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Causes, effects and control of inflation: inflation targeting and the Monetary Policy Committee

मराठीत स्पष्टीकरण

Inflation · Part 2 / 1 · Fact-checked on 19 October 2026 · how we check

Written with AI from the sources listed at the bottom of this page, then fact-checked by a separate AI.

Why prices rise (demand-pull, cost-push, imported and structural), inflation by speed, deflation, disinflation, reflation and stagflation, the Phillips curve, who gains and loses, the inflation target under the RBI Act (s.45ZA, s.45ZN), the Monetary Policy Committee (s.45ZB) and the monetary, fiscal and supply-side tools of control.

Each idea is explained first in Marathi (मराठी), ending with the English and Hindi exam terms, followed by the same point in exam English. UPSC Prelims is in English or Hindi, so understand it in Marathi and revise it in English.

पहिल्या भागात भाव कसे मोजतात ते पाहिले. आता तीन प्रश्न: भाव का वाढतात? कोणाला फायदा, कोणाला तोटा? भारत त्यांना आळा कसा घालतो? 2016 पासून कायदेशीर चलनवाढ लक्ष्य निर्धारण आहे: केंद्र सरकार एक आकडा लक्ष्य म्हणून ठरवते, आणि RBI मधील एक समिती व्याजदर वापरून ते गाठते. क्रिकेटमध्ये एकटा गोलंदाज सामना जिंकून देऊ शकत नाही, क्षेत्ररक्षकही लागतात ना — तसेच फक्त RBI पुरेशी नाही. आपल्याकडे अनेक भाववाढीचे धक्के अन्न आणि इंधनातून येतात; ते सरकार साठा, व्यापाराचे नियम आणि कर यांद्वारे हाताळते. (→ English: inflation targeting · हिन्दी: मुद्रास्फीति लक्ष्यीकरण)

In exam EnglishPart 1 showed how inflation is measured. This part asks three further questions. Why do prices rise? Who gains and who loses when they do? And how does India try to keep inflation low and stable? Since 2016 India's answer to the last question has a legal form called inflation targeting: the Central Government fixes a numerical target for consumer price inflation, and a Monetary Policy Committee in the RBI sets the policy interest rate to meet it. The RBI is not the only actor, though. Many price shocks in India start with food or fuel, and these are handled mainly by the government through buffer stocks, trade rules and taxes.

मागणीजन्य चलनवाढ म्हणजे खरेदीसाठी पैसा जास्त आणि विकायला वस्तू कमी, त्यामुळे भाव वाढणे. लग्नसराईत सगळे गाव एकाच वेळी मंगल कार्यालय आणि आचाऱ्यांसाठी धावले तर दर कसे वाढतात, तसे. सरकार उत्पन्नापेक्षा जास्त खर्च करते, बँका स्वस्त कर्ज देतात, उत्पन्न झपाट्याने वाढते, किंवा उत्पादनापेक्षा पैशाचा पुरवठा वेगाने वाढतो, तेव्हा मागणी वाढते. कारखाने आणि शेते आधीच पूर्ण क्षमतेने चालत असतील तर जास्तीचा माल येत नाही, विक्रेते भाव वाढवतात. ती खर्चामुळे येते, म्हणून जास्त व्याजदर, काटकसरीचे सरकारी अंदाजपत्रक अशा खर्च कमी करणाऱ्या उपायांना ती दाद देते. (→ English: demand-pull inflation · हिन्दी: माँगजनित मुद्रास्फीति)

In exam Englishdemand-pull inflation arises when total demand in the economy grows faster than the economy's ability to supply goods and services. Demand can rise because the government spends more than it collects, because banks lend freely at low interest rates, because incomes rise quickly, or because the money supply grows faster than output. When factories and farms are already working close to capacity, extra spending cannot be met by extra production, so sellers raise prices instead. Because demand-pull inflation comes from spending, it responds to the tools that cool spending, such as higher interest rates and tighter government budgets.

खर्चजन्य चलनवाढ पुरवठ्याच्या बाजूने सुरू होते: उत्पादनाचा खर्च वाढला तर, खरेदीदारांची मागणी बदलली नसली तरी, विक्रेता भाव वाढवतो. डिझेल महागले की रिक्षावाला भाडे वाढवतो ना — तसे. कच्च्या तेलाचे भाव, महाग कच्चा माल, उत्पादकता न वाढता वाढलेले पगार, रुपया घसरून आयात महागणे (आयातित चलनवाढ) — ही सगळी कारणे. दुष्काळ, पूर, कीड यांनी पीक घटले तर अन्नधान्य महागते. आपल्याकडे गोदामे, शीतगृहे, वाहतुकीतील उणिवा आणि डाळींचे कमी उत्पादन अशा संरचनात्मक अडचणीही आहेत. कामगार भावांच्या बरोबरीने पगार मागतात, कंपन्या पुन्हा भाव वाढवतात — हेच वेतन-किंमत चक्र. (→ English: cost-push inflation · हिन्दी: लागतजनित मुद्रास्फीति)

In exam Englishcost-push inflation starts on the supply side. When the cost of producing goods rises, firms pass it on to buyers even if demand has not changed. Common triggers are a rise in the price of crude oil, costlier raw materials, higher wages that are not matched by higher productivity, and a fall in the rupee that makes imports dearer, a form called imported inflation. Supply shocks such as a drought, floods or a pest attack cut the output of crops and push up food prices. In India many bouts of food inflation are also structural: weak storage, gaps in cold chains and transport, and low yields in crops such as pulses keep supply from responding quickly. Cost-push and demand-pull pressures can feed each other in a wage-price spiral, in which workers demand higher wages to keep up with prices and firms then raise prices to cover the higher wage bill.

चलनवाढीला तिच्या वेगावरूनही नावे आहेत — गाडीच्या वेगासारखी. रांगणारी (दरवर्षी एक अंकी, कमी): कोणी फारसे लक्ष देत नाही. चालणारी (मध्यम): जाणवते, निर्णय बदलतात. दौडणारी (दरवर्षी दोन-तीन अंकी): साठवलेल्या पैशाची किंमत जाते. अतिचलनवाढ: पगार हातात येताच खर्च करायला धावावे लागते अशी स्थिती — 1923 चा जर्मनी, 2008 चा झिम्बाब्वे. कमी आणि स्थिर चलनवाढ निरोगी असते असे बहुतेक अर्थतज्ज्ञ मानतात. म्हणूनच भारताचे लक्ष्य शून्य नव्हे, 4 टक्के आहे. (→ English: inflation · हिन्दी: मुद्रास्फीति)

In exam EnglishInflation is also described by its speed. Creeping inflation is mild, a low single-digit rise each year that most people barely notice. Walking or trotting inflation is moderate but noticeable and starts to affect decisions. Galloping inflation runs into double or even triple digits a year, and money begins to lose its usefulness as a store of value. Hyperinflation is an extreme case in which prices rise so fast that people rush to spend money the moment they receive it; Germany in 1923 and Zimbabwe in 2008 are well-known examples. Most economists see low and stable inflation as healthy rather than harmful. This is why India's target is a positive number, 4 per cent, rather than zero.

हे गोंधळात टाकणारे शब्द आहेत. चलनघट: किंमत पातळीच खाली येणे. ऐकायला बरे वाटले तरी धोकादायक — 'अजून स्वस्त होईल' म्हणून खरेदी पुढे ढकलतो, कंपन्या उत्पादन आणि नोकऱ्या कमी करतात, कर्ज फेडायच्या पैशाची किंमत वाढून बोजा वाढतो; 1990 च्या दशकाच्या अखेरीपासून जपानला असा त्रास झाला. चलनवाढ घट: भाव अजून वाढताहेत पण हळू (7% वरून 4%) — गाडीचा वेग कमी झाला, ती थांबली नाही. पुनर्चलनवाढ (रिफ्लेशन): मंदीनंतर कमी व्याज आणि जास्त सरकारी खर्चाने भाव आणि उत्पादन पुन्हा वर आणणे. मंदीयुक्त चलनवाढ: भाव जास्त, उत्पादन ठप्प, बेरोजगारी जास्त — 1970 च्या तेलधक्क्यांनंतर अनेक देशांत; एका आजारावरचे औषध दुसरा आजार वाढवते. (→ English: deflation · disinflation · stagflation · हिन्दी: अपस्फीति · अवस्फीति · मुद्रास्फीतिजनित मंदी)

In exam EnglishSeveral related terms are easy to confuse. deflation is a fall in the general price level, that is, negative inflation. It sounds pleasant but is dangerous: people postpone purchases in the hope of lower prices, firms cut output and jobs, and the real burden of debts rises because loans must be repaid in money that is worth more; Japan struggled with falling prices for years from the late 1990s. disinflation is different: inflation is still positive but its rate is falling, for example from 7 per cent to 4 per cent, so prices are rising more slowly. Reflation is a deliberate policy push, through lower interest rates or higher public spending, to lift prices and output back up after a slump or a spell of deflation. stagflation combines high inflation with stagnant output and high unemployment. It was the experience of many countries after the oil price shocks of the 1970s, and it is especially hard to treat because the remedy for one problem worsens the other.

Inflation and its look-alikes
Term	What happens to prices	What happens to output	Example
Inflation	General level rises	Varies	CPI rising 5 per cent a year
Disinflation	Still rise, but more slowly	Varies	Inflation falling from 7 to 4 per cent
Deflation	General level falls	Often weak	Japan from the late 1990s
Reflation	Pushed back up by policy	Recovering	Rate cuts and spending after a slump
Stagflation	Rise fast	Stagnant, high unemployment	Many countries after the 1970s oil shocks
Hyperinflation	Rise extremely fast	Collapses	Germany 1923, Zimbabwe 2008

फिलिप्स वक्र रोजगार आणि भाव यांचा संबंध सांगतो. 1958 मध्ये ए.डब्ल्यू. फिलिप्स यांनी ब्रिटनची आकडेवारी पाहून — बेरोजगारी कमी असलेल्या वर्षांत पगार झपाट्याने वाढले, आणि उलटही — असे पाहिले. म्हणजे 'थोडे जास्त भाव सहन केले तर जास्त रोजगार' असा सौदा असल्यासारखे वाटले. 1970 च्या मंदीयुक्त चलनवाढीत भाव आणि बेरोजगारी दोन्ही एकत्र वाढले आणि ती कल्पना कोसळली. तो सौदा फक्त अल्पकाळाचा: भाव वाढणार असे सगळ्यांना वाटू लागले की ते पगाराच्या मागण्यांत आणि भावांत शिरते; रोजगार जुन्या पातळीवर, भाव मात्र चढेच. म्हणूनच मध्यवर्ती बँका लोकांच्या अपेक्षा स्थिर ठेवण्यासाठी स्पष्ट, जाहीर लक्ष्य ठेवतात. (→ English: Phillips curve · हिन्दी: फिलिप्स वक्र)

In exam EnglishThe link between inflation and jobs is summed up in the Phillips curve. In 1958 the economist A.W. Phillips, studying British data, found that years of low unemployment tended to be years of fast-rising money wages, and the reverse. Read as a menu, this suggested that a government could buy lower unemployment at the price of somewhat higher inflation. The stagflation of the 1970s broke that idea: inflation and unemployment rose together. The lesson drawn by later economists was that the trade-off holds, if at all, only in the short run. Once people come to expect higher inflation, they build it into wage demands and prices, and unemployment returns to its earlier level while inflation stays high. This is why modern central banks put so much weight on keeping inflation expectations anchored, and it is the thinking behind a clear, public numerical target.

चलनवाढ सर्वांना सारखी मारत नाही; ती खरेदीशक्ती काहींकडून इतरांकडे सरकवते. अपेक्षेपेक्षा जास्त भाव वाढले तर कर्ज घेणाऱ्याचा फायदा, देणाऱ्याचा तोटा — परत करायच्या रुपयांची खरेदीशक्ती आता कमी. भावांशी न जोडलेले निवृत्तिवेतनधारक, क्वचितच पगार वाढणारे कामगार तोट्यात जातात. उदा. बँक 7% व्याज देते आणि भाव 5% वाढले तर खरे हातात येते जवळपास 2% च — हाच 'वास्तविक व्याजदर'. पैसा रोख ठेवणारे आणि उत्पन्नातील बहुतेक भाग अन्नावर खर्च करणारे गरीब सर्वांत जास्त भरडले जातात — म्हणून चलनवाढीला 'गरिबांवरचा कर' म्हणतात. (→ English: real interest rate · inflation · हिन्दी: वास्तविक ब्याज दर · मुद्रास्फीति)

In exam EnglishInflation does not hurt everyone equally; it moves purchasing power from some people to others. Borrowers tend to gain and lenders to lose when inflation turns out higher than expected, because a loan is repaid in rupees that buy less than when it was taken. People on fixed money incomes, such as pensioners without price-linked increases or workers whose wages are revised rarely, lose. Savers lose when the interest on their deposits is below the inflation rate. The real interest rate is roughly the nominal rate minus inflation: a deposit paying 7 per cent when inflation is 5 per cent earns a real return of only about 2 per cent. The poor, who hold much of their wealth as cash and spend most of their income on food, are hit hardest, which is why inflation is sometimes called a tax on the poor.

2014 मध्ये उर्जित पटेल समिती: 'एकत्रित' ग्राहक निर्देशांकाची चलनवाढच आधार व्हावी, लक्ष्य 4%, दोन्ही बाजूंना 2 टक्के गुण. फेब्रुवारी 2015 मध्ये सरकार-RBI करार, आणि मग वित्त अधिनियम 2016 द्वारे RBI कायदा 1934 मध्ये चलनवाढ लक्ष्य निर्धारण आले. कलम 45ZA: केंद्र सरकार, RBI शी सल्लामसलत करून, दर पाच वर्षांनी लक्ष्य ठरवते आणि राजपत्रात जाहीर करते. शाळेतल्या 'उत्तीर्ण गुणां'सारखे — लक्ष्य 4%, 2% ते 6% पर्यंत सहनशीलता. 2016 मध्ये सुरू, 2021 मध्ये आणि पुन्हा 2026 मध्ये (1 एप्रिल 2026 – 31 मार्च 2031) तेच कायम. (→ English: inflation targeting · हिन्दी: मुद्रास्फीति लक्ष्यीकरण)

In exam EnglishThe Expert Committee to Revise and Strengthen the Monetary Policy Framework, chaired by Urjit Patel, recommended in 2014 that CPI (Combined) inflation become the nominal anchor, with a target of 4 per cent and a band of 2 percentage points on either side. In February 2015 the government and the RBI signed a Monetary Policy Framework Agreement on these lines, and the Finance Act, 2016 then wrote inflation targeting into the RBI Act, 1934. Under section 45ZA, the Central Government, in consultation with the RBI, determines the inflation target in terms of the CPI once every five years and notifies it in the Official Gazette. The target of 4 per cent CPI (Combined) inflation, with an upper tolerance of 6 per cent and a lower tolerance of 2 per cent, was first notified in 2016, retained in 2021, and retained again in 2026 for the period from 1 April 2026 to 31 March 2031.

लक्ष्य असेल तर यश-अपयशाची कसोटी आणि अपयश आले तर कारण सांगण्याची जबाबदारी हवी. अपयश म्हणजे: सलग कोणत्याही तीन तिमाहींमध्ये सरासरी चलनवाढ 6% च्या वर किंवा 2% च्या खाली राहणे; एक वाईट महिना म्हणजे अपयश नव्हे. तेव्हा कलम 45ZN नुसार RBI ने केंद्र सरकारला अहवाल पाठवायचा: अपयश का आले, कोणते उपाय, किती काळात लक्ष्य गाठणार. परीक्षेत नापास झालेला विद्यार्थी पालकांना 'का, काय करणार, कधी' हे सांगतो तसे. पहिल्यांदा नोव्हेंबर 2022 मध्ये असे घडले — 2022 च्या पहिल्या तीनही तिमाहींत सरासरी 6% च्या वर गेली. (→ English: inflation targeting · हिन्दी: मुद्रास्फीति लक्ष्यीकरण)

In exam EnglishA target needs a test of success and a duty to explain failure. The Central Government has defined failure as average CPI inflation staying above the upper tolerance level or below the lower tolerance level for any three consecutive quarters; a single bad month is not a failure. When failure occurs, section 45ZN of the RBI Act requires the RBI to send a report to the Central Government setting out the reasons for the failure, the remedial actions it proposes, and an estimate of the time within which the target will be achieved. This provision was used for the first time in November 2022, after average inflation stayed above 6 per cent in each of the first three quarters of 2022.

व्याजदराचा निर्णय पतधोरण समितीचा (MPC) — कलम 45ZB अंतर्गत स्थापन, पहिली बैठक ऑक्टोबर 2016. सहा सदस्य: अध्यक्ष म्हणून RBI गव्हर्नर, पतधोरण पाहणारे डेप्युटी गव्हर्नर, RBI मंडळाने नेमलेला एक RBI अधिकारी — हे तिघे आतले; केंद्राने नेमलेले तिघे बाहेरचे. बाहेरच्यांना चार वर्षे, पुनर्नियुक्ती नाही. वर्षातून किमान चार बैठका (प्रत्यक्षात साधारण दर दोन महिन्यांनी). चार जण असले की गणपूर्ती; प्रत्येकाला एक मत; समसमान मते पडली तर गव्हर्नरना दुसरे (निर्णायक) मत — क्रिकेटमध्ये टाय झाल्यावर सुपर ओव्हरसारखे. ठराव लगेच, प्रत्येक सदस्याचे मत असलेले इतिवृत्त 14 व्या दिवशी; दर सहा महिन्यांनी पतधोरण अहवालही. (→ English: Monetary Policy Committee · हिन्दी: मौद्रिक नीति समिति)

In exam EnglishThe rate decision itself belongs to the Monetary Policy Committee (MPC), set up under section 45ZB of the RBI Act; it first met in October 2016. It has six members: the RBI Governor as chairperson, the Deputy Governor in charge of monetary policy, one RBI officer nominated by the RBI's Central Board, and three persons appointed by the Central Government. The three external members hold office for four years and cannot be reappointed. The MPC must meet at least four times a year; in practice it meets about every two months. Four members make a quorum, each member has one vote, and if votes are tied the Governor has a second or casting vote. After each meeting the RBI publishes the resolution, and the minutes, including each member's vote and statement, are published on the fourteenth day. The RBI also publishes a Monetary Policy Report every six months.

भाव कमी करायला MPC रेपो दर वाढवते — RBI बँकांना अल्प काळासाठी कर्ज देते तो दर. मग बँका कर्जावर जास्त व्याज घेतात, ठेवींवर जास्त देतात; घरे आणि कंपन्या कमी कर्ज घेऊन कमी खर्च करतात, मागणी थंडावते. सरकारकडेही साधने आहेत: खर्च आणि तूट कमी करणे, इंधनावरील कर कमी करणे. पुरवठ्याच्या बाजूने: अन्नधान्याचा साठा FCI मार्फत खुल्या बाजारात विकणे, किंमत स्थिरीकरण निधीतून कांदा, डाळींचा साठा, जीवनावश्यक वस्तू कायदा 1955 अंतर्गत व्यापाऱ्यांवर साठा मर्यादा, आयात शुल्क कपात, निर्यातीवर निर्बंध (जुलै 2023 मधील बिगर-बासमती पांढऱ्या तांदळाच्या निर्यातीवर बंदी). (→ English: repo rate · हिन्दी: रेपो दर)

In exam EnglishTo bring inflation down, the MPC raises the policy repo rate, the rate at which the RBI lends to banks for short periods. Banks then charge more for loans and pay more on deposits, so households and firms borrow and spend less, and demand cools. The government has its own instruments. On the fiscal side it can cut its spending or deficit, or reduce indirect taxes on items such as fuel. On the supply side it holds buffer stocks of foodgrains and sells them in the open market through the Food Corporation of India, builds stocks of onions and pulses through a Price Stabilisation Fund, imposes stock limits on traders under the Essential Commodities Act, 1955, eases imports by cutting duties, and restricts exports, as with the ban on exports of non-basmati white rice in July 2023.

आता सगळे जुळते. भारताचे उत्तर म्हणजे कायद्यात लिहिलेली कामाची वाटणी: केंद्र दर पाच वर्षांनी 4% लक्ष्य (2-6%) ठरवते; सहा सदस्यांची पतधोरण समिती रेपो दराने मागणीला दिशा देते आणि तीन तिमाहींच्या अपयशाचे उत्तर देते; सरकार साठा, कर आणि व्यापारातून पुरवठा सांभाळते. व्याजदर डाळ पिकवत नाही, आणि साठा तापलेल्या अर्थव्यवस्थेला थंड करत नाही. (→ English: inflation targeting · Monetary Policy Committee · हिन्दी: मुद्रास्फीति लक्ष्यीकरण · मौद्रिक नीति समिति)

In exam EnglishThe pieces now fit together. India's answer is a division of labour fixed in law: the Central Government sets the target of 4 per cent CPI (Combined) inflation with a 2 to 6 per cent band every five years; the six-member MPC uses the repo rate to steer demand towards it, and must explain any failure that lasts three consecutive quarters; and the government handles the supply side through food stocks, taxes and trade measures. Monetary and supply measures work best together, because interest rates cannot grow pulses and buffer stocks cannot cool an overheated economy.

Exam traps

The inflation target is determined by the Central Government in consultation with the RBI (s.45ZA), not by the MPC or the RBI on its own.
The target is 4 per cent CPI (Combined) inflation with a band of 2 to 6 per cent; it was notified in 2016, retained in 2021 and retained again for 1 April 2026 to 31 March 2031.
Failure means average inflation outside the band for three consecutive quarters, not one month; the RBI then reports to the Central Government under s.45ZN (first done in November 2022).
The MPC has six members: three from the RBI (Governor, Deputy Governor, one officer) and three external members appointed by the Central Government. No Finance Ministry official sits on it.
External MPC members serve four years and are not eligible for reappointment; the Governor has a casting vote only when votes are tied, not a veto.
Disinflation is a falling but still positive inflation rate; deflation is a fall in the price level itself.
Stagflation is high inflation with stagnant output and high unemployment; it contradicted the simple Phillips curve trade-off.
Unexpected inflation helps borrowers and hurts lenders, savers and fixed-income earners; the real interest rate is roughly the nominal rate minus inflation.

Recap

Demand-pull: spending outruns supply; cost-push: costs and supply shocks push prices up; imported inflation comes through a weaker rupee or costlier imports.
By speed: creeping, walking, galloping, hyperinflation; low and stable inflation is considered healthy.
Deflation (prices fall), disinflation (inflation slows), reflation (policy lifts prices and output), stagflation (high inflation with stagnation).
Phillips curve: short-run trade-off between unemployment and inflation that breaks down once expectations adjust.
Inflation helps borrowers, hurts lenders, savers, fixed-income earners and the poor; real interest rate is about nominal minus inflation.
Urjit Patel Committee (2014), Monetary Policy Framework Agreement (2015), Finance Act 2016 amending the RBI Act.
s.45ZA: Central Government, with the RBI, sets the target every five years: 4 per cent CPI (Combined), band 2-6 per cent, retained for 2026-2031.
s.45ZN: failure over three consecutive quarters requires a report to the government (first in November 2022).
s.45ZB MPC: six members, external members four years without reappointment, quorum four, Governor's casting vote, minutes on the fourteenth day.
Control: repo rate and liquidity (RBI); spending and indirect taxes (fiscal); buffer stocks, open market sales, stock limits, trade measures (supply).

Practice questions

Q1. Under the Reserve Bank of India Act, 1934, the inflation target is determined by:

The Monetary Policy Committee
The Central Board of the RBI
The Central Government in consultation with the RBI
Parliament by a resolution

Show answer

Answer: C. The Central Government in consultation with the RBI

Section 45ZA gives this power to the Central Government, in consultation with the RBI, once every five years. The MPC decides the policy rate to meet the target but does not set it; the RBI's Central Board has no role in fixing it; and Parliament does not pass a resolution on it.

Q2. Consider the following statements about the Monetary Policy Committee:
1. It has six members, three of whom are appointed by the Central Government.
2. In the event of a tie, the RBI Governor has a second or casting vote.
Which of the statements given above is/are correct?

1 only
2 only
Both 1 and 2
Neither 1 nor 2

Show answer

Answer: C. Both 1 and 2

Both statements are correct: the MPC has the Governor, a Deputy Governor and one RBI officer plus three members appointed by the Central Government, and the Governor breaks a tie with a casting vote. So '1 only', '2 only' and 'neither' are each wrong.

Q3. Match List I with List II:
List I: A. Deflation B. Disinflation C. Stagflation
List II: 1. Inflation rate falls but stays positive 2. High inflation with stagnant output 3. Fall in the general price level
Select the correct answer using the code given below:

A-1, B-3, C-2
A-3, B-1, C-2
A-3, B-2, C-1
A-2, B-1, C-3

Show answer

Answer: B. A-3, B-1, C-2

Deflation is a fall in the price level (A-3), disinflation a slowing but positive inflation rate (B-1), and stagflation high inflation with stagnation (C-2). The first code swaps deflation and disinflation; the third swaps disinflation and stagflation; the fourth gives deflation the meaning of stagflation.

Q4. Consider the following statements about the inflation targeting framework:
1. The RBI is deemed to have failed if CPI inflation exceeds 6 per cent in any single month.
2. On failure, the RBI must report to the Central Government the reasons, the remedial actions proposed and the time within which the target will be achieved.
Which of the statements given above is/are correct?

1 only
2 only
Both 1 and 2
Neither 1 nor 2

Show answer

Answer: B. 2 only

Statement 1 is wrong: failure means average inflation outside the 2-6 per cent band for three consecutive quarters. Statement 2 is correct under section 45ZN. So '1 only' and 'both' are wrong, and 'neither' misses statement 2.

Q5. Inflation that turns out higher than expected generally benefits:

Lenders who gave loans at a fixed rate
Borrowers who took loans at a fixed rate
Pensioners on a fixed money pension
Savers holding cash

Show answer

Answer: B. Borrowers who took loans at a fixed rate

Borrowers repay in rupees that buy less, so they gain. Lenders receive repayment of lower real value, pensioners on fixed money pensions can buy less with the same amount, and cash loses purchasing power, so the other three lose.

Q6. Which one of the following is an example of cost-push inflation?

A rise in global crude oil prices raises transport and production costs
A large pay rise for millions of employees boosts spending
Banks lend freely at low interest rates
A cut in income tax raises household consumption

Show answer

Answer: A. A rise in global crude oil prices raises transport and production costs

A rise in the cost of crude oil pushes up production costs, which is cost-push. The other three raise spending or demand: a pay rise, cheap credit and a tax cut are all sources of demand-pull inflation.

Q7. The Phillips curve describes the relationship between:

Tax rates and tax revenue
Unemployment and the rate of inflation
Income and the share of food in spending
Interest rates and exchange rates

Show answer

Answer: B. Unemployment and the rate of inflation

The Phillips curve links unemployment with the rate of wage and price inflation, suggesting a short-run trade-off. The link between tax rates and revenue is the Laffer curve; the falling share of food as income rises is Engel's law; interest and exchange rates are a separate topic of the external sector.

Q8. Which of the following are supply-side measures to control food inflation?
1. Open market sale of foodgrains by the Food Corporation of India
2. An increase in the policy repo rate
3. Stock limits on traders under the Essential Commodities Act, 1955
Select the correct answer using the code given below:

1 and 2 only
1 and 3 only
2 and 3 only
1, 2 and 3

Show answer

Answer: B. 1 and 3 only

Open market sales and stock limits act on the supply of food, so 1 and 3 are supply-side. A higher repo rate is a monetary tool that works on demand, so every option that includes 2 is wrong.

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Sources

Reserve Bank of India Act, 1934, Chapter IIIF (ss.45Z to 45ZO, inserted by the Finance Act, 2016), and the Central Government's notifications of the inflation target (2016, 2021, 2026) — https://www.indiacode.nic.in
Reserve Bank of India: Report of the Expert Committee to Revise and Strengthen the Monetary Policy Framework (2014); Monetary Policy Framework Agreement (2015); MPC resolutions, minutes and Monetary Policy Reports — https://www.rbi.org.in
Economic Survey, Ministry of Finance, Government of India (chapters on prices, inflation and food management) — https://www.indiabudget.gov.in/economicsurvey/
Essential Commodities Act, 1955 — https://www.indiacode.nic.in