Static Quiz 04 April 2022 (Indian Economy)

Solution: c)
Justification: Justification: Statement 1 and 3: It is common in the case of onion, pulses, etc. where the government often cracks down on illegal hoarding to increase market supply and at times import pulses to increase their domestic supply so that prices can be reduced.
Statement 2: Tight monetary policy is basically intended to cut down the money supply in the economy by siphoning out the extra money from the economy so that effective demand is reduced. This is a short-term measure. In the long-run, the best way is to increase production with the help of the best production practices. Statement 4: Loose fiscal policy only increases the liquidity and pushes demand thereby raising inflation.

Solution: d)
Justification: It is the ratio of the value of goods and services an economy produces in a particular year at current prices to that at prices prevailing during any other reference (base) year. This ratio basically shows to what extent an increase in GDP or gross value added (GVA) in an economy has happened on account of higher prices, rather than increased output. Since the deflator covers the entire range of goods and services produced in the economy — as against the limited commodity baskets for the wholesale or consumer price indices — it is seen as a more comprehensive measure of inflation.

Solution: d)
Justification: Statement 1: RBI Governor had adopted the new Consumer Price Index (CPI) (combined) as the key measure of inflation in 2014 based on the Urijeet Patel committee recommendation. Earlier, RBI had given more weightage to Wholesale Price Index (WPI) than CPI as the key measure of inflation for all policy purposes.

Statement 2: Headline inflation is a measure of the total inflation within an economy, including commodities such as food and energy prices (e.g., oil and gas). Core inflation calculations excludes food and energy which tend to be much more volatile and prone to inflationary spikes.

Solution: a)
Justification: The reason is clear enough. If an investor has invested 100 crores and expects to get a return of 20% with over 120 crores as revenue; he will receive less return if inflation is over 10% due to which effective return reduces to nearly 10%. The same 120 crore of revenue will now mean only 108 crores (10% deduction due to inflation) and thus means a loss for the company. Erratic inflation rates make these cost-benefit calculations even more difficult and thus companies hesitate to invest.

Solution: c)
Justification: Inflation tax is not an actual legal tax paid to a government; instead “inflation tax” refers to the penalty for holding cash at a time of high inflation. When the government prints more money or reduces interest rates, it floods the market with cash, which raises inflation in the long run. If an investor is holding securities, real estate or other assets, the effect of inflation may be negligible. If a person is holding cash, though, this cash is worthless after inflation has risen. The degree of decrease in the value of cash is termed the inflation tax for the way it punishes people who hold assets in cash, which tend to be lower- and middle-class wage earners. It is noteworthy that even deficit financing (sometimes leading to high inflation) can act as a tax on people which actually was intended to boost demand in the economy