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. ​

Demand-pull inflation arises when aggregate demand outruns the economy's capacity to produce, so prices rise.

• Statement 1 (correct): Expansionary monetary and fiscal policies put more money and spending into the economy, pushing up demand.
• Statement 2 (correct): Fiscal stimulus, such as higher government spending or tax cuts, directly raises aggregate demand.
• Statement 3 (wrong): Wage indexation, like dearness allowance linked to inflation, sustains inflation once it exists. It is an inertial or cost-side mechanism, not a fresh demand shock.
• Statement 4 (correct): Higher purchasing power from income growth or easier credit increases consumption demand.
• Statement 5 (wrong): Rising interest rates make borrowing costlier and cool spending and investment. This is an anti-inflation tool.

Answer: A. For Mains GS-3, link this to monetary policy transmission and the RBI's inflation-targeting framework under the Monetary Policy Framework Agreement.

Trap: Candidates pick D by treating wage indexation as a demand-side cause. Indexation feeds inflation after it has started; it does not add demand by itself.