Following are believed to be causes for inflation except ________

Question

Examoogle · Accepted Answer

Option C: supply exceeding the demand

Explanation & Concepts:
Inflation is defined as the general increase in prices and a fall in the purchasing power of money. When the supply of goods and services exceeds the aggregate demand, it leads to a surplus or deflationary pressure, not inflation.

Working Principle: Inflation occurs when demand exceeds supply (demand-pull) or production costs rise (cost-push). Mathematically, based on the quantity theory of money, $MV = PT$, where $M$ is the money supply, $V$ is velocity of money, $P$ is the price level, and $T$ is the total volume of transactions. If $M$ increases faster than the economic output ($T$), the price level ($P$) must rise to maintain equilibrium.

Key Formulas: $P = \frac{MV}{T}$ — Basic Price Level Equilibrium

Key Points: Demand-Pull inflation arises when demand exceeds supply.; Cost-Push inflation is driven by rising production costs.; Excess supply relative to demand leads to price reduction or surplus stocks.; Currency devaluation increases the cost of imported goods, contributing to inflation.

Advantages: Mild inflation can stimulate economic investment.; Prevents wage stagnation in growing economies.

Disadvantages: Erodes purchasing power of fixed-income earners.; Creates uncertainty for long-term industrial planning.

Applications: Central bank monetary policy adjustments.; Cost-benefit analysis in engineering projects.

Additional Info: Option A (Excess Money Supply) leads to 'Monetary Inflation'.. Option B (Rising Costs) is the definition of 'Cost-Push Inflation'.. Option D (Currency Exchange) leads to 'Imported Inflation'.

Answer: C is correct — supply exceeding the demand creates a surplus which generally puts downward pressure on prices, rather than causing inflation.

Exam Tip: Always remember that in macroeconomics, $Supply > Demand$ creates deflationary conditions, which is the exact inverse of inflationary conditions.

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Option A: the volume of money in the system is higher that the economic growth

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Option B: producers of goods and services push their increasing operating costs along to the customer through higher prices

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Option D: relative strength or weakness of currency i.e. exchange rate

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