Q1. How many of the following can act as factors leading to disinflation in an economy?
- Contraction in money supply
- Economic slowdown
- Rising unemployment
(a) Only one
(b) Only two
(c) All three
(d) None
Correct Answer: C
Explanation :
- Money supply contraction — Correct
Tight monetary / fiscal stance reduces liquidity → weakens demand → tempers price rise. - Recession — Correct
Lower income & weak consumption pressure firms to cut / restrain prices. - Higher unemployment — Correct
Less disposable income → reduced spending → moderates inflation momentum.
Disinflation = fall in the rate of inflation (prices still rising, but more slowly).
Q2.
Assertion (A): The Producer Price Index (PPI) is considered a more forward-looking gauge of inflation than the Consumer Price Index (CPI).
Reason (R): Changes in prices received by producers often get transmitted to retail prices over time.
(a) A and R are correct, and R explains A
(b) A and R are correct, but R does not explain A
(c) A is correct, R is incorrect
(d) A is incorrect, R is correct
Correct Answer: A
Explanation:
- Assertion — Correct: PPI reflects price changes at the producer level → signals upcoming cost pressures.
- Reason — Correct & explanatory: Higher input / output costs faced by producers are often passed on to consumers later, hence CPI responds with a lag.
Q3. Consider the following statements about India’s inflation indicators:
- The Wholesale Price Index (WPI) does not capture inflation in services.
- The Consumer Price Index (CPI) includes both goods and services.
- Price movements of imported goods get reflected in both WPI and CPI.
- The CPI does not cover inflation in capital and intermediate goods.
Which of the above statements are correct?
(a) 1, 2 and 3 only
(b) 2, 3 and 4 only
(c) 1, 2 and 4 only
(d) 1, 2, 3 and 4
Correct Answer: D
Explanation:
- WPI excludes services → only goods traded at wholesale level.
- CPI covers goods + services consumed by households.
- Imported goods affect both wholesale & retail prices.
- CPI excludes capital / intermediate goods (these are captured in WPI).
Q4.
Assertion (A): A narrowing gap between CPI and WPI inflation indicates better market efficiency.
Reason (R): WPI reflects price movements at the producer level, while CPI tracks price changes faced by consumers.
(a) A and R are correct and R explains A
(b) A and R are correct but R does not explain A
(c) A is correct, R is incorrect
(d) A is incorrect, R is correct
Correct Answer: A
Explanation:
- Assertion — Correct: In efficient markets, producer-level price changes transmit quickly to retail markets → CPI and WPI converge.
- Reason — Correct & explanatory: WPI = producer prices; CPI = consumer prices → faster pass-through reduces divergence.
Q5. In a situation of rising inflation, which of the following effects are most likely?
- Decline in bond prices
- Losses for existing bondholders
- Increase in bond yields
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1, 2 and 3
(d) 1 and 3 only
Correct Answer: C
Explanation:
- Inflation ↑ → fixed coupon becomes less attractive → bond prices fall.
- Bondholders lose value in real terms.
- Yields rise as new bonds are issued at higher interest to offset inflation risk.
