Which of the following is the primary cause of inflation?

• A. A fall in production costs
• B. A reduction in government spending
• C. A decrease in consumer demand
• D. An increase in the overall money supply

Answer: (D)

Verified step by step guidance

1. Understand the concept of inflation: Inflation is the general increase in prices across the economy over time, which reduces the purchasing power of money.
2. Recognize the main causes of inflation: Inflation can be caused by demand-pull factors (increased demand for goods and services), cost-push factors (rising production costs), or built-in inflation (expectations of future inflation).
3. Analyze the options given: A fall in production costs would typically reduce prices, a reduction in government spending tends to decrease demand, and a decrease in consumer demand usually lowers prices, all of which are unlikely to cause inflation.
4. Focus on the role of the money supply: An increase in the overall money supply means more money is available in the economy, which can lead to higher demand for goods and services, pushing prices up and causing inflation.
5. Conclude that the primary cause of inflation among the options is an increase in the overall money supply, as it directly influences demand and price levels in the economy.