Discussion
It has been generally viewed that when an economy grows beyond its potential growth rate, it causes inflation. How does growing faster than the potential rate cause inflation?
Answer: B
There are two major determinants of the potential rate at which an economy can grow in the long run. Infrastructure investments and skills of labor can raise India potential growth rate because the country has ample labor supply. The overall demand in the economy rises up due to fast growth and more resources are used to meet higher demand.
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