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Inflation
Economics
Useful for: UPSC Civil Services, OSSC RHT — Regular High School Teacher, OSSC Economics, OSSSC Govt TGT Arts, SSB Lecturer (Degree Colleges), SSB TGT Arts
Overview
Inflation is a sustained rise in the general price level; India targets CPI inflation, while WPI tracks wholesale prices.
Key points
- CPI (Combined) is compiled by the NSO and used for the inflation target; base year 2012.
- WPI is compiled by the Office of the Economic Adviser, DPIIT; base year 2011–12; it does not include services.
- Core inflation excludes volatile food and fuel items.
- Demand-pull: too much demand; cost-push: rising input costs.
- Disinflation is a falling rate of inflation that is still positive; deflation is a fall in the price level.
- Stagflation combines high inflation with stagnant growth and high unemployment.
Explanation
- The Phillips curve suggests a short-run trade-off between inflation and unemployment.
- Inflation hurts fixed-income earners and creditors; it may help debtors.
- Imported inflation arises from costlier imports or a weaker rupee.
- Supply-side measures (storage, imports) address food inflation.
- Inflation expectations shape wage and price setting.
Step by step
- Identify the concept, law or fact asked.
- Recall the definition, formula, example or year.
- Apply it and eliminate mismatched options.
Examples
- Statement: "WPI includes services." → Incorrect.
- Statement: "Disinflation means prices are falling." → Incorrect (the rate of increase is falling).
- Statement: "The RBI’s target is defined in terms of CPI." → Correct.
Traps and advanced points
- Trap: Calling disinflation deflation.
- Trap: Assigning WPI to the NSO.
- Trap: Thinking core inflation includes food.
Quick revision
- CPI → NSO, target; WPI → DPIIT.
- Core excludes food and fuel.
- Disinflation ≠ deflation.
Practice MCQs
From the perspective of definition and scope, which one of the following statements about Inflation is correct?
- A temporary rise in the price of one vegetable necessarily means the economy is experiencing generalized inflation.
- Inflation is unrelated to institutions, processes or real-world applications.
- Inflation has no exceptions or limitations in exam analysis.
- Inflation is a sustained rise in the general price level, not merely a rise in one commodity price.
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Answer: (d) Inflation is a sustained rise in the general price level, not merely a rise in one commodity price.. Inflation is a sustained rise in the general price level, not merely a rise in one commodity price.
Consider the following statements on Inflation, focusing on definition and scope: 1. Inflation is a sustained rise in the general price level, not merely a rise in one commodity price. 2. Demand, supply shocks, expectations, exchange rates and administered prices can all affect inflation. Which of the statements given above is/are correct?
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
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Answer: (c) Both 1 and 2. Both statements are correct.
With reference to Inflation (definition and scope), consider the following statements: 1. Inflation is a sustained rise in the general price level, not merely a rise in one commodity price. 2. A temporary rise in the price of one vegetable necessarily means the economy is experiencing generalized inflation. Which of the statements given above is/are correct?
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
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Answer: (a) 1 only. Only statement 1 is correct.
From the perspective of institutional design, which one of the following statements about Inflation is correct?
- Headline and core inflation differ by the basket components included or excluded.
- Foreign-exchange reserves provide buffers but are not a substitute for sound macroeconomic fundamentals.
- Buffer stocks can serve food-security and price-stabilization objectives but create carrying costs.
- Fiscal policy works through taxation, expenditure, transfers and borrowing.
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Answer: (a) Headline and core inflation differ by the basket components included or excluded.. Headline and core inflation differ by the basket components included or excluded.
Consider the following statements on Inflation, focusing on working mechanism: 1. Demand, supply shocks, expectations, exchange rates and administered prices can all affect inflation. 2. Inflation is a sustained rise in the general price level, not merely a rise in one commodity price. Which of the statements given above is/are correct?
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
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Answer: (c) Both 1 and 2. Both statements are correct.
With reference to Inflation (practical application), consider the following statements: 1. A temporary rise in the price of one vegetable necessarily means the economy is experiencing generalized inflation. 2. Demand, supply shocks, expectations, exchange rates and administered prices can all affect inflation. Which of the statements given above is/are correct?
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
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Answer: (b) 2 only. Only statement 2 is correct.
With reference to Inflation (institutional design), consider the following statements: 1. A temporary rise in the price of one vegetable necessarily means the economy is experiencing generalized inflation. 2. Headline and core inflation differ by the basket components included or excluded. Which of the statements given above is/are correct?
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
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Show answer
Answer: (b) 2 only. Only statement 2 is correct, so the answer is (B) 2 only. Statement 1 is incorrect — it is an overstated or wrong claim. Correct position: Inflation is a sustained rise in the general price level, not merely a rise in one commodity price. Statement 2 is correct.
Consider the following statements on Inflation, focusing on practical application: 1. A temporary rise in the price of one vegetable necessarily means the economy is experiencing generalized inflation. 2. Real interest rate is approximately nominal interest rate minus inflation for basic analysis. Which of the statements given above is/are correct?
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
Read chapter notes · Similar questions
Show answer
Answer: (b) 2 only. Only statement 2 is correct, so the answer is (B) 2 only. Statement 2 is correct; Statement 1 is a common misconception.
With reference to Inflation (definition and scope), consider the following statements: 1. Headline and core inflation differ by the basket components included or excluded. 2. A temporary rise in the price of one vegetable necessarily means the economy is experiencing generalized inflation. Which of the statements given above is/are correct?
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
Read chapter notes · Similar questions
Show answer
Answer: (a) 1 only. Only statement 1 is correct, so the answer is (A) 1 only. Statement 1 is correct. Statement 2 is incorrect — it is an overstated or wrong claim. Correct position: Inflation is a sustained rise in the general price level, not merely a rise in one commodity price.
With reference to Inflation (working mechanism), consider the following statements: 1. Real interest rate is approximately nominal interest rate minus inflation for basic analysis. 2. A temporary rise in the price of one vegetable necessarily means the economy is experiencing generalized inflation. Which of the statements given above is/are correct?
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
Read chapter notes · Similar questions
Show answer
Answer: (a) 1 only. Only statement 1 is correct, so the answer is (A) 1 only. Statement 1 is correct. Statement 2 is incorrect — it is an overstated or wrong claim. Correct position: Inflation is a sustained rise in the general price level, not merely a rise in one commodity price.
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