TEST 04: ECONOMY

Syllabus: Inflation

1. Which among the following correctly describes skewflation in an economy?

(a) It refers to a situation of inflation combined with a slow growth rate and a relatively high unemployment rate.

(b) It refers to a sustained, across-the-board price increase in the market.

(c) It refers a price rise in one or a small group of commodities over a sustained period of time along with decreasing prices in others.

(d) None of the above

2. Which of the following policies of government can lead to increase in inflation?

1. Greater number of social sector schemes by government

2. Increase in Minimum Support Prices

3. Import of pulses at cheaper price

4. Accepting 7th pay commission’s recommendations

Select the correct answer from the code given below.

(a) 1 and 2 only

(b) 2 and 3 only

(c) 1, 2 and 4 only

(d) 2, 3 and 4 only

3.Consider the following statements with regard to the Gini Coefficient:

1. It depicts the economic inequalities prevailing in the country.

2. Its value ranges from 0 to 1, with 0 representing high inequality and 1 representing that there is no income inequality in the country.

Which of the above statement/statements is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

4. The official data on poverty released in India is estimated on the basis of consumption expenditure data collected by

(a) Office of Economic Advisor

(b) Labour Bureau

(c) National Sample Survey Organization (NSSO)

(d) Central Statistical Office (CSO)

5. Which of the following can be the possible benefits of greater financial inclusion?

1. Higher domestic savings

2. Enhanced investment

3. Better delivery of welfare schemes

4. Greater penetration of financial services

Select the correct answer using the code given below.

(a) 1 and 2 only

(b) 1, 3 and 4 only

(c) 3 and 4 only

(d) 1, 2, 3 and 4                

6. Consider the following statements about the high inflationary pressure being experienced from the past decade in India:

1. It is both cyclical and structural in nature.

2. High global commodity prices have increased inflationary pressure on the local markets.

3. Improper fiscal policies have led to increase in the inflationary pressure.

Which of the following statements given above is/are correct?

(a) 1 only

(b) 1 and 2 only

(c) 2 and 3 only

(d) 1, 2 and 3

7. Consider the following statements with regard to private and public goods:

1. Private goods are rivalrous in nature which means that its consumption by one individual prevents another individual from consuming it.

2. Public goods are non-excludable in nature which means there is no feasible way of excluding anyone from enjoying the benefits of the good.

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

8. Which of the following economic reforms would help in curtailing ‘unnatural inflation’, which arises due to supply side constraints?

1. GST act

2. Model APMC act

3. FDI in multi brand retail

Select the correct answer using the codes given below.

(a) 1 and 2 only

(b) 2 and 3 only

(c) 1 and 3 only

(d) 1, 2 and 3

9. Which among the following employment are part of unorganised sector in India?

1. Sweeper working in PWD department on contract basis

2. Household industry with 8 employees

3. Rickshaw puller

4. Domestic servant

Select the correct answer using the code given below.

(a) 1, 2 and 4 only

(b) 1 and 3 only

(c) 2, 3 and 4 only

(d) 1, 2, 3 and 4

10. With reference to Inflation Targeting, consider the following statements:

1. It indicates the primacy of price stability as the key objective of fiscal policy by the government.

2. It aims to target wholesale price index.

3. It was recommended by Nachiket More Committee.

Which of the statements given above is/are correct?

(a) 1 and 2 only

(b) 1 and 3 only

(c) 2 and 3 only

(d) None

11. Consider the following factors:

1. Increase in government expenditure

2. Rising population and household consumption

3. Buying and selling of real estate in urban areas

4. Fluctuations in output and supply

5. Increase in administered prices

Which of the above is/are attributed to the demand-pull factors of inflation?

(a) 1, 2 and 3 only

(b) 1, 3 and 5 only

(c) 2, 3 and 4 only

(d) 4 and 5 only

12. Consider the following statements:

1. Headline inflation excludes those commodities from its basket which are volatile in short-term.

2. Core inflation is a correct measure of inflation in long term.

3. Consumer Price Index (CPI) is the measure of headline inflation in India.

Which of the following statements given above is/are correct?

(a) 1 only

(b) 1 and 2 only

(c) 2 and 3 only

(d) 1, 2 and 3

13. The opposite situation of inflation is known as:

(a) Deflation

(b) Stagflation

(c) Hyperinflation

(d) All of the above

14. Which of the following are used to measure inflation?

1. Wholesale Price Index

2. Consumer Price Index

3. Purchasing Power of individuals

Which of the following statement(s) is/are correct?

(a)    Only 1

(b)   1and 2

(c)    2 and 3

(d)   All of the above

15. Which of the following measures could be taken to check existing inflation in an economy:

(a) The government may go for the import of goods which are in shortsupply— as a short-term measure.

(b) As a long-term measure, governments go on to increase the production to matching the level of demand.

(c) The governments may try to cool down the price by cutting down the production cost of the goods showing price rise with the help of tax breaks—cuts in the excise and custom duties.

(d) All of the above

ANSWERS

1.C

• Skewflation is defined as a price rise of one or a small group of commodities over a sustained period of time, along with decreasing prices in others. The term was suggested by Economic survey 2010-11 which noted that: “The skewedness of inflation that has been observed – some sectors are facing huge inflation, some none and some deflation – is rather rare in the country’s history.”
• Stagflation is a term used to define an economy that has inflation, a slow or stagnant economic growth rate and a relatively high unemployment rate.

2. C

• Greater number of social sector schemes would lead to increased Fiscal deficit which would add to inflation.
• Increase in MSP would lead to increase in prices of agriculture commodities and hence would increase inflation.
• Import of pulses at cheaper price from outside India would lead to decline in it’s price in India.
• Accepting 7th pay commission report would also lead to increase in inflation.

3. A

• Gini Coefficient depicts the income equalities prevailing in the country. The coefficient varies between 0, which reflects complete equality and 1, which indicates complete inequality (one person has all the income or consumption, all others have none).

4. C

5. D

• Financial inclusion can have the following benefits for the economy:
• More domestic savings
• More domestic consumption, hence boosts up aggregate demand.
• Greater risk taking ability of household with savings
• More penetration of corporate bond markets, small saving instruments and insurance products.
• Greater resilience of financial markets and banking system
• Boost to microfinance, hence a boost to self employment through greater edit offtake for Micro and Small enterprises and Agriculture.
• More self-employment opportunities can help reduce income inequality and poverty.
• Better targeting and improving accessibility can be achieved through DBT of subsidies, scholarship payments and pensions.

6. D

• India is experiencing high inflationary pressure from the past decade.
• The inflationary pressure being experienced by India is both cyclical and structural in nature owing to complexities in demand and supply side constraints. For instance, structural problems accrues from poor forward and backward linkages like lack of proper storage facilities for food grains etc. Cyclical nature of business activities like boom, recession, recovery also creates inflationary pressure by reducing output and demands, particularly for a country like India which is dependent upon monsoon the consumption cycle is heavily dependent upon its strength to boost consumption.
• The increasing global commodity prices have increased the inflationary pressure in the last decade.
• Improper fiscal policies due to fulfillment of populist agenda like sharply higher price to farmers for their produce further exacerbated it.

7. C

• A private good is a product that must be purchased to be consumed, and its consumption by one individual prevents another individual from consuming it. The private goods are referred to as rivalrous and excludable.
• Public goods, as distinct from private goods, are collectively consumed. Two important features of public goods are: they are non-rivalrous in that one person can increase her satisfaction from the good without reducing that obtained by others and they are non-excludable, and there is no feasible way of excluding anyone from enjoying the benefits of the good. These make it difficult to collect fees for their use and private enterprise will in general not provide these goods. Hence, they must be provided by the government.

8. D

• Unnatural inflation is defined as inflation occurring out of supply side constraints. Supply side constraints include:
• Entry barriers: Through creating artificial supply shocks like hoarding etc
• Lack of enforcement
• Reforms which could curtail unnatural inflation are:
• GST: It would help in reducing multiple taxing thus easy entry and supply of goods.
• Model APMC act: It would reduce the multiple entree fees being paid by sellers for their agricultural produce. Also, this would help in unification of agriculture market.
• FDI in multi brand retail: A contentious reform on which people are divided. It is argued that ownership right given to foreign multi-brand retail would exhaust India’s traditional subsistence retail system. But, it would also help in augmenting storage capability and would reduce hoarding generally done to artificially increase the price by traders.

9. D

• All the given employments are under unorganized sector. Even the contract workers come under the unorganized sector.
• National Commission for Enterprises in the Unorganized Sector (NCEUS) has defined unorganized sector as “the sector consists of all unincorporated private enterprises owned by individuals or households engaged in the sale and production of goods and services operated on a proprietary or partnership basis and with less than ten total workers”.
• Unorganised sector includes millions of farmers, agricultural labourers, owners of small enterprises and people working in those enterprises. These workers do not enjoy social security benefits nor their job is permanent i.e. they can be removed any time.

10. D

• Inflation targeting is a monetary policy strategy used by Central Banks for maintaining price level at a certain level or within a range. It indicates the primacy of price stability as the key objective of monetary policy.
• Inflation Targeting indicates the primacy of price stability as the key objective of monetary policy not fiscal policy.
• Inflation Targeting is aimed to contain inflation under Consumer Price Index
• (CPI) within 6 percent by January 2016 and within 4 percent with a band of (+/-) 2 percent for all subsequent years.
• Inflation Targeting was recommended by the Urjit Patel committee.

11. A

• Inflation primarily occurs due to two sets of factors, the demand-pull factors and the cost-push factors.
• (a) Demand Pull factors: These are those set of factors due to which there may be an increase in the demand for goods and services in the economy. Some of them are: (i) Increase in government expenditure (ii) Rising population (iii) Black Money (iv) Changing consumption patterns (v) Deficit financing;
• (b) Cost- Push Factors: (i) Rise in wages (ii) Increase in indirect taxes (iii) Increase in administered prices (iv) Infrastructural bottlenecks (v) Fluctuations in output and supply (vi) Taxation, as a factor in rising costs and prices (vii) Hike in oil prices and global inflation.

12. C

• Headline inflation is a measure of the total inflation within an economy, including commodities such as food and energy prices (e.g., oil and gas), which tend to be much more volatile and prone to inflationary spikes.
• Core inflation represents the long run trend in the price level. In measuring long run inflation, transitory price changes should be excluded. One way of accomplishing this is by excluding items frequently subject to volatile prices, like food and energy.
• CPI is used to measure headline inflation in India.

13. A

• When the general level of prices is falling over a period of 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. Instead, a price rise is termed a ‘rise in inflation’ and a price fall is termed a ‘fall in inflation’.

14. D

15. D