Inflation Questions and Answers---REDDY SIR

UPSC Previous Years

1. With reference to the Indian economy, demand-pull
inflation can be caused/increased by which of the
following?
1. Expansionary policies
2. Fiscal stimulus
3. Inflation-indexing wages
4. Higher purchasing power
5. Rising interest rates
Correct Answer: a) 1, 2 and 4 only
Explanation: Expansionary policies, fiscal stimulus, and
higher purchasing power increase aggregate demand,
causing demand-pull inflation. Inflation-indexing wages and
rising interest rates do not directly contribute.

2. Which one of the following is likely to be one of the most

inflationary in its effects?
• a) Repayment of public debt
• b) Borrowing from the public to finance a budget deficit
• c) Borrowing from the banks to finance a budget deficit
• d) Creation of new money to finance a budget deficit
Correct Answer: d) Creation of new money to finance a
budget deficit
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Explanation: Printing new money increases the money
supply, leading to inflation.

3. Which of the following factors/policies were affecting the

price of rice in India in the recent past?
1. Minimum Support Price
2. Government’s trading
3. Government’s stockpiling
4. Consumer subsidies
Correct Answer: d) 1, 2, 3 and 4
Explanation: MSP, government trading and stockpiling, and
consumer subsidies all influence the price of rice by
impacting supply and demand.

4. Consider the following statements:

1. The weightage of food in CPI is higher than that in WPI.
2. WPI does not capture changes in the prices of services,
which CPI does.
3. RBI has now adopted WPI as its key measure of
inflation and to decide on changing the key policy rates.
Correct Answer: a) 1 and 2 only
Explanation: CPI gives more weightage to food compared to
WPI. WPI excludes services, while CPI includes them. RBI
uses CPI, not WPI, for inflation targeting.

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5. With reference to inflation in India, which of the
following statements is correct?
• a) Controlling the inflation in India is the responsibility
of the Government of India only
• b) The Reserve Bank of India has no role in controlling
the inflation
• c) Decreased money circulation helps in controlling the
inflation
• d) Increased money circulation helps in controlling the
inflation
Correct Answer: c) Decreased money circulation helps in
controlling the inflation
Explanation: Reducing money circulation lowers aggregate
demand, thereby controlling inflation.

6. Which of the following brings out the ‘Consumer Price

Index Number for Industrial Workers’?
• a) The Reserve Bank of India
• b) The Department of Economic Affairs
• c) The Labour Bureau
• d) The Department of Personnel and Training
Correct Answer: c) The Labour Bureau
Explanation: The Labour Bureau compiles the CPI for

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Industrial Workers (CPI-IW), which is primarily used for
wage indexation.

7. Consider the following statements:

1. Inflation benefits the debtors.
2. Inflation benefits the bond-holders.
Correct Answer: a) 1 only
Explanation: Inflation benefits debtors as they repay loans
with depreciated money. Bondholders suffer as fixed returns
lose real value.

8. A rise in general level of prices may be caused by:

1. An increase in the money supply
2. A decrease in the aggregate level of output
3. An increase in the effective demand
Correct Answer: d) 1, 2 and 3
Explanation: Higher money supply, reduced output, and
increased demand all contribute to inflation.

10. Supply of money remaining the same when there is an

increase in demand for money, there will be:
• a) A fall in the level of prices

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 • b) An increase in the rate of interest
• c) A decrease in the rate of interest
• d) An increase in the level of income and employment
Correct Answer: b) An increase in the rate of interest
Explanation: With the same money supply, higher demand
leads to increased competition, pushing interest rates up.

Practice questions
1. What is Inflation?
• A) A decrease in the general price level of goods and
services.
• B) A sustained increase in the general price level of
goods and services.
• C) An increase in the production of goods and services.
• D) A rise in the unemployment rate.
• Answer: B
Explanation: Inflation refers to a sustained increase in
the general price level of goods and services in an
economy over a period of time.

2. Which of the following is NOT a type of inflation?

• A) Demand-pull inflation
• B) Cost-push inflation

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 • C) Fiscal inflation
• D) Stagflation
• Answer: C
Explanation: Fiscal inflation is not a recognized type of
inflation. Demand-pull, cost-push, and stagflation are
commonly studied inflation types.

3. The Reserve Bank of India uses which index to measure

inflation?
• A) Wholesale Price Index (WPI)
• B) Consumer Price Index (CPI)
• C) Producer Price Index (PPI)
• D) GDP Deflator
• Answer: B
Explanation: The RBI uses the Consumer Price Index
(CPI) as the primary measure for inflation targeting.

4. What is the current inflation target set by the Reserve

Bank of India (as of 2024)?
• A) 2% ± 1%
• B) 3% ± 1%
• C) 4% ± 2%
• D) 5% ± 2%

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 • Answer: C
Explanation: The inflation target set under the RBI Act
is 4%, with a tolerance band of ±2% (i.e., 2% to 6%).

5. What does 'headline inflation' include?

• A) Only core inflation
• B) All goods and services, including food and fuel prices
• C) Only food prices
• D) Excludes volatile components like food and fuel
• Answer: B
Explanation: Headline inflation includes the prices of all
goods and services, including food and fuel, which are
volatile.

6. Which of the following best defines "stagflation"?

• A) High inflation and low unemployment
• B) High inflation and high economic growth
• C) High inflation and stagnant economic growth
• D) Low inflation and high economic growth
• Answer: C
Explanation: Stagflation is a situation where an
economy experiences high inflation combined with
stagnant or negative economic growth.

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7. What is the Phillips Curve?
• A) It depicts the relationship between inflation and
GDP growth.
• B) It shows the trade-off between inflation and
unemployment.
• C) It measures the impact of inflation on exports.
• D) It explains the relationship between inflation and
interest rates.
• Answer: B
Explanation: The Phillips Curve describes the inverse
relationship between inflation and unemployment in
the short term.

8. Which of the following can cause cost-push inflation?

• A) Increase in demand for goods and services.
• B) Decrease in wages of workers.
• C) Rise in the cost of raw materials or fuel.
• D) Reduction in government spending.
• Answer: C
Explanation: Cost-push inflation occurs when the cost
of production increases, leading to higher prices of
goods and services.

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9. What is the base year for the Consumer Price Index (CPI)
in India?
• A) 2010
• B) 2011-12
• C) 2012
• D) 2015
• Answer: C
Explanation: The base year for CPI in India is 2012.

10. Which of the following measures can be used to control

inflation?
1. Increasing the Repo Rate
2. Increasing the Cash Reserve Ratio (CRR)
3. Reducing government expenditure
• A) 1 and 2 only
• B) 1 and 3 only
• C) 2 and 3 only
• D) 1, 2, and 3
• Answer: D
Explanation: All the measures listed—raising the repo
rate, increasing the CRR, and reducing government
expenditure—help control inflation by reducing
liquidity and aggregate demand in the economy.

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11. Consider the following statements about 'Demand-pull
Inflation':
1. It is caused by an increase in aggregate demand in the
economy.
2. It typically occurs when the economy is operating
below its potential output.
• A) 1 only
• B) 2 only
• C) Both 1 and 2
• D) Neither 1 nor 2
• Answer: A
Explanation: Demand-pull inflation arises when
aggregate demand exceeds the productive capacity of
the economy. It usually occurs when the economy is
operating at or near full capacity.

12. Which of the following best defines 'core inflation'?

• A) Inflation excluding food and fuel prices.
• B) Inflation that includes only essential commodities.
• C) Inflation driven by global factors.
• D) Inflation measured at the wholesale level.
• Answer: A
Explanation: Core inflation excludes volatile
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 components like food and fuel prices to provide a
clearer picture of the underlying inflation trend.

13. What is 'hyperinflation'?

• A) A very high and persistent increase in prices.
• B) A moderate rise in prices over a long period.
• C) An increase in inflation followed by deflation.
• D) A decrease in prices due to oversupply.
• Answer: A
Explanation: Hyperinflation is an extremely high and
often accelerating rate of inflation, which erodes the
value of currency significantly.

14. What is the primary purpose of monetary policy during

high inflation?
• A) Increase aggregate demand to boost economic
growth.
• B) Reduce liquidity in the economy to stabilize prices.
• C) Encourage credit expansion in the banking sector.
• D) Reduce unemployment through fiscal transfers.
• Answer: B
Explanation: During high inflation, monetary policy
focuses on reducing liquidity by raising interest rates or
tightening money supply to control prices.
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15. Which of the following are components of the Consumer
Price Index (CPI) in India?
1. Food and beverages
2. Fuel and light
3. Housing
4. Clothing and footwear
• A) 1, 2, and 3 only
• B) 1, 3, and 4 only
• C) 1, 2, 3, and 4
• D) 2, 3, and 4 only
• Answer: C
Explanation: The CPI in India consists of components
such as food and beverages, fuel and light, housing,
clothing, and footwear.

16. Consider the following statements about the Wholesale

Price Index (WPI):
1. WPI measures inflation at the retail level.
2. WPI does not include services in its basket.
• A) 1 only
• B) 2 only
• C) Both 1 and 2
• D) Neither 1 nor 2
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 • Answer: B
Explanation: WPI measures inflation at the wholesale
level, not the retail level, and excludes services from its
basket.

17. What is the purpose of inflation targeting by the Reserve

Bank of India (RBI)?
• A) To achieve zero inflation.
• B) To stabilize the currency exchange rate.
• C) To maintain price stability while supporting
economic growth.
• D) To promote deflationary trends in the economy.
• Answer: C
Explanation: The RBI's inflation targeting aims to
maintain price stability within the target range while
supporting overall economic growth.

18. Which of the following could be a potential cause of

'imported inflation' in India?
• A) Depreciation of the Indian rupee.
• B) Increase in domestic agricultural production.
• C) Reduction in global crude oil prices.
• D) Decrease in import tariffs.

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 • Answer: A
Explanation: Imported inflation occurs when a
country's currency depreciates, making imports more
expensive, or when global commodity prices rise.

19. Inflation Indexed Bonds (IIBs) are primarily designed to:

• A) Hedge against deflation.
• B) Protect investors from inflation.
• C) Provide higher returns than regular government
bonds.
• D) Support government infrastructure projects.
• Answer: B
Explanation: Inflation Indexed Bonds (IIBs) provide
returns linked to inflation, ensuring the real value of
returns is maintained.

20. What is the main difference between CPI and WPI in

India?
• A) WPI includes services, while CPI excludes them.
• B) CPI is calculated at the wholesale level, and WPI at
the retail level.
• C) WPI focuses on goods at the wholesale level, while
CPI reflects prices faced by consumers.

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 • D) Both are identical in methodology but differ in
basket size.
• Answer: C
Explanation: CPI measures retail prices that consumers
pay, while WPI measures prices at the wholesale level
for goods.

21. Consider the following pairs regarding inflation:

1. Headline Inflation: Includes all items like food and fuel.
2. Core Inflation: Excludes volatile items like food and
fuel.
3. Hyperinflation: Low but persistent inflation.
• A) 1 and 2 only
• B) 1 and 3 only
• C) 2 and 3 only
• D) 1, 2, and 3
• Answer: A
Explanation: Hyperinflation refers to extremely high
inflation, not low inflation.

22. Which of the following is a major cause of stagflation?

• A) Excessive fiscal stimulus in the economy.
• B) Simultaneous rise in production costs and economic
slowdown.
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 • C) Sharp decline in aggregate demand.
• D) Strong currency appreciation.
• Answer: B
Explanation: Stagflation occurs when rising costs (cost-
push inflation) coincide with slow economic growth or
stagnation.

23. Which institution releases the Consumer Price Index

(CPI) data in India?
• A) Reserve Bank of India
• B) Ministry of Finance
• C) National Statistical Office (NSO)
• D) NITI Aayog
• Answer: C
Explanation: The National Statistical Office (NSO) under
the Ministry of Statistics and Programme
Implementation releases CPI data in India.

24. The term ‘Built-in Inflation’ refers to:

• A) Inflation caused by excessive demand in the
economy.
• B) Inflation due to rising input costs, leading to higher
wages and prices.
• C) Inflation resulting from currency depreciation.
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 • D) Temporary inflation caused by seasonal variations.
• Answer: B
Explanation: Built-in inflation arises from a wage-price
spiral where higher wages increase costs, leading to
higher prices.

25. The GDP Deflator is a measure of inflation that:

• A) Considers only consumer goods and services.
• B) Includes all goods and services in the economy.
• C) Measures inflation at the wholesale level.
• D) Is a component of the Consumer Price Index.
• Answer: B
Explanation: The GDP Deflator accounts for price
changes in all goods and services produced within the
economy.

26. Which of the following policies is likely to reduce

inflation?
1. Increase in tax rates.
2. Reduction in government expenditure.
3. Increase in public subsidies.
• A) 1 and 2 only
• B) 2 and 3 only

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 • C) 1 and 3 only
• D) 1, 2, and 3
• Answer: A
Explanation: Increasing taxes and reducing government
expenditure lower aggregate demand, thus reducing
inflation. Increasing subsidies may raise inflation.

27. Consider the following regarding 'Imported Inflation':

1. It can result from the depreciation of the domestic
currency.
2. It arises when the cost of imported goods increases.
3. It can be controlled by reducing exports.
• A) 1 and 2 only
• B) 1 and 3 only
• C) 2 and 3 only
• D) 1, 2, and 3
• Answer: A
Explanation: Imported inflation arises from higher
import prices or currency depreciation. Reducing
exports does not directly impact imported inflation.

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