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Inflation Types

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Inflation Types

shape Introduction

General Awareness is an important section of most of the competitive exams for employment in the government sector in India including, but not limited to, Banking, SSC, UPSC, Railways Insurance, etc. The article Inflation Types presents the key points related to Inflation, Inflation Types, and the effects of Inflation.

shape Inflation

Inflation – Inflation Types:

  • Creeping Inflation

  • Walking or Trotting Inflation

  • Running Inflation

  • Hyperinlation or Galloping Inlation or Runway Inflation


Creeping Inflation:

  • Price rises at a very small rate (< 3 %)

  • It is considered safe and essential for the economy.


Walking or Trotting Inflation:

Price rises at a moderate rate (3 % < Inflation < 10 %) Inflation at this rate is a warning signal for the Economy.

Running Inflation:

Price rises at high rate (10 % < Inflation < 20 %) It affects economy adversely.

Runway Inflation:

Price rise at very high rate (20 % < Inflation < 100 %) This situation brings total collapse of Economy.

Based on Causes:

  • Demand Pull Inflation

  • Cost-Push Inflation


Demand Pull Inflation: When Inflation arises due to higher demand for goods and services over the limited supply.

Cost-Push Inflation: When Inflation arises due to higher input cost for goods and services over the limited supply.

Example: raw material, wages etc.

Inflation – Important Terms and Definitions:

Delation:

  • It is opposite to Inflation.

  • Reduction of general level of price in an economy.

  • In this price index measured is negative.


Stagflation: When stagnation and inflation coexist in the economy.

Stagnation: low national income growth and high unemployment.

Disinflation: When the rate of Inflation is at a slower rate.

Example: If the Inflation of last month was 4 % and the rate of inflation in the current month is 3 %.

Relation: Deliberate action of government to increase the rate of inflation to redeem the economy from a deflationary situation.

Inflation – Effects of Inflation:

Redistribution of income and wealth:

Due to the effect of inflation, some group of people loses and another group of people gains.

Example:

  • In the case of debtors and creditors

  • Debtor – gainer Creditor- loser

  • In the case of Producers and Consumers

  • Producer – gainer Consumer- loser


Effects on Production and Consumption:

  • Due to inflation, the demand decreases

  • People try to use fewer services and it causes decrease in consumption


Unfavorable Balance of Payments:

Export decreases and import increases from other countries which lead to a decrease in forex reserve.

Measures to control Inflation:

  • Credit control:

    It is used by RBI.


  • Increase in Direct Taxes:

    Due to the increase in direct taxes, people have less money available to them and low demand from them leads to a lower price.


    Price Control:

    By fixing maximum price limit by authorities.


  • Trade measures:

    Maintain proper supply in the economy by export and import of goods and services.


shape Quiz

1. If RBI is concerned about inflation and wishes to raise interest rates. Which of the following instruMents cannot be used:

    A. Interest rate control
    B. Open market operations
    C. Quantitative easing.
    D. Reserve ratio controls


Answer: Option C

Explanation: The name ‘Hindustan’ combines Sindhu and Hindu and thus refers to the Land of Hindus. The Aryan worshippers referred to the river India as the Sindhu. The Persian invaders converted it into Hindu.

  • According to the Shastras, Bharatavarsha and Jambudwipa are two of the earliest names by which our country was known.

  • It is also called Aryavart.


2. Which is the most effective quantitative methods to control inflation in the economy ?

    A. Bank Rate Policy
    B. Selective Credit Control
    C. Cash reserve ratio
    D. Both A and B


Answer: Option C

3. Which one of the following is not a component of demand pull inflation ?

    A. An increase in government expenditure with no change in tax rate
    B. A downward shift in savings function
    C. A rise in money wage rate
    D. An upward shift of investment function


Answer: Option C

4. which of the following group suffers the Most froM inflation ?

    A. Debtors
    B. Creditors
    C. Businessman
    D. Holders of real assets


Answer: Option B

5. In conditions of inflation, which method will leads to the lowest value of stock ?

    A. FIFO
    B. LIFO
    C. Average Price Method
    D. Weighted Average Price Method


Answer: Option B

6. Inflation in India is generally expressed on what basis ?

    A. Wholesale Price Index (WPI
    B. Consumer Price Index (CPI)
    C. Foreign Direct Investment (FDI)
    D. Both A and B


Answer: Option D

7. Which is the cause of Inflation ?

    A. Printing too much money
    B. Increase in production cost
    C. Foreign Direct Investment
    D. All of the above


Answer: Option A

8. Which Measure is adopted to reduce inflation? ?

    A. Cuts in government spending
    B. Reduction in Repo rate
    C. Increase in government expenditure
    D. Reduction in bank rate


Answer: Option D

9. Which of the following is not a Method of controlling inflation ?

    A. Surplus Budgeting
    B. Reduction in public expenditure
    C. Reduced repo rate
    D. Increased taxation


Answer: Option C

10. Name the type of inflation which is developed because of fewer goods being produced, while the demand remains consistent. ?

    A. Demand pull inflation
    B. Cost push inflation
    C. Galloping inflation
    D. Stagflation


Answer: Option B