Inflation: Key Concepts and Policy Tools

These 50 Q&A flashcards cover definitions, causes, effects, measurement, and policy tools related to inflation, reflecting the key points from the EduTap lecture notes.

What is inflation in economic terms?

A sustained rise in the general price level of goods and services, resulting in a fall in the purchasing power of money.

How is the rate of inflation mathematically calculated?

[(Price in current year − Price in base year) / Price in base year] × 100.

What basic idea summarizes demand-pull inflation?

"Too much money chasing too few goods"—aggregate demand grows faster than aggregate supply.

Which economic school most closely associates with demand-pull inflation?

The Keynesian school of economics.

What triggers cost-push inflation?

Rising production costs that lead firms to raise prices to protect profit margins.

Name two common drivers of cost-push inflation.

Higher raw-material/component costs and wage increases exceeding productivity gains.

What is the "wage-price effect" (second-round effect) in inflation?

Initial price rises lead workers to demand higher wages, which then push prices up further.

Define monetary inflation.

Price rises caused by an oversupply of money relative to goods and services.

Which school of thought links inflation primarily to money-supply growth?

The Monetarist school.

During inflation, who gains—creditors or debtors?

Debtors gain and creditors lose because debts are repaid in money that has lost value.

What does rising inflation usually signal about aggregate demand?

Aggregate demand is increasing relative to supply.

How does mild inflation affect investment in the short run?

It boosts investment by indicating strong demand and lowering the real cost of borrowing.

How does inflation distort nominal versus real income?

Nominal income rises, but real purchasing power remains the same or falls.

What happens to household savings behavior in the short run when inflation rises?

People deposit more in banks to avoid holding depreciating cash—the shoe-leather cost.

What is the typical long-run impact of high inflation on the saving rate?

Persistent high inflation ultimately reduces the overall saving rate.

How does inflation affect consumption expenditure?

Higher prices curb consumption as households cut back to offset cost increases.

What is "bracket creep" in a tax system?

Inflation pushes taxpayers into higher nominal tax brackets even though real income is unchanged.

Under a flexible exchange-rate regime, what is inflation’s general effect on the domestic currency?

The currency tends to depreciate against foreign currencies.

Why does high domestic inflation hurt exports?

It raises production costs, making exports less competitive internationally.

How does high inflation influence imports?

Imported goods become relatively cheaper, so import volumes tend to rise.

For developing countries, how does inflation usually affect the trade balance?

It generally worsens the trade balance because costlier compulsory imports outweigh any export gain.

What relationship does the Phillips Curve depict?

An inverse short-run trade-off between inflation and unemployment.

What is disinflation?

A fall in the rate of inflation while prices are still rising (e.g., from 3% to 2%).

Define deflation.

A persistent decline in the general price level of goods and services.

What range characterizes galloping inflation?

Very high, double- or triple-digit annual inflation (e.g., 20%, 100%, 200%).

What distinguishes hyperinflation?

Extremely rapid and accelerating price increases, potentially millions of percent per year.

Explain stagflation.

A situation with both high inflation and high unemployment simultaneously.

What causes bottleneck (structural) inflation?

Severe supply-side constraints that sharply cut supply while demand stays the same.

What is skewflation?

A sustained price rise confined to one or a small group of commodities, not the overall basket.

When does reflation occur in the business cycle?

During recovery from recession, when policy actions push some prices up temporarily.

Which index currently represents headline inflation for monetary policy in India?

CPI (Combined) with base year 2011-12.

How is core inflation typically defined?

Headline inflation minus volatile food and energy components.

What is an inflationary gap?

Excess total spending (fiscal deficit) over national income, pushing prices upward.

Describe a deflationary (output) gap.

Government spending falls short of national income, leading to excess supply and slowdown.

What is inflation tax (seigniorage)?

The implicit tax on holders of money as its value erodes due to government-created inflation.

Define an inflation spiral (wage-price spiral).

A self-reinforcing cycle where wages push prices up and higher prices push wages up.

What is the "inflation premium" to borrowers?

The reduction in the real interest cost because nominal rates do not fully offset inflation.

What is the overarching monetary strategy to arrest (reduce) inflation?

Decrease the money supply through tighter monetary policy.

In open-market operations, what action does the RBI take to fight inflation?

It sells government securities to absorb liquidity.

To combat inflation, should the Cash Reserve Ratio (CRR) be raised or lowered?

Raised, so banks hold more reserves and lend less.

List the three major commodity groups in WPI in descending weight order.

Manufacturing, Primary Articles, Fuel & Power.

What is the current base year and item count for India’s WPI?

Base year 2011-12 with a basket of 697 items.

Which government office releases WPI data?

The Office of Economic Adviser, Department for Promotion of Industry & Internal Trade.

What is the base year for CPI (Combined), and which body publishes it?

Base year 2011-12; it is released by the National Statistical Office (NSO) under MOSPI.

Which price index does the RBI explicitly target for monetary policy decisions?

CPI (Combined) inflation.

What does the Consumer Food Price Index (CFPI) measure?

Monthly retail price changes of food products for rural, urban, and combined populations.

How is the WPI Food Index constructed?

By combining 'Food Articles' from Primary Articles with 'Food Products' from Manufactured Products in WPI.

What is India’s officially defined comfort range for inflation?

A CPI inflation band of 2% to 6%.

What numeric inflation target has been set under India’s Monetary Policy Framework (until 2026)?

4% CPI inflation with a tolerance of ±2 percentage points.

Who sits on the Monetary Policy Committee (MPC) of India?

RBI Governor (Chair), RBI Deputy Governor (Monetary Policy), one RBI officer, and three government-appointed external members.