Question Answer

● Inflation is a quantitative measure of the rate at which

the average price level of a basket of selected goods
and services in an economy increases over some period
of time.
● It is the rise in the general level of prices where a
unit of currency effectively buys less than it did in
prior periods. Often expressed as a percentage,
inflation thus indicates a decrease in the purchasing
1. What do you mean by inflation? power of a nation’s currency.
● Inflation can be contrasted with deflation, which occurs
when prices instead decline.
● The most commonly used inflation indexes are the
Consumer Price Index (CPI) and the Wholesale Price
Index (WPI).
● Inflation can be viewed positively or negatively
depending on the individual viewpoint and rate of
change.

Demand-Pull Inflation: This type of inflation is caused

due to an increase in aggregate demand in the
economy.
Major reasons to support the statement are stated below:
● A growing economy or increase in the supply of money
– When consumers feel confident, they spend more and
take on more debt. This leads to a steady increase in
demand, which means higher prices.
● Asset inflation or Increase in Forex reserves- A sudden
rise in exports forces a depreciation of the currencies
involved.
● Government spending or Deficit financing by the
2. What are the causes of inflation? government – When the government spends more
freely, prices go up.
● Due to fiscal stimulus
● Increased borrowing
● Depreciation of the rupee

Cost-Push Inflation: This type of inflation is caused due

to various reasons such as:
● Increase in price of inputs
● Hoarding and Speculation of commodities
● Defective Supply chain
● Increase in indirect taxes
● Depreciation of Currency
 ● Crude oil price fluctuation
● Defective food supply chain
● Low growth of Agricultural sector
● Food Inflation (growth in the agriculture sector has
been averaging at 3.5%)
● Interest rates were increased by RBI.
● Cost-pull inflation is considered bad among the two
types of inflation. Because the National Income is
reduced along with the reduction in supply in the
Cost-push type of inflation.

Built-in Inflation
● This type of inflation involves a high demand for wages
by the workers which the firms address by increasing
the cost of goods and services for the customers.

● A cartel is a grouping of producers that work

together to protect their interests. Cartels are
created when a few large producers decide to cooperate
with respect to aspects of their market. Once formed,
cartels can fix prices for members, so that competition
on price is avoided.
● Cartelization happens, when enterprises collude to fix
3. What do you mean by cartelization? prices, indulge in bid-rigging, share customers, etc. But
when prices are controlled by the government under a
law that is not cartelization.
● The Competition Commission Act contains strong
provisions against cartels. It also has the leniency
provision to incentivize a party to a cartel to break away
and report to the Commission, and thereby expect total
or partial leniency.

Based on the severity of inflation or, the rate of

acceleration in prices we can divide inflation into three
different types, namely, moderate, galloping, and
hyperinflation. These are explained below:
● Moderate inflation: When the general price level
increases slowly but steadily, it is known as moderate
inflation. Moderate inflation remains within a single-digit
4. Explain different types of inflation? level of less than 9 percent. You can say that the
increase in the price level stays within ‘limits’. There are
no major uncertainties regarding the price level in the
future.
● Galloping inflation: Steady and fairly high rate of
increases in the general price level is known as
galloping inflation. The rate of inflation runs into two
digits (20 percent, 40 percent, etc.) and sometimes
 even as high as three digits (i.e., 200 percent). Some
Latin American countries like Brazil and Argentina had
experienced inflation rates of over 100 percent in the
1970s.
● Hyperinflation: Hyperinflation is characterized by
astronomical increases in the annual rate of inflation.
There have been cases in history when the price index
rose from 100 to 10,000,000,000 within a year and a
half. In such situations, money ceases to be a store of
value as well as a medium of exchange. An example of
hyperinflation is perhaps the case of Brazil in the latter
half of the 1980s.

Based on Aggregate Supply and Aggregate Demand,

inflation is divided into two types:
● Cost-push inflation: Cost-push inflation is inflation
caused by an increase in prices of inputs like labor, raw
material, etc. The increased price of the factors of
production leads to a decreased supply of these goods.
While the demand remains constant, the prices of
commodities increase causing a rise in the overall price
level. This is in essence cost-push inflation.
● Apart from the rise in prices of inputs, there could be
other factors leading to supply-side inflation such as
natural disasters or depletion of natural resources,
monopoly, government regulation or higher taxation,
change in exchange rates, etc. Generally, cost-push
inflation may occur in the case of an inelastic demand
curve where the demand cannot be easily adjusted
according to rising prices.
○ Wage-push inflation: The workers, faced with
higher prices, demand still higher wage rates, to
which the producers respond by increasing the
price of their commodities. A series of increases
in wage rates leads to a series of price increases.
This kind of inflation is known as wage-push
inflation.
○ Profit-push inflation: When the firms increase
the price of their products to increase their
profits, there is a demand for a higher wage rate
by the workers. The higher cost of production due
to increases in the wage rate and prices of inputs
makes the producers raise their prices further.
Again a series of increases in the wage rate leads
to a series of increases in the prices. This kind of
inflation is known as profit-push inflation.
 ● Demand-Pull Inflation: Factors that increase
aggregate demand, while there is no increase in
aggregate supply, can cause demand-side or
demand-pull inflation. According to the Keynesian view,
demand-pull inflation occurs when aggregate demand
exceeds aggregate supply at full employment level of
output thereby attributing inflation to the relationship
between aggregate demand (C+I+G) and full
employment level of output. An increase in aggregate
demand will take place if there is an increase in:
○ Consumption (could be due to increases in
income, reduction in saving, or reduction in tax
rate),
○ Investment (due to a reduction in the rate of
interest, or optimism in business sentiments),
and
○ An increase in government expenditure.

● Hoarding is the purchase of large quantities of a

commodity by a speculator with the intent of benefiting
from future price increases.
● It is possible for hoarding to create a cycle of
5. What do you mean by hoarding? speculation, self-fulfilling prophecies, and inflation.
● Laws are often passed against certain types of hoarding
to prevent tragedies and reduce economic instability.
● In the long run, investing in stocks has outperformed
hoarding commodities.

Wholesale Price Index, measures the changes in the prices

of goods sold and traded in bulk by wholesale businesses to
other businesses.
Major components of WPI
● Primary articles are a major component of WPI, further
subdivided into Food Articles and Non-Food Articles.
● Food Articles include items such as Cereals, Paddy,
Wheat, Pulses, Vegetables, Fruits, Milk, Eggs, Meat &
6. Discuss WPI and CPI. Fish, etc.
● Non-Food Articles include Oil Seeds, Minerals, and
Crude Petroleum.
● The next major basket in WPI is Fuel & Power, which
tracks price movements in Petrol, Diesel, and LPG.
● The biggest basket is Manufactured Goods. It spans a
variety of manufactured products such as Textiles,
apparel, Paper, Chemicals, Plastic, Cement, Metals, and
more.
 ● The Manufactured Goods basket also includes
manufactured food products such as Sugar, Tobacco
Products, Vegetable and Animal Oils, and Fats.

New Series of WPI

With an aim to align the index with the base year of other
important economic indicators such as GDP and IIP, the base
year was updated to 2011-12 from 2004-05 for the new series
of Wholesale Price Index (WPI), effective from April 2017.
The consumer price index (CPI) is a comprehensive
measure used for the estimation of price changes in a basket
of goods and services representative of consumption
expenditure.
● The calculation for the estimation of CPI involves
various categories and subcategories that have been
made for classifying consumption items and on the
basis of consumer categories like urban or rural.
● Based on these indices and sub-indices obtained, the
final overall index of the price is calculated mostly by
national statistical agencies. It gives an idea of the
cost of living.
● Inflation is measured using CPI. The percentage change
in this index over a period of time gives the amount of
inflation over that specific period, i.e. the increase in
prices of a representative basket of goods consumed.
● The CPI is calculated with reference to a base year,
which is used as a benchmark. The price change
pertains to that year. When the CPI is calculated,
the price of the basket in 1 year has to be first
divided by the price of the market basket of the
base year. Then, it is multiplied by 100.
Old Consumer Price Index:
(a) Consumer Price Index for Industrial Workers (CPI-IW).
(b) Consumer Price Index for Urban Non-Manual Employees
(CPI-UNME). It has been discontinued.
(c) Consumer Price Index for Agricultural Labourers
(CPI-AL).
(d) Consumer Price Index for Rural Labourers (CPI-RL).

New Consumer Price Index:

(a) CPI-Rural
(b) CPI-Urban
(c) CPI-Combined.

● Supply-side economics holds that increasing the

7. What do you mean by supply-side
supply of goods translates to economic growth for a
theory?
country.
 ● In supply-side fiscal policy, practitioners often focus on
cutting taxes, lowering borrowing rates, and
deregulating industries to foster increased production.

● A supply shock is an unexpected event that

suddenly changes the supply of a product or
commodity, resulting in an unforeseen change in price.
The supply shocks can be negative, resulting in a
decreased supply, or positive, yielding an increased
supply.
● Assuming aggregate demand is unchanged, a negative
supply shock causes a product's price to spike
8. What do you mean by supply
upward, while a positive supply shock decreases the
shock?
price.
● A positive supply shock increases output causing
prices to decrease due to a shift in the supply curve to
the right, while a negative supply shock decreases
production causing prices to rise.
● Supply shocks can be created by any unexpected event
that constrains output or disrupts the supply chain, such
as natural disasters or geopolitical events.

Inflation targeting
● It is a central banking policy that revolves around
adjusting monetary policy to achieve a specified annual
rate of inflation. The principle of inflation targeting is
based on the belief that long-term economic growth is
best achieved by maintaining price stability, and price
stability is achieved by controlling inflation.

Inflation targeting in India

● The new monetary framework was an outcome of the
agreement between the Reserve Bank of India (RBI)
9. What do you mean by inflation and the central government signed in February 2015.
targeting? This agreement explicitly made inflation targeting the
objective of the Monetary Policy Committee (MPC) while
using the repo rate as the instrument for it.
● The Reserve Bank’s MPC has the target of keeping
inflation at 4% with a tolerance limit of 2%. This meant
that inflation should be between 2% and 6%. The target
was in contrast with the multiple indicator approach
that predated this framework where the central bank
focused on both growth and price stability.
● Every two months, the Reserve Bank’s MPC has a
review meeting where they discuss the likely inflation
and growth estimates over the coming months.
 ● Based on this review, the MPC targets inflation using
the policy rate, or the repo rate. When inflation is
higher than the inflation target set by the central bank,
then the MPC must increase the repo rate. On the other
hand, when the actual inflation is lower than the target,
the MPC could decrease the repo rate. The MPC looks at
consumer price inflation (CPI) as the inflation target
that it must keep between 2% and 6%.

● The inverse relationship between the unemployment

rate and inflation when graphically charted is called the
Phillips curve.
● William Phillips pioneered the concept first in his paper
"The Relation between Unemployment and the Rate of
Change of Money Wage Rates in the United Kingdom,
1861-1957,' in 1958. This theory is now proven for all
major economies of the world.
● The Phillips curve states that inflation and
unemployment have an inverse relationship.
10.
Higher inflation is associated with lower
Discuss the Phillips curve.
unemployment and vice versa.
● Thus, high levels of employment can be achieved
only at high levels of inflation. The policies to induce
growth in an economy, increase employment, and
sustain development are heavily dependent on the
findings of the Phillips curve.
● However, the implications of the Phillips curve are true
only in the short term. The Phillips curve fails to justify
the situation of stagflation when both inflation and
unemployment are alarmingly high.

● Nominal GDP differs from real GDP as Nominal GDP

doesn’t include inflation, while Real GDP includes
inflation. As a result, nominal GDP will most often be
higher than real GDP in an expanding economy.
● Nominal Gross Domestic Product is evaluated at present
market prices. GDP is the financial equivalent of all the
complete products and services generated within a
11. Differentiate between real and nation in a definite time. Nominal data varies from real
nominal GDP. GDP, and it incorporates changes in cost prices due to
an increase in the complete cost price. Generally,
economists utilize a gross domestic factor to change
nominal GDP to real GDP also known as current dollar
GDP or chained dollar GDP.
● Real GDP is an inflation-adjusted calculation that
analyzes the rate of all commodities and services
manufactured in a country for a fixed year. It is
 expressed in foundation year prices and is referred to as
a fixed cost price. Inflation rectified GDP or fixed dollar
GDP. Real GDP is regarded as a reliable indicator of a
nation’s economic growth as it solely considers
production and is free from currency fluctuations.

Introduction
● There are many commodities essential to our
day-to-day life for the purpose of meeting the basic
needs related to food, clothing, housing, health,
education, transportation, etc.
● Due to the greedy tendency of some traders to make
more profit, the scope and possibility of hoarding, black
marketing, and other unfair trade practices had gone up
with these essential commodities.
● To make these commodities easily available with a fair
price and quality to the common man, The Government
of India enacted an Act in 1955 called ‘Essential
Commodities Act, 1955’ in the interest of the general
public for control of production, supply, distribution,
trade, and commerce of certain commodities.
● The Act came into force on 1st April 1955. It is
socio-economic legislation, which safeguards the
12. What is ECA, 1955? interest of the common man.

Aims of the Act

The aim of this Act is to:
● To check black marketing
● To prevent and punish the offenders of the law
● To check the inflationary trends in prices and
commodities and
● To ensure equitable distribution of essential
commodities.

Objectives of the Act

● The objectives of the Act are to provide for the control
of:
● Production,
● Supply, and
● Distribution of trade commerce in certain commodities,
in the interest of the general public.

1. Core inflation- When volatile items like food &

energy-related items are excluded from the basket for
13. What do you mean by Core
which inflation is being calculated, it is known as Core
inflation and Headline inflation?
inflation. Core inflation is important because it's used to
determine the impact of rising prices on consumer
 income.
2. Headline inflation- When all items in the basket are
included to calculate the price change, the inflation
measured is known as Headline inflation. It is measured
through CPI and is published by NSO.

● MPFA stands for Monetary Policy Framework

Agreement. The Government of India and the Reserve
Bank of India signed a Monetary Policy Framework
14. Discuss MPFA. Agreement on February 20, 2015.
● The objective of the monetary policy framework is to
primarily maintain price stability while keeping in mind
the objective of growth.

● Foreign exchange reserves are assets denominated

in a foreign currency that is held by a central bank.
15. What do you mean by forex
● These may include foreign currencies, bonds, treasury
reserves?
bills, and other government securities.
● Most foreign exchange reserves are held in U.S. dollars

Inflation is generally controlled by the Central Bank and/or the

government. The main policy used is the monetary policy
(changing interest rates). However, in theory, there are a
variety of tools to control inflation including:
● Monetary policy – Higher interest rates reduce
demand in the economy, leading to lower economic
growth and lower inflation.
● Control of money supply – Monetarists argue there is
16. What are the measures to a close link between the money supply and inflation,
control inflation? therefore controlling money supply can control inflation.
● Supply-side policies – policies to increase the
competitiveness and efficiency of the economy, putting
downward pressure on long-term costs.
● Fiscal policy – a higher rate of income tax could
reduce spending, demand, and inflationary pressures.
● Wage controls – trying to control wages could, in
theory, help to reduce inflationary pressures. However,
apart from the 1970s, it has been rarely used.

● In 2015, RBI and the central government agreed on a

policy framework. The Reserve Bank of India Act, 1934
was amended to provide a statutory basis for this
framework. The Flexible Inflation Targeting (FIT)
17. What do you mean by Flexible Inflation
framework was adopted in 2016.
Targeting (FIT).
● RBI shall set out a report to the Central Government
stating the
○ reasons for such a failure
○ remedial actions proposed to be taken by RBI
 ○ an estimate of the time period within which the
inflation target shall be achieved

● GDP deflator, also known as the implicit price deflator,

is used to measure inflation. It is used to determine the
levels of prices of the new domestically produced final
goods and services in a country in a year.
18.
● GDP deflector shows the changes in the average price
Describe GDP Deflator.
levels in an economy, and therefore, it is used in
conjunction with the Consumer Price Index (CPI) for
measuring inflation.
● GDP deflator consists of two important components,
which are the nominal GDP and real GDP.
● It is calculated by dividing the nominal GDP by the real
GDP and multiplying it by 100.