Question
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.
(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2 and 3
Answer:
D
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Explanation:
A rise in the general level of prices, also known as inflation, can be caused by multiple factors. These factors include:
an increase in the money supply: When there is an increase in the money supply in the economy, more money is available to be spent on goods and services, which can lead to an increase in demand and prices.
a decrease in the aggregate level of output: If the overall production or output in the economy decreases, while the demand remains constant or increases, the scarcity of goods and services can drive prices up.
an increase in the effective demand: Effective demand refers to the desire and ability of consumers to purchase goods and services. When there is an increase in effective demand, it can create upward pressure on prices.