Question 1

Consider the following statements regarding inflation and economic growth:
1. The Wholesale Price Index (WPI) is the key measure of inflation used by the Reserve Bank of India for its monetary policy decisions.
2. In the long run, achieving a higher economic growth rate is often associated with maintaining a high rate of inflation.
3. The rate of inflation is calculated as the percentage change in the average price level over a period of time compared to a previous period.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. The Reserve Bank of India (RBI) formally adopted the Consumer Price Index (CPI) Combined as its key measure of inflation for monetary policy purposes in 2014, not the Wholesale Price Index (WPI).

Statement 2 is incorrect. The idea of a trade-off between higher inflation and higher growth (the Phillips Curve) is generally considered a short-run phenomenon. In the long run, high and volatile inflation is detrimental to sustainable economic growth, and price stability is seen as a necessary condition for it.

Statement 3 is correct. This is the standard definition of the rate of inflation. It measures the rate of change in the general price level of goods and services in an economy over a specific period.

Since only one statement (Statement 3) is correct, the correct option is 'a'.

Question 2

Consider the following statements:
Statement-I: In the short run, policy measures intended to reduce the rate of inflation may lead to a fall in the economic growth rate.
Statement-II: In the short run, economic growth and inflation are inversely proportional.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Statement-I is correct but Statement-II is incorrect.. Statement-I is correct. The text states that in the short run, the 'Economic Growth rate falls with any policy to reduce the rate of inflation'. This supports the idea that anti-inflationary policies can dampen growth. Statement-II is incorrect. The text explicitly mentions that 'Economic Growth and Inflation go hand in hand (are directly proportional) in the short run'. An inverse relationship is the opposite of a direct one, making this statement false.

Question 3

Consider the following statements regarding the causes of inflation:

1. An unexpected increase in oil prices, leading to a rise in the general price level, is an example of Demand-Pull inflation.
2. A reduction in taxes that increases the disposable income in the hands of households is a primary driver of Cost-Push inflation.
3. Inefficient distribution and storage facilities leading to persistent shortages are characteristic causes of Structural Inflation.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. An increase in the cost of factors of production, such as a rise in oil prices, leads to Cost-Push inflation, also known as supply shock inflation. It is not caused by an increase in aggregate demand. Statement 2 is incorrect. A reduction in taxes increases disposable income, which boosts aggregate demand. An inflation caused by an increase in aggregate demand is known as Demand-Pull inflation, not Cost-Push inflation. Statement 3 is correct. Structural inflation, or Bottleneck Inflation, is caused by long-term deficiencies or bottlenecks in an economy, such as an inefficient distribution system, which leads to shortages and subsequent price rises.

Question 4

Consider the following statements regarding different types of inflation based on their rate:

1. Galloping inflation occurs when the rate of price rise is between 3 per cent and 10 per cent.
2. Creeping inflation, with a price rise between 2 to 3 per cent, is considered detrimental to the economy as it discourages investment.
3. Hyperinflation is an extreme form where prices rise at a rate of more than 50% every month, potentially rendering the national currency worthless.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. A price rise between 3 per cent and 10 per cent is defined as Walking/Trotting inflation. Galloping inflation involves a much higher rate, typically more than 10 per cent and up to 50 per cent. Statement 2 is incorrect. A mild inflation rate of 2 to 3 per cent (Creeping Inflation) is generally considered good for the economy because it allows producers and traders to make reasonable profits, which in turn encourages more investment. Statement 3 is correct. Hyperinflation is characterized by an alarmingly high rate of price increase, defined as more than 50% per month. This extreme situation erodes the value of money, causing it to stop functioning as a store of value and medium of exchange.

Question 5

Consider the following two statements:

Statement-I: Built-in inflation is often described as a self-reinforcing loop involving wages and prices.

Statement-II: The cycle of built-in inflation is initiated when businesses increase their prices to offset rising wage costs, which in turn leads workers to demand even higher wages.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I.. Statement-I is correct. Built-in inflation is characterized by a 'wage-price spiral', which is a self-reinforcing loop. Statement-II is also correct. It accurately describes the mechanism of the wage-price spiral: workers demand higher wages to cope with the rising cost of living, and businesses then raise prices to cover these increased wage costs. This price hike then prompts further wage demands. Therefore, Statement-II provides the correct explanation for why built-in inflation is a self-reinforcing loop, as stated in Statement-I.

Question 6

Consider the following statements regarding the Wholesale Price Index (WPI) and Producer Price Index (PPI):

1. The WPI measures inflation at the final stage of production, reflecting the prices paid by consumers before the inclusion of indirect taxes.
2. In the revision of the WPI series to the base year 2011-12, the weightage assigned to 'Fuel and Power' was decreased.
3. The Producer Price Index (PPI) is conceptually similar to WPI as it measures prices from the producer's perspective, but it improves upon WPI by including services and avoiding the bias of double counting.

How many of the above statements are correct?

Accepted Answer

Only two. Statement 1 is incorrect. The WPI measures the change in wholesale prices at the ex-factory level, before commodities reach consumers. It is the Consumer Price Index (CPI) that measures inflation at the final stage, reflecting prices paid by consumers. Statement 2 is correct. The weight for 'Fuel and Power' in the WPI basket decreased from 14.91% (base 2004-05) to 13.15% (base 2011-12). Statement 3 is correct. The PPI measures the average change in prices that a producer receives, thus excluding indirect taxes, similar to WPI's ex-factory price concept. However, PPI is an improvement as it includes services (which WPI excludes) and is designed to avoid the issue of multiple counting inherent in the WPI methodology.

Question 7

Consider the following statements regarding different measures of inflation:

1. The GDP Deflator is a comprehensive measure as it covers all goods and services in an economy, but it is not used for short-term inflation targeting due to its monthly data unavailability.
2. Core Inflation is calculated using the CPI (Combined) by excluding volatile categories like food items and energy products to assess underlying inflation trends.
3. The Consumer Price Index for Industrial Workers (CPI-IW) and the Consumer Price Index for Agricultural Labourers (CPI-AL) are both compiled by the National Statistics Office (NSO).

How many of the above statements are correct?

Accepted Answer

Only two. Statement 1 is correct. The GDP deflator is calculated as the ratio of GDP at Current Prices to GDP at Constant Prices, covering all economic output. However, GDP data is not available on a monthly basis, making it unsuitable for frequent, short-term policy decisions. Statement 2 is correct. Core inflation is derived from the headline CPI figure by removing the price effects of food and energy, which are typically volatile, to provide a clearer picture of long-term price pressures. Statement 3 is incorrect. Both the CPI-IW and CPI-AL are compiled by the Labour Bureau, which operates under the Ministry of Labour and Employment. The National Statistics Office (NSO) is responsible for compiling the CPI (Rural, Urban, and Combined) series.

Question 8

Consider the following statements regarding the causes of inflation:
1. An increase in deficit financing, where the government borrows to meet its spending needs, is a demand-side cause of inflation.
2. Hoarding of essential commodities by wholesalers, which artificially reduces market supply, is a supply-side cause of inflation.
3. A year-on-year increase in the Minimum Support Prices (MSPs) for crops is considered a demand-side cause of inflation.

How many of the above statements are correct?

Accepted Answer

Only two. Statement 1 is correct. Deficit financing increases government expenditure and the money supply in the economy. This boosts aggregate demand, leading to demand-pull inflation. Statement 2 is correct. Hoarding reduces the available supply of goods in the market, creating an artificial scarcity. This decrease in supply for a given level of demand pushes prices up, which is a supply-side factor. Statement 3 is incorrect. An increase in MSPs raises the procurement cost of food grains. This acts as a cost-push factor for industries and can lead to higher food inflation. Therefore, it is a supply-side cause of inflation, not a demand-side one. Since statements 1 and 2 are correct, the correct option is 'Only two'.

Question 9

Consider the following statements regarding the effects of inflation:
1. During a period of inflation, lenders (creditors) generally benefit because the real value of the money they are repaid with increases.
2. In the short run, a rise in inflation is typically associated with a corresponding rise in unemployment.
3. Inflation can lead to a decrease in the Marginal Propensity to Save (MPS) and may skew the savings pattern towards unproductive assets like gold.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. Inflation erodes the real value of money. Therefore, lenders (creditors) who are repaid later receive money with less purchasing power, causing them a real-term loss. It is the borrowers (debtors) who benefit. Statement 2 is incorrect. The conventional short-run economic relationship shows an inverse trade-off between inflation and unemployment. Higher inflation is often associated with lower unemployment, not a rise, as increased aggregate demand can boost both prices and employment temporarily. Statement 3 is correct. High inflation reduces the future purchasing power of money, which can discourage saving out of current income, thereby lowering the Marginal Propensity to Save (MPS). It also incentivizes savers to shift from financial assets to physical assets like gold to protect their wealth, which are considered unproductive from a capital formation perspective. Since only the third statement is correct, the correct option is 'a'.

Question 10

Consider the following two statements:

Statement-I: In the short run, policymakers might face a situation where attempts to achieve price stability could lead to an increase in unemployment.

Statement-II: The Phillips Curve, as described by A.W. Phillips, illustrates a direct and positive relationship between the rate of inflation and the rate of unemployment in an economy.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Statement-I is correct but Statement-II is incorrect. Statement-I is correct. It accurately reflects the trade-off between price stability and unemployment mentioned in the context of the Phillips Curve. To achieve price stability (lower inflation), policymakers might have to accept higher unemployment. Statement-II is incorrect. The Phillips Curve describes an INVERSE relationship between the rate of inflation and the rate of unemployment, not a direct one. This means that as one decreases, the other tends to increase, and vice versa.

Question 11

Consider the following statements regarding measures to control inflation:

1. Reducing private spending by enhancing taxes on private businesses is a monetary measure undertaken by the RBI.
2. The sale of Government securities through Open Market Operations is a fiscal measure to reduce liquidity in the market.
3. Banning the export of constrained materials and preventing hoarding are classified as administrative measures.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. Measures related to government revenue, such as enhancing taxes to reduce private spending, are fiscal measures undertaken by the Government, not monetary measures by the RBI. Statement 2 is incorrect. The sale of Government securities via Open Market Operations (OMO) is a quantitative monetary measure used by the RBI to control the money supply, not a fiscal measure. Statement 3 is correct. Administrative measures to control inflation include actions like preventing hoarding and black marketing, and banning the export of materials that are in short supply.

Question 12

Consider the following statements regarding India's inflation targeting framework:

1. The Urjit Patel Committee recommended adopting WPI (minus food & fuel) as the nominal anchor for monetary policy.
2. Under the Flexible Inflation Targeting framework, the inflation target is set exclusively by the RBI once every 5 years.
3. The numerical inflation target recommended by the Urjit Patel Committee was 4 per cent with a tolerance band of ± 2 per cent.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. The Urjit Patel Committee recommended adopting CPI (Combined) as the nominal anchor for monetary policy, citing that WPI ignores the significant contribution of the service sector to the GDP. Statement 2 is incorrect. The inflation target under the Flexible Inflation Targeting (FIT) framework is set by the Government of India (GoI) once every five years, in consultation with the RBI; it is not an exclusive mandate of the RBI. Statement 3 is correct. The committee recommended a numerical inflation target of 4 per cent with a tolerance band of ± 2 per cent, which was subsequently adopted.

Question 13

Consider the following statements:

Statement-I: The Urjit Patel Committee recommended adopting the Consumer Price Index (Combined) as the nominal anchor for inflation targeting over the Wholesale Price Index.

Statement-II: The Wholesale Price Index adequately captures the price changes in the service sector, which constitutes a majority of India's GDP.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Statement-I is correct but Statement-II is incorrect.. Statement-I is correct. The Urjit Patel Committee did recommend adopting CPI (Combined) instead of WPI as the anchor for monetary policy. Statement-II is incorrect. A primary reason for the committee's recommendation was that the WPI *ignores* the effect of the service sector, which contributes almost 60 per cent to the overall GDP. Since CPI is based on retail prices, it provides a broader picture of inflation's effect. Therefore, Statement-II is factually incorrect and cannot be the explanation for Statement-I.

Question 14

Consider the following statements regarding macroeconomic concepts:

1. Stagflation is characterized by high unemployment and a general fall in the prices of goods.
2. Disinflation occurs when the rate of inflation declines and becomes negative for a period.
3. Deflation is typically associated with a significant level of unemployment in an economy.

How many of the above statements are correct?

Accepted Answer

Only one. Stagflation is a period of stagnant economic growth, high unemployment, and a rise in the general price level (inflation), not a fall. Disinflation is a decline in the rate of inflation, but the rate remains positive; a negative inflation rate is termed deflation. Deflation, a decrease in general price levels, is usually associated with significant unemployment as economic activity slows down. Therefore, only the third statement is correct.

Question 15

Consider the following statements:

Statement-I: Stagflation is a macroeconomic condition characterized by the simultaneous occurrence of economic stagnation and high inflation.

Statement-II: An extraordinary rise in global oil prices can lead to stagflation by increasing production costs across the economy, thereby raising prices while simultaneously depressing economic growth.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I. Statement-I correctly defines stagflation as a period combining stagnation (zero or negative growth, high unemployment) and inflation (rising prices). Statement-II provides a valid causal mechanism for stagflation. A major supply-side shock, such as a sharp increase in oil prices, raises costs for businesses, leading to higher prices (inflation). At the same time, these higher costs can cause businesses to reduce production and investment, leading to lower economic growth and higher unemployment (stagnation). Therefore, Statement-II correctly explains a potential cause for the phenomenon described in Statement-I.

Question 16

With reference to key inflationary concepts, consider the following statements:

1. Skewflation is a phenomenon where there is inflation in some commodities and deflation in others, and it is considered the opposite of stagflation.
2. Deflation leads to a decrease in the real value of money held by individuals.
3. To combat deflation, appropriate fiscal policy measures include increasing taxes and reducing government spending.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is correct. Skewflation is defined as a situation with price rises in some commodities (inflation) and price falls in others (deflation), and it is noted to be the opposite of stagflation. Statement 2 is incorrect. Deflation is a general decrease in price levels, which means that a unit of currency can purchase more goods and services. Therefore, deflation increases the real value of money, it does not decrease it. Statement 3 is incorrect. To combat deflation, the goal is to increase money supply and boost demand. The appropriate fiscal policy measures would be to decrease taxes (to increase disposable income and spending) and increase government spending, not the other way around.

Question 17

With reference to inflation monitoring and surveys in India, consider the following statements:

1. The Wholesale Price Index (WPI) data is compiled and released by the National Statistical Office (NSO).
2. The Inflation Expectations Survey of Households is conducted by the Ministry of Finance to gather inputs for fiscal policy decisions.
3. The Consumer Confidence Survey gathers sentiments of households on various economic aspects, including the employment scenario and household income.

How many of the above statements are correct?

Accepted Answer

Only one. Let's analyze each statement:

1. **Statement 1 is incorrect.** The Wholesale Price Index (WPI) is released by the Office of the Economic Adviser, Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry. The National Statistical Office (NSO) releases the Consumer Price Index (CPI).

2. **Statement 2 is incorrect.** The Inflation Expectations Survey of Households is conducted by the Reserve Bank of India (RBI), not the Ministry of Finance. It provides crucial inputs for the formulation of monetary policy, not fiscal policy.

3. **Statement 3 is correct.** The Consumer Confidence Survey, also conducted by the RBI, gathers qualitative responses from households regarding their sentiments on the general economic situation, employment scenario, price levels, and their own household income and spending.

Since only statement 3 is correct, the total number of correct statements is one. Therefore, option 'a' is the correct answer.

Question 18

Consider the following two statements:

Statement-I: The inflationary impact of recent global commodity price rises is expected to be less disruptive than the oil crises of the 1970s.

Statement-II: Compared to the 1970s, the energy intensity of GDP has fallen significantly, and central banks today operate within more robust institutional frameworks that prioritize price stability.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I.. Statement-I is a correct assertion based on the text, which concludes that 'we may expect recent commodity price rises to be less disruptive than those of the 1970s'. Statement-II provides two key reasons mentioned in the text that support this conclusion. The text states that 'The energy intensity of GDP... has fallen by around 40 per cent since the late 1970s' and that 'central banks today have much clearer and robust institutional frameworks that focus on price stability'. Therefore, both statements are correct, and Statement-II provides a valid explanation for Statement-I.

Question 19

Consider the following measures taken by the Government of India to control inflation:

1. Operation Green was launched to create buffer stocks for pulses and onions to be used during periods of price rise.
2. The government has imposed stock holding limits on tur and desi chana and has also allowed duty-free imports for certain pulses to augment domestic supply.
3. The introduction of the Goods and Services Tax (GST) is considered a measure that helped control inflation by reducing the cascading effect of taxes.

How many of the above statements are correct?

Accepted Answer

Only two. Statement 1 is incorrect. Operation Green was initially launched to address price volatility in Tomato, Onion, and Potato (TOP) crops by strengthening their value chains and improving logistics. It was not primarily for creating buffer stocks of pulses and onions. Buffer stocks for pulses are managed under a separate mechanism, the Price Stabilization Fund (PSF).

Statement 2 is correct. To control rising prices of pulses, the government frequently uses supply-side management tools. These include imposing stock holding limits on traders under the Essential Commodities Act to prevent hoarding and allowing duty-free imports of pulses like tur, urad, and masur to increase domestic availability.

Statement 3 is correct. The Goods and Services Tax (GST) regime replaced multiple indirect taxes, which often led to a 'tax on tax' or cascading effect. By creating a unified tax structure with input tax credits, GST eliminated this cascading effect, which helped in rationalizing the final prices of many goods and services, thus acting as a structural measure to moderate inflation.

Since statements 2 and 3 are correct, the correct option is (b).

Question 20

With reference to the measurement and management of inflation in India, consider the following statements:
1. Volatility in vegetable prices is a major contributor to headline inflation.
2. Core inflation, which excludes volatile food prices, also includes 'fuel and light'.
3. The Monetary Policy Committee (MPC) statutorily targets headline CPI inflation for its policy decisions.
How many of the above statements are correct?

Accepted Answer

Only two. Statement 1 is correct. Food and beverages have a significant weight in the CPI basket, and prices of perishables like vegetables are highly volatile, making them a major driver of short-term changes in headline inflation. Statement 2 is incorrect. Core CPI inflation is calculated by excluding 'Food and Beverages' and 'Fuel and Light' from the headline CPI basket to measure underlying, less volatile inflation trends. Statement 3 is correct. The Monetary Policy Committee operates under a statutory mandate to target the headline Consumer Price Index (CPI) inflation for its policy decisions.

Question 21

Consider the following statements regarding monetary policy and inflation management:
Statement-I: A central bank often maintains a high policy repo rate as a measure to manage persistent inflationary pressures.
Statement-II: An increase in the repo rate makes borrowing from the central bank cheaper for commercial banks, thus increasing liquidity in the economy.
Which one of the following is correct in respect of the above statements?

Accepted Answer

Statement-I is correct, but Statement-II is incorrect.. Statement-I is correct. A high repo rate is a key tool of contractionary monetary policy, intended to reduce money supply and curb inflation by making credit more expensive. Statement-II is incorrect as it presents a directional inversion. An increase in the repo rate makes borrowing from the central bank more expensive for commercial banks, which in turn reduces liquidity and helps control inflation.

Question 22

Consider the following statements regarding the measurement of inflation in India:
1. The Consumer Price Index (CPI) assigns a significantly higher weightage to food items compared to the Wholesale Price Index (WPI).
2. The base year for the calculation of both the Consumer Price Index (CPI) and the Wholesale Price Index (WPI) is the same.
3. The National Statistical Office (NSO) is the authority responsible for compiling and releasing the Wholesale Price Index (WPI).

Accepted Answer

1 only. Statement 1 is correct. In the CPI (Combined) basket, 'Food and Beverages' have a weightage of 45.86%. In contrast, the combined weightage of 'Food Articles' and 'Food Products' in the WPI basket is approximately 24.4%. This makes the CPI more sensitive to changes in food prices.

Statement 2 is incorrect. The base years for the two indices are different. The current base year for the Consumer Price Index (CPI) is 2012, whereas the base year for the Wholesale Price Index (WPI) is 2011-12.

Statement 3 is incorrect. The Wholesale Price Index (WPI) is compiled and released by the Office of the Economic Adviser, Department for Promotion of Industry and Internal Trade (DPIIT), under the Ministry of Commerce and Industry. The National Statistical Office (NSO), under the Ministry of Statistics and Programme Implementation (MoSPI), is responsible for releasing the Consumer Price Index (CPI).

Question 23

Consider the following statements regarding inflation metrics in India:

Statement-I: Recent trends can show a persistent and widening divergence between headline CPI and core inflation.
Statement-II: This divergence is primarily driven by the increasing stickiness and upward trend in services inflation.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Statement-I is correct but Statement-II is incorrect.. Statement-I is correct. High volatility in food and fuel prices, which are part of headline CPI but not core CPI, can widen the gap between the two metrics. Statement-II is incorrect because this divergence is driven by volatile components (food/fuel), not core components. Services inflation is part of core inflation itself; thus, it explains the behavior of core inflation, not its divergence from headline inflation. The trap is in misattributing the cause of divergence.

Question 24

With reference to the ongoing process of revising India's Consumer Price Index (CPI), consider the following statements:

1. The revision is expected to decrease the weightage of the 'Food and Beverages' group in the CPI basket.
2. The National Statistical Office (NSO) is exploring the use of Big Data and scanner data to supplement the traditional price collection mechanism.
3. The base year for the CPI (Combined) is being updated from the current 2012 to a more recent year to reflect structural shifts in consumption patterns.

How many of the above statements are correct?

Accepted Answer

All three. Statement 1 is correct. According to Engel's Law, as per capita income rises, the proportion of income spent on food tends to decline relative to other goods and services. The results of the latest Household Consumption Expenditure Survey (HCES) for 2022-23 indicate a fall in the share of expenditure on food. Therefore, a revised CPI basket based on this survey would logically feature a lower weight for the 'Food and Beverages' group compared to the current series, which is based on the 2011-12 survey.

Statement 2 is correct. The NSO, in line with global best practices, is actively working on incorporating new data sources. This includes using scanner data from retail chains and price data scraped from e-commerce websites. The objective is to improve the quality, frequency, and geographical coverage of price data. This approach is intended to supplement, not immediately replace, the extensive field surveys, which remain crucial for capturing price data from unorganized retail and rural markets.

Statement 3 is correct. Base year revisions are essential to ensure that the CPI remains representative of the current economic reality. The current base year for CPI (Combined), which is the headline inflation measure, is 2012. Given the significant economic and structural changes over the past decade, including shifts in consumption patterns revealed by the HCES 2022-23, updating the base year to a more recent period is a primary and logical goal of the revision exercise.

Question 25

Consider the following statements regarding the institutional framework for inflation in India:

1. The National Statistical Office (NSO) is responsible for the compilation of the Consumer Price Index (CPI).
2. The Monetary Policy Committee (MPC) is mandated to target core inflation, excluding volatile items.
3. The final authority to notify a new base year for CPI rests with the Ministry of Finance.

Which of the statements given above is/are correct?

Accepted Answer

1 only. Statement 1 is correct; the NSO, under the Ministry of Statistics and Programme Implementation (MoSPI), compiles and releases CPI data. Statement 2 is incorrect; the MPC is mandated by law to target headline CPI inflation, not core inflation. This is a common point of confusion. Statement 3 is incorrect; the authority to notify the base year revision lies with MoSPI, the parent ministry of the NSO, not the Ministry of Finance. This is an 'Authority Swap' trap.

Question 26

With reference to the Flexible Inflation Targeting (FIT) Framework in India, consider the following statements:
1. The inflation target is determined solely by the Monetary Policy Committee.
2. The primary objective is achieving the inflation target, while keeping in mind the objective of growth.
3. The Governor of the RBI has a casting vote in the MPC in case of a tie.
How many of the above statements are correct?

Accepted Answer

Only two. Statement 1 is incorrect. The inflation target is set by the Government of India in consultation with the RBI, not by the MPC. The MPC's role is to use monetary policy instruments to achieve the set target. Statement 2 is correct; this reflects the 'flexible' nature of the framework, where price stability is the primary objective but growth considerations are also important. Statement 3 is correct; the RBI Governor, as the MPC's ex-officio Chairperson, holds a casting vote in the event of a tie among the members.

Question 27

Consider the following statements regarding the Flexible Inflation Targeting Framework (FITF):
1. To contain inflation when it is above the target, the Monetary Policy Committee (MPC) primarily acts by lowering the policy repo rate.
2. The effectiveness of the framework relies on the successful transmission of policy rate changes to market interest rates.
3. The Reserve Bank of India Act, 1934 was amended to provide a statutory basis for the FITF.
Which of the statements given above is/are correct?

Accepted Answer

2 and 3 only. Statement 1 is incorrect. To contain or curb inflation, the MPC raises the policy repo rate. This makes borrowing more expensive, which reduces liquidity and demand in the economy, thereby helping to control price rises. Lowering the repo rate is an expansionary measure used to boost growth. Statement 2 is correct; the entire mechanism of monetary policy hinges on the effective transmission of changes in the policy rate to the lending and deposit rates in the broader economy. This is known as monetary policy transmission. Statement 3 is correct; the RBI Act, 1934 was amended in 2016 to provide a statutory and institutionalized backing for the Flexible Inflation Targeting framework.

Question 28

Consider the following statements regarding India's Flexible Inflation Targeting Framework (FITF):
Statement-I: The Consumer Price Index-Combined (CPI-C) is the nominal anchor for monetary policy under the FITF.
Statement-II: CPI-C is used as the anchor because it measures core inflation by excluding volatile food and fuel prices.

Accepted Answer

Statement-I is correct, but Statement-II is incorrect.. Statement-I is correct; the RBI is mandated to target inflation as measured by the CPI-Combined. Statement-II is incorrect; CPI-Combined measures headline inflation, which includes volatile food and fuel prices. Core inflation is what excludes these components, so the statement misclassifies CPI-Combined.

Question 29

Consider the following statements regarding agricultural support policies:
1. Globally, government support to agricultural producers as a percentage of farm receipts has shown a consistent and uninterrupted declining trend over the past two decades.
2. Under international agricultural trade principles, direct income support to farmers, decoupled from production levels, is generally considered less market-distorting than administered price support mechanisms.
3. In the context of India's agricultural support, expenditure on general services like research and development (R&D) and infrastructure is significantly larger than the support provided through input subsidies.
How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. While there might have been periods of decline, agricultural support globally is highly responsive to crises. Recent events like the COVID-19 pandemic and geopolitical conflicts have led to significant increases in government support to ensure food security and stabilize farm incomes, interrupting any long-term declining trend. Statement 2 is correct. This is a core principle of the WTO's Agreement on Agriculture. Direct income support that is 'decoupled' from the volume of production (like PM-KISAN) is classified as 'Green Box' support, which is considered minimally or non-market-distorting. In contrast, price support mechanisms (like MSP) directly influence production decisions and market prices, and are thus considered 'Amber Box' or trade-distorting. Statement 3 is incorrect. In India, the bulk of agricultural support is in the form of input subsidies (e.g., for fertilizers, power, and irrigation), which far exceeds the expenditure on General Services Support Estimate (GSSE), which includes R&D, infrastructure, and inspection services.

Question 30

Consider the following statements regarding agricultural support policies:
Statement-I: There is an observable trend in many developed economies to shift agricultural subsidies from production-linked support towards payments for non-commodity outputs like environmental services.
Statement-II: Payments for environmental services are classified under the most trade-distorting categories of domestic support, such as the WTO's 'Amber Box', as they directly influence production levels.

Accepted Answer

Statement-I is correct but Statement-II is incorrect.. Statement-I is correct. Many advanced economies are reforming their agricultural policies to focus on 'green payments' or payments for ecosystem services. This moves support away from measures that encourage overproduction and towards rewarding farmers for providing public goods. Statement-II is incorrect. This is a classification swap. Payments for environmental services that are not linked to the type or volume of production are considered minimally or non-trade-distorting. In WTO terminology, they typically qualify for the 'Green Box', which includes subsidies that are permitted without limits as they do not distort trade. The 'Amber Box' is reserved for the most trade-distorting subsidies, such as market price support and input subsidies, which are subject to reduction commitments.

Question 31

With reference to the 'Agricultural Policy Monitoring and Evaluation 2024' report's assessment of India, consider the following statements:
1. The report's calculation of Total Support Estimate (TSE) for India comprehensively includes all central and state government agricultural schemes.
2. It identifies that market price support for producers often results in a negative Consumer Support Estimate (CSE).
3. The report mandates the replacement of all input subsidies with a single, universal direct income transfer scheme.
Which of the statements given above is/are correct?

Accepted Answer

2 only. Statement 1 is incorrect. This is an 'Exclusion' trap. Such international reports often explicitly state methodological limitations, such as the exclusion of certain state-level schemes due to data inconsistency or unavailability. The word 'comprehensively' makes it incorrect. Statement 2 is correct. Market Price Support (MPS) keeps domestic prices above international levels for producers. This cost is borne by consumers, who pay higher prices, resulting in an implicit tax on them, which is measured as a negative Consumer Support Estimate (CSE). Statement 3 is incorrect. Reports provide recommendations, not 'mandates'. Furthermore, they rarely suggest absolute measures like 'replacement of all' subsidies, usually proposing a phased and nuanced transition.

Inflation and Business Cycle

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