HPAS/Allied Mains 2022 Answer Writing Challenge Day 180: Model Answer

QUESTION: What are the main causes of inflation? (4 marks/ 60 words)

Answer: 

Inflation can be defined as a persistent rise in the general price of goods and services of common or daily use — such as clothing, food, fuel, transport, etc — which results in an increase in the cost of living.

The main causes of inflation are as follows:

Monetary Policy: It determines the supply of currency in the market. Excess supply of money leads to inflation. Hence decreasing the value of the currency.

Fiscal Policy: It monitors the borrowing and spending of the economy. Higher borrowings (debt), result in increased taxes and additional currency printing to repay the debt.

Demand-pull Inflation: Increases in prices due to the gap between the demand (higher) and supply (lower).

Cost-push Inflation: Higher prices of goods and services due to increased cost of production.

Exchange Rates: Exposure to foreign markets is based on the dollar value. Fluctuations in the exchange rate have an impact on the rate of inflation.