Inflation: WPI & CPI — Set 2

Correct Answer: B. B. 4% ± 2%

The RBI's medium-term inflation target for CPI is 4% with a tolerance band of ±2%, meaning inflation is acceptable between 2% and 6%. This flexible inflation targeting framework was adopted in 2016 under the Monetary Policy Framework Agreement. If CPI stays outside the 2-6% band for three consecutive quarters, the RBI must report to the government.

Correct Answer: C. C. Demand-pull inflation

Demand-pull inflation is caused by excess aggregate demand relative to aggregate supply in the economy. When 'too much money chases too few goods,' prices are pulled up. It typically occurs during economic booms, high employment periods, or excessive government spending. Keynes described this as inflation from the demand side.

Correct Answer: B. B. Cost-push inflation

Cost-push inflation is caused by rising production costs such as wages, raw material prices, or energy costs that push up prices from the supply side. Rising oil prices causing higher transportation and production costs that feed into consumer prices is a classic example of cost-push inflation. Supply chain disruptions also trigger cost-push inflation.

Correct Answer: C. C. Stagnant economic growth combined with high inflation and unemployment

Stagflation is the simultaneous occurrence of stagnant economic growth (or recession), high inflation, and high unemployment. This contradicts traditional Phillips Curve theory which suggests inflation and unemployment move in opposite directions. The 1970s oil shocks caused severe stagflation in Western economies.

Correct Answer: B. B. Quantity Theory of Money and inflation

The correct answer is B. Quantity Theory of Money and inflation. The Fisher Equation MV = PT is the foundation of the Quantity Theory of Money, where M = Money supply, V = Velocity of money, P = Price level, T = Volume of transactions. It implies that if money supply (M) grows faster than real output (T), and velocity (V) is stable, prices (P) must rise — causing inflation. This topic is frequently tested in competitive examinations such as RRB NTPC, SSC, and UPSC.

Correct Answer: B. B. Primary Articles, Fuel & Power, Manufactured Products

India's WPI covers three main commodity groups: Primary Articles (weight ~22.6%), Fuel & Power (~13.2%), and Manufactured Products (~64.2%). Primary articles include food and non-food agricultural items, minerals. Manufactured products form the largest weight including chemical products, textiles, metals. WPI covers 697 commodities total.

Correct Answer: C. C. Volatile food and fuel prices

Core inflation (also called CPI excluding food and fuel) strips out the volatile food and energy components to reveal the underlying inflation trend. Since food and fuel prices are subject to seasonal and supply shocks, core inflation is considered a better indicator of persistent inflationary pressures. RBI monitors both headline and core CPI.

Correct Answer: B. Ministry of Statistics and Programme Implementation (MoSPI)

The Consumer Price Index (CPI) in India is compiled and released by the Ministry of Statistics and Programme Implementation (MoSPI) through the Central Statistics Office (CSO). CPI measures the average change over time in prices of goods and services consumed by households. It is released monthly and has been the official inflation benchmark for RBI's monetary policy since 2016.

Correct Answer: B. B. CPI (Combined) — All India

The RBI's Monetary Policy Committee uses CPI (Combined) — All India (which is a weighted average of urban and rural CPI) as the headline inflation measure. This combined CPI replaced WPI as the official inflation benchmark for monetary policy when the flexible inflation targeting framework was adopted in 2014-16. NSO releases this monthly.

Correct Answer: B. B. Sustained fall in general price level

Deflation is a sustained fall in the general price level of goods and services. While lower prices seem beneficial, deflation is economically dangerous because consumers delay purchases expecting further price falls (deflationary spiral), investment declines, real debt burdens increase, and economic growth stalls. Japan's 'Lost Decade' is a classic example of deflationary pressure.