Question

Which of the following may lead to increased inflation?

1. Reducing government tax collection

2. Reducing government spending

3. Banning the export of essential items

Which of the above statements is/are correct?

1. 1 and 3 only
2. 1 only
3. 2 and 3 only
4. 1, 2 and 3 

Answer 1

Correct Answer - Option 2 : 1 only

The correct answer is 1 only

• Reducing government spending is tool to control inflation.  Hence, statement 2 is incorrect.
• Reducing government tax collection. Will lead to money supply in the market and increase inflation.  Hence, statement 1 is correct
• Some protectionist measures government take to control inflation (such as banning the export of essential items such as pulses, cereals and oils to support the domestic consumption, encourage imports by lowering duties on import items etc.). Hence, statement 3 is incorrect.

What is Inflation?

• Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc.
• Inflation measures the average price change in a basket of commodities and services over time.
• The opposite and rare fall in the price index of this basket of items is called ‘deflation’.
• Inflation is indicative of the decrease in the purchasing power of a unit of a country’s currency. This could ultimately lead to a deceleration in economic growth.
• However, a moderate level of inflation is required in the economy to ensure that production is promoted.

Who measures Inflation in India?

• Inflation is measured by a central government authority, which is in charge of adopting measures to ensure the smooth running of the economy. In India, the Ministry of Statistics and Programme Implementation measures inflation.
• In India, inflation is primarily measured by two main indices — WPI (Wholesale Price Index) and CPI (Consumer Price Index) which measure wholesale and retail-level price changes, respectively. The CPI calculates the difference in the price of commodities and services such as food, medical care, education, electronics etc, which Indian consumers buy for use.

What are the main causes of Inflation?

• Some key reasons for Inflation:
  • High demand and low production or supply of multiple commodities create a demand-supply gap, which leads to a hike in prices.
  • Excess circulation of money leads to inflation as money loses its purchasing power.
  • With people having more money, they also tend to spend more, which causes increased demand.
  • Spurt in production prices of certain commodities also causes inflation as the price of the final product increases. This is called cost-push inflation.
  • Increase in the prices of goods and services is also a factor to consider as the involved labour also expects and demands more costs/wages to maintain their cost of living. This spirals to further increase in the prices of goods.