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

Concept:
Inflation means a sustained rise in the general price level, and it happens when the amount of money chasing goods rises faster than the supply of those goods.

Explanation:
When the money supply in an economy increases without a matching rise in output, people have more money to spend but the same (or a shrinking) quantity of goods to buy, so prices are bid upward. If production also falls at the same time, the scarcity of goods adds further pressure on prices, making the price rise even sharper. Option A (only a decrease in production) can raise prices but is usually termed a supply shock rather than the general definition of inflation. Option C (only an increase in money supply) is the classic monetarist explanation but is a narrower, partial cause. Option D (increase in production) would actually help control inflation by adding to supply, not cause it. The combined effect described in option B, more money in circulation along with less output, captures both the demand-side and supply-side pressures that drive up prices, which is why it is treated as the most complete answer here.

Final Answer:
Inflation is best explained by a rise in money supply together with a fall in production, so option B is correct.