73 practice questions on Inflation & Prices from the Economy section of the UPSC Prelims syllabus.
73 come with a written explanation and 16 are actual previous year questions.
Try the sample set below - the answer stays hidden until you ask for it.
17 Easy34 Medium22 Hard16 from past papers
Sample questions
Q1
Previous year questionmedium
Consider the following statements:
1. In the case of all cereals, pulses and oil-seeds, the procurement at Minimum Support Price (MSP) is unlimited in any State/UT of India.
2. In the case of cereals and pulses, the MSP is fixed in any State/UT at a level to which the market price will never rise.
Which of the statements given above is/are correct?
A1 only
B2 only
CBoth 1 and 2
DNeither 1 nor 2
Show answer and explanation
Correct answer: D - Neither 1 nor 2
Statement 1 is wrong because MSP procurement is not unlimited for all crops; open-ended procurement applies mainly to wheat and rice through the FCI, while pulses and oilseeds are procured in limited, scheme-bound quantities under PSS. Statement 2 is wrong because the MSP is a floor price meant to protect farmers when market prices fall, and market prices frequently rise well above the MSP for many crops. Since both statements misstate how MSP works, neither is correct.
Q2
Previous year questionmedium
India has experienced persistent and high food inflation in the recent past. What could be the reasons?
1. Due to a gradual switchover to the cultivation of commercial crops, the area under the cultivation of food grains has steadily decreased in the last five years by about 30%.
2. As a consequence of increasing incomes, the consumption patterns of the people have undergone a significant change.
3. The food supply chain has structural constraints.
Which of the statements given above are correct?
A1 and 2 only
B2 and 3 only
C1 and 3 only
D1, 2 and 3
Show answer and explanation
Correct answer: B - 2 and 3 only
Rising incomes shifted demand towards protein-rich foods like pulses, milk, eggs and vegetables faster than supply could grow, pushing prices up, so statement 2 is correct. Inadequate storage, weak cold chains and too many intermediaries are genuine structural constraints that raise food prices, so statement 3 is correct. Statement 1 is factually false: the area under foodgrains did not fall by anything like 30% over five years; such a drastic, exact figure is an exaggeration that did not occur. Hence only 2 and 3 are correct.
Q3
Previous year questioneasy
With reference to inflation in India, which of the following statements is correct?
AControlling the inflation in India is the responsibility of the Government of India only
BThe Reserve Bank of India has no role in controlling the inflation
CDecreased money circulation helps in controlling the inflation
DIncreased money circulation helps in controlling the inflation
Show answer and explanation
Correct answer: C - Decreased money circulation helps in controlling the inflation
Decreased money circulation reduces demand-pull inflation, so option c is correct. Controlling inflation is a shared responsibility of both the government (fiscal measures) and the RBI (monetary measures), so saying it is the government's responsibility only (a) or that the RBI has no role (b) is wrong. Increased money circulation would worsen inflation, not control it, so option d is wrong.
Q4
Previous year questionmedium
With reference to 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.
A1, 2 and 4 only
B3, 4 and 5 only
C1, 2, 3 and 5 only
D1, 2, 3, 4 and 5
Show answer and explanation
Correct answer: A - 1, 2 and 4 only
Demand-pull inflation arises when aggregate demand exceeds supply. Expansionary monetary or fiscal policies (1), fiscal stimulus (2) and higher purchasing power (4) all boost aggregate demand and pull prices up. Inflation-indexing of wages is more a cost-push and propagation mechanism than a demand-pull trigger, so 3 is excluded. Rising interest rates (5) reduce demand and curb inflation, so they cannot cause demand-pull inflation. Hence the answer is 1, 2 and 4 only.
Q5
Previous year questionmedium
A rapid increase in the rate of inflation is sometimes attributed to the "base effect". What is "base effect"?
AIt is the impact of drastic deficiency in supply due to failure of crops
BIt is the impact of the surge in demand due to rapid economic growth
CIt is the impact of the price levels of previous year on the calculation of inflation rate
DNone of the statements (a), (b) and (c) given above is correct in this context
Show answer and explanation
Correct answer: C - It is the impact of the price levels of previous year on the calculation of inflation rate
Inflation is measured as the percentage change in prices over a year-ago value, so the figure depends heavily on the price level in that earlier base period; an unusually low or high base last year mechanically inflates or deflates the current inflation rate. This is the base effect, exactly as option (c) states. Option (a) (supply failure) and option (b) (demand surge) describe real causes of price rises, not the statistical base effect. Since (c) is correct, (d) is ruled out.
Q6
Previous year questionmedium
Which one of the following is likely to be the most inflationary in its effects?
ARepayment of public debt
BBorrowing from the public to finance a budget deficit
CBorrowing from the banks to finance a budget deficit
DCreation of new money to finance a budget deficit
Show answer and explanation
Correct answer: D - Creation of new money to finance a budget deficit
Printing or creating fresh money to finance a deficit directly expands the money supply without a matching rise in output, making it the most inflationary option. Repaying public debt actually returns money to lenders and is not inflationary in the same way. Borrowing from the public transfers existing purchasing power rather than creating new money. Borrowing from banks can be mildly expansionary but is less inflationary than monetisation. Hence creation of new money is the most inflationary.
Q7
Previous year questioneasy
Economic growth is usually coupled with
ADeflation
BInflation
CStagflation
DHyperinflation
Show answer and explanation
Correct answer: B - Inflation
Correct answer (b) Inflation. Rapid economic growth raises demand for goods, services, labour and resources, which typically exerts upward pressure on prices, so growth is usually accompanied by moderate inflation. Deflation is falling prices, generally linked to weak demand, so (a) is wrong. Stagflation pairs stagnation with inflation, and hyperinflation is runaway price rise associated with crisis, neither being the normal companion of healthy growth, so (c) and (d) are incorrect.
Q8
Previous year questionmedium
Consider the following statements:
1. The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale Price Index (WPI).
2. The WPI does not capture changes in the prices of services, which CPI does.
3. Reserve Bank of India has now adopted WPI as its key measure of inflation and to decide on changing the key policy rates.
Which of the statements given above is/are correct?
A1 and 2 only
B2 only
C3 only
D1, 2 and 3
Show answer and explanation
Correct answer: A - 1 and 2 only
Statements 1 and 2 are correct: food has a higher weight in the Consumer Price Index than in the Wholesale Price Index, and the WPI does not capture services prices whereas the CPI does. Statement 3 is wrong because the RBI now uses CPI, not WPI, as its key inflation measure under the flexible inflation-targeting framework. Hence the answer is 1 and 2 only.
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