Ramesh Singh Test: Inflation & Business Cycle- 1


10 Questions MCQ Test Indian Economy for UPSC CSE | Ramesh Singh Test: Inflation & Business Cycle- 1


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QUESTION: 1

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?

Solution:

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.

QUESTION: 2

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?

Solution:
  • 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.

QUESTION: 3

Which of the following is Demand-Pull Inflation:

Solution:
  • 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.

QUESTION: 4

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?

Solution:
  • 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.

QUESTION: 5

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?

Solution:
  • 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)

QUESTION: 6

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?

Solution:
  • 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.

QUESTION: 7

Which of the following is also known as Jumping Inflation?

Solution:

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.

 

 

QUESTION: 8

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?

Solution:
  • This is the ratio between GDP at Current Price and GDP at Constant Prices.

  • 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. If GDP deflator is found to be 2, it implies a rise in price level by a factor of 2.

  • GDP deflator is acclaimed as a better measure of price behaviour because it covers all goods and services produced in the country (because the weight of services has not been equitably accounted in the Indian "headline inflation', i.e., inflation at WPI).

QUESTION: 9

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?

Solution:
  • Rising inflation indicates rising aggregate demand and indicates comparatively lower supply and higher purchasing capacity among the consumers.

  •  

    Usually, higher inflation suggests the producers increase their production level as it is generally considered as an indication of higher demand in the economy.

 

 

 

QUESTION: 10

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 incorrect?

Solution:

Rising inflation indicates rising aggregate demand and indicates comparatively lower supply and higher purchasing capacity among the consumers. Usually, higher inflation suggests the producers to increase their production level as it is generally considered as an indication of higher demand in the economy. Higher inflation indicates higher demand and suggests entrepreneurs to expand their production level and Higher the inflation, lower the cost of loan.