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Which of the following is a reason for inflation?
  • a)
    Deficit financing
  • b)
    Growth in per capita income
  • c)
    Structural deficiencies
  • d)
    All the above
Correct answer is option 'D'. Can you explain this answer?
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Which of the following is a reason for inflation?a)Deficit financingb)...
Inflation refers to rise in the general price level in the economy. Various demand and supply side factors cause inflation.
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Passage 1Any government that runs on a huge fiscal deficit has to, at some point, finance that deficit by creating money through borrowings. When the government does that, there is more money chasing the same number of goods and services in the economy. The result is a hike in prices, or inflation. At 5.1%, Indias fiscal deficit is dangerously high, controlling which should have been the governments highest priority. Raising diesel prices by 14% such that the subsidy bill on the fuel falls will help bring this deficit under control. To put that issue in perspective, at Rs.47,800 crore oil subsidies for the first quarter of the current financial year have already exceeded the full years budgeted figure.For consumers already reeling under a double digit onslaught of food prices, the hike in the diesel prices will hurt, no doubt. Part of this increase can be neutralized, by cutting excise duties on the fuel, for instance. But for successive governments that have been unable to curb spending on vote buying schemes- some of them crucial - or on an inflated and unproductive bureaucracy, the other option is to increase taxes and return to the sky high rates of the coercive 1970s, a regime that is best behind us.This brings us to the next issue: economic growth. With a high fiscal deficit that keeps inflation high, there is no way the RBI will cut interest rates. Even though most ofthe inflationary expectations are coming from goods outside Indias control- crude oil imports, a falling rupee and a globally rising food and commodity prices- RBIs stance has been to keep policy rates high so that thousands cut down on discretionary grounds. In the process, home loan EMIs have been rising and along with inflation on one side, scissoring household targets.Making matters more complex is the fact that today the sovereign has very little control over its finances. Like it or nor, India cant and will not grow at 9% if the rest of the world is contracting, thereby closing business opportunities- there, the UPA government is right. The political power of the sovereign goes down with every move towards globalization, Kaushik Basu said. Economics has become an instrument of global, political and even military strategy. To illustrate, Indian farmers and businesses get affected by WTO negotiations, Indian workers by ILO negotiations, Indian fiscal policy by G20 communities, Indian markets by QE3.Q.Which of the following would help explain the relationship between the interest rates and a high fiscal deficit?

Passage 1Any government that runs on a huge fiscal deficit has to, at some point, finance that deficit by creating money through borrowings. When the government does that, there is more money chasing the same number of goods and services in the economy. The result is a hike in prices, or inflation. At 5.1%, Indias fiscal deficit is dangerously high, controlling which should have been the governments highest priority. Raising diesel prices by 14% such that the subsidy bill on the fuel falls will help bring this deficit under control. To put that issue in perspective, at Rs.47,800 crore oil subsidies for the first quarter of the current financial year have already exceeded the full years budgeted figure.For consumers already reeling under a double digit onslaught of food prices, the hike in the diesel prices will hurt, no doubt. Part of this increase can be neutralized, by cutting excise duties on the fuel, for instance. But for successive governments that have been unable to curb spending on vote buying schemes- some of them crucial - or on an inflated and unproductive bureaucracy, the other option is to increase taxes and return to the sky high rates of the coercive 1970s, a regime that is best behind us.This brings us to the next issue: economic growth. With a high fiscal deficit that keeps inflation high, there is no way the RBI will cut interest rates. Even though most ofthe inflationary expectations are coming from goods outside Indias control- crude oil imports, a falling rupee and a globally rising food and commodity prices- RBIs stance has been to keep policy rates high so that thousands cut down on discretionary grounds. In the process, home loan EMIs have been rising and along with inflation on one side, scissoring household targets.Making matters more complex is the fact that today the sovereign has very little control over its finances. Like it or nor, India cant and will not grow at 9% if the rest of the world is contracting, thereby closing business opportunities- there, the UPA government is right. The political power of the sovereign goes down with every move towards globalization, Kaushik Basu said. Economics has become an instrument of global, political and even military strategy. To illustrate, Indian farmers and businesses get affected by WTO negotiations, Indian workers by ILO negotiations, Indian fiscal policy by G20 communities, Indian markets by QE3.Q.Which of the following best explains why raising diesel prices will control the fiscal deficit?

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Which of the following is a reason for inflation?a)Deficit financingb)Growth in per capita incomec)Structural deficienciesd)All the aboveCorrect answer is option 'D'. Can you explain this answer?
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