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Indian Economy - Prelims Questions DPP - 23

1. Consider the following statements regarding Which of the statements given above is/are
Inflation: correct?
1. Inflation is a situation in which persistent (a) 1 only (b) 2 only
increases in the prices of goods and (c) Both 1 and 2 (d) Neither 1 nor 2
services.
2. Demand-pull inflation arises from rising 4. Consider the following statements:
raw material prices or higher wages 1. Structural inflation is caused by an excess
3. Cost-push inflation occurs when aggregate of demand over supply.
demand for goods and services exceeds 2. Shrinkflation is a process whereby the size
aggregate supply. of the commodity is decreased while
How many of the above statements are correct? keeping the same or increasing a little bit in
(a) Only one (b) Only two the commodity's price.
(c) All three (d) None Which of the statements given above is/are
correct?
2. With reference to Inflation, consider the (a) 1 only (b) 2 only
following statements: (c) Both 1 and 2 (d) Neither 1 nor 2
1. Hyperinflation is an extreme form of
inflation where the prices rise at an 5. Consider the following statements:
alarmingly high rate. 1. The Consumer Price Index (CPI) is
2. Stagflation is a situation where there is a calculated by the Ministry of Commerce
coexistence of inflation with stagnation in and Industry.
the economy. 2. Under the Wholesale Price Index (WPI),
Which of the statements given above is/are both goods and services are taken into
correct? consideration.
(a) 1 only (b) 2 only 3. The base year for calculating the Wholesale
(c) Both 1 and 2 (d) Neither 1 nor 2 Price Index (WPI) is 2012.
How many of the above statements are not
3. Consider the following statements: correct?
1. Core Inflation does not consider food and (a) Only one (b) Only two
energy prices that are beyond the (c) All three (d) None
government's control causing inflation.
2. Headline Inflation is the overall
measurement of inflation in an economy
impacted by specific market segments that
may experience unexpected inflationary
surges.
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Answer

1. (a) 4. (b)
2 (c) 5. (b)
3. (c)

Hints and Solutions
1. Option (a) is correct:
❖ Statement 1 is correct: Inflation can be
defined as a situation when there is a
persistent increase in the general prices
of goods and services, which may generate
an expectation of a future rise in the prices.
Inflation may also be defined as the
reduction in the purchasing power per unit
of currency because each unit of currency
can now buy fewer goods and services.
3.
❖ Statement 2 is not correct: Demand-pull
inflation occurs when aggregate demand
for goods and services exceeds aggregate
supply. This can happen due to increased
consumer spending, government
expenditures, or investment. It basically
occurs in a situation when the total demand
in the economy has exceeded the total
supply
❖ Statement 3 is not correct: Supply-side
inflation is a key factor for the rising
inflation in India. Cost-push inflation
arises from an increase in production
costs, such as rising raw material prices
or higher wages. Producers may pass these
increased costs onto consumers through
higher prices.
2. Option (c) is correct:
❖ Statement 1 is correct: Hyperinflation is
an extreme form of inflation where the
prices rise at an alarmingly high rate (i.e.,
more than 50% every month). It happens in
some extraordinary situations like War,
political turmoil in a country, internal
disturbances in the economy, etc
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❖ Statement 2 is correct: In economics,
stagflation occurs when the inflation rate
is high or rising, the rate of economic
growth slows, and unemployment remains
persistently high. It creates a quandary for
economic policymakers because actions
aimed at lowering inflation may exacerbate
unemployment.
Option (c) is correct:
❖ Statement 1 is correct: Core inflation
means inflation which does not take into
consideration the impact of such factors
that are beyond the Government's
control causing inflation. It excludes
commodities such as food and energy
prices (e.g., oil and gas), which tend to be
much more volatile. For example: If the
inflation rate in India is calculated without
considering the impact of the rise in the
international prices of oil, it will be core
inflation.
❖ Statement 2 is correct: It is a measure of
total inflation in an economy and is
majorly affected by certain areas of the
market which may experience sudden
inflationary spikes. It includes
commodities such as food and energy prices
(e.g., oil and gas), which tend to be much
more volatile and prone to inflationary
spikes. For example: If a large amount of
crop is destroyed, the value of the remaining
crop will rise sharply.
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4. Option (b) is correct: Consumer Price Wholesale Price

❖ Statement 1 is not correct: Structural Index (CPI) Index (WPI)
inflation is a type of inflation that is not
caused merely by the excess demand over Base year-2012 Base year-2011-12
supply but built into an economy due to the Indices: CPI Urban, Indices: WPI,
Government’s monetary policy and fiscal CPI Rural, CPI Wholesale Food
policy. Combined, Price Index
❖ Statement 2 is correct: It is the process Consumer Food Price
wherein the size or quantity of the
Index
commodity decreases instead of any rise in
the price of the commodity. It is the process Calculated by the Calculated by the
of items shrinking in size or quantity or Ministry of Statistics Ministry of
even sometimes reformulating or reducing and Programme Commerce and
quality while their prices remain the same Implementation Industry (MoC&I)
or increase a little bit. This is due to a rise
(MoSPI)
in the prices of inputs in the market.
It talks about the It talks about the
5. Option (b) is correct. retail market wholesale market
❖ Statement 1 is not correct: The Consumer Takes both goods Takes only goods
Price Index (CPI) is a statistical measure and services into into consideration
that quantifies the average change in the consideration (200 (697 goods)
prices paid by consumers for a fixed
goods and services)
basket of goods and services over a specific
period. The Consumer Price Index (CPI) is Calculated on a Calculated on a
calculated by the Ministry of Statistics and monthly basis monthly basis
Programme Implementation.
Calculated from a Calculated from the
❖ Statement 2 is not correct: The Wholesale
consumer point of businessman's point
Price Index (WPI) takes only goods into
consideration. A total of 697 commodities view of view
are taken into account. Out of 697 Weightage* Weightage:
commodities, 117 are primary items Out of 697
(22.62%),16 items are related to fuels and
commodities, 117 are
power (13.15%), and 564 items of
primary goods
manufacturing products (64.23%).
❖ Statement 3 is correct: The Wholesale (22.62%), 16 items
Price Index (WPI) is a statistical measure for fuels and power
that quantifies the average change in the (13.15%), 564 items
prices of a selected basket of goods at the for manufacturing
wholesale level over a specific period. products (64.23%)
Unlike the Consumer Price Index (CPI),
which measures retail prices paid by
consumers, the WPI focuses on prices at
earlier stages of production and
distribution. The base year to calculate
Wholesale Price Index (WPI) is 2012.
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