Inflation: UPSC Previous Year Questions (Indian Economy)
3 previous year UPSC Prelims questions on Inflation (Indian Economy). Choose an option to see the answer and explanation.
Explanations state facts as of the year each question was asked; words like “recently” refer to that year.
Showing 1–3 of 3 questions
UPSC 2021Indian Economy · Inflation
Q1. Which one of the following is likely to be the most inflationary in its effects?
Explanation
Inflation is the general rise in prices of goods and services within an economy wherein, the purchasing power of consumers decreases, and the value of the cash holdings erode. The creation of new money to finance a Budget Deficit is highly inflationary. The government prints new money or borrows directly from the central bank (RBI in India) to fund its deficit. This directly increases the money supply in the economy without a corresponding increase in goods and services. It leads to excess liquidity in the economy causing demand-pull inflation.
Exam tip:
"Which option puts extra, unlimited cash in the system without removing any? "Only (d) fits that test."
UPSC 2021Indian Economy · Inflation
Q2. Which of the following steps is most likely to be taken at the time of an economic recession?
Explanation
A fall in the gross domestic product (GDP) for two or more consecutive quarters is often regarded as an economic recession. Recessions are brought on by high interest rates because they reduce liquidity, or the quantity of money available for investment.
Option (b) is correct: An increase in expenditure on public projects will lead to an increase in investments, leading to an increase in GDP and income in the economy and in turn increase in demand, completing the virtuous cycle of investment.
Option (a), (c) and (d) is incorrect:
Cutting taxes can increase disposable income, encouraging consumption and investment, which helps in a recession. However, raising interest rates makes borrowing more expensive, discouraging investment and consumption, which contradicts the objective of stimulating the economy during a recession. When income is falling in the economy then an increase in tax rates accompanied by a reduction of interest rate is not desirable at the moment. Reduction of expenditure on public projects in the time of recession will not be favourable as it will reduce the output of the economy.
Exam tip:
If the private sector freezes, the public sector must step in. Hence option B aligns most.
Option A and C are One foot on the brake, one on the accelerator" = bad policy mix, hence likely false.
Option D, exactly the opposite of what’s needed, Govt pulling back = even less money in the economy, hence false.
UPSC 2021Indian Economy · Inflation
Q3. With reference to the Indian economy, demand-pull inflation can be caused/increased by which of the following? 1. Expansionary policies 2. Fiscal stimulus 3. Inflation-indexing wages 4. Higher purchasing power 5. Rising interest rates Select the correct answer using the code given below.
Explanation
Demand-pull inflation is caused by an increase in demand and wherein the demand in the economy outgrows the supply in the economy. It can be summed up as a condition of ‘too much money chasing too few goods’. With reference to the Indian economy, demand-pull inflation can be caused/increased by the following:
1. Expansionary policies: Money in the market rises when the government spends more freely. It leads to an increase in demand for the goods and fuels demand-pull inflation.
2. Fiscal Stimulus: Fiscal stimulus is a government-driven strategy that involves adjusting government spending and taxes to stimulate the economy. It also increases the money in the market which leads to an increase in demand for the goods and fuels demand-pull inflation
3. Higher Purchasing Power: Consumers feel more confident and spend more when they have a better income. As a result, demand increases, driving up inflation. Rising interest rates will reduce the money supply in the market. Borrowing money will become costlier, creating a credit crunch in the economy. So, it can not cause demand to pull inflation in the economy. Inflation-indexing wages means wages are linked to the inflation which means wages move as inflation changes in the economy. Such indexing is provided to reduce the effect of inflation on wages. It can not lead to demand pull inflation in the economy. Effective change in the wages is zero and it does not increase/ decrease purchasing power. So it cannot lead to demand-pull inflation in the economy.
Answer key for these questions
Q
UPSC year
Correct answer
1
2021
(d) Creation of new money to finance a budget deficit
2
2021
(b) Increase in expenditure on public projects
3
2021
(a) 1, 2 and 4 only
Frequently asked questions
How many previous year UPSC questions are there on Inflation?
This page covers 3 previous year UPSC Prelims GS Paper-I questions on Inflation (Indian Economy), asked from 1997 to 2021. Each has the correct answer and an explanation.
How should I use previous year UPSC questions for Prelims?
Attempt each question first, then open the answer and read the explanation for every option. Repeat by chapter, and track which statements UPSC reuses across years. Previous year questions show the exam pattern and difficulty level.
Which years are covered for Inflation?
Questions on Inflation (Indian Economy) are available for 9 years, from 1997 to 2021. Use the Year filter to practise a single paper.
