Question

Which among the following can result in ‘demand pull inflation’?

1. Increase in subsidy on LPG
2. Increase in fuel prices
3. Decrease in income tax rates
Select the correct answer using the codes given below.

A. Only 1 and 2
B. Only 1 and 3
C. Only 2 and 3
D. All of the above

Answer 1

An increase in fuel prices and a decrease in income tax rates can result in demand pull inflation. Therefore, the correct answer is Option C. Only 2 and 3.

Step-by-step explanation:

Demand pull inflation occurs when there is an increase in aggregate demand (AD) in the economy, causing prices to rise. In the given options, an increase in fuel prices and a decrease in income tax rates can both result in demand pull inflation.

When fuel prices increase, it leads to higher production costs for businesses, which in turn increases the prices of goods and services, causing inflation. A decrease in income tax rates can result in higher disposable income for consumers, leading to increased spending and higher demand for goods and services, further driving up prices.

Therefore, the correct answer is Option C. Only 2 and 3.