Q. Consider the following statements:
1.The supply decreases with the same level of demand and thus the situation of demand-pull inflation arise.
2.The price rise which is the result of increase in the production cost is cost-push inflation.
Which of the statements given above is/are NOT correct?

[A] 1 only

[B] 2 only

[C] Both 1 and 2

[D] Neither 1 nor 2

Answer: D
Notes:

Explanation: A mis-match between demand and supply pulls up prices. Either the demand increases over the same level of supply, or the supply decreases with the same level of demand and thus the situation of demand-pull inflation arise.

  • This was a Keynesian idea. The Keynesian School suggests cuts in spending as the way of tackling excess demand mainly by increasing taxes and reducing government expenditure.
  • An increase in factor input costs (i.e., wages and raw materials) pushes up prices. The price rise which is the result of increase in the production cost is cost-push inflation.

Source: Ramesh Singh