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Consider the following statements with reference to the imported inflation:
1. It is a general and sustainable price increase due to an increase in the cost of imported products.
2. The more the currency appreciates in the foreign exchange market, the higher the imported inflation.
Which of the statements given above is/are correct?
- a)1 only
- b)2 only
- c)Both 1 and 2
- d)Neither 1 nor 2
Correct answer is option 'A'. Can you explain this answer?
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Consider the following statements with reference to the imported infla...
Imported Inflation
Imported inflation refers to the increase in domestic prices resulting from higher costs of imported goods. Let's analyze the given statements:
Statement 1: It is a general and sustainable price increase due to an increase in the cost of imported products.
- This statement is correct. Imported inflation occurs when the prices of imported goods rise, leading to an overall increase in the price level in the domestic economy. This can happen due to factors such as exchange rate fluctuations, changes in global commodity prices, or trade barriers.
Statement 2: The more the currency appreciates in the foreign exchange market, the higher the imported inflation.
- This statement is incorrect. When a country's currency appreciates, it actually reduces the cost of imported goods in terms of domestic currency. This should theoretically lead to lower imported inflation as the cost of imports decreases. On the other hand, a depreciation of the domestic currency can lead to higher imported inflation as the cost of imported goods increases.
Therefore, the correct answer is option 'A' - 1 only. It is important for policymakers to monitor and manage imported inflation to ensure stable prices and economic growth.
Imported inflation refers to the increase in domestic prices resulting from higher costs of imported goods. Let's analyze the given statements:
Statement 1: It is a general and sustainable price increase due to an increase in the cost of imported products.
- This statement is correct. Imported inflation occurs when the prices of imported goods rise, leading to an overall increase in the price level in the domestic economy. This can happen due to factors such as exchange rate fluctuations, changes in global commodity prices, or trade barriers.
Statement 2: The more the currency appreciates in the foreign exchange market, the higher the imported inflation.
- This statement is incorrect. When a country's currency appreciates, it actually reduces the cost of imported goods in terms of domestic currency. This should theoretically lead to lower imported inflation as the cost of imports decreases. On the other hand, a depreciation of the domestic currency can lead to higher imported inflation as the cost of imported goods increases.
Therefore, the correct answer is option 'A' - 1 only. It is important for policymakers to monitor and manage imported inflation to ensure stable prices and economic growth.
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Consider the following statements with reference to the imported infla...
The Asian Development Bank recently warned that India could face imported inflation as the rupee could depreciate amid the rise in interest rates in the West.
About Imported Inflation:
- Imported inflation is a general and sustainable price increase due to an increase in the costs of imported products.
- This price increase concerns the price of raw materials and all imported products or services used by companies in a country.
- Imported inflation is also referred to as cost inflation.
- Several factors cause imported inflation:
- Exchange Rates: The most significant driver of imported inflation is fluctuations in exchange rates. The more the currency depreciates in the foreign exchange market, the higher the price of imports. Effectively, more money is needed to buy goods and services outside the country.
- Commodity Prices: Many countries, particularly smaller countries, are highly dependent on imported commodities like oil, metals, and agricultural products. When commodity prices rise globally, it directly impacts the cost of imports and can lead to higher inflation in the importing country.
- Trade Policies and Global Supply-Chains: Changes in trade policies, such as tariffs and quotas, can influence the cost of imported goods.
- Transportation Costs: Fluctuations in transportation costs, influenced by factors like fuel prices and logistical challenges, can affect the final cost of imported goods.
- Effect:
- With imported inflation, production costs are higher for companies. These companies most often reflect this increase in the selling price of the goods and services sold.
- As a result, prices within the country rise.
Hence only statement 1 is correct.
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Consider the following statements with reference to the imported inflation:1. It is a general and sustainable price increase due to an increase in the cost of imported products.2. The more the currency appreciates in the foreign exchange market, the higher the imported inflation.Which of the statements given above is/are correct?a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'A'. Can you explain this answer?
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