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Inflation — GK Questions with Answers

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24 questions
  1. Economic growth is usually coupled with — (IAS, 2011)
    1. deflation
    2. inflation
    3. stagflation
    4. hyper inflation
    Show answer

    Answer: (B) inflation

    In a period of growth employment and income rise, demand climbs, and mild inflation runs along with it.

  2. Which one of the following is likely to be the most inflationary in its effect — (IAS, 2021)
    1. Repayment of public debt
    2. Borrowing from the public to finance a budget deficit
    3. Borrowing from banks to finance a budget deficit
    4. Creating new money to finance a budget deficit
    Show answer

    Answer: (D) Creating new money to finance a budget deficit

    Creating new money raises the supply of money directly, so it is the most inflationary of the four.

  3. In India, inflation is measured in respect of — (RPSC, 2013)
    1. the Wholesale Price Index
    2. the Consumer Price Index for urban non-manual workers
    3. the Consumer Price Index for agricultural labourers
    4. the national income deflator
    Show answer

    Answer: (A) the Wholesale Price Index

    At that time the WPI was the chief measure. Note that since 2014 the RBI measures inflation by CPI Combined.

  4. With reference to inflation in India, which statement is correct — (UPSC, 2015)
    1. Controlling inflation in India is the responsibility of the Government of India only
    2. The Reserve Bank of India has no role in controlling inflation
    3. Decreased money circulation helps in controlling inflation
    4. Increased money circulation helps in controlling inflation
    Show answer

    Answer: (C) Decreased money circulation helps in controlling inflation

    Less money circulating means less demand, and prices come down; that is exactly what the RBI works at.

  5. Which measure does the government generally use to contain a recession — (UPPCS, 2009)
    1. Increasing money supply
    2. Increasing government spending
    3. Decreasing taxation
    4. All of the above
    Show answer

    Answer: (D) All of the above

    All three create demand in the economy, so all three are used together in a recession.

  6. Which statements about headline inflation are correct — 1. It counts inflation in an economy in full. 2. Segments that can spike all of a sudden, such as food, vegetables and energy, move it about.
    1. Only 1
    2. Only 2
    3. Both 1 and 2
    4. Neither 1 nor 2
    Show answer

    Answer: (C) Both 1 and 2

    Both are correct; it is exactly these volatile categories that are removed to arrive at core inflation.

  7. Consider these statements — 1. Both goods and services come under the CPI. 2. Services are left out of the WPI.
    1. Only 1
    2. Only 2
    3. Both 1 and 2
    4. Neither 1 nor 2
    Show answer

    Answer: (C) Both 1 and 2

    Both are correct, and this is the biggest difference between the two measures.

  8. Consider these statements — 1. Inflation benefits debtors. 2. Inflation benefits bondholders.
    1. Only 1
    2. Only 2
    3. Both 1 and 2
    4. Neither 1 nor 2
    Show answer

    Answer: (A) Only 1

    A debtor gains because the sum to be repaid has lost value; a bondholder earns a fixed rate, so he loses.

  9. About the food price index — 1. It breaks into two parts, one for primary food articles and one for manufactured food products. 2. Of the two, the primary food articles carry the smaller weight.
    1. Only 1
    2. Only 2
    3. Both 1 and 2
    4. Neither 1 nor 2
    Show answer

    Answer: (A) Only 1

    The first is correct; primary food articles carry more weight than manufactured food products, so the second is wrong.

  10. Which is the most important word in the definition of inflation
    1. sudden
    2. persistent
    3. seasonal
    4. regional
    Show answer

    Answer: (B) persistent

    Inflation is a persistent rise in the general price level, not a jump of a day or two.

  1. Which type of inflation may have an annual rate running into millions
    1. Creeping
    2. Galloping
    3. Hyper
    4. Bottleneck
    Show answer

    Answer: (C) Hyper

    Hyper inflation; Germany after the First World War and Bolivia in mid-1985 are the examples.

  2. When does bottleneck inflation arise
    1. When demand rises fast
    2. When supply falls drastically and demand stays the same
    3. When the money supply falls
    4. When exports rise
    Show answer

    Answer: (B) When supply falls drastically and demand stays the same

    A blocked road cuts supply, and that by itself pushes prices up.

  3. Which of these is not a cause on the demand side
    1. A rise in public expenditure
    2. A reduction in direct taxes
    3. Hoarding by traders
    4. A growing population
    Show answer

    Answer: (C) Hoarding by traders

    Hoarding cuts supply, so it is a cause on the supply side.

  4. What is the other name for cost-push inflation
    1. Demand pull inflation
    2. Supply side inflation
    3. Creeping inflation
    4. Bottleneck inflation
    Show answer

    Answer: (B) Supply side inflation

    Inflation that comes from the supply side is called cost-push inflation.

  5. What happens to investors during inflation
    1. Both bondholders and equity holders gain
    2. Bondholders lose and equity holders gain
    3. Both lose
    4. Bondholders gain and equity holders lose
    Show answer

    Answer: (B) Bondholders lose and equity holders gain

    A bond pays a fixed rate, while rising company profits bring a higher dividend on equity.

  6. What is a chief side effect of deflation
    1. Rising unemployment
    2. Rising exports
    3. Falling savings
    4. Rising interest rates
    Show answer

    Answer: (A) Rising unemployment

    Demand in the economy stays low, so unemployment rises, and that can lead on to a depression.

  7. What is removed from core inflation
    1. Housing and transport
    2. Food and energy
    3. Education and health
    4. Clothing and footwear
    Show answer

    Answer: (B) Food and energy

    These are the most volatile categories, so they are left out for framing long-term policy.

  8. Under which ministry is the WPI published
    1. The Ministry of Finance
    2. The Ministry of Commerce and Industry
    3. The Ministry of Statistics and Programme Implementation
    4. The Ministry of Labour and Employment
    Show answer

    Answer: (B) The Ministry of Commerce and Industry

    It is published by the Office of the Economic Adviser in the Ministry of Commerce and Industry.

  9. What is the new base year of the WPI
    1. 2004-05
    2. 2011-12
    3. 2012
    4. 2022-23
    Show answer

    Answer: (D) 2022-23

    The new series has 2022-23 as its base year and 957 items in the basket.

  10. How many items are in the new WPI series
    1. 676
    2. 697
    3. 810
    4. 957
    Show answer

    Answer: (D) 957

    The old series had 697 items; the new one has been raised to 957.

  1. Where does the PPI chiefly differ from the WPI
    1. The PPI covers agriculture only
    2. The WPI reflects the average cost of production including taxes, while the PPI measures the price at the gate excluding taxes
    3. The PPI is weekly and the WPI monthly
    4. There is no difference
    Show answer

    Answer: (B) The WPI reflects the average cost of production including taxes, while the PPI measures the price at the gate excluding taxes

    Besides the coverage, that is the basic difference between the two.

  2. What is the base year of CPI (IW)
    1. 2010
    2. 2012
    3. 2016
    4. 2022
    Show answer

    Answer: (C) 2016

    The government revised it to 2016 in October 2020; the base year of the general CPI is 2012.

  3. By which index is the Dearness Allowance settled
    1. The WPI
    2. CPI (IW)
    3. The GDP deflator
    4. Core inflation
    Show answer

    Answer: (B) CPI (IW)

    The Consumer Price Index for Industrial Workers settles the DA of government employees and industrial workers.

  4. What does a GDP deflator of 1 mean
    1. The price level has doubled
    2. There is no change in the price level
    3. The price level has halved
    4. The economy is in recession
    Show answer

    Answer: (B) There is no change in the price level

    GDP at current prices equalling GDP at constant prices means the price level has not moved.

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