A rise in general level of prices may be caused by 1. An increase in the money supply 2. A decrease in the aggregate level of output 3. An increase in the effective demand Select the correct answer using the codes given below.

A rise in the general level of prices, or inflation, is driven by both demand-side and supply-side factors. First, an increase in the money supply leads to 'too much money chasing too few goods,' which increases aggregate demand and bids up prices [3]. This aligns with the quantity theory of money, where higher growth in nominal money supply results in higher inflation. Second, a decrease in the aggregate level of output (supply shock) causes cost-push inflation; when supply falls while demand remains constant, prices are pushed upward [5]. Third, an increase in effective demand (demand-pull inflation) occurs when the total demand for goods and services exceeds the economy's sustainable production capacity, creating upward pressure on prices [1]. Therefore, all three factors—increased money supply, decreased output, and increased demand—can cause a rise in general prices.

Sources

1. [1] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > There are mainly two causes of inflation: > p. 112
2. [3] https://www.jvwu.ac.in/documents/Demand%20pull%20Inflation%20and%20Cost%20Push%20inflation.pdf
3. [2] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > CAUSE OF INFLATION > p. 69
4. [5] https://www.investopedia.com/articles/05/012005.asp