UPSC Prelims Practice Questions — Brace for impact

Q1. With reference to the statutory framework of flexible inflation targeting in India, consider the following statements: Which of the statements given above is/are correct?

  1. The inflation target is fixed by the Central Government in consultation with the Reserve Bank of India, and not by the Monetary Policy Committee.
  2. A single monthly headline CPI print above the upper tolerance level, by itself, constitutes a failure to achieve the inflation target.
  3. The Monetary Policy Committee is tasked with determining the policy repo rate needed to achieve the notified target.
  • A. 1, 2 and 3
  • B. 2 and 3 only
  • C. 1 only
  • D. 1 and 3 only

Q2. Suppose average headline CPI inflation in India stays below 2 per cent for three consecutive quarters. Under the statutory framework for flexible inflation targeting, which of the following follows?

  • A. The RBI must report to the Central Government the reasons for missing the target and the remedial actions it proposes.
  • B. The Central Government must dissolve and reconstitute the Monetary Policy Committee before it next meets.
  • C. No statutory obligation arises, because the framework treats only breaches of the upper tolerance level as a failure.
  • D. The Central Government must lower the inflation target so that actual inflation is brought back within the band.

Q3. Consider the following statements: Which of the following is correct in respect of the above statements?

  1. A rise in the policy repo rate is a relatively weak instrument for containing a surge in food prices caused by a deficient monsoon.
  2. Under the RBI Act, the Monetary Policy Committee is mandated to target core inflation, so food price shocks lie outside its remit.
  • A. Both Statement-I and Statement-II are correct and Statement-II explains Statement-I
  • B. Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
  • C. Statement-I is correct, but Statement-II is incorrect
  • D. Statement-I is incorrect, but Statement-II is correct

Q4. When a consumer price index is rebased and the weight assigned to food in its basket is reduced, which of the following is the most likely consequence, other things remaining the same?

  • A. Measured headline inflation will now become more sensitive to monsoon-driven food price shocks than before.
  • B. A given rise in food prices will now move measured headline inflation less than it did under the old weights.
  • C. Food prices in the market will rise more slowly because the index now assigns them a smaller weight.
  • D. Households will spend a smaller share of their budgets on food as a result of the revised index weights.

Q5. Consider the following facts about a month's retail inflation data: headline CPI inflation crossed the upper tolerance level; food inflation rose sharply; and ten of the twelve major CPI categories, including healthcare, education, housing and clothing, recorded their highest inflation levels in the current series. Which of the following inferences can be drawn from the above?

  1. The price pressure in that month was not confined to food and fuel.
  2. Every individual item within the ten categories recorded its highest-ever price increase in that month.
  3. Core inflation, which excludes food and fuel, remained within the tolerance band in that month.
  • A. 1 and 3 only
  • B. 2 only
  • C. 1 only
  • D. 2 and 3 only

Q6. Consider a situation in which food prices rise considerably faster than the general price level. In this context, consider the following statements: Which of the statements given above is/are correct?

  1. Households that spend a larger share of their budgets on food face a higher effective inflation rate than the headline figure indicates.
  2. The burden of such inflation falls more heavily on poorer households than on richer ones.
  3. A worker whose nominal wage rises exactly at the headline inflation rate is fully protected against the rise in their own cost of living, whatever their consumption basket.
  • A. 2 and 3 only
  • B. 1 and 2 only
  • C. 1, 2 and 3
  • D. 1 and 3 only

Q7. With reference to India's inflation-targeting framework, consider the following statements: Which of the statements given above is/are correct?

  1. The figure of 6 per cent in the framework is the inflation target that the Monetary Policy Committee is mandated to achieve.
  2. Revising the base year of the CPI does not by itself alter the inflation target, which can be changed only through a fresh notification by the Central Government.
  • A. 1 only
  • B. 2 only
  • C. Both 1 and 2
  • D. Neither 1 nor 2