Q.1 Which of the following best defines inflation?
A general rise in the prices of goods and services
A decrease in the general price level
A situation when money supply decreases
An increase in production without price change
Explanation - Inflation refers to a sustained increase in the general price level of goods and services in an economy over a period of time.
Correct answer is: A general rise in the prices of goods and services
Q.2 Which type of inflation occurs due to an increase in production costs?
Demand-pull inflation
Cost-push inflation
Hyperinflation
Deflation
Explanation - Cost-push inflation occurs when the cost of production increases, leading producers to raise prices to maintain profit margins.
Correct answer is: Cost-push inflation
Q.3 Which index is commonly used to measure inflation in India?
GDP Deflator
Consumer Price Index (CPI)
Producer Price Index (PPI)
Human Development Index (HDI)
Explanation - The CPI measures changes in the price level of a basket of consumer goods and services purchased by households.
Correct answer is: Consumer Price Index (CPI)
Q.4 Deflation is characterized by:
Rising prices
Falling prices
Stable prices
Rising wages
Explanation - Deflation occurs when the general price level of goods and services decreases over a period of time.
Correct answer is: Falling prices
Q.5 Which of the following is a consequence of high inflation?
Increased purchasing power of money
Decreased cost of living
Erosion of savings
Reduced interest rates automatically
Explanation - High inflation reduces the real value of money, eroding the purchasing power of savings.
Correct answer is: Erosion of savings
Q.6 Demand-pull inflation occurs when:
Aggregate demand exceeds aggregate supply
Production costs rise
Government reduces taxes
Money supply decreases
Explanation - Demand-pull inflation occurs when the demand for goods and services exceeds the economy's capacity to produce, pushing prices up.
Correct answer is: Aggregate demand exceeds aggregate supply
Q.7 Which sector is most affected by cost-push inflation?
Manufacturing sector
Service sector
Financial sector
Agriculture sector only
Explanation - Rising input costs such as labor and raw materials in manufacturing directly increase production costs, causing cost-push inflation.
Correct answer is: Manufacturing sector
Q.8 Hyperinflation is:
Inflation below 2%
A moderate and manageable rise in prices
An extremely rapid and uncontrolled rise in prices
Deflationary period in an economy
Explanation - Hyperinflation is an exceptionally high and typically accelerating inflation rate that erodes the real value of money.
Correct answer is: An extremely rapid and uncontrolled rise in prices
Q.9 Which of the following measures can control inflation?
Increasing money supply
Increasing interest rates
Lowering taxes
Subsidizing imports
Explanation - Higher interest rates reduce borrowing and spending, which helps in controlling inflation by lowering aggregate demand.
Correct answer is: Increasing interest rates
Q.10 Which is considered a direct effect of deflation on borrowers?
Debt burden increases
Debt burden decreases
No impact
Borrowing becomes cheaper automatically
Explanation - Deflation increases the real value of money, making it more expensive for borrowers to repay their debts.
Correct answer is: Debt burden increases
Q.11 Which inflation type is caused primarily by excessive money supply?
Cost-push inflation
Demand-pull inflation
Monetary inflation
Stagflation
Explanation - Monetary inflation occurs when the money supply in an economy grows faster than the production of goods and services.
Correct answer is: Monetary inflation
Q.12 Stagflation refers to:
Low inflation and high growth
High inflation and low growth
Low inflation and low growth
Moderate inflation and high growth
Explanation - Stagflation is an economic situation with stagnant growth, high unemployment, and high inflation simultaneously.
Correct answer is: High inflation and low growth
Q.13 Which of the following is a primary cause of deflation?
Increase in demand
Decrease in aggregate demand
Rising production costs
Government subsidies
Explanation - Deflation often occurs when overall demand in the economy falls, leading to a reduction in prices.
Correct answer is: Decrease in aggregate demand
Q.14 Which of these is an effect of prolonged deflation?
Increased investment
Reduced unemployment
Delayed consumption and reduced profits
Rising wages
Explanation - During prolonged deflation, consumers delay spending, and businesses earn lower profits, slowing economic growth.
Correct answer is: Delayed consumption and reduced profits
Q.15 Which measure can a central bank use to combat deflation?
Increase interest rates
Decrease money supply
Decrease interest rates
Sell government bonds
Explanation - Lowering interest rates encourages borrowing and spending, increasing demand to counter deflation.
Correct answer is: Decrease interest rates
Q.16 Which is NOT a common indicator of inflation?
Rising consumer prices
Rising producer prices
Rapid currency depreciation
Declining unemployment always
Explanation - Inflation can occur with or without changes in unemployment; declining unemployment is not a guaranteed indicator.
Correct answer is: Declining unemployment always
Q.17 Which of the following sectors may benefit during inflation?
Fixed-income borrowers
Real estate investors
Savers with cash holdings
Fixed wage employees
Explanation - Real estate often appreciates during inflation, helping investors protect their wealth against rising prices.
Correct answer is: Real estate investors
Q.18 Core inflation excludes which of the following?
Food and energy prices
Housing prices
Healthcare costs
Transportation costs
Explanation - Core inflation excludes volatile items like food and energy to provide a clearer picture of long-term inflation trends.
Correct answer is: Food and energy prices
Q.19 Which type of inflation is typically mild and gradual?
Creeping inflation
Galloping inflation
Hyperinflation
Stagflation
Explanation - Creeping inflation is a low-level, gradual increase in prices, generally around 2-3% annually.
Correct answer is: Creeping inflation
Q.20 Which of these policies can help reduce demand-pull inflation?
Expansionary fiscal policy
Contractionary fiscal policy
Reducing taxes
Increasing government spending
Explanation - Contractionary fiscal policy, like reducing government spending or increasing taxes, lowers aggregate demand and helps control inflation.
Correct answer is: Contractionary fiscal policy
Q.21 Which of the following is a sign of deflationary expectations?
Increased borrowing
Consumers delay purchases
Rising commodity prices
Banks increase lending rates
Explanation - If consumers expect prices to fall further, they postpone buying, which further reduces demand and reinforces deflation.
Correct answer is: Consumers delay purchases
Q.22 Which type of inflation is most harmful to an economy?
Creeping inflation
Moderate inflation
Galloping inflation
Mild inflation
Explanation - Galloping inflation is extremely high and rapid, causing economic instability, uncertainty, and erosion of savings.
Correct answer is: Galloping inflation
Q.23 Which of these measures does the Reserve Bank of India use to control inflation?
Repo rate adjustments
Directly setting prices
Increasing subsidies on goods
Fixing exchange rates
Explanation - The RBI controls liquidity and credit through repo rate changes, which influence inflation by affecting borrowing costs.
Correct answer is: Repo rate adjustments
Q.24 Which of the following statements is true about deflation?
It encourages borrowing
It increases real income of savers
It reduces the real value of money
It leads to higher wages automatically
Explanation - During deflation, the purchasing power of money rises, so savers benefit as their money can buy more goods and services.
Correct answer is: It increases real income of savers