Read the following report carefully and answer the questions on the basis of the same:

Along with the weakening of global economic activity, inflation the world over also remained muted in 2019. Inflation softened in advanced and emerging economies reflecting a slack in consumer demand. From the supply side, lower energy prices in 2019 also contributed to softening of inflation. In India, inflation rose slightly to 4.1% in April - December 2019, after a sharp decline from 5.9% in 2014 to 3.4% in 2018.

The cause of the above situation is?

Increase in imports.

The correct answer is Option (2) → Increase in imports.

The report describes a situation of: Weakening global economic activity, Muted inflation, Slack in consumer demand. The question asks for the cause of this situation, particularly focusing on the demand-side factors implied by "slack in consumer demand" and "weakening global economic activity."

• Increase in government expenditure: An increase in government expenditure is a component of aggregate demand. If government expenditure increases, it would generally lead to an increase in aggregate demand, which would tend to increase economic activity and potentially inflation, not weaken it or cause a slack in demand. So, this is incorrect.

• Increase in imports: An increase in imports means more spending on foreign goods and services, which is a leakage from the domestic circular flow of income and reduces net exports (X-M). A rise in imports, all else being equal, leads to a fall in aggregate demand. This aligns with the "weakening of global economic activity" and "slack in consumer demand" as it indicates less demand for domestically produced goods. This is a plausible cause.

• Increase in consumption expenditure: An increase in consumption expenditure is a direct component of aggregate demand. If consumption expenditure increases, it would lead to an increase in aggregate demand, which would stimulate economic activity and potentially inflation, not cause a "slack in consumer demand" or muted inflation. So, this is incorrect.

• Increase in producer's investment: An increase in producer's investment is a component of aggregate demand. If investment increases, it would lead to an increase in aggregate demand, stimulating economic activity and potentially inflation. So, this is incorrect.