Inflation and Deflation Overview
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Questions and Answers

What is a trade deficit?

  • When imports and exports are equal
  • When a country has no international trade
  • When exports exceed imports
  • When imports exceed exports (correct)

    • How can a strong domestic currency affect a nation's balance of payments?

  • It encourages more exports than imports.
  • It has no effect on the balance of payments.
  • It can lead to a trade deficit due to expensive exports. (correct)
  • It makes exports cheaper and imports costlier.

    • What is the purpose of exchange rate devaluation?

  • To stabilize the economy after natural disasters
  • To decrease the cost of domestic products abroad (correct)
  • To increase the value of imports
  • To eliminate all trade deficits

    • Which of the following is NOT a factor contributing to disequilibrium in the balance of payments?

    <p>Effective fiscal policies</p> Signup and view all the answers

    Which monetary policy action could help correct a trade deficit?

    <p>Contract the money supply</p> Signup and view all the answers

    What was the annual wholesale price inflation rate in January after falling for four consecutive months?

    <p>6.55%</p> Signup and view all the answers

    Which factor contributed to the decline in food inflation rate observed in January 2012?

    <p>Bumper kharif harvest</p> Signup and view all the answers

    What does the Inflation Expectations Survey of Households indicate about future price rises?

    <p>Respondents expect prices to rise more than the current rate</p> Signup and view all the answers

    What is a potential consequence of a bad monsoon following a good one, as discussed in the context?

    <p>Reduction in food supply</p> Signup and view all the answers

    What has been identified as a key issue confronting the Indian economy?

    <p>Insufficient investment levels</p> Signup and view all the answers

    What has consistently registered negative growth from September to December?

    <p>Capital goods production index</p> Signup and view all the answers

    What stance has the Reserve Bank of India maintained due to inflationary pressures?

    <p>Maintaining a hard money stance</p> Signup and view all the answers

    How did food inflation change from September 2011 to January 2012?

    <p>Decreased from 9.62% to -0.52%</p> Signup and view all the answers

    What is the main purpose of injecting liquidity through the purchase of commercial papers and corporate bonds?

    <p>To stimulate economic growth</p> Signup and view all the answers

    Which statement best describes the situation where prices steadily rise?

    <p>Inflation</p> Signup and view all the answers

    What effect does reducing the reserve requirement ratio have on lenders?

    <p>Encourages increased lending</p> Signup and view all the answers

    In the context of inflation, what does the term 'inflationary gap' refer to?

    <p>Too much money chasing too few goods</p> Signup and view all the answers

    Which economic situation is characterized by stagnation accompanied by inflation?

    <p>Stagflation</p> Signup and view all the answers

    What was the primary goal of the Indian government’s fiscal stimulus packages announced between December 2008 and February 2009?

    <p>To boost economic activity</p> Signup and view all the answers

    Which monetary policy tool involves the rates at which the Reserve Bank of India lends to banks?

    <p>Repo rate</p> Signup and view all the answers

    What was one of the measures taken by the People's Bank of China to stimulate the economy recently?

    <p>Lowering the reserve requirement ratio</p> Signup and view all the answers

    What defines an inflationary gap according to J.M. Keynes?

    <p>An excess of anticipated expenditure over the available output at base prices.</p> Signup and view all the answers

    According to Lipsey, what does the inflationary gap indicate?

    <p>The amount by which aggregate expenditure exceeds aggregate output at full employment.</p> Signup and view all the answers

    What happens to the inflationary gap as aggregate expenditure increases?

    <p>It increases, leading to more rapid inflation.</p> Signup and view all the answers

    What is the main cause of an inflationary gap during a war?

    <p>Increased government expenditure leading to higher community income.</p> Signup and view all the answers

    Calculate the inflationary gap based on the provided data: Disposable income is Rs.12,000 crore, and available output is Rs.9,000 crore.

    <p>Rs.3,000 crore</p> Signup and view all the answers

    In the situation described, what leads to the development of an inflationary gap?

    <p>Rising incomes at full employment with a constant savings rate.</p> Signup and view all the answers

    What is the relationship between the inflationary gap and consumption expenditure during a period of increased income?

    <p>Increased consumption expenditure exacerbates the inflationary gap.</p> Signup and view all the answers

    What is the amount of gross disposable income based on the provided details?

    <p>Rs.15,000 crore</p> Signup and view all the answers

    What is one of the primary social effects of inflation?

    <p>Widening gap between the rich and the poor</p> Signup and view all the answers

    Which of the following is a potential political consequence of inflation?

    <p>Explosive political situations</p> Signup and view all the answers

    How does inflation affect the volume of exports?

    <p>Reduces due to higher domestic prices</p> Signup and view all the answers

    What can escalation of inflation lead to regarding business practices?

    <p>Use of anti-social tactics for profit</p> Signup and view all the answers

    What does the term 'demonstration effect' refer to in the context of inflation?

    <p>Encouragement of consumerism</p> Signup and view all the answers

    Which measure is classified as a monetary measure to control inflation?

    <p>Raising interest rates</p> Signup and view all the answers

    How does inflation affect international competitiveness?

    <p>It leads to a decline in competitiveness</p> Signup and view all the answers

    What is often a result of a loss of faith in government due to inflation?

    <p>Emergence of political instability</p> Signup and view all the answers

    What are measures to control inflation?

    <p>Implementing price controls</p> Signup and view all the answers

    Which of the following best describes deflation?

    <p>A decrease in the general price level</p> Signup and view all the answers

    What is a common effect of inflation?

    <p>Rising interest rates</p> Signup and view all the answers

    Which of the following does not cause inflation?

    <p>Decrease in asset prices</p> Signup and view all the answers

    Which fiscal measure can help control inflation?

    <p>Reducing public expenditure</p> Signup and view all the answers

    What can be a direct effect of deflation?

    <p>Increased levels of debt</p> Signup and view all the answers

    What is an administrative measure to control inflation?

    <p>Implementing wage controls</p> Signup and view all the answers

    How is the inflationary gap defined?

    <p>The difference between actual and potential output</p> Signup and view all the answers

    Study Notes

    Inflation and Deflation

    • Inflation is a sustained increase in the general price level of goods and services in an economy.
    • Deflation is a sustained decrease in the general price level of goods and services in an economy.
    • Inflation widens the gap between rich and poor, hindering social justice. It leads to social inequality and unethical business practices (e.g., black marketing, adulteration).
    • Inflation results in political uncertainty, as discontent among the public grows.
    • Inflation reduces a country's exports due to higher domestic prices compared to international prices.
    • Inflation often leads to a decrease in the value of a home currency.
    • Inflation discourages foreign capital inflow, and lowers international competitiveness.
    • Inflation is primarily a monetary phenomenon, requiring judicious use of measures to control it.

    Types of Inflation (2.1)

    • The provided text does not give specific types of inflation.

    Causes of Inflation (2.2)

    • The text does not list specific causes.

    Effects of Inflation (2.3)

    • Inflation negatively impacts social equity with widening wealth gaps
    • Inflation leads to unethical business practices for higher profits.
    • This results in political instability and loss of public confidence in the government.
    • Inflation decreases export volume because domestic prices are higher than international prices.
    • Inflation impacts exchange rates, often leading to currency devaluation and harming international competitiveness.
    • Inflation results in a discouraged foreign capital inflow.

    Measures to Control Inflation (3)

    • Monetary Measures: Used to manage money supply and credit.
    • Fiscal Measures: Government adjusting income and expenditure policies.
    • Other Measures: Direct and administrative controls, to address issues.
    • Inflationary Gap: The difference between anticipated spending and available supply at base prices. This leads to rapid inflation if aggregate spending exceeds supply. (Keynesian theory)

    Deflation (4)

    • Deflating effects affect different societal groups, both negatively and positively.

    Inflationary Gap Explained

    • The gap between a community's income and the available supply of goods at base prices.
    • Increased government spending (e.g., during war) can lead to an inflationary gap due to increased demand outpacing supply.

    Controlling Measures (various countries)

    • Several countries implemented measures during the 2008-2009 global financial crisis:
      • Interest rate reductions (UK, China, India)
      • Quantitative easing (UK, maybe elsewhere)
      • Fiscal stimulus packages (India)
      • Reserve requirement ratios adjusted(China)

    Case Study: Inflation in India

    • Wholesale price inflation in India decreased to 6.55% in January 2012, after reaching a peak of 10% in September 2011.
    • Food price decline was a significant factor, due to a bumper kharif harvest.
    • However, inflation expectations remain high for the future.
    • Investment concerns and capital goods production were major economic problems discussed as important indicators.

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    Related Documents

    Managerial Economics - Inflation and Deflation PDF

    Description

    Explore the fundamental concepts of inflation and deflation, including their effects on the economy and social justice. Understand how these phenomena impact various aspects of financial stability and international competitiveness. This quiz will help solidify your understanding of economic fluctuations.

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