Daily Static Quiz Prelims Practice 2027
Since 2016, India uses CPI as the primary inflation measure for monetary policy under flexible inflation targeting, with the MPC targeting CPI inflation at 4% within a band of ±2%. WPI was previously used but is now a secondary indicator.
- Demand-pull inflation occurs when aggregate demand exceeds aggregate supply — too much money chasing too few goods.
- Cost-push inflation occurs when rising production costs force producers to raise prices — a supply-side pressure driving inflation.
Statement 1 is correct — demand-pull inflation, "too much money chasing too few goods," arises when aggregate demand outpaces supply, typically during economic booms or sharp rises in government spending. Statement 2 is also correct, since cost-push inflation is supply-side driven, with rising input costs such as oil, wages, and raw materials increasing production costs that are passed on to consumers as higher prices — India's 2021–22 inflation had significant cost-push components from global commodity price surges.
Option (d) is incorrect — India's CPI does not give equal weightage to each category, since food and beverages carry the highest weight at roughly 45.86% of the basket, while fuel and light carry about 6.8% and housing about 10.07%, making the claim of equal weightage factually wrong. Options (a), (b), and (c) are all correct statements.
- Assertion (A): The Reserve Bank of India raises the Repo Rate when inflation rises above the target band.
- Reason (R): A higher Repo Rate makes borrowing more expensive for commercial banks — this is passed on as higher loan rates to consumers and businesses, reducing credit growth, cooling consumption and investment, and thereby reducing inflationary pressure.
Assertion A is correct — when CPI inflation rises above the 6% upper tolerance band, the MPC raises the Repo Rate as its primary contractionary monetary policy tool. Reason R is correct and directly explains A, since a higher Repo Rate raises the cost of funds for commercial banks, which then raise their lending rates, making credit more expensive, reducing credit offtake, slowing consumption and investment, and cooling aggregate demand — this is the precise transmission mechanism that explains why the RBI raises rates to fight inflation.
- Stagflation refers to high inflation combined with high unemployment and stagnant economic growth.
- Hyperinflation refers to extremely rapid price rise — historically associated with post-war Germany (1923) and Zimbabwe (2000s).
- Deflation is always beneficial for an economy as falling prices allow consumers to buy more with the same income.
Statement 1 is correct — stagflation, the simultaneous occurrence of stagnation and inflation, is difficult to address because the remedy for one tends to worsen the other, with India and the world experiencing elements of stagflation during the 1970s oil crisis. Statement 2 is correct — hyperinflation, typically exceeding 50% per month, devastated Weimar Germany in 1923 and Zimbabwe in 2007–08, wiping out savings and destabilising economies. Statement 3 is incorrect, since deflation is not always beneficial — persistent deflation causes consumers to defer purchases, reducing demand, production, and employment, with Japan's "Lost Decades" standing as the classic example of deflationary harm.
