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CDS – 2 VIRAAT 2023

Inflation and Money DPP: 2.1

1. What is inflation? 7. What does inflation indicate?

(a) The rate at which the general price level for (a) An increase in the purchasing power of a unit
goods and/or services rises of currency in the country
(b) The rate at which the general price level for (b) A decrease in the purchasing power of a unit of
goods and/or services falls currency in the country
(c) The rate at which the general price level for (c) A constant purchasing power of a unit of
goods and/or services remains constant currency in the country
(d) None of the above (d) None of the above

2. What happens to the purchasing power of currency 8. What is demand-pull inflation?

during inflation? (a) When people want to buy more things than
(a) It increases there are things available, so businesses raise
(b) It decreases their prices
(c) It remains constant (b) When people want to buy fewer things than
(d) None of the above there are things available, so businesses lower
their prices
3. What is general inflation measured unit? (c) When people want to buy the same amount of
(a) In percentages things as there are things available, businesses
(b) In dollars keep their prices the same
(c) In pounds (d) None of the above
(d) None of the above
9. What happens when there is excess demand?
4. What are the three types of inflation? (a) Producers utilize situations resulting in
(a) Demand-pull, Cost-Drop, and Built-in decreased prices to derive greater profits.
(b) Demand-Drop, Cost-push, and Built-in (b) Producers utilize situations resulting in
(c) Demand-pull, Cost-push, and Built-out increased prices to derive greater profits.
(d) None of the above (c) Producers utilize situations resulting in constant
prices to derive greater profits.
5. What are the most commonly used inflation (d) None of the above.
indexes?
(a) Consumer Price Index (CPI) and Wholesale 10. What is cost-pull inflation?
Price Index (WPI) (a) Takes place when firms respond to rising costs
(b) Retail Price Index (RPI) and Producer Price by decreasing prices to protect their profits
Index (PPI) (b) Takes place when firms respond to rising costs
(c) Consumer Price Index (CPI) and Producer by increasing prices to protect their profits.
Price Index (PPI) (c) Takes place when firms respond to rising costs
(d) None of the above by keeping prices constant to protect their
profits.
6. What is deflation? (d) None of the above.
(a) A fall in the price index of a basket of items
(b) A rise in the price index of a basket of items
(c) A constant price index of a basket of items
(d) None of the above
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Answer Key
1. (a) 6. (a)
2. (b) 7. (b)
3. (a) 8. (a)
4. (c) 9. (b)
5. (a) 10. (b)

Hints and Solutions
1. (a)
Explanation:
• Inflation is the rate at which the general price
level for goods and services in an economy
rises over time.
• This means that as inflation increases, the
purchasing power of money decreases, and it takes
more money to buy the same goods and services.
2. (b)
Explanation:
• During inflation, the purchasing power of
currency decreases. This means that as prices
rise, each unit of currency can buy less than it
could before.
• For example, if the inflation rate is 2%, then a
$1 candy bar will cost $1.02 in a year.
3. (a)
Explanation:
• Inflation is generally measured in percentages.
This refers to the percentage change in the price
level of goods and services over time.
• For example, if the inflation rate is 2%, this
means that prices have increased by 2%
compared to the previous year.
4. (c)
Explanation:
• There are three main types of inflation:
demand-pull, cost-push, and built-in. Demand-
pull inflation occurs when demand for goods
and services exceeds supply, leading to higher
prices. Cost-push inflation occurs
• when the cost of production increases, leading
to higher prices. Built-in inflation occurs when
businesses and workers expect prices to rise
and adjust their behavior accordingly, leading
to a self-fulfilling cycle of rising prices.
5. (a)
Explanation:
• The most commonly used inflation indexes are
the Consumer Price Index (CPI) and the
Wholesale Price Index (WPI). The CPI
measures changes in the price level of a basket
of consumer goods and services,
• while the WPI measures changes in the price
level of a basket of wholesale goods.
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6. (a)
Explanation:
• Deflation is the opposite of inflation and refers
to a fall in the general price level for goods and
services in an economy. This means that as
deflation increases, the purchasing power of
money increases, and it takes less money to buy
the same goods and services.
7. (b)
Explanation:
• Inflation indicates a decrease in the purchasing
power of a unit of currency in a country. As
prices rise, each unit of currency can buy less
than it could before. This can make it more
difficult for people to afford the things they
need.
8. (a)
Explanation:
• Demand-pull inflation occurs when there is
more demand for goods and services than there
is supply. This means that people want to buy
more things than there are things available.
• As a result, businesses can raise their prices
because people are willing to pay more for the
limited goods and services available.
9. (b)
Explanation:
• When there is excess demand for goods and
services, producers can take advantage of this
situation by raising their prices to derive greater
profits. This is because people are willing to
pay more for limited goods and services.
10. (b)
Explanation:
• Cost-pull inflation, also known as cost-push
inflation, occurs when businesses respond to
rising costs by increasing their prices to protect
their profits.
• This can happen when there is an increase in
costs such as wages or raw materials. As
businesses pass on these costs to consumers by
raising their prices, this leads to an overall
increase in prices.