2021 GS Paper I, all questions

UPSC Prelims 2021 · GS Paper I

Question 12: Economy and Social Development

With reference to Indian economy, demand-pull inflation can be caused/increased by which of the following?

  1. 1.Expansionary policies
  2. 2.Fiscal stimulus
  3. 3.Inflation-indexing wages
  4. 4.Higher purchasing power
  5. 5.Rising interest rates

Select the correct answer using the code given below.

a1, 2 and 4 only
b3, 4 and 5 only
c1, 2, 3 and 5 only
d1, 2, 3, 4 and 5

AnswerUPSC’s answer is (a).

Demand-pull inflation arises when total demand outruns supply. Expansionary policies, fiscal stimulus and higher purchasing power all raise aggregate demand and can pull prices up. Inflation-indexed wages raise production costs and feed a wage-price spiral, which is a cost-push channel, not a demand-pull one. Rising interest rates make borrowing dearer and cool demand, so they reduce demand-pull pressure. Remember: more spending power chasing the same goods is demand-pull; higher input costs is cost-push.

  • 1. Expansionary policy raises spending and aggregate demand.
  • 2. Fiscal stimulus puts more money into the economy and lifts demand.
  • 3. Inflation-indexed wages raise costs and feed a wage-price spiral, which is cost-push.
  • 4. More purchasing power means more demand chasing the same goods.
  • 5. Rising interest rates discourage borrowing and spending, reducing demand.

How you could have got this

  1. If you were sure statement 3 is not correct, (b), (c) and (d) go: each of them includes 3.

    What you needed to know: Inflation-indexed wages raise costs and feed a wage-price spiral, which is cost-push.

Only (a) is left. You didn’t need statements 1, 2, 4 or 5.

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) Right: expansionary policy, fiscal stimulus and higher purchasing power all lift demand.
  • (b) Wrong: indexed wages are a cost-push factor and rising interest rates reduce demand.
  • (c) Wrong: it adds wage indexing and rising rates, neither of which is a demand-pull cause.
  • (d) Wrong: it includes statements 3 and 5, which are not demand-pull causes.

Answer: UPSC’s key. Explanation: written by UPSC Grade, not by UPSC.

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Source: UPSC, Civil Services (Preliminary) Examination 2021, General Studies Paper I, Series A. The paper on upsc.gov.in.