Inflation — Set 5

Correct Answer: A. Consumer Price Index (CPI)

The Consumer Price Index (CPI) has been used by the RBI as the primary benchmark for its Flexible Inflation Targeting (FIT) framework since April 2014, following the recommendations of the Urjit Patel Committee. The RBI is mandated to maintain CPI inflation at 4% with a tolerance band of ±2%. Prior to 2014, the WPI was the dominant inflation benchmark in India. CPI is preferred because it reflects the actual cost of living for ordinary consumers and includes services, which are a growing part of the economy.

Correct Answer: C. High inflation and low growth

Stagflation occurs when an economy faces stagnant growth and high inflation simultaneously. It is often accompanied by high unemployment. This situation is difficult for central banks to manage.

Correct Answer: B. Reserve Bank of India (RBI)

Under the Flexible Inflation Targeting (FIT) framework adopted in 2016, the Reserve Bank of India (RBI) is specifically mandated to maintain Consumer Price Index (CPI) inflation at 4% with a tolerance band of ±2% (i.e., between 2% and 6%). The RBI uses monetary policy tools — primarily the repo rate — to achieve this target. While the Ministry of Finance influences inflation through fiscal policy (taxes and expenditure), the legal mandate for inflation targeting under the amended RBI Act belongs exclusively to the RBI through the Monetary Policy Committee (MPC).

Correct Answer: B. Increase in money supply

Demand-pull inflation happens when there is more money in the hands of people, increasing demand. When demand exceeds supply, prices go up. It is the most common form of inflation in a growing economy.

Correct Answer: A. Cost-Push Inflation

Cost-push inflation occurs when the cost of raw materials or labor increases. Since oil is used in transport and production, its price rise increases the cost of almost everything. This leads to a general increase in prices.

Correct Answer: B. Decreases investment and production

During deflation, consumers delay purchases expecting lower prices in the future. This reduces demand, which leads to lower production and job losses. It can create a dangerous cycle of economic recession.

Correct Answer: B. Fixed income earners

People with fixed salaries or pensions suffer because their income does not increase with prices. Their purchasing power falls as things become more expensive. Debtors and business owners often benefit or remain stable during inflation.

Correct Answer: B. 4%

The official inflation target for the RBI is 4%. It has a flexibility range of 2% to 6%. This target is reviewed every five years by the government and the RBI.

Correct Answer: A. All goods and services produced in the economy

Unlike CPI and WPI, which focus on a specific 'basket' of goods, the GDP deflator covers everything. It includes all final goods and services produced within the country. It is the ratio of nominal GDP to real GDP.

Correct Answer: C. Improvement in the standard of living for everyone

Inflation usually makes the standard of living worse for poor and middle-class people. It creates uncertainty for investors and consumers. However, it can help some sectors like exports if the currency weakens.