raise the general price level.
- 1. More money chasing the same goods raises prices.
- 2. Lower output means fewer goods for the same demand.
- 3. Higher effective demand pulls prices up.
How you could have got this
- If you were sure statement 1 is correct, (c) goes: it leaves 1 out.
What you needed to know: More money chasing the same goods raises prices.
- Then, if you were sure statement 3 is correct, (a) and (b) go: each of them leaves 3 out.
What you needed to know: Higher effective demand pulls prices up.
Only (d) is left. You didn’t need statement 2.
Which options go is worked out from UPSC’s key and the options, not by a model.
Why each option is right or wrong
- (a) Wrong. Falling output and rising demand also push prices up.
- (b) Wrong. Rising effective demand also raises prices.
- (c) Wrong. Money supply growth also raises prices.
- (d) Correct. All three can raise the general price level.
Answer: UPSC’s key. Explanation: written by UPSC Grade, not by UPSC.
Source: UPSC, Civil Services (Preliminary) Examination 2013, General Studies Paper I, Series A. The paper on upsc.gov.in.