QUESTION-Prelims-IAS –ECONOMICS MCQ-20
- When there are falling prices, this often encourages people to delay purchases because they will be cheaper in the future and they could save money by waiting for it to be cheaper. Therefore, periods of deflation often leads to lower consumer spending and lower economic growth.
- Deflation increases the real value of debt. Deflation makes it more difficult for debtors to pay off their debts. Therefore, consumers and firms have to spend a bigger percentage of disposable income on meeting debt repayments. Europe has a big burden of government debt, deflation will make it more difficult to reduce debt to GDP ratios.
- Deflation increases the real value of money. Also, in a period of deflation, firms will be getting lower revenue, and consumers will likely to get lower wages. Therefore, this leaves less money for spending and investment. Therefore, its effect on the spending power of consumers is uncertain.
- If one country has deflation, and others have inflation, then that country will become more internationally competitive, leading to a rise in exports. During Japan’s deflation, they saw strong exports – which helped offset the fall in consumer spending (though it still wasn’t enough).
- WPI focuses on prices of goods and not services, at the wholesale prices and CPI focuses on prices of goods and services that are paid by the final consumer at retail level producer price index focuses on prices of goods and services that are received by the producer.
- PPI is the average change in selling prices received by domestic producers for their output.
- First statement is right while the second statement is wrong because CPI not WPI used as a deflator in national accounting.
- RBI and government both play a role in controlling the inflation, often termed as “inflation targeting” by the RBI.
- Increased money circulation leads to increased inflation as demand increases. RBI increases bank rates and SLR etc. to reduce money supply in the market which tames demand and hence, inflation.
- Compared to a weight of fuel and power at 14.9% in the WPI, the weight of fuel and light in the CPI is 9.5%.
- As fuel has larger weight in the WPI, the decline in fuel prices lead to a sharper fall in the WPI as compared to the Consumer Price Index (CPI).
- Similarly, food has larger weightage in the CPI, with a combined weight of food, beverages and tobacco at 49.7%.
- Within WPI, Food commodities have a combined weight of 24.31%.
- This includes “Food Articles” in the Primary Articles (14.34%) and “Food Products” in the Manufactured Products category (9.97%).
- Hence, an increase in food prices leads to a sharper increase in CPI than in WPI
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