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UPSC IAS Prelims 2021: Important Questions on Economics - Topic 9 (Inflation)

Sakshi Saroha

Inflation is mainly caused either by demand Pull factors or Cost-Push factors. Apart from demand and supply factors, Inflation sometimes is also caused by structural bottlenecks and policies of the government and the central banks. Inflation is one of the most important concepts of the Economy and UPSC aspirants should prepare the topic in detail for Prelims as well as Mains exam. To help the aspirants in their preparation, we have provided the 10 most important questions from the Inflation topic of Economics for UPSC Prelims 2021.

Also Check: Topic-wise Important Questions on Economics

Ques 1:  Consider the following statements regarding the measurement of the rate of inflation:

  1. The rate of inflation is measured on the basis of the Wholesale Price Index (WPI) and Consumer Price Index (CPI).
  2. A price index is a measure of the average level of prices.
  3. Price index shows the exact price rise or fall of a single good.

Which of the following statement(s) is/are correct?

(a) 1 only

(b) 1 and 2 only 

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(c) 2 and 3 only

(d) 1 and 3 only

Ans: b

Explanation:

The rate of inflation is measured on the basis of price indices which are of two kinds—Wholesale Price Index (WPI) and Consumer Price Index (CPI). A price index is a measure of the average level of prices, which means that it does not show the exact price rise or fall of a single good.

Ques 2: What do you understand by the Inflationary gap?

(a) It is a situation which arises when Aggregate demand in the economy falls short of Aggregate Supply at the full employment level.

(b) It is a situation when inflation rises at an extremely faster rate.

(c) It is a situation which arises when Aggregate demand in an economy exceeds the Aggregate supply at the full employment level.

(d) The mechanism through which the central banks controls inflation depends on interest rate.

Ans: c

Explanation:

Inflationary Gap: the Inflationary gap is a situation which arises when Aggregate demand in an economy exceeds the Aggregate supply at the full employment level.

Ques 3: Which of the following mentioned authorities is responsible to measures Inflation in India?

(a) Reserve Bank of India

(b) Ministry of Statistics and Programme Implementation

(c) Ministry of Finance

(d) National Financial Reporting Authority 

Ans: b

Explanation:

Inflation is measured by a central government authority, which is in charge of adopting measures to ensure the smooth running of the economy. In India, the Ministry of Statistics and Programme Implementation measures inflation.

Ques 4: Which of the following situations contribute to cause the Inflation situation in an economy?

  1. Demand-supply gap
  2. Excess circulation of money
  3. Increase in increase tax rates

Select the correct code:

(a) 1 only

(b) 1 and 2 only 

(c) 2 and 3 only

(d) 1 and 3 only

Ans: b

Explanation:

The government can increase taxes (such as income tax and VAT) and cut spending. This improves the government’s budget situation and helps to reduce demand in the economy.

Both these policies reduce inflation by reducing the growth of aggregate demand.

Also Check: Important Topics to study from Economics Syllabus

Ques 5: Consider the following statements regarding Stagflation:

  1. It happens when an economy faces stagnant growth as well as persistently high inflation.
  2. The purchasing power of a consumer is not affected by stagflation

Which of the given statements is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Ans: a

Explanation:

With stalled economic growth during Stagflation, unemployment tends to rise and existing incomes do not rise fast enough and yet, people have to contend with rising inflation. So people find themselves pressurised from both sides as their purchasing power is reduced.

Ques 6: Which of the following is not a cause of Cost-Push Inflation?

(a) Deficit financing by the government

(b) Defective Supply chain

(c) Depreciation of Currency

(d) Food Inflation

Ans: a

Explanation:

There exists a situation in an economy where inflation is fuelled up, not because of increase in Aggregate Demand but mainly due to increase in the cost of producing goods and services. This is called cost-push inflation.

Deficit financing by the government – When the government spends more freely, prices go up. This causes an increase in aggregate demand in the economy which is known as demand-pull inflation.

Ques 7: With reference to the ‘bottleneck inflation’ which of the following statements is correct?

(a) Bottleneck inflation takes place when the supply falls drastically and the demand remains at the same level.

(b) Bottleneck inflation takes place when the supply falls drastically along with the demand.

(c) Bottleneck inflation takes place when the supply increases rapidly and the demand remains at the same level.

(d) Bottleneck inflation takes place when the supply increases rapidly along with the demand.

Ans: a

Explanation:

This inflation takes place when the supply falls drastically and the demand remains at the same level. Such situations arise due to supply-side accidents, hazards or mismanagement which is also known as ‘structural inflation’. This could be put in the ‘demand-pull inflation’ category.

Ques 8: An inflationary situation in an economy which results out of a process of wage and price interaction ‘when wages press prices up and prices pull wages up’ called:

(a) Inflationary gap

(b) Deflationary gap

(c) Inflation spiral

(d) Seignorage

Ans: c

Explanation:

An inflationary situation in an economy that results out of a process of wage and price interaction ‘when wages press prices up and prices pull wages up’ is known as the inflationary spiral. It is also known as the wage-price spiral.

This wage-price interaction was seen as a plausible cause of inflation in the year 1935 in the US economy, for the first time.

Ques 9: Phillips Curve advocates a relationship between which of the two aggregates of an economy?

(a) Inflation and unemployment

(b) Demand and Supply of money

(c) Supply of money and rate of interest

(d) Rate of interest and unemployment

Ans: a

Explanation:

It is a graphic curve that advocates a relationship between inflation and unemployment in an economy. As per the curve there is a ‘trade off’ between inflation and unemployment i.e. an inverse relationship between them.

Ques 10: A situation in which the rate of inflation falls over a period of time is termed as:

(a) Disinflation

(b) Deflation

(c) Inflation

(d) Hyperinflation

Ans: a

Explanation:

Disinflation: Disinflation is a situation in which the rate of inflation falls over a period of time. Deflation is when the overall price level in the economy falls for a period of time.

We sincerely hope that the given questions would have helped you in your Prelims preparation. You can also check the below link to keep yourself updated on the latest GK quiz and events. 

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