1. An inflationary situation in an economy which results out of a process of wage and price interaction ‘when wages press prices up and prices pull wages up’ called:
An inflationary situation in an economy that results out of a process of wage and price interaction ‘when wages press prices up and prices pull wages up’ is known as the inflationary spiral. It is also known as the wage-price spiral. This wage-price interaction was seen as a plausible cause of inflation in the year 1935 in the US economy, for the first time.
2. A situation in which the rate of inflation falls over a period of time is termed as:
Disinflation: Disinflation is a situation in which the rate of inflation falls over a period of time. Deflation is when the overall price level in the economy falls for a period of time.
3. India has experienced persistent and high food inflation in the recent past. What could be the reasons?
Rising income and diversification of diets raising the demand for high-value food products, and thereby adding to inflationary pressures. Bhattacharya and Sen-Gupta (2015) calculate the demand-supply gap for major food commodities including, cereals, pulses, vegetables, fruits, milk, and meat and fish, and find empirical support for this hypothesis. Using National Sample Survey Organisations household consumption expenditure survey data for 2009-10, the expenditure elasticities for all these commodities are estimated. All the estimated expenditure elasticities are found to be positive, with those for milk, vegetables and fruits exceeding one, implying that a 1% increase in household expenditure is associated with a more than 1% increase in their demand. Elasticity for meat and fish, although below one, is high enough to cause a significant rise in their demand with rising food expenditure. In an emerging economy, with growing per capita income, high expenditure elasticities of vitamin and protein-rich commodities indicate growing demand pressure for these commodities. Demand is found to persistently outstrip supply in the case of pulses, meat and fish, and in recent years in the case of milk and vegetables. Overall, an additional gap of 1 million tonnes in demand relative to supply would result in food prices increasing by 0.3% to 1.1% annually. Hence, statement 2 is correct. Supply-side and external factors affecting food inflation: Fuel and agricultural wage inflation and international food price surge. Hence, statement 3 is correct. On the supply side, the rise in prices of key inputs, including fuel and agricultural wages have impacted the prices of various commodities and aggregate food inflation. A varied combination of factors is found to drive different components of food inflation. The rise in cost of production and MSP are the main drivers of cereal inflation, while inflation in milk, vegetables, and meat and fish are driven by input cost inflation and positive demand-supply gap. These two factors along with MSP inflation mainly drive pulses inflation. Global food inflation increases prices of edible oil and sugar, while the rise in MSP is an additional factor driving sugar price inflation.
4. A rapid increase in the rate of inflation is sometimes attributed to the "base effect". What is "base effect"?
The base effect refers to the impact of the rise in the price level (i.e. last year’s inflation) in the previous year over the corresponding rise in price levels in the current year (i.e., current inflation).
Consider the following statements :
Inflation redistributes wealth from creditors to debtors i.e. lenders suffer and borrowers benefit out of inflation. Bondholders have lent money (to debtor) and received a bond in return. So he is a lender, he suffers (Debtor benefits from inflation). Hence statement 1 is correct. Statement 2 has not used specifically the word “inflation-indexed bonds”, hence we cannot say Inflation benefits the bond-holders. Hence statement 2 is incorrect.
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