UPSC Previous Year Questions (Prelims): Price & Inflation | Indian Economy for UPSC CSE PDF Download

Q.1.  Which one of the following effects of creation of black money in India has been the main cause of worry to the Government of India?       (2021)
(a) Diversion of resources to the purchase of real estate and investment in luxury housing
(b) Investment in unproductive activities and purchase of precious stones, jewelley, gold, etc.
(c) Large donations to political parties and growth of regionalism
(d) Loss of revenue to the state exchequer due to tax evasion

Correct Answer is Option (d)
Black money eats up a part of the tax and, thus, the government’s deficit increases.

Q.2. With reference to Indian economy, demand-pull inflation can be caused/increased by which of the following?        (2021)

1. Expansionary policies
2. Fiscal stimulus
3. Inflation-indexing wages
4. Higher purchasing power
5. Rising interest rates

Select the correct answer using the code given below.
(a) 1, 2 and 4 only
(b) 3, 4 and 5 only
(c) 1, 2, 3 and 5 only
(d) 1, 2, 3, 4 and 5

Correct Answer is Option (a)
Rising interest rates will deter people to borrow money and hence it will not aid in demand pull inflation

Q.3. Consider the following statements        (2020-I)

1. The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale Price Index (WPI).
2. The WPI does not capture changes in the prices of services, which CPI does.
3. Reserve Bank of India has now adopted WPI as its key measure of inflation and to decide on changing the key policy rates.

Which of the statements given- above is/are correct ?
(a) 1 and 2 only
(b) 2 only
(c) 3 only 4,
(d) 1, 2 and 3

Correct Answer is Option (a)
Under the new monetary policy Framework effective since 2016, RBI tries to control inflation at 2-6% of CPI (All India). So, #3 is wrong. Option c and d eliminated. In both (a & b) the options, statement#2 is common so we have to accept #2 as correct, Even without checking. Everything boils down to whether statement#1 is correct or not?
Both WPI and CPI are based on Laspeyres formula wherein weightage is assigned to multiple commodities and their prices are tracked. The weight of an individual commodity depends on how frequently it is bought by the consumer. So obviously consumer price index would be giving more weightage to the food products compared to WPI which is aimed at the manufacturers. So, #1 should be correct.

Q.4. Consider the following statements:        (2013 - I)

1. Inflation benefits the debtors.
2. Inflation benefits the bondholders.

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)
Those who benefit from higher inflation are debtors and those who suffer from it are creditors. If one has substantial debt, each rupee one has to repay would be worth less than when it was borrowed. In this way, one pays back less in real terms.

Q.5. Which one of the following statements is an appropriate description of deflation?       (2010)
(a) It is a sudden fall in the value of a currency against other currencies
(b) It is a persistent recession in both the financial and real sectors of economy
(c) It is a persistent fall in the general price level of goods and services
(d) It is a fall in the rate of inflation over a period of time

Correct Answer is Option (c)
Deflation is a decrease in the prices of goods and services. It occurs when the annual inflation rate falls below 0% which is a negative inflation rate. This is different from Disinflation which is a slow-down in the inflation rate. This is a situation when inflation declines to lower levels but prices continue to rise.

Q.6. With reference to India, consider the following statements:      (2010)

1. The Wholesale Price Index (WPI) in India is available on a monthly basis only.
2. As compared to Consumer Price Index for Industrial Workers (CPIIW), the WPI gives less weight to food articles.

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 (b)
Alter the Abhijit Sen committee’s proposals in 2004- 05, the government had approved the proposal to release or wholesale price based inflation data on a monthly basis, instead of every week. The base year was changed to 2004- 05 from 1993-94. However data on primary and fuel items was continued to release on a weekly basis. Consumer Price Index food group has a weight of 39.1 percent as compared to the combined weight of 24.4 percent (food articles and Manufactured food products) in wholesale Price Index food basket.

Q.7. In India, inflation is measured by the:      (1997)
(a) Wholesale Price Index number
(b) Consumers Price Index for urban non-manual workers
(c) Consumers Price Index for agricultural workers
(d) National Income Deflation

Correct Answer is Option (a)
Wholesale Price Index (WPI) is an index used by the Reserve Bank of India till 2014 to measure inflation. WPI is the price of a representative basket of wholesale goods. It takes a basket of 697 items into account and shows the combined prices. The RBI, ex-governor Raghuram Rajan, Shifted to consumer Price Index (CPI) is because WPI neglects services and the bottlenecks between a wholesaler and a retailer. CPI, based on 260 commodities including certain services, measures the change in Prices at the retail level. The base year of CPI is 2012.