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

Hint:

Think of the phrase too much money chasing too few goods.

Answer 1

The Correct Option is B

Remember inflation with the simple idea, too much money chasing too few goods.

1. Decrease in production alone: reduces supply and can push prices up, but by itself this is usually called a supply shock rather than the standard definition of inflation.
2. Increase in money supply and decrease in production: more currency in people's hands plus fewer goods on the shelves means both extra demand and reduced supply are pulling prices up together, which is the fullest description of what drives sustained inflation.
3. Increase in money supply alone: the standard monetarist cause of inflation, but only half the picture compared to option B.
4. Increase in production: this raises supply and would ease price pressure, not cause it.

Because option B combines both the demand-side (more money) and supply-side (less output) triggers, it is the correct choice.