With reference to Indian economy, demand-pull inflation can be caused/ increased by which of the following? 1. Expansionary policies 2. Fiscal stimulus 3. Inflation-indexing wages 4. Higher purchasing power 5. Rising interest rates Select the correct answer using the code given below.

Answer: A. Statements 1, 2 and 4 cause demand-pull inflation; 3 and 5 do not. DEMAND-PULL INFLATION occurs when AGGREGATE DEMAND in the economy exceeds AGGREGATE SUPPLY at the current price level, pulling prices upward. Classic causes: 'too much money chasing too few goods'. (1) EXPANSIONARY POLICIES: CORRECT. Expansionary monetary (low interest rates, easy credit) and fiscal policies (high government spending, tax cuts) increase aggregate demand. By boosting consumption and investment, they drive prices up — demand-pull. (2) FISCAL STIMULUS: CORRECT. Government injects spending into the economy (public works, transfers, tax rebates). This directly raises aggregate demand and causes demand-pull pressure (especially when supply is near capacity). (3) INFLATION-INDEXING WAGES: WRONG (in the demand-pull sense). Wage indexation (automatically raising wages with inflation) sustains COST-PUSH INFLATION — it propagates higher production costs forward, NOT demand-pull pressure. It causes a wage-price spiral on the SUPPLY side, not pure demand-pull. (4) HIGHER PURCHASING POWER: CORRECT. When consumers' real income / disposable income rises (through tax cuts, wage gains, transfers, wealth effects), they demand more goods and services. This is the textbook demand-pull mechanism. (5) RISING INTEREST RATES: WRONG. Higher interest rates are CONTRACTIONARY — they REDUCE borrowing, consumption, and investment, COOLING aggregate demand. Rising rates fight inflation, not cause it. (They are the RBI's primary tool against inflation, not a cause.) So 1, 2, 4 cause demand-pull; 3 is cost-push; 5 is contractionary. Answer A. Source: NCERT Class 12 Macroeconomics Chapter on Inflation / RBI Monetary Policy Framework.