Q1. Consider the following statements on Stagflation:
- It features high inflation and high unemployment.
- It is caused by demand-pull factors.
- India faced stagflation in 1973–75.
How many of the above statements are correct?
(a) Only one (b) Only two (c) All three (d) None
Answer: (b) Only two
In-depth Explanation:
- Statement 1 – Correct:
Stagflation combines stagnation (low growth, high unemployment) with inflation (rising prices). It defies the traditional Phillips Curve, which suggests an inverse relation between inflation and unemployment.
The term was first used by British MP Iain Macleod (1965) and became prominent after the 1970s oil shock. - Statement 2 – Incorrect:
It arises mainly from adverse supply shocks — such as a sudden oil price spike or drought — which shift the aggregate supply (AS) curve leftward, raising prices while reducing output and employment.
Demand-pull factors, in contrast, typically raise inflation with falling unemployment, not rising. - Statement 3 – Correct:
India experienced stagflation in 1973–75, driven by the OPEC oil crisis, poor monsoons, and high import dependence.
Inflation crossed 25%, GDP growth was near zero, and unemployment rose — fitting the stagflation profile.
Q2. Consider the following statements on Inflation Targeting:
- India adopted it via the Monetary Policy Framework Agreement in 2015.
- Target is 4% CPI with ±2% band.
- Failure to meet target for 3 quarters requires RBI to write to Finance Minister.
How many of the above statements are correct?
(a) Only one (b) Only two (c) All three (d) None
Answer: (c) All three
In-depth Explanation:
- Statement 1 – Correct:
The Monetary Policy Framework Agreement (MPFA) was signed between the Government of India and RBI on 20 February 2015, institutionalising flexible inflation targeting (FIT). - Statement 2 – Correct:
As per RBI Act (Section 45ZA, amended 2016), the inflation target is 4% CPI, with a tolerance band of ±2% (2–6%).
This target is periodically reviewed; currently valid till March 2026 (extended in 2021). - Statement 3 – Correct:
Under Section 45ZN, if inflation stays outside the band for three consecutive quarters, RBI must submit a public report to the Government detailing:- Reasons for failure,
- Corrective measures, and
- Time frame for returning to the target.
Q3. Consider the following statements:
- Hyperinflation is defined as inflation above 10% per month.
- It always leads to economic growth due to high spending.
- Germany in 1923 is an example of demand-pull hyperinflation.
Answer: (d) None
In-depth Explanation:
- Statement 1 – Incorrect:
According to Philip Cagan (1956), hyperinflation is defined as monthly inflation exceeding 50%, equivalent to prices doubling roughly every 35 days. - Statement 2 – Incorrect:
Hyperinflation erodes purchasing power, collapses confidence in currency, and leads to economic paralysis — not growth. It destroys savings and financial intermediation. - Statement 3 – Incorrect:
The Weimar Germany (1923) episode was triggered by massive money printing to pay war reparations and a collapse in production after World War I — a monetary and supply-side shock, not demand-pull inflation.
Q4. Consider the following statements on Base Effect:
- It distorts YoY inflation comparison.
- A low base inflates current inflation rate.
- Base effect is permanent.
How many of the above statements are correct?
(a) Only one (b) Only two (c) All three (d) None
Answer: (b) Only two
In-depth Explanation:
- Statement 1 – Correct:
Base effect refers to the impact of unusually high or low prices in the corresponding month of the previous year on the year-on-year (YoY) inflation rate.
It can distort trends, making inflation appear higher or lower than actual price momentum. - Statement 2 – Correct:
A low base year/month (i.e., unusually low prices last year) causes the current YoY inflation rate to appear inflated even if current price rise is modest. - Statement 3 – Incorrect:
The base effect is temporary, usually lasting 12 months. Once the base period moves out of the calculation window, the effect dissipates.
Q5. Consider the following statements:
- Skewflation means inflation is skewed toward services.
- It is caused by excess money supply.
- RBI uses skewflation as a target variable.
Answer: (d) None
In-depth Explanation:
- Statement 1 – Incorrect:
Skewflation means inflation concentrated in a few sectors or commodities (e.g., pulses, onions, vegetables) while other sectors show low inflation.
The term was popularised in India during 2009–10, when food prices surged while industrial inflation remained low. - Statement 2 – Incorrect:
It usually arises from supply-side constraints — production bottlenecks, weather shocks, poor logistics — rather than excess liquidity. - Statement 3 – Incorrect:
The RBI’s monetary policy framework targets headline CPI inflation (overall price index), not sector-specific inflation measures like skewflation.
