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

Correct Option (A):

Demand-pull inflation arises when aggregate demand for goods and services in an economy exceeds the available aggregate supply, leading to an upward pressure on prices.

• Expansionary policies: Monetary policies that increase the money supply or reduce interest rates, or fiscal policies that increase government spending or reduce taxes, inject more liquidity into the economy. This enhances consumer and investor spending, thereby increasing aggregate demand.
• Fiscal stimulus: Government measures such as increased public expenditure or tax reductions directly boost disposable income for individuals and businesses. This leads to higher consumption and investment, consequently elevating aggregate demand.
• Higher purchasing power: An increase in the disposable income of individuals enables them to purchase more goods and services. This augmented buying capacity translates into greater aggregate demand, which, if not met by an equivalent increase in supply, results in price increases.

Incorrect Options:

• Inflation-indexing wages: This mechanism adjusts wages in line with inflation to maintain real income. While it can perpetuate inflationary spirals (cost-push effect), it primarily responds to existing inflation rather than initiating demand-pull inflation. It does not inherently create new demand but rather preserves existing purchasing power in real terms.
• Rising interest rates: An increase in interest rates by the central bank makes borrowing more expensive for consumers and businesses. This discourages consumption, investment, and overall spending, thereby reducing aggregate demand. Consequently, rising interest rates are a measure used to curb demand-pull inflation, not a cause of it.