MCQ
Inflation and Growth MCQ - Practice Questions with Answers
Solve 89 Inflation and Growth questions for RAS/RPSC preparation.
Practice questions
Q1Consider the following statements regarding India's flexible inflation targeting framework: 1. The inflation target is defined in terms of the all India Consumer Price Index. 2. The inflation target is defined in terms of the Wholesale Price Index because WPI is primarily used as a GDP deflator. 3. The notified inflation target was 4 per cent CPI inflation with an upper tolerance limit of 6 per cent and a lower tolerance limit of 2 per cent. 4. The inflation target is set by the RBI alone every year without consultation with the Government of India. Which of the statements given above are correct?
Statements 1 and 3 are correct: India's statutory target is CPI-based and the notified point target is 4 per cent with a 2-6 per cent tolerance band. Statement 2 confuses the target indicator with WPI's use as a deflator. Statement 4 is wrong because the target is set by the Government of India in consultation with the RBI, once in five years.
Q2Consider the following statements about monetary policy and inflation in India: 1. The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. 2. India's flexible inflation targeting framework uses Consumer Price Index inflation as the inflation target. 3. Under this framework, monetary policy ignores price stability and focuses only on maximizing real GDP growth. Which of the statements given above are correct?
Statement 1 is correct: RBI describes price stability, with growth kept in mind, as the primary objective. Statement 2 is correct because the target is framed in terms of CPI inflation. Statement 3 is incorrect because growth is considered along with, not in place of, price stability.
Q3Consider the following statements about inflation, demand and productive capacity: 1. Demand-pull inflation reflects pressure when demand exceeds the economy's production capacity. 2. Expansionary policies can temporarily boost overall demand and economic growth. 3. Policymakers never face a balance between supporting demand and avoiding overstimulation. 4. When aggregate demand is below potential output, firms generally put upward pressure on prices. Which of the statements given above are correct?
Statements 1 and 2 are true: demand-pull inflation arises when demand runs beyond capacity, and expansionary policy can raise demand and growth temporarily. Statement 3 is false because policymakers must balance support to demand with the risk of overstimulating the economy. Statement 4 is false because when demand is below potential output, firms are more likely to put downward pressure on prices.
Q4Consider the following statements regarding India in the IMF April 2026 World Economic Outlook: 1. India is expected to maintain 6.5% GDP growth in FY28 alongside FY27 and remain the fastest-growing major economy. 2. India's headline inflation is projected to rise to 4.7% in FY27 from 2.1% in FY26, broadly within the Reserve Bank of India's tolerance band. Which of the statements given above is/are correct?
Both statements are correct. The IMF projects India to grow at 6.5% in both FY27 and FY28 and to remain the fastest-growing major economy. India's headline inflation is projected to rise from 2.1% in FY26 to 4.7% in FY27 before easing to about 4% in FY28, broadly within the Reserve Bank of India's 4% +/- 2% tolerance band.
Q5Consider the following statements regarding price indices used for inflation analysis in India: 1. CPI measures changes over time in the general level of prices of goods and services that households acquire for consumption. 2. CPI is used only for wage indexation and not as a macroeconomic indicator of inflation. 3. WPI is used as an important measure of inflation in India. 4. WPI price collection is done on the OEA portal of WPI. Which of the statements given above are correct?
Statements 1, 3 and 4 are correct. CPI measures changes in the prices of goods and services that households acquire for consumption. WPI is an important measure of inflation in India, and its price collection and transmission take place through the OEA portal. Statement 2 is incorrect because CPI is also widely used as a macroeconomic indicator of inflation.
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6Consider the following statements about demand-pull inflation: 1. Demand-pull inflation can occur when increased demand outpaces supply and leads producers to raise prices. 2. Rising incomes or lower borrowing costs can be sources of demand-pull inflation. 3. Demand-pull inflation is caused by a leftward shift of aggregate supply that lowers output. Which of the statements given above are correct?
7Consider the following statements about low, stable inflation and growth: 1. Low and stable inflation can improve allocative efficiency. 2. Low and stable inflation can reduce inflation uncertainty. 3. Low and stable inflation can support growth and economic welfare through improved monetary policy effectiveness. 4. A low positive inflation target necessarily increases the probability of hitting the zero lower bound more often. Which of the statements given above are correct?
8Consider the following statements about growth-inflation balance in India's monetary policy: 1. The Monetary Policy Committee is entrusted to decide the policy rate required to achieve the inflation target. 2. The MPC takes domestic growth-inflation dynamics into account while deciding the policy rate. 3. The tolerance band gives flexibility to focus on inflation or growth depending on the evolving situation. Which of the statements given above are correct?
9Consider the following statements about the WPI series with base 2011-12: 1. The new WPI series with base 2011-12 is effective from April 2017. 2. WPI captures the average movement of wholesale prices of goods and is primarily used as a GDP deflator. 3. WPI (2011-12) includes taxes, transport charges and trade discounts in its price concept. Which of the statements given above are correct?
10Consider the following statements about money supply and inflation: 1. If money supply grows too big relative to the size of an economy, the currency's purchasing power can fall and prices can rise. 2. The relationship between money supply and the size of the economy is called the quantity theory of money. 3. The quantity theory says that money supply is unrelated to prices in all periods. Which of the statements given above are correct?
11Consider the following statements about Wholesale Price Index in India: 1. WPI measures the average change in commodity prices for bulk sale at the early stage of transactions. 2. The WPI basket covers Primary Articles, Fuel and Power, and Manufactured Products. 3. Services are included in the WPI basket in India. Which of the statements given above are correct?
12Consider the following statements regarding demand-pull inflation and aggregate demand: 1. Demand-pull inflation is associated with demand being greater than available supply. 2. The demand-pull idea is captured by the phrase too much money chasing too few goods. 3. In the Keynesian account cited by Britannica, increasing aggregate demand and expenditure can boost economic growth. 4. Demand-pull inflation is caused only by falling wages amid unchanged demand. Which of the statements given above are correct?
13Consider the following statements about Wholesale Price Index in India: 1. The WPI base year mentioned by the Office of Economic Adviser is 2011-12=100. 2. WPI captures the average movement of wholesale prices of goods. 3. WPI includes taxes, rebate, trade discounts, transport and other charges in the 2011-12 series. Which of the statements given above are correct?
14Consider the following statements about inflation and purchasing power: 1. If nominal income does not rise as much as prices, purchasing power falls. 2. Real income means income before adjusting for inflation. 3. Inflation can reduce the purchasing power of consumers when prices rise unevenly. Which of the statements given above are correct?
15Consider the following statements about nominal GDP, real GDP and inflation: 1. Real GDP is a measure of economic output adjusted for price changes such as inflation or deflation. 2. Nominal GDP can increase because of inflation even when physical output is fixed. 3. Nominal GDP of a given year is computed using base-year prices. 4. GDP deflator is obtained by dividing nominal GDP by real GDP and multiplying by 100. Which of the statements given above are correct?