Theory of inflation part 2

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Theory of InflationPart -- 2
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Effects of inflation Lender          gtgt  Loose
r ? Borrower    gtgt Gainer Bond issuer gtgt
Gainer Bond holder gtgt Looser Fixed income
earner gtgt Looser         Variable income
earner gtgt May be Gainer Domestic  currency gtgt
Depreciates Export  gtgt Decreases
Import  gtgt Increases Savings  gtgt Decreases
Inequality  gtgt Increases Fiscal deficit  gtgt
Increases Investment  gtgt Decreases
Growth gtgt Decreases
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Corrective measures against inflationOrAnti
inflationary measures Inflation is to be
controlled by reducing money supply in the
economy or by reducing aggregate demand in the
economy.
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Goverment Measures / Fiscal measures The
fiscal  measures  undertaken by the government in
form of -- 1. Decreasing government expenditure
specially non -- development expenditures 2.
Increasing Direct taxes to reduce disposable
income3. Decrease indirect taxes on commodities
and services4. Not to follow deficit financing
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Monetary measures The monetary  measures
undertaken by the central bank. The
contractionary monetary policy followed during
inflationary period are 1. Increasing CRR2.
Increasing SLR3. Increasing bank rate4.
Increasing repo rate5. Increasing reverse repo
rate6. Increasing Marginal standing Facility
ratio7. Selling government securities under open
market operations8. Lowering credit rationing
limit9. Moral suasion.
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Direct measures 1. Imposing price ceiling by
the government under price control mechanism2.
Initiating rationing3. Encouraging production of
necessary commodities4. Utilisation of buffer
stock.5. Initiating Vigilance against hoarding
and preventing black marketing6. Ban on export
of essential items7. Suspending future trading
activities.
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MCQ on Inflation
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• Which among the following is exact opposite of
  inflation?
• A. StagflationB. DisinflationC.
  HyperinflationD. Deflation

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2. Which of the following is phenomenon that
leads to Demand-Pull Inflation? A. It is a
situation when aggregate demand in an economy
outpaces aggregate supplyB. It is a situation of
persistent rise in inflation along with  fall in
growth and increase in unemploymentC. It is a
situation caused by an increase in prices of
inputs like labour, raw material etcD. It is a
situation when a nation experiences very high and
accelerating inflation.
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3. Which out of the following is phenomenon that
leads to Cost-Push Inflation? A. It is a
situation when aggregate demand in an economy
outpaces aggregate supplyB. It is a situation of
persistent rise in inflation along with dip in
growth and increase in unemploymentC. It is a
situation caused by an increase in prices of
inputs like labour, raw material etcD. It is a
situation when a nation experiences very high and
accelerating inflation.
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4. Inflationary gap said to exist when
_________? A. Real GDP gt Potential GDPB. Real
GDP lt Potential GDPC. Real GDP Potential
GDPD. Unemployment rate gt natural rate of
unemployment
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5. Deflationary gap said to exist when
_________? A. Real GDP gt Potential GDPB. Real
GDP lt Potential GDPC. Real GDP Potential
GDPD. Unemployment rate gt natural rate of
unemployment
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6. Which out of the following is phenomenon that
leads to Stagflation? A. It is a situation when
aggregate demand in an economy outpaces aggregate
supplyB. It is a situation of persistent rise in
inflation along with fall in growth and increase
in unemploymentC. It is a situation caused by an
increase in prices of inputs like labour, raw
material etcD. It is a situation when a nation
experiences very high and accelerating inflation.
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7. Which one of the following is likely to be the
most inflationary in its effect? A. Repayment of
public debtB. Borrowing from the public to
finance a budget deficitC. Borrowings from banks
to finance a budget deficitD. Creating new money
to finance a budget deficit
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8. Which out of the following is phenomenon that
leads to Deflation? A. It is a decrease in the
rate of inflation a slowdown in the rate of
increase of the general price level of goods and
servicesB. It is a situation of persistent rise
in inflation along with dip in growth and
increase in unemploymentC. It is the situation
where prices fall continuously or have tendency
to fallD. It represents price rise in all goods
and services but does not include articles from
food and energy sector.
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9. Which out of the following is phenomenon that
leads to Disinflation? A. A slowdown in the rate
of increase of the general price level of goods
and servicesB. It is a situation of persistent
rise in inflation along with dip in growth and
increase in unemploymentC. It is the situation
where prices fall continuously or have tendency
to fallD. It represents price rise in all goods
and services but does not include articles from
food and energy sector.
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10. When too much money chases too few goods, the
resulting Inflation is called (a)   
Deflation(b)    Demand-pull Inflation(c)    Cost
push inflation(d)    Stagflation
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11. Cause of Inflation in India is / are (a)   
Deficit financing(b)    Erratic agriculture
growth(c)    Inadequate rise in industrial
production(d)    All of the above
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12. Stagflation means (a)    Inflation with
stagnation(b)    Recession with
stagnation(c)     Inflation galloping like
stage(d)    Inflation increasing output
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13. Which is the most effective quantitative
method to control inflation in the
economy? (a)    Bank rate policy(b)   
Selective credit control(c)    Cash reserve
ratio(d)    Both (a) and (b)
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14. Consider the following statements      1.
Inflation benefits the debtors     2. Inflation
benefits the bondholders Which of the 
statements given above is /  are correct A. 1
onlyB. 2 onlyC. Both 1 2D. None of the above
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15. With reference to inflation in India which of
the following statement is correct A.
Controlling the inflation in India is the
responsibility of the GOI onlyB. The RBI has no
role in controlling the inflationC. Decreased
money circulation helps in controlling the
inflationD. Increased money circulation helps in
controlling the inflation
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