Q.Explain the main causes of inflation in an economy.

Inflation's causes split into demand-side factors that push aggregate demand above aggregate supply and supply-side (cost) factors that raise the cost of production directly.

Inflation's causes are conventionally grouped into demand-side and supply-side factors, corresponding to demand-pull and cost-push inflation respectively.

Demand-side (demand-pull) causes: an increase in money supply (monetary expansion outpacing output growth); rising government expenditure financed by deficit financing (borrowing from the RBI, effectively creating new money); rising exports (withdrawing goods from the domestic market while adding to domestic purchasing power); population growth (steadily raising aggregate demand); tax cuts (raising households' disposable income); and cheap/easy monetary policy (low interest rates encouraging borrowing and spending). …

A common gap in exam answers is listing only demand-side causes (money supply, government spending) and omitting supply-side/cost-push causes entirely — a complete answer needs both sides, since real-world inflati …