Question

Explain four causes of inflation.

Answer 1

Four causes of Inflation:

1. Increase in Money Supply: Increase in money supply is one of the major causes of inflation. Increase in the supply of money leads to increase in aggregate demand for goods and services and hence rise in their prices.
2. Increase in Population: Increase in population is another major cause responsible for inflation. Increase in population leads to increased demand for goods and services and hence increase in their prices.
3. Higher Taxes: The imposition of higher taxes on commodities results in rise in prices of taxed commodities. It leads to cost push inflation.
4. Rise in Wages: Rise in wages has been considered as the main cause behind cost push inflation in modern times. It is because workers have organised themselves into strong labour unions which have succeeded in getting high wages for their members.