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All questions of Price and Inflation for BPSC (Bihar) Exam

Consider the following statements.
1. The governments may take recourse to tighter monetary policy to cool down either the demand-pull or the cost-push inflations.
2. This is intended to increase the money supply in the economy.
Which of these statements is/are correct?
  • a)
    1 Only
  • b)
    2 Only
  • c)
    Both 1 and 2
  • d)
    None of them
Correct answer is option 'A'. Can you explain this answer?

Pankaj Pillai answered
Explanation:

Neither of the statements are correct.

1. Tighter monetary policy is actually intended to decrease the money supply in the economy, not increase it. This is because a decrease in money supply will lead to higher interest rates, which in turn will reduce borrowing and spending and ultimately reduce inflation.

2. The statement is incorrect because tighter monetary policy is intended to decrease the money supply, not increase it.

Therefore, the correct option is 'A' (None of them).
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Which of the following is also known as Jumping Inflation?
  • a)
    Core Inflation 
  • b)
    Bottleneck Inflation
  • c)
    Galloping Inflation
  • d)
    Creeping Inflation
Correct answer is option 'C'. Can you explain this answer?

Pooja Shah answered
Gallopin Inflation is a type of inflation that occurs when the prices of goods and services increase at two-digit or three-digit rate per annum. Galloping inflation is also known as jumping inflation.
 
 

Consider the following statements.
1. Real interest rate is always lower than the normal interest rate.
2. To neutralize the effects of inflation premium, the lender takes the recourse to decrease the nominal rate of interest.
Which of these statements is/are correct?
  • a)
    None of them
  • b)
    2 Only
  • c)
    Both 1 and 2
  • d)
    1 Only
Correct answer is option 'A'. Can you explain this answer?

Debanshi Desai answered
Explanation:

Real interest rate and normal interest rate are two different concepts. Real interest rate is the nominal interest rate adjusted for inflation, while normal interest rate is the rate at which the demand for credit equals the supply of credit.

1. Real interest rate is always lower than the normal interest rate - False

Real interest rate can be higher or lower than the normal interest rate depending upon the inflation rate. If the inflation rate is high, the real interest rate will be lower than the normal interest rate, and vice versa.

For example, if the nominal interest rate is 10% and the inflation rate is 5%, the real interest rate will be 5%. However, if the inflation rate is 15%, the real interest rate will be -5%, which means the borrower is paying less in real terms than what he has borrowed.

2. To neutralize the effects of inflation premium, the lender takes the recourse to decrease the nominal rate of interest. - False

Inflation premium is the additional return that lenders demand to compensate for the loss in purchasing power due to inflation. To neutralize the effects of inflation premium, the lender can increase the nominal rate of interest, not decrease it.

For example, if the inflation rate is 5% and the lender wants to earn a real rate of return of 5%, he will charge a nominal rate of interest of 10%. This means that the borrower will pay an additional 5% as inflation premium.

Conclusion:

Both the statements given in the question are false. Real interest rate can be higher or lower than the normal interest rate depending upon the inflation rate. To neutralize the effects of inflation premium, the lender can increase the nominal rate of interest, not decrease it.

Consider the following statements.
1. India's official Housing Price Index (HPI) was launched in July 2007 in Mumbai.
2. It was developed by the Indian home loans regulator, the National Housing Bank (NHB) the index is named NHB Residex.
Which of these statements is/are incorrect?
  • a)
    1 Only
  • b)
    2 Only
  • c)
    Both 1 and 2
  • d)
    None of them
Correct answer is option 'D'. Can you explain this answer?

Sanjay Rana answered
  • India's official Housing Price Index (HPI) was launched in July 2007 in Mumbai.
  • Developed by the Indian home loans regulator, the National Housing Bank (NHB) the index is named NHB Residex.
  • Presently, the index has been introduced as a pilot project for five cities Bangalore, Bhopal, Delhi, Kolkata and Mumbai, -till now it has been updated up to the quarter ended March 2016.

Which of the following are the economy traits of the cycle of recovery?
1. An upturn in aggregate demand which has to be accompanied by an increase in the level of production.
2. Production process expands and new investments become attractive.
3. Inflation also moves downward making borrowing cheaper for investors.
Which of these statements is/are correct?
  • a)
    1 and 2 Only
  • b)
    2 and 3 Only
  • c)
    1 and 3 Only
  • d)
    All of them
Correct answer is option 'A'. Can you explain this answer?

Mohit Chakraborty answered
The correct answer is option 'A': 1 and 2 Only.

Explanation:
1. An upturn in aggregate demand which has to be accompanied by an increase in the level of production:
During the cycle of recovery, one of the key economy traits is an upturn in aggregate demand. This means that consumers and businesses are willing to spend more on goods and services. As a result, there is an increase in the level of production to meet this higher demand. This can be seen in various sectors of the economy, such as manufacturing, services, and construction, where production activities expand to meet the increased demand.

2. Production process expands and new investments become attractive:
With the upturn in aggregate demand, businesses start to expand their production process. This expansion can include increasing the capacity of existing facilities, hiring more workers, and investing in new machinery and equipment. The expansion of production not only helps to meet the increased demand but also creates new job opportunities and stimulates economic growth. Additionally, new investments become attractive during this period as businesses see the potential for higher returns due to increased consumer spending.

3. Inflation also moves downward making borrowing cheaper for investors:
The statement that inflation moves downward during the cycle of recovery is not correct. Inflation is a general increase in prices over time, and during the recovery phase, it is more likely that inflation will increase rather than decrease. As the economy recovers, demand for goods and services increases, which can lead to upward pressure on prices. This can be seen in rising consumer prices and higher input costs for businesses.

Therefore, the correct answer is option 'A': 1 and 2 Only, as statement 3 is incorrect.

Consider the following statements about Phillips Curve
1. It is a graphic curve which advocates a relationship between inflation and unemployment in an economy.
2. The curve suggests that higher the inflation, lower the unemployment and lower the inflation, higher the unemployment.
Which of these statements is/are correct?
  • a)
    Both 1 and 2
  • b)
    2 Only
  • c)
    1 Only
  • d)
    None of them
Correct answer is option 'A'. Can you explain this answer?

Pooja Shah answered
  • It is a graphic curve which 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.
  • The curve suggests that lower the inflation, higher the unemployment and higher the inflation, lower the unemployment.

Consider the following statements
1. Inflation has no impact on the self-employed people in the short-run
2. In the long-run they also get affected as the economy as a whole gets affected
Which of these statements is/are correct?
  • a)
    1 Only
  • b)
    2 Only
  • c)
    Both 1 and 2
  • d)
    None of them
Correct answer is option 'C'. Can you explain this answer?

Anjana Sharma answered
Statement Analysis:
The given statements are related to the impact of inflation on self-employed people. Let's analyze each statement:

1. Inflation has no impact on the self-employed people in the short-run: This statement suggests that self-employed individuals do not experience any impact from inflation in the short-run.

2. In the long-run they also get affected as the economy as a whole gets affected: This statement indicates that self-employed individuals are affected by inflation in the long-run because the overall economy is impacted.

Explanation:
Impact of Inflation on Self-Employed People in the Short-Run:
Inflation refers to the general increase in prices of goods and services over time. In the short-run, self-employed individuals may not experience a direct impact from inflation as they set their own prices for their products or services. However, there are indirect ways in which inflation can affect them:

1. Increased Costs: Self-employed individuals may face higher costs of production due to inflation. For example, the prices of raw materials, equipment, or utilities may increase, which can reduce their profit margins.

2. Consumer Demand: Inflation can affect consumer purchasing power. If inflation erodes the purchasing power of consumers, their demand for goods and services may decrease. This can impact the sales and revenue of self-employed individuals.

3. Interest Rates: Inflation can influence interest rates set by banks and financial institutions. Higher interest rates can make it more expensive for self-employed individuals to borrow money for business expansion or investment.

Impact of Inflation on Self-Employed People in the Long-Run:
While self-employed individuals may not experience an immediate impact from inflation, they are still affected in the long-run as the overall economy is influenced. Here's how inflation affects them in the long-run:

1. Income and Profit: Inflation can erode the purchasing power of income and profits. If the prices of goods and services increase faster than the income earned by self-employed individuals, their real income and profits may decline.

2. Competition: Inflation can lead to increased competition in the market. As prices rise, new players may enter the market, increasing competition for self-employed individuals. This can put pressure on their profit margins.

3. Economic Uncertainty: Inflation can create economic uncertainty, which can affect business planning and decision-making. Self-employed individuals may find it challenging to predict future costs and revenues, making it difficult to plan for business growth.

4. Economic Growth: Inflation can impact overall economic growth. If inflation is high and unstable, it can create an unfavorable business environment, affecting the growth prospects of self-employed individuals.

Therefore, both statements are correct. While self-employed individuals may not experience an immediate impact from inflation in the short-run, they are still affected in the long-run as the overall economy gets influenced.

Consider the following statements.
1. Rising inflation indicates rising aggregate demand and indicates comparatively lower supply and higher purchasing capacity among the consumers
2. Higher inflation suggests the producers to increase their production level as it is generally considered as an Inflation of higher demand in the economy
Which of these statements is/are incorrect?
  • a)
    1 Only
  • b)
    2 Only
  • c)
    None of them
  • d)
    Both 1 and 2 
Correct answer is option 'D'. Can you explain this answer?

Anjali Mehta answered
  • The first statement says that rising inflation indicates rising aggregate demand, which suggests a comparatively lower supply and higher purchasing capacity among consumers. This is False. Rising inflation could indicate rising demand, but it doesn't necessarily mean there is a higher purchasing capacity among consumers. Inflation can erode purchasing power if wages do not increase at the same rate as prices. Additionally, inflation can also be caused by factors other than aggregate demand, such as increased costs of production or supply chain disruptions.
  • The second statement suggests that higher inflation prompts producers to increase their production level as it is generally considered a sign of higher demand. This is false; producers might increase production if they perceive inflation as a sign of increased demand. However, if inflation is caused by supply-side factors (like increased costs of raw materials), higher production levels may not be feasible or profitable. Furthermore, inflation could also be a result of too much money chasing too few goods, which doesn't necessarily mean that demand has increased in real terms — it could just mean that the money supply has increased.

Consider the following statements.
1. Higher inflation indicates higher demand and suggests entrepreneurs expand their production level.
2. Higher the inflation, the higher the cost of the loan.
Which of these statements is/are correct?
  • a)
    2 Only 
  • b)
    Both 1 and 2 
  • c)
    1 Only 
  • d)
    None of them
Correct answer is option 'B'. Can you explain this answer?

Rounak Sharma answered
Explanation:
Statement 1: Higher inflation indicates higher demand and suggests entrepreneurs expand their production level.
• Inflation is a general increase in the price level of goods and services in an economy over a period of time.
• It can be caused by demand-pull factors such as increased consumer demand or cost-push factors such as rising production costs.
• When inflation is caused by increased demand, it indicates that people have more money to spend on goods and services. This, in turn, suggests that entrepreneurs can expand their production level to meet the increased demand.
• Therefore, statement 1 is correct.

Statement 2: Higher the inflation, the higher the cost of the loan.
• Inflation can affect the cost of loans in two ways- through the nominal interest rate and the real interest rate.
• Nominal interest rate is the interest rate that is quoted by lenders and paid by borrowers. It is the rate at which money actually grows.
• Real interest rate is the nominal interest rate adjusted for inflation. It is the rate at which the purchasing power of money grows.
• When inflation is high, lenders tend to charge a higher nominal interest rate to compensate for the loss of purchasing power of the money they lend.
• Therefore, statement 2 is also correct.

Hence, the correct answer is option B.

What is the effect of inflation on the expenditure?
1. Increased prices make our consumption levels fall as goods and services we buy get costlier.
2. Inflation makes investment expenditure decrease as a result of the increased cost of money.
Which of these statements is/are correct?
  • a)
    1 and 2 Only
  • b)
    1 Only
  • c)
    2 Only
  • d)
    None of these
Correct answer is option 'A'. Can you explain this answer?

Aditya Kumar answered
Both statements are correct.
  1. When inflation occurs, the prices of goods and services increase, and people need to spend more money to buy the same quantity of goods and services as before. This means that the purchasing power of their income decreases, which ultimately leads to a decrease in consumption levels.
  2. Inflation also increases the cost of borrowing money, which means that the interest rates on loans increase. As a result, people and businesses tend to decrease their investment expenditure as the cost of borrowing money becomes too high.
Therefore, both statements correctly describe the effects of inflation on expenditure.
 
 
 
 
 

What is the effect of inflation on the tax structure of the economy?
1. Taxpayers suffer while paying there direct and indirect taxes
2. On the other hand, the government gets the benefit of inflation on the tax collection
Which of these statements is/are correct?
  • a)
    1 Only
  • b)
    2 Only
  • c)
    Both 1 and 2
  • d)
    None of them
Correct answer is option 'A'. Can you explain this answer?

Vikram Kapoor answered
  • The extent to which tax collections of the government are concerned, inflation increases the nominal value of the gross tax revenue, while the real value of the tax collection does not compare with the current pace of inflation as there is a lag (delay) in the tax collection in all economies.
  • But governments get an advantage on their interest burden, on their borrowings as inflation benefits borrowers. This benefit, however, depends upon the contemporary levels of fiscal deficit and the total national debt.

Which of the following is Demand-Pull Inflation:
  • a)
    According to Keynesian it is that the demand increases over the same level of supply, or the supply decreases with the same level of demand.
  • b)
    According to monetarists, it is the creation of extra purchasing power to the consumer over the same level of production.
  • c)
    Neither of them
  • d)
    Both of them
Correct answer is option 'D'. Can you explain this answer?

Meera Kapoor answered
  • A mismatch between demand and supply pulls up prices.
  • Either the demand increases over the same level of supply, or the supply decreases with the same level of demand and thus the situation of demand-pull inflation arises.
  • This was a Keynesian idea. The Keynesian School suggests cuts in spending as the way of tackling excess demand mainly by increasing taxes and reducing government expenditure.
  • Monetarists view Demand-pull inflation as the creation of extra purchasing power to the consumer over the same level of production.
  • This is the type of creating extra money (either by the printing or public borrowing) without equivalent creation in production/supply i.e. too much money chasing too little output.
 
 
 
 
 

Consider the following statements.
1. The long term measure is to cool down Inflation is to make money costlier.
2. The short term is to increase the Bank Rate or Repo Rate.
3. Other short term is measure is to increase production.
Which of these statements is/are correct?
  • a)
    2 only
  • b)
    3 Only
  • c)
    1 Only
  • d)
    1 and 3 Only
Correct answer is option 'A'. Can you explain this answer?

Meera Singh answered
  • The governments may take recourse to tighter monetary policy to cool down either the demand-pull or the cost-push inflations.
  • This is intended to cut down the money supply in the economy by siphoning out the extra money (as RBI increases the Cash Reserve Ratio of banks in India) from the economy and by making money costlier (as RBI increases the Bank Rate or Repo Rate in India) This is a short-term measure.
  • In the long-run, the best way is to increase production with the help of the best production practices.

Consider the following statements about the non-accelerating Inflation rate of unemployment.
1. The NAIRU is that rate of unemployment which is consistent with a constant rate of inflation.
2. The upward and downward forces on price and wage neutralise each other and there is no tendency of change in the rate of inflation.
Which of these statements is/are correct?
  • a)
    1 Only
  • b)
    2 Only
  • c)
    Both 1 and 2
  • d)
    None of them
Correct answer is option 'C'. Can you explain this answer?

Athira Kumar answered
Explanation:

Non-Accelerating Inflation Rate of Unemployment (NAIRU) is the rate of unemployment at which the rate of inflation remains constant.

Statement 1: The NAIRU is that rate of unemployment which is consistent with a constant rate of inflation.

This statement is correct. NAIRU is the rate of unemployment at which the rate of inflation remains constant. It represents the equilibrium level of unemployment in an economy. When the actual rate of unemployment is below the NAIRU, the economy is operating at a level of output above its potential and there is upward pressure on prices. On the other hand, when the actual rate of unemployment is above the NAIRU, the economy is operating at a level of output below its potential and there is downward pressure on prices. Thus, the NAIRU represents the rate of unemployment at which the forces of supply and demand in the labor market are in balance and there is no upward or downward pressure on prices.

Statement 2: The upward and downward forces on price and wage neutralize each other and there is no tendency of change in the rate of inflation.

This statement is also correct. The NAIRU represents the equilibrium level of unemployment in an economy, where the upward and downward forces on prices and wages are in balance. At this level of unemployment, there is no tendency for the rate of inflation to change. If the actual rate of unemployment is above the NAIRU, there is downward pressure on prices and wages, which helps to bring the rate of inflation down. Conversely, if the actual rate of unemployment is below the NAIRU, there is upward pressure on prices and wages, which puts upward pressure on the rate of inflation. Thus, the NAIRU represents the level of unemployment at which there is no tendency for the rate of inflation to change.

Conclusion:

Both the statements are correct. The NAIRU represents the rate of unemployment at which the rate of inflation remains constant, and at this level of unemployment, the upward and downward forces on prices and wages are in balance, which neutralizes each other, and there is no tendency for the rate of inflation to change.

Which of the following is the definition of inflation?
1. Rise in the general level of prices
2. Sustained rise in the general level of prices
3. Persistent increases in the general level of prices
Which of these statements is/are correct?
  • a)
    1 and 2 Only
  • b)
    2 Only
  • c)
    3 Only
  • d)
    All of them
Correct answer is option 'D'. Can you explain this answer?

Pooja Choudhury answered
These are some of the most common academic definitions of inflation.
  • A rise in the general level of prices;
  • a sustained rise in the general level of prices;
  • persistent increases in the general level of prices;
  • an increase in the general level of prices in an economy that is sustained over time;
  • rising prices across the boards—is inflation.

Consider the following statements about GDP Deflator.
1. This is the ratio between GDP at Current Price and GDP at Constant Prices
2. If GDP at Current Prices is equal to the GDP at Constant Prices, GDP deflator will be 1, implying no change in the price level
3. GDP deflator is acclaimed as a better measure of price behaviour because it covers all goods and services produced in the country
Which of these statements is/are correct?
  • a)
    1 and 2 Only
  • b)
    2 and 3 Only
  • c)
    1 and 3 Only
  • d)
    All of them
Correct answer is option 'D'. Can you explain this answer?

Ashutosh Chavan answered
Explanation:
The GDP deflator is a measure of the overall price level of goods and services produced in an economy. It is calculated by dividing the nominal GDP (GDP at current prices) by the real GDP (GDP at constant prices) and multiplying by 100.

Statement 1: This is the ratio between GDP at Current Price and GDP at Constant Prices.
This statement is correct. The GDP deflator is calculated by dividing the nominal GDP by the real GDP. It measures the price level by comparing current prices to a base year.

Statement 2: If GDP at Current Prices is equal to the GDP at Constant Prices, GDP deflator will be 1, implying no change in the price level.
This statement is also correct. If the nominal GDP (GDP at current prices) is equal to the real GDP (GDP at constant prices), it means that there has been no change in the price level. In this case, the GDP deflator would be 1.

Statement 3: GDP deflator is acclaimed as a better measure of price behavior because it covers all goods and services produced in the country.
This statement is correct. The GDP deflator takes into account the prices of all goods and services produced in an economy. It provides a comprehensive measure of price behavior as it includes a wide range of goods and services.

Conclusion:
All three statements are correct. The GDP deflator is a ratio between GDP at current prices and GDP at constant prices, and it is a widely used measure of the overall price level. If the nominal GDP is equal to the real GDP, the GDP deflator is 1, indicating no change in the price level. The GDP deflator is considered a better measure of price behavior because it covers all goods and services produced in the country.

Consider the following statements.
1. Deflation is the general level of prices is falling over some time.
2. Disinflation means a reduction in the level of national income and output, unlike the deflation.
Which of these statements is/are correct?
  • a)
    1 Only
  • b)
    2 Only
  • c)
    Both 1 and 2
  • d)
    None of them
Correct answer is option 'A'. Can you explain this answer?

Pooja Shah answered
  • When the general level of prices is falling over some time this is deflation, the opposite situation of inflation.
  • It is also known as disinflation. But in contemporary economics deflation or disinflation not used to indicate fall in prices.
  • In policy terms, deflation or disinflation means a reduction in the level of national income and output, usually accompanied by a fall in the general price level.

Consider the following statements.
1. For the monetarists, a particular level of money supply for a particular level of production is healthy for an economy
2. Extra creation of money over the same level of production causes inflation
3. Monetarists accepted this Keynesian theory of inflation.
Which of these statements is/are correct?
  • a)
    1 and 2 Only
  • b)
    2 and 3 Only
  • c)
    1 and 3 Only
  • d)
    All of them
Correct answer is option 'A'. Can you explain this answer?

Vijay Kumar answered
  • For the monetarists, a particular level of money supply for a particular level of production is healthy for an economy.
  • Extra creation of money over the same level of production causes inflation.
  • They suggested proper monetary policy (money supply, interest rates, the printing of currencies, public borrowing etc.), to check situations of inflationary pressure on the economy.
  • Monetarists rejected the Keynesian theory of inflation.

Which of the following are the traits of depression?
1. An extremely low aggregate demand in the economy causes activities to decelerate.
2. Inflation is comparatively higher.
3. The employment avenues start shrinking forcing unemployment rate to grow fast.
Which of these statements is/are correct?
  • a)
    1 and 2 Only
  • b)
    2 and 3 Only
  • c)
    1 and 3 Only
  • d)
    All of them
Correct answer is option 'C'. Can you explain this answer?

Devanshi Reddy answered
The major traits of depression could be as given below.
  • (i) an extremely low aggregate demand in the economy causes activities to decelerate;
  • (ii) the inflation being comparatively lower;
  • (iii) the employment avenues start shrinking forcing unemployment rate to grow fast;
  • (iv) to keep the business going, production houses go for forced labour-cuts or retrenchment (to cut down production cost and be competitive in the market,) etc.

Chapter doubts & questions for Price and Inflation - Indian Economy for State PSC Exams 2024 is part of BPSC (Bihar) exam preparation. The chapters have been prepared according to the BPSC (Bihar) exam syllabus. The Chapter doubts & questions, notes, tests & MCQs are made for BPSC (Bihar) 2024 Exam. Find important definitions, questions, notes, meanings, examples, exercises, MCQs and online tests here.

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