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Inflation & Prices — UPSC Prelims Economy previous year questions

33 solved previous year questions on Inflation & Prices, papers from 2008 to 2023, drawn from UPSC CDS, UPSC CSE Prelims, UPPCS. Each carries the printed answer key and the explanation from the source compilation.

1. #1Previous year
   Economic growth is usually coupled with [UPSC CSE Pre. 201 l
   • ADeflation
   • BInflation
   • CStagflation s
   • DHyperinflation 0,1 a
   Answer: (B) Inflation
   Explanation

   Option b is the growth results in higher di sposable with the consumers which increases the along with the supply available for the increase in demand spurs inflation, which a necessary evil for a growing economy

2. #2UPSC CDS 2016
   Which one of the Five Year Plans had a high priority to bring inflation under control and to achieve stability in the economic situation'?
   • AFourth Plan (1969-74)
   • BFifth Plan ( 197 4- 79)
   • CSixth Plan (1980-85)
   • DSeventh Plan (1965-90)
   Answer: (A) Fourth Plan (1969-74)
   Explanation

   } Option a is the correct Fourth Plan (1969-74) in India had a high priority inflation under control and achieve stability in situation. It focused on addressing rising implementing measures to control inflation and monetary policies. Important Tips Five-Year Plans in India were centralized economic development initiatives implemented by the government. The plans aimed to promote balanced growth across various sectors, including agriculture, industry, infrastructure, and social welfare. The first Five-Year Plan was launched in 1951, and a total of 12 plans were implemented until 2017. Each plan had specific targets and objectives set for economic growth, investment, employment generation, poverty alleviation, and regional development

3. #3UPSC CSE Prelims 2022
   In India which one of the following is for maintaining for prices stability by controlling inflation?
   • ADepartment of Consumer Affairs
   • BExpenditure Management Commission
   • CFinancial Stability and Development Council
   • DReserve Bank of India
   Answer: (D) Reserve Bank of India
   Explanation

   Option d is the correct Bank of India is India's central bank has to keep check on the inflation by use of in forms of qualitative and quantitative Solution: Option d is the correct financing means generating funds to finance which results from excess of expenditure over gap being covered by borrowing from the public by the of bonds or by printing new expenditure by printing money boosts l incomes and raises private demand in the economy. fuels inflation A little increase in inflation is healthy as business activity. But if the government in time, more and more money floods the market high inflation. And since inflation is revealed with it is often too late before governments realise, they Higher inflation and higher provide grounds for macroeconomic instability

4. #4UPSC CSE Prelims 2020
   Consider the following statements: 1. The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale Price Index (WPI). 2. The WPI does not capture changes in the 25 prices of services, which CPI does. 3. Reserve Bank of India has now adopted WPI as its key measure of inflation and to decide on changing the key policy rates.Which of the statements given above is/are correct?
   • A1 and 2 only
   • B2 only
   • C3 only
   • D1, 2 and 3
   Answer: (A) 1 and 2 only
   Explanation

   Option a is the correct 1 is correct. The weightage of food in Index (CPI) is higher than that in Wholesale 2 is correct. The does not capture changes prices of services, which CPI 3 is incorrect. Based on the suggestions of Patel committee, in 2014, RBI abandoned WPI CPI as the key measure of inflation. Important Tips Definition Amounts to the Indicates the average change average change in prices of in the prices or commodities at the commodities at wholesale level. the retail level. Publishing Office of Economic National Statistical office Advisor (Ministry office of Commerce Industry) Commodities Goods only Goods and Services both Inflation First stage of a Final stage of a Measurement transaction transaction Prices paid by Manufactures and Consumers wholesalers Types of Manufacturing Education, Commodities inputs and communication, covered intermediate goods transportation, like mine

5. #5UPSC CSE Prelims 2011
   A rapid increase in the rate of inflation is sometimes attributed to the effect". What is "base effect"?
   • AIt is the impact of drastic deficiency in supply due to failure of crops
   • BIt is the impact of the surge in demand due to rapid economic growth
   • CIt is the impact of the price levels of previous year on the calculation of inflation rate
   • DNone of the statements (a), (b) and (c) 'given above is correct 'in this context
   Answer: (C) It is the impact of the price levels of previous year on the calculation of inflation rate
   Explanation

   Option c is the correct c is correct: The base effect relates to inflation in period of the previous year, if the was too low in the corresponding period of the even a smaller rise in the Price Index will a high rate of inflation Solution: ( Option c is the correct is a persistent fall in the general price level and services. It means that the purchasing power increases over time, as each unit of currency more goods and services. Deflation is the opposite which is a persistent rise in the general price goods and services

6. #6UPPCS 2008
   The basis of determining dearness allowances to employees of India is
   • ANational Income
   • BConsumer Price Index
   • CStandard of Living
   • DPer Capita Income
   Answer: (B) Consumer Price Index
   Explanation

   Option b is the correct basis of determining dearness allowance to India is Consumer Price Index. The Consumer Price measures the changes in the prices of a fixed basket and services that are consumed by households, the changes in the cost of living. Important Tips The dearness allowance (DA) is calculated as a percentage of the basic salary to offset the impact of inflation on the purchasing power of employees The DA is revised twice a year, in January and July, based on the average CPI for the previous 12 months

7. #7State PCS 2008
   Tick mark which is incorrect about inflation
   • AInflation indicates the rise in the price. of a basket of commodities on a point-to- point basis
   • BThe inflation rate in India is cakulated the basis of the wholesale price index
   • CFor some commodities retail price are also considered for measurement of inflation
   • DInflation rate going down does not mean prices are declining
   Answer: (B) The inflation rate in India is cakulated the basis of the wholesale price index
   Explanation

   Option h is the correct Bank of India (RBI) has shifted to using Price Index (CPI) as its preferred inflation since 2014. The CPI calculates the prices fixed basket of goods and services that are consumed and reflects the changes in the cost of accurately than the Wholesale Price Index measures the prices at the wholesale level

8. #8UKPSC 2012
   The Phillips Curve represents relationship between
   • ADeflation and Unemployment
   • BInflation and Unemployment
   • CInflation and Disguised Unemployment
   • DDeflation and Cyclical Unemployment
   Answer: (B) Inflation and Unemployment
   Explanation

   Option b is the correct Phillips curve is an economic theory that unemployment have a stable and inverse by William Phillips, it claims that with comes inflation, which in turn should lead to and less unemployment. Tips The concep t behind the Phillips curve states the change in unemployment within an economy has a predictable effect on price inflation. The inverse relationship between unemployment and inflation is depicted as a downward sloping, concave curve, with inflation on the Y-axis arid unemployment on the X-axis. Increasing inflation decreases unemployment, and vice versa. Alternatively, a focus on decreasing unemployment also increases inflation and vice versa

9. #9JPSC 2021
   In India, headline inflation is based on
   • AConsumer Price Index-Combined (CPI-C)
   • BConsumer Food Price Index (CFPI)
   • CConsumer Price Index - Rural Labourers (CPI-RL)
   • DWholesale Price Index (WPI)
   Answer: (A) Consumer Price Index-Combined (CPI-C)
   Explanation

   Option a i.s the Price Index-Combined (CPI- C) measures in the prices of a fixed basket of goods and are consumed by households, and reflects the the cost of living. The CPI--C is the preferred measure inflation by the Reserve Bank of India (RBI) Important Tips The Consumer Food Price Index (CFPI) measures the changes in the prices of food items only. It is a subindex of the CPI-C, and covers items such as cereals, pulses, vegetables, fruits, milk, eggs, meat, fish, oils, fats, spices, sugar, etc. The Consumer Price Index - Rural Labourers (CPI- RL) measures the changes in the prices of goods and services consumed by rural laborers only. It is one of the six occupational indices compiled by the Labour Bureau under the Ministry of Labour and Employment The Wholesale Price Index {WPI) measures the changes in the prices at the wholesale level only. It is compiled by the Office of Econom.ic

10. #10UPSC CDS 2023
    Which one of the following situations can lead to inflation?
    • ARapid growth of aggregate demand outweighing supply
    • BSluggish growth of aggregate demand
    • CReduction in the money supply
    • DHigher levels of unemployment
    Answer: (A) Rapid growth of aggregate demand outweighing supply
    Explanation

    Option a is the correct is a sustained increase in the gene ral price level and services in an economy over time. It occurs demand for goods and services surpasses the leading to upward pressure on a is correct: When aggregate demand (the for goods and services in an economy) and outpaces the available supply, it creates where there is excess demand in the economy. this higher denrnnd, producers may increase to inflationary b is incorrect: A sluggish growth of generally does not lead to inflation. In fact, it in deflationary press ures, where there is to absorb the available supply, leading to a c is incorrect: A reduction in the money supply lead to deflationary pressures rather than the money supply decreases, it can reduce and aggregate demand, leading to a decrease d is incorrect: Higher levels of unemployment associated with a slowdown in economic lower aggregate demand In this scen

11. #11UPSC CDS 2023
    Which one of the following is a measure that can be used by the Government for combatting inflation?
    • AIncreasing the non-planned expenditure on defence, police, etc
    • BProviding more subsidies on exports
    • CIncreasing the rate of interest on savings and fixed deposits
    • DReduction in the cash reserve ratio (CRR)
    Answer: (C) Increasing the rate of interest on savings and fixed deposits
    Explanation

    Option c is the correct the rate of interest on savings and fixed a measure that can be us ed by the government to When the interest rates on savings and are increased, it encournges individuals to and reduce their spending. This leads to a the demand for goods and services, which can help inflationary pressures. making saving more attractive, higher interest discourage excessive spending and dampen thus contributing to inflation control. This often employed by central banks and governments as a influence consumer behavior and manage inflation

12. #12UPSC CDS 2017
    Which one of the following indices is now used by the Reserve Bank of India (RBI) to measure the rate of inflation in India?
    • ANASDAQ Index
    • BBSE
    • CConsumer Price Index
    • DWholesale Price Index
    Answer: (C) Consumer Price Index
    Explanation

    Option c is the correct Reserve Bank of India (RBI) uses the Consumer (CPI) to measure the rate of inflation in India. is a measure of the change in prices of a basket of services that are consumed by households. The calculated by the National Statistical Office (NSO) The RBI uses the CPI to set monetary policy. increases interest rates en inflation is high interest rates when in is low. This helps inflation and keep the economy stable

13. #13UPSC CDS 2014
    In India, contribution of food inflation to overall inflation is around I/3rd to 2/Sth. Within food inflation, contribution of food articles is higher because price rise in food articles is
    • Ahigher and their weight is also higher compared to food products
    • Bhigher but their weight is lower compared to food products
    • Clower but their weight is higher compared to food products
    • Dlower and their weight is also lower compared to food products
    Answer: (A) higher and their weight is also higher compared to food products
    Explanation

    Option a is the correct answer articles {cereals, pulses, fruits, vegetables, and a higher contribution to food inflation in their prices tend to rise more compared to (processed or manufactured food items) and have a higher weightage in the inflation index. often experience significant price fluctuations supply and demand imbalances and seasonal essential nature and higher weightage in the their contribution to overall food inflation

14. #14UPSC CAPF 2020
    Which of the goods are included to estimate food inflation in India? 1. Wheat 2. Paddy 3. Tobacco 4. SugarSelect the correct answer using the codes given below
    • A1, 2 and 3
    • B2, 3 and 4
    • C1, 3 and 4
    • D1, 2 and 4 _
    Answer: (D) 1, 2 and 4 _
    Explanation

    Option d is the d items are included to infiati.on in the accounts for about of India's among inflation-targeting countries. Most namely, cereals, pulses, milk, fruits and eggs (MFE) and sugar etc. are included in it. unit consists of questions from Poverty, Health, Consider the following statements in relation to Janani Suraksha Yojana

15. #15Practice set
    Which of the following may indicate that an economy is fadng deflation? 1. Rise in general price of goods 2. Fall in the money supply fall in the aggregate demandSelect the correct answer using the code given below
    • A2 only
    • B2 and 3 only
    • C1 and 3 only
    • D1, 2 and 3
    Answer: (B) 2 and 3 only
    Explanation

    Option b is the correct causes the nominal costs of capital, labor, services to fall, though their relative prices may 1 is incorrect: Deflation is a decrease in price level of goods and services. When it value of currency increases over time. Thus, more services can be purchased for the same amount of 2 is correct: Deflation happens when the goods falls in relation to the supply. The reduction occurs due to a reduction in the supply of an economy. In simple words, a shortage of money leads to a reduction in demand for goods, to 3 is correct: Negative events in the as recession, may cause a fall in aggregate demand. in aggregate demand typically results in price and finally deflation if continued over

16. #16Practice set
    You often hear the terms 'recession' and 'depression' in relation to movement of economies around the globe. In this context, how would you differentiate between recession and depression? 1. While demand may or may not decrease during a recession, there is always a general fall in total demand during a depression. 2. While the inflation rate decreases during a recession, depression is characterized by higher inflation. 3. Unlike recession, depression is characterized by a fall in the employment rate. 4. Depression typically lasts for longer time than recession.Select the correct answer using the code given below
    • A1, 2 and 3 only
    • B3 and 4 only
    • C4 only
    • D1, 2 and 4 only
    Answer: (C) 4 only
    Explanation

    Option c is the correct economic recession is often defined as a decline gross domestic product (GDP) for two On the contrary, an economic depression understood as an extreme downturn in lasting several years. A depression is a more 1 is incorrect: There is a general fall in economic activities takes a downturn during there is no increase in demand even at a Similarly, during depression, an extremely low in the economy causes activities to 2 is incorrect: Inflation remains lower further signs of falling down during recession. is comparatively much lower during the times 3 is incorrect: Employment rate rate grows during both recession The employment avenues start shrinking rate to grow fast during these 4 is correct: Depressions tend to be much more severe and they tend to last for a much longer period of time than recession

17. #17Practice set
    Which of the following items are the components of macroeconomics? 1. Inflation. 2. Level of Unemployment in an economy. 3. Wage levels in a company. 4. External trade balance. PradicebookSelect the correct answer using the code given below
    • A1, 2 and 4 only
    • B1 and 3 only
    • C2, 3 and 4 only
    • D1, 2, 3 and 4
    Answer: (A) 1, 2 and 4 only
    Explanation

    Option a is the correct deals with the aggregate of an economy. Examples include: GDP, Level, Inflation, Unemployment, external is the study of individual economic the markets. Level of wages in a company is the microeconomics

18. #18Practice set
    With reference to the concept of business cycle, consider the following statements: 1. It is a microeconomic concept that explains the growth dynamics of individual companies. 2. Inflation is at a comparatively high level in depression stage. 3. Boom stage may be characterized as a mismatch between demand and supply.How many statements given above are correct?
    • AOnly one
    • BOnly two
    • CAll three
    • DNone
    Answer: (A) Only one
    Explanation

    Option a is the correct l is incorrect: Business cycle is a that explains why and how economies best and worst levels of economic activities. Statement 2 is incorrect: Inflation is at a low level stage. Depression is characterized by levels of demand, and under such conditions be 3 is correct: When the demand peaks up to high level that it exceeds sustainable This is called the boom stage. In this stage, there is between demand and supply

19. #19Practice set
    With reference to the methods of Gross Domestic Product calculation, consider the following statements: 1. In a fixed base index, weight assigned to various economic activities and goods automatically changes as the economy changes structurally. 2. In chain method, the base period keeps changing from year to year. 3. Unlike fixed base method, chain method cannot be used if data on previous year is not available.How many of the above given statements are correct?
    • AOnly one
    • BOnly two
    • CAll three
    • DNone
    Answer: (B) Only two
    Explanation

    Option b is the correct l is incorrect: In a fixed base index, to various economic activities and goods if two conditions are met simultaneously change its structure and Government should to change the weights and base. So, mere change structure is not sufficient condition for change automatically, government should also take to change 2 is correct: In chain base method, the is not fixed. In this method, the year the one for which the price index has to is assumed as the base 3 is correct: A disadvantage of the chain that if the data for the previous year is not we cannot compute the chain index number for period

20. #20Practice set
    With regards to inflation targeting in India, consider following statements: 1. The RBI solely determines the inflation target, in terms of the Consumer Price Index, once in every five years. 2. RBI's flexible inflation targeting places price stability as the primary objective of the monetary policy. 3. If the RBI fails to meet the inflation target, then a new monetary policy committee will be formed to address the issue. 4. The monetary policy committee determines the policy interest rates required to achieve the inflation target.How many of the above given statements are correct?
    • AOnly One
    • BOnly Two
    • COnly Three
    • DAll Four
    Answer: (B) Only Two
    Explanation

    Option b is the correct 1 is incorrect. The RBI Act provides for target to be set by the Government of India, with the Reserve Bank, once in every Accordingly, the Central Government has notified cent Consumer Price Index (CPI) inflation as the the fiscal year 2025-26 with the upper tolerance limit per cent and the lower tolerance limit of 2 per 2 is correct. India formally adopted targeting (FIT) in June 2016 to place price in terms of a target CPI inflation, as the of the monetary policy. In May 2016, the of India (RBI) Act, 1934 was amended to statutory basis for the implementation of the targeting 3 is incorrect. If RBI fails to meet the then it will have to explain the reason for its meet the target as well as give a timeframe within will achieve the inflation 4 is correct. The amended RBI Act, 1934 an empowered six-member monetary policy to be constituted by the Central Government

21. #21Practice set
    Consider the following statements with reference to Refined Core Inflation: 1. Refined core inflation was constructed to address the anomaly in retail core inflation by excluding main fuel items. 2. Since 2020, refined core inflation has been much above the conventional core inflation indicating the impact of inflation in fuel items.Which of the statements given above is/are correct?
    • A1 only
    • B2 only
    • CBoth 1 and 2
    • DNeither 1 nor 2
    Answer: (A) 1 only
    Explanation

    Option a is the correct the current financial year, retail core excluding 'food and beverages' and 'fuel and the transitory components of the index) has shown a l is correct: Conventionally, core inflation by excluding 'food and beverages' and light' groups from overall inflation. While in fuel items such as 'petrol for vehicle' and 'diesel which have relatively large weights, are not 'fuel and light'. A 'refined' core inflation was address this anomaly by excluding main fuel items for vehicle', 'diesel for vehicle' and 'lubricants fuels for vehicles', in addition to 'food and 'fuel and light' from the headline retail 2 is incorrect: Since June 2020, refined has been much below the conventional indicating the impact of inflation in fuel items conventional core inflation measure. Conventional calculating retail core inflation, instead of excluding fuel items from core inflation, continue

22. #22Practice set
    Consider the following statement regarding the different indexes used to measure inflation: 1. Both Wholesale Price Index (WPI) and Consumer Price Index (CPI) capture the changes in the prices of goods and services. 2. The Reserve Bank of India (RBI) has adopted the CPI as its key measure of inflation. 3. The basket of goods and services used to compute the GDP deflator changes automatically over time.How many of the above given statements are correct?
    • AOnly one
    • BOnly two
    • CAll three
    • DNone
    Answer: (B) Only two
    Explanation

    Option b is the correct wholesale price index (WPI) measures overall change prices over time. It is a measure of inflation the prices of goods before they reach Consumer Price Index measures the overall change prices based on a representative basket of services over time. Statement 1 is incorrect: WPI does not capture changes prices of services, while CPI captures the changes in and 2 is correct: In 2014, the Reserve Bank of India the new Consumer Price Index (CPI) (combined) key measure of 3 is correct: The GDP price deflator changes in prices for all the goods and services produced in an economy. The GDP price deflator is a inflation measure as it is not based on a of goods. The Basket of goods and services used the GDP deflator changes automatically over time. Important Tips WPI tracks the inflation at the producer level and CPI captures the inflation at the consumer level. WPI is rel

23. #23Practice set
    Which of the following are the likely benefits of a certain level of Inflation in economy? 1. Easier for government to achieve its fiscal deficit target 2. According to the Philip's Curve, rising unemployment can be fought with increased inflation. 3. It encourages the domestic savings by earning high interest rateSelect the correct answer using the code given below
    • A1 and 2 only
    • B1 and 3 only
    • C2 and 3 only
    • D1, 2 and 3
    Answer: (A) 1 and 2 only
    Explanation

    Option a is the correct is a general rise in the prices of goods and high inflation is generally considered harmful, believe that a small amount of inflation can economic l is correct. In the short term, the is the single largest borrower in the economy, high inflation. Inflation allows the government to fiscal deficit target. Fiscal deficit limits are a percentage of the nominal GDP. As the nominal because of inflation, the same amount of fiscal becomes a smaller percentage of the 2 is correct. Economists believe that an exists between inflation and unemployment, rising unemployment could be fought with This relationship is defined in the famous 3 is incorrect. High inflation eats away the earned from keeping one's money in the bank savings instruments. Earning a nominal a savings deposit effectively means earning inflation is at By the reverse logic, borrowers off when inflation rises

24. #24Practice set
    With reference to the Indian economy, demand-pull inflation can be caused by which of the following? 1. Increase in welfare expenditure 2. Higher purchasing power of consumers 3. Raising tax rates 4. Increase in prices of raw materials 5. Increased labour costsSelect the correct answer using the code given below
    • A1 and 2 only
    • B1, 2 and 5 only
    • C1, 2 and 3 only
    • D2, 4 and 5 only
    Answer: (A) 1 and 2 only
    Explanation

    Option a is the correct can be divided into Demand pull inflation inflation is caused by an increase in driven by the four sections of the business, governments, and foreign buyers. caused by an expanding economy, increased or overseas 1 is correct: as increase in welfare expenditure in government spending. This in tun will pull 2 is correct: When the consumers have levels and have a higher purchasing power feel confident and they spend more and even more debt to spend. This leads to a steady increase which means higher prices and higher Option 3 is incorrect: as an increased rate of taxes the personal disposable income of a person. Thus, one of the measures used by the government and RBI demand pull 4 and 5 are incorrect: Cost push inflation is the decrease in the aggregate supply of goods resulting from an increase in the cost of increase in the costs of raw materials or labour to cost

25. #25Practice set
    Which of the following factors is/are responsible for influencing the prices of gold in India? 1. Inflationary conditions in the economy 2. Rise in Global Crude Oil Prices 3. Increase in Government Reserves 4. Good Harvesting Season for rural economy 5. International value of the US dollarSelect the correct answer using the code given below
    • A1 and 2 only
    • B1, 2 and 3 only
    • C1, 3 and 5 only
    • D1, 2, 3, 4 and 5
    Answer: (D) 1, 2, 3, 4 and 5
    Explanation

    Option dis the correct l is correct. Gold prices react to inflation, to invest in gold. When inflation rises the go down. Thus, people tend to hold money in the gold. When inflation lasts high for a long period of acts as a hedging tool against inflationary 2 is correct. Crude oil price that is one of contributors in the inflation of the economy can gold prices in the market. The volatility of the prices and any sharp moves by the economies would have implications for the inflation expectations as gold 3 is correct. The government holds reserves When RBI starts to buy greater quantity than it price increases as it will result in insufficient supply and vice versa. Hence, the central bank's decision to sell gold can affect the price due to the sheer volume 4 is correct. Good monsoon results in and the amount earned is used to invest in is used in rainy season as in poor monsoon gold a saf

26. #26Practice set
    Consider the following statements regarding Stagflation: 1. It denotes a price rise of a small group of commodities over a sustained period of time. 2. It results in high inflation and unemployment levels in the economy.Which of the statements given above is/are correct?
    • A1 only
    • B2 only
    • CBoth 1 and 2
    • DNeither 1 nor 2
    Answer: (B) 2 only
    Explanation

    Option bis the correct 1 is incorrect: Stagflation is a situation in when inflation and unemployment both are levels, contrary to conventional Skewflation is a phenomenon in which there is rise of one or a small group of commodities over period of time, without a traditional 2 is correct: Stagflation is an economic by slow growth and a high unemployment by inflation. Economic policymakers find particularly difficult to handle, as attempting one of the factors can exacerbate another

27. #27Practice set
    to Galloping Inflation, consider the following statements: 1. During galloping inflation, people try to get rid of currency by buying physical assets. 2. During galloping inflation, exporters will be much less motivated to export their products.Which of the statements given above is/are correct?
    • A1 only
    • B2 only
    • CBoth 1 and 2
    • DNeither 1 nor 2
    Answer: (A) 1 only
    Explanation

    Option a is the correct inflation refers to a condition when the is extraordinarily high. In this scenario, the currency country will lose value. Inflation in the double or triple digit range of 20, 100 or 200 percent a year is called l is correct: As galloping inflation results in in the money value of local currency, people to preserve its real value tend to get rid of purchasing precious metals, Land 2 is incorrect: Exporters benefit during as the local currency depreciates, making expensive relative to overseas competitors. receive hard foreign currency, which appreciates in the local currency depreciates. This can be a for them to export their products

28. #28Practice set
    Consider the following statements with respect to the impact of inflation: 1. Increase in inflation can lead to depreciation in the value of Indian rupee. 2. Rise in inflation rate will likely increase borrowing costs for businesses. 3. A decline in inflation leads to an increase in the savings rate 4. Inflation may lead to a significant decrease in value of assets with adjustable cash flows.How many of the above given statements are correct?
    • AOnly one
    • BOnly two
    • COnly three
    • DAll four
    Answer: (C) Only three
    Explanation

    Option c is the correct is the steady rise of prices for goods and a l is correct: Inflation is one of the most that affect the exchange rate. Example: Suppose rate was exactly 1 in the first year. This means Rs 100, one could buy something that was priced in the US. But suppose the Indian inflation is US inflation is zero. Then, in the second year, an need Rs 120 to buy the same item priced at rupee's exchange rate would depreciate to 1.20. Thus, lead to the depreciation of Indian 2 is correct: High inflation may lead to costs for businesses and people needing mortgages. Financial markets protect themselves prices and increase the cost of borrowing on longer-term debt. If the cost of borrowing money and businesses have less money to spend. falls, economic growth slows 3 is correct: Every rise in prices is affecting of living, leaving a dent in your savings and reason is, with the rise i

29. #29Practice set
    With reference to differences between Disinflation and Deflation, consider the following statements: 1. Deflation means a fall in prices of commodities, while disinflation means a slowdown in the rate of inflation. 2. Deflation will always lead to a decrease in the value of money whereas disinflation will always lead to an increase in the value of money. 3. Compared to disinflation, deflation is good for the financial markets.How many of the a hove are correct?
    • AOnly one
    • BOnly two
    • CAll three
    • DNone
    Answer: (A) Only one
    Explanation

    Option a is the correct 1 is correct: Deflation means prices are falling inflation rate is in the negative, while disinflation slowdown in the rate of inflation while still the positive. Disinflation occurs more commonly 2 is incorrect: During times of deflation, money supply is tightened, there is an increase in of money, which increases the real value of inflation is positive during disinflation, the value 3 is incorrect: During disinflation Stocks often do, perform well when the bonds are likely above-average returns in a disinflationary it makes central banks less likely to raise and more likely to reduce them. Whereas an extremely destructive condition for the economy markets. During periods of deflation, stock likely to perform poorly. Important Tips Deflation and disinflation refer to two very different conditions with respect to the direction and change of general price levels in

30. #30Practice set
    the following slatements about AU India House Price Index: 1. It is published by the Reserve Bank of India. 2. The base year for price calculations under this index is 1986-87. 3. The index is released for all the state capital cities of India. Huw many of Lhe above given statements are correct? H
    • AOnly one
    • BOnly two
    • CAll three
    • DNone
    Answer: (A) Only one
    Explanation

    Option a is the correct l is correct: Reserve Bank of India price index (HPI) on a basis. The in composite.Housing Price Index indicates in the housing sector which sets off a virtuous growth and 2 is incorrect: Reserve Bank of India releases house price index (HPI) which has base year 3 is incorrect: Beginning with Mumbai, Bank began compiling a house price index (HPI) and published a quarterly HPI for Mumbai. The been expanded over the quarters by incorporating 9 cities, namely, Delhi, Chennai, Kolkata, Ahmedabad, Jaipur Kanpur, and Kochi. RBI publishes housing data for ten major not for all the state capital cities)

31. #31Practice set
    With reference to the Non-Accelerating Inflation Rate of Unemployment (NAIRU), which of the following statements is correct?
    • AIt is the highest level of unemployment rate that can be sustained without causing growth in wages
    • BWhen unemployment is at NAIRU level, rate of inflation will be constant
    • CIt reflects the level of disguised unemployment in the country
    • DIt is always calculated by adjusting the inflation rate to the GDP of the economy
    Answer: (B) When unemployment is at NAIRU level, rate of inflation will be constant
    Explanation

    Option b is the correct non-accelerating inflation rate of is the lowest level of unemployment that can the economy before inflation starts to inch a is incorrect: The NAIRU is the rate (and not highest) that can be causing wages growth and inflation to b is correct: The non-accelerating inflation rate (NAIRU) is the specific unemployment which the rate of inflation stabilises and is inflation will neither increase nor decrease. rises above NAIRU level, inflation unemployment drops, inflation c is incorrect: NAIRU does not reflect the level unemployment in the economy. The natural unemployment is sometimes called the NAIRU is consistent with an economy that is growing at its long term potential, so there is no upward or downward d is incorrect: There is no set formula to The countries use statistical models to put level. Example: The US Federal Reserve puts between and unemployment. Impo

32. #32Full-length test
    the context of Indian economy, which one of the following is likely to have the most inflationary effect?
    • AIncrease in foreign investment in the country
    • BDecrease in government spending
    • CIncrease in oil prices in the international market
    • DReduction in import tariffs on goods
    Answer: (C) Increase in oil prices in the international market
    Explanation

    Option c is the correct a is incorrect: An increase in foreign increase economic activity and demand, but it increase the supply of goods and services, which out any inflationary pressure I l b is incorrect: A decrease in government lead to a reduction in demand for goods and can have a deflationary impact on the c is correct: Oil is one of the most in the global economy, and changes in can have a significant impact on the inflation level. in oil prices in the international market will lead increase in the cost of production of goods and services, is a major input in many industries. This will lead to in the prices of goods and services in the leading to inflation. In addition, an increase in will also lead to an increase in transportation can further exacerbate inflationary dis incorrect: Import tariffs refer to taxes the government on imported goods. A reduction tariffs can lead to an

33. #33Full-length test
    Consider the following statements with reference to Cost Inflation Index: 1. The index is released by the National Statistical Office every year. 2. It is used to calculate the inflation adjusted rise in the price of equity mutual funds for taxation purposes.Which of the statements given above is/are correct?
    • A1 only
    • B2 only
    • CBoth 1 and 2
    • DNeither 1 nor 2
    Answer: (D) Neither 1 nor 2
    Explanation

    Option d is the correct 1 is incorrect: Central Board of Direct (not National Statistical Office) releases the Index (CII) annually. The formula to cost price is: CII of the year of sale / the year of purchase Actual cost 2 is incorrect: The Cost Inflation Index (CII) index that is used to calculate the inflation-adjusted the value of an asset. Long-term capital gains or then calculated using the inflation-adjusted price. figure is used to compute the inflation adjusted value including land, buildings, houses, gold jewellery, funds, and so on. It cannot, however, be utilized on equity shares and equities mutual funds that at a rate of without any indexation benefit

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