Question

Inflation is caused by

• A. decrease in production
• B. increase in money supply and decrease in production
• C. increase in money supply
• D. increase in production

Answer 1

The Correct Option is B

Step 1 — Understand the concept of inflation:
Inflation refers to a sustained rise in the general price level of goods and services in an economy. It reduces the purchasing power of money — meaning more money is required to buy the same quantity of goods and services.

Step 2 — Main causes of inflation:
Inflation can be caused by two major factors:
1. Demand-pull inflation: When money supply increases or when demand rises faster than supply, prices go up.
2. Cost-push inflation: When production decreases or production costs rise, supply falls, leading to higher prices.

Step 3 — Apply to the given options:
The question states: "Inflation is caused by increase in money supply and decrease in production."
- Increase in money supply → more demand, pushing prices upward.
- Decrease in production → reduced supply, which again pushes prices upward.

Step 4 — Conclusion:
Thus, inflation is caused when there is both an increase in the money supply and a decrease in production, because together they create excess demand and limited supply.

Final Answer:
The correct option is (B) : increase in money supply and decrease in production.