Inflation: WPI & CPI — Set 7
Economy Advanced · मुद्रास्फीति: WPI और CPI · Questions 61–70 of 141
The concept of 'monetary transmission mechanism' in controlling inflation means:
Correct Answer: B. B. The process by which RBI's policy rate changes affect economic activity and ultimately inflation
Monetary transmission mechanism describes the chain through which RBI's policy rate changes (repo rate) pass through to bank lending rates, credit availability, investment, consumption, and ultimately inflation. The effectiveness of transmission depends on bank competition, financial market depth, and structural factors. Incomplete transmission reduces the impact of RBI policy.
'Inflation tax' refers to:
Correct Answer: B. B. The implicit tax on holders of cash and fixed assets through inflation eroding their real value
The inflation tax is the implicit tax borne by holders of money and fixed nominal assets as inflation erodes their real value. When the government finances spending by printing money (monetising deficit), it causes inflation which transfers purchasing power from holders of currency to the government. Those with cash savings suffer; those with physical assets benefit.
RBI's Monetary Policy Committee (MPC) has how many members?
Correct Answer: B. B. 6
The MPC has 6 members: 3 from the RBI (Governor as ex-officio Chairman, Deputy Governor in charge of monetary policy, and one RBI officer nominated by Central Board) and 3 external members appointed by the Government. Decisions are by majority vote; the Governor has a casting vote in case of a tie. The MPC meets at least 4 times a year.
'Creeping inflation' is generally considered:
Correct Answer: B. B. Mildly beneficial as it encourages spending and investment
Creeping inflation (1-3% per year) is generally considered mildly beneficial as it encourages spending over saving, supports business investment decisions, and prevents deflation. Most central banks target mild positive inflation as part of their price stability mandate. Very low inflation near zero is risky as it can quickly turn to deflation.
When WPI inflation is higher than CPI inflation, it typically means:
Correct Answer: B. B. Wholesale prices are rising faster than consumer prices — producers absorbing cost increases
When WPI inflation exceeds CPI inflation, it typically indicates that wholesale/producer prices are rising faster than retail/consumer prices. This means producers and retailers are absorbing cost increases rather than fully passing them to consumers, potentially compressing profit margins. Eventually, sustained WPI > CPI leads to pass-through to consumer prices.
India's food security policies that impact food inflation include:
Correct Answer: B. B. Minimum Support Price (MSP), Public Distribution System (PDS), and Food Corporation of India (FCI) buffer stocks
India's food inflation is managed through a combination of: Minimum Support Prices (MSP) — government procurement prices for crops; Public Distribution System (PDS) — subsidised food to poor households; and FCI buffer stocks — government grain reserves released to moderate price rises. These supply-side interventions complement RBI's monetary policy in managing food inflation.
'Real effective exchange rate' (REER) is linked to inflation because:
Correct Answer: B. B. Higher domestic inflation (relative to trading partners) typically appreciates the nominal rate but depreciates REER
REER adjusts the nominal exchange rate for inflation differentials between countries. If India's inflation is higher than its trading partners', India's goods become relatively expensive (less competitive). This means India's REER appreciates (India's goods cost more relative to competitors), hurting export competitiveness. RBI considers REER in exchange rate management.
The CPI weight for 'Pan, Tobacco, and Intoxicants' in India is approximately:
Correct Answer: B. B. 2.38%
Pan, Tobacco, and Intoxicants have a weight of approximately 2.38% in India's CPI basket. Despite being a relatively small component, tobacco and related products are widely consumed across income groups. Higher excise duties on tobacco are often used as health policy tools that incidentally affect CPI through this component.
The Clothing & Footwear component of India's CPI has a weight of approximately:
Correct Answer: B. B. 6.53%
Clothing and Footwear has a weight of approximately 6.53% in India's CPI basket. This includes all garments, footwear, and related accessories for men, women, and children. Textile price inflation and cotton price fluctuations influence this component. The weight reflects that a significant portion of household spending goes toward clothing needs.
Which of the following is a consequence of high inflation for savers?
Correct Answer: B. B. Purchasing power of savings erodes
High inflation erodes the purchasing power of savings — even if the nominal value of a deposit remains the same, it buys fewer goods and services when prices are higher. Savers suffer when real interest rates (nominal rate minus inflation) are negative. This is why protecting savers from inflation is an important objective of monetary policy.