Question:
Excess of money supply as compared to supply of goods results in
Excess of money supply as compared to supply of goods results in
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Too much money chasing too few goods pushes the general price level in one direction.
Updated On: Jul 17, 2026
- Depression
- Deflation
- Trade deficit
- Inflation
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The Correct Option is D
Solution and Explanation
Step 1: Understanding the Question:
The question describes a situation where the amount of money floating in the economy grows faster than the amount of goods available to buy. It asks what such a mismatch produces.
Step 2: Key Formula or Approach:
Use the simple idea of too much money chasing too few goods. When buyers hold more money but the supply of goods stays the same, buyers bid prices up, so the general price level rises.
Step 3: Detailed Explanation:
Inflation means a sustained rise in the general price level, which is the same as a fall in the purchasing power of money. If the central bank or government pushes extra money into circulation while output of goods does not grow to match, each unit of money now chases the same basket of goods, so prices climb. This is exactly the case described in the question, and it is called demand pull inflation.
Why the other options fail:
Deflation is the opposite case, a general fall in prices, which happens when money supply is tight relative to goods.
Depression is a long and severe fall in output and employment, usually with falling prices, not a direct result of extra money.
Trade deficit means imports exceed exports in value. It is a balance of payments idea and does not follow automatically from extra money supply.
Step 4: Final Answer:
Excess money supply against limited goods causes inflation, so option (D) is correct.
The question describes a situation where the amount of money floating in the economy grows faster than the amount of goods available to buy. It asks what such a mismatch produces.
Step 2: Key Formula or Approach:
Use the simple idea of too much money chasing too few goods. When buyers hold more money but the supply of goods stays the same, buyers bid prices up, so the general price level rises.
Step 3: Detailed Explanation:
Inflation means a sustained rise in the general price level, which is the same as a fall in the purchasing power of money. If the central bank or government pushes extra money into circulation while output of goods does not grow to match, each unit of money now chases the same basket of goods, so prices climb. This is exactly the case described in the question, and it is called demand pull inflation.
Why the other options fail:
Deflation is the opposite case, a general fall in prices, which happens when money supply is tight relative to goods.
Depression is a long and severe fall in output and employment, usually with falling prices, not a direct result of extra money.
Trade deficit means imports exceed exports in value. It is a balance of payments idea and does not follow automatically from extra money supply.
Step 4: Final Answer:
Excess money supply against limited goods causes inflation, so option (D) is correct.
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