Inflation: WPI & CPI — Set 8

Correct Answer: C. C. Improving agricultural supply chains, storage, cold chains, and logistics

Supply-side inflation control focuses on increasing the supply of goods to bring down prices. Key measures include improving cold storage infrastructure, reducing wastage in food supply chains, enhancing rural roads and market connectivity, reforming APMC mandi laws, and improving agricultural productivity. These complement monetary policy (demand-side) in controlling food inflation.

Correct Answer: B. B. Price stability and growth — but primarily price stability

The MPC's primary mandate under the RBI Act is maintaining price stability (CPI 4% ±2%) as its foremost objective. While the MPC keeps growth in mind, price stability is the overriding goal. The preamble to the amended RBI Act states: 'the primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth.'

Correct Answer: C. C. 1114 villages and 310 towns

India's CPI collects price data from 1,114 village markets for rural CPI and 310 towns/cities for urban CPI. This wide geographic coverage ensures the index captures regional price variations across urban and rural India. Price data is collected weekly by field investigators of NSO using standardised schedules.

Correct Answer: B. B. Services (in CPI but not WPI), imported goods treatment, and different basket compositions

The divergence between CPI and WPI inflation is explained by: (1) Services are included in CPI but not WPI; (2) CPI weights towards food and services; (3) WPI covers only goods and has higher manufacturing and commodity weight; (4) Import prices are included in WPI. When global commodity prices fall, WPI drops faster than CPI.

Correct Answer: B. B. Irving Fisher

The equation of exchange MV = PT was developed by Irving Fisher in his 1911 work 'The Purchasing Power of Money.' Fisher reformulated the earlier Quantity Theory of Money into this mathematical form. M = money supply, V = velocity of circulation, P = price level, T = volume of transactions. It became the foundation of monetarist economics.

Correct Answer: C. C. CPI

CPI measures inflation from the perspective of final consumers — it tracks the prices of goods and services purchased by households for consumption. This is why CPI is the most relevant inflation measure for monetary policy targeting living costs. WPI and PPI measure inflation at the producer/wholesale level, before goods reach consumers.

Correct Answer: B. B. Vegetable supply is highly seasonal, perishable, and weather-dependent with limited storage

Vegetable prices in India are extremely volatile because supply is highly seasonal (dependent on kharif/rabi seasons), vegetables are perishable (with short shelf life), weather shocks (excess rain, drought, frost) can destroy crops rapidly, and cold storage infrastructure is inadequate. A single crop failure can cause onion or tomato prices to spike 10-fold within weeks.

Correct Answer: B. B. The natural rate of interest and its relationship with inflation and economic stability

The Wicksell effect (from Knut Wicksell) describes the relationship between the market interest rate, the natural rate of interest, and inflation/deflation. If the market interest rate is below the natural rate, investment exceeds saving, aggregate demand rises, and inflation occurs. If above, deflation occurs. This concept is important in modern central banking.

Correct Answer: A. A. Return to normal inflation after deflation — stimulating economy to raise prices and growth

Reflation refers to policies aimed at reversing deflation or very low inflation by stimulating the economy to raise prices and revive growth. Reflationary policies include fiscal stimulus, monetary easing, and quantitative easing. After the deflation/near-deflation of 2015-16, India implemented various growth-supportive policies that were reflationary in nature.

Correct Answer: B. B. NSO/MOSPI

The Household Consumer Expenditure Survey (HCES), conducted by NSO under MOSPI, provides the data used to determine the expenditure weights for India's CPI basket. The current weights are based on the 2011-12 HCES. A new HCES was conducted in 2022-23 (after a gap due to data quality issues with the 2017-18 survey) to potentially update CPI weights.