In the money market, the demand for money (Md) is inversely related to the interest rate, while the supply of money (Ms) is typically considered fixed by the central bank. If the demand for money increases (shifts right) while the supply is fixed, the equilibrium in the money market shifts to a higher interest rate, as people are willing to pay more to hold money or borrow funds.
An increase in the money supply, if not matched by a proportional increase in output, leads to too much money chasing too few goods, causing demand-pull inflation. 2. A decrease in the aggregate level of output, with demand remaining constant or increasing, creates scarcity relative to demand, leading to cost-push or supply-side inflation. 3. An increase in effective demand (aggregate demand) that exceeds the available supply leads to demand- pull inflation. 365. Supply of money remaining the same when there is an increase in demand for money, there will be
Asked in UPSC IAS 2013 · Topic: Money & Banking (Inflation: Types, Causes, Effects, and Monetary Policy Responses)
More Economic Development questions
- Consider the following statements: The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale Price Index (WPI). The WPI does not capture changes in the prices of services, which CPI does. Reserve Bank of India has now adopted WPI as its key measure of inflation and to decide on changing the key policy rates. Which of the statements given above is/are correct ?
- With reference to Indian economy, demand-pull inflation can be caused/increased by which of the following? Expansionary policies Fiscal stimulus Inflation-indexing wages Higher purchasing power Rising interest rates Select the correct answer using the code given below.
- Expansionary policies (monetary or fiscal) increase the money supply or government spending/ reduce taxes, leading to higher aggregate demand. 2. Fiscal stimulus is a type of expansionary fiscal policy specifically aimed at boosting demand. 4. Higher purchasing power means consumers and businesses have more ability and willingness to spend, directly increasing aggregate demand. 3. Inflation-indexing wages can contribute to persistent inflation by maintaining demand and fueling a wage-price spiral, but it's often discussed in the context of cost-push or inertial inflation as well. However, maintaining purchasing power supports demand. 5. Rising interest rates reduce borrowing and spending, thus decreasing aggregate demand, which is the opposite of what causes demand-pull inflation. Given the options, {1, 2, 4} represent the most direct and clear drivers of demand-pull inflation. Statement 3 is debatable in its primary classification but does support demand. Statement 5 directly reduces demand. 368. Which one of the following is likely to be the most inflationary in its effects?
- The term 'inflation' refers to the increase in
- The index that measures the average change in the prices of goods and services consumed by urban households is called
- Core CPI inflation is generally lower than headline CPI inflation because
- The rate of inflation is the rate of change of general price level which is measured as
- Inflation in India is
