MCQs with answers on “Inflation in India: Causes, Effects and Policy Measures”

What is inflation?
- A) Decrease in the price of goods
- B) Increase in the general price level of goods and services
- C) Stability in the price level
- D) None of the above
- Answer: B) Increase in the general price level of goods and services
Which index is primarily used to measure inflation in India?
- A) Consumer Price Index (CPI)
- B) Wholesale Price Index (WPI)
- C) Gross Domestic Product (GDP) Deflator
- D) Balance of Payment Index
- Answer: A) Consumer Price Index (CPI)
What is the main objective of the Reserve Bank of India (RBI) concerning inflation?
- A) Control the money supply
- B) Maintain price stability
- C) Promote economic growth
- D) All of the above
- Answer: D) All of the above
Which of the following is NOT a cause of inflation?
- A) Demand-pull inflation
- B) Cost-push inflation
- C) Stable currency value
- D) Built-in inflation
- Answer: C) Stable currency value
Demand-pull inflation is primarily caused by:
- A) Decrease in production costs
- B) Increase in demand for goods and services
- C) Increase in taxes
- D) None of the above
- Answer: B) Increase in demand for goods and services
Cost-push inflation occurs when:
- A) Demand for goods decreases
- B) Production costs increase
- C) The government increases subsidies
- D) The economy is in recession
- Answer: B) Production costs increase
What effect does inflation generally have on purchasing power?
- A) Increases purchasing power
- B) Decreases purchasing power
- C) No effect on purchasing power
- D) Stabilizes purchasing power
- Answer: B) Decreases purchasing power
Which of the following is a potential effect of high inflation?
- A) Increase in savings
- B) Decrease in investment
- C) Increased purchasing power
- D) Stable employment rates
- Answer: B) Decrease in investment
The main policy measure to control inflation is:
- A) Increasing public expenditure
- B) Monetary policy tightening
- C) Reducing interest rates
- D) Encouraging foreign investment
- Answer: B) Monetary policy tightening
What is the purpose of the Monetary Policy Committee (MPC) in India?
- A) To determine fiscal policy
- B) To control inflation and stabilize the economy
- C) To manage public debt
- D) To oversee trade agreements
- Answer: B) To control inflation and stabilize the economy
Which of the following is a tool used by the RBI to control inflation?
- A) Increasing the repo rate
- B) Decreasing the reverse repo rate
- C) Reducing the cash reserve ratio (CRR)
- D) Increasing government spending
- Answer: A) Increasing the repo rate
In the context of inflation, what does the term ‘deflation’ refer to?
- A) A decrease in the price level
- B) An increase in the money supply
- C) A stable price level
- D) Hyperinflation
- Answer: A) A decrease in the price level
Which of the following sectors is most affected by inflation?
- A) Agricultural sector
- B) Industrial sector
- C) Service sector
- D) All sectors are equally affected
- Answer: D) All sectors are equally affected
What is hyperinflation?
- A) Moderate inflation
- B) Inflation that exceeds 50% per month
- C) Inflation controlled by the government
- D) None of the above
- Answer: B) Inflation that exceeds 50% per month
Which of the following is an indirect effect of inflation?
- A) Reduced purchasing power
- B) Increased cost of living
- C) Increased wage demands
- D) Decreased consumer spending
- Answer: C) Increased wage demands
The ‘inflation targeting’ framework in India aims for a specific inflation rate of:
- A) 4%
- B) 6%
- C) 8%
- D) 3%
- Answer: A) 4%
Which government body is responsible for estimating the Consumer Price Index (CPI) in India?
- A) Ministry of Finance
- B) Reserve Bank of India
- C) National Statistical Office (NSO)
- D) Planning Commission
- Answer: C) National Statistical Office (NSO)
Which of the following can lead to ‘built-in inflation’?
- A) Wage-price spiral
- B) Government subsidies
- C) Increased competition
- D) Technological advancements
- Answer: A) Wage-price spiral
What is the relationship between inflation and unemployment according to the Phillips Curve?
- A) Positive relationship
- B) Negative relationship
- C) No relationship
- D) Indeterminate relationship
- Answer: B) Negative relationship
Which economic phenomenon often accompanies inflation?
- A) Deflation
- B) Stagflation
- C) Economic boom
- D) Economic contraction
- Answer: B) Stagflation
What can be a direct consequence of persistent inflation?
- A) Increase in foreign investment
- B) Decrease in consumer confidence
- C) Increase in savings rates
- D) Stabilization of prices
- Answer: B) Decrease in consumer confidence
Which of the following measures can be taken to control demand-pull inflation?
- A) Increase in public sector investment
- B) Tightening of fiscal policy
- C) Increasing government subsidies
- D) Decreasing taxes
- Answer: B) Tightening of fiscal policy
In India, which group is particularly vulnerable to the effects of inflation?
- A) Wealthy individuals
- B) Fixed-income groups
- C) Entrepreneurs
- D) Investors
- Answer: B) Fixed-income groups
What effect does inflation have on the real interest rate?
- A) Real interest rate increases with inflation
- B) Real interest rate decreases with inflation
- C) No effect on real interest rate
- D) Real interest rate becomes negative
- Answer: B) Real interest rate decreases with inflation
Which of the following is NOT a policy response to curb inflation?
- A) Increasing taxation
- B) Reducing interest rates
- C) Tightening the money supply
- D) Reducing government expenditure
- Answer: B) Reducing interest rates
Which measure can help increase agricultural productivity and thus mitigate food inflation?
- A) Subsidies for fertilizer and seeds
- B) Decreasing minimum support prices (MSP)
- C) Limiting agricultural exports
- D) Increasing import duties on food items
- Answer: A) Subsidies for fertilizer and seeds
What impact does inflation have on long-term contracts?
- A) Reduces the need for contracts
- B) Increases the value of contracts
- C) Alters the real value of future payments
- D) Stabilizes contractual agreements
- Answer: C) Alters the real value of future payments
What is the primary goal of fiscal policy in the context of inflation?
- A) Encourage spending
- B) Increase aggregate demand
- C) Control budget deficits
- D) Stabilize the economy and control inflation
- Answer: D) Stabilize the economy and control inflation
What role do expectations play in inflation?
- A) They have no impact
- B) They can contribute to actual inflation through wage demands
- C) They always stabilize prices
- D) They are only important during deflation
- Answer: B) They can contribute to actual inflation through wage demands
Which of the following can lead to an increase in the Consumer Price Index (CPI)?
- A) Decrease in consumer spending
- B) Increase in import prices
- C) Increase in production efficiency
- D) Lower interest rates
- Answer: B) Increase in import prices

These questions and answers are designed to cover a comprehensive range of topics related to inflation in India, including its causes, effects, and policy measures. They can serve as a useful resource for preparing for the Civil Services Examination.

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