What primarily causes inflation?

What primarily causes inflation?

• A. Decrease money supply and rise prices
• B. Increase money supply and rising prices
• C. Deflation due to surplus goods
• D. Stable prices due to equilibrium

Answer: (B)

Inflation shows up as a general rise in the price level across the economy. The most direct way this happens is when the money supply grows faster than the economy’s ability to produce goods and services. With more money in circulation, people have more to spend, and demand increases. Producers raise prices to balance that higher demand, so the overall price level climbs. That’s why the option describing an increase in the money supply along with rising prices is the best match. The other scenarios don’t describe inflation: reducing the money supply tends to slow inflation or cause deflation; deflation arises from falling prices, not rising ones; stable prices at equilibrium imply no inflation.

Inflation shows up as a general rise in the price level across the economy. The most direct way this happens is when the money supply grows faster than the economy’s ability to produce goods and services. With more money in circulation, people have more to spend, and demand increases. Producers raise prices to balance that higher demand, so the overall price level climbs.

That’s why the option describing an increase in the money supply along with rising prices is the best match. The other scenarios don’t describe inflation: reducing the money supply tends to slow inflation or cause deflation; deflation arises from falling prices, not rising ones; stable prices at equilibrium imply no inflation.