Question

Read the article given below carefully and answer the questions that follow:

Business Standard, Friday, 26th November, 2010 Food inflation declined to a 17 month low of 10.15 percent for the week ended November 13, as vegetable prices softened on fresh crop arrival, raising hopes that the Reserve Bank of India (RBI) would not raise key rates for now.

This is the sixth week in a row that food inflation has declined on the back of improved crop arrivals in markets across the country, as also the impact or RBI’s monetary tightening which arrested pressure on demand.

1. Define inflation. 

2. What according to the article are two causes of a fall in food price? 

3. What is meant by demand pull inflation? Briefly explain two factors which determine this phenomenon.

Answer 1

1. Inflation: Inflation is a situation in which the value of money falls and price rises. 

2. Two causes of fall in food price are: 

1. Regular supply of fresh crop 

2. Impact of monetary policy 

3. Demand-pull inflation occurs when the demand for goods and services exceeds the supply available at existing prices, i.e., when there is excess demand for goods and services. 

Two causes of demand pull inflation:

1. Increase in public expenditure: Government deficit increases when the public expenditure increases and the government fails to mobilize sufficient funds to meet its expenditure. This tremendous increase in Government expenditure has led to the increase in demand of goods and services but the availability of these has not increased proportionately and under such condition there is price rise.

2. Decrease in taxes or hoarding of black money: Black money means unaccounted money. It is created through tax evasion and is responsible for price rise.