Page 108 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Indian Economic Policy

Notes distortions in relative prices, malallocation of resources, and social and political unrest. Therefore,
it cannot be allowed to go uncontrolled. If it is controlled, it will limit the employment and
cause unemployment. The policy-makers are therefore often faced with a situation of dilemma.
If inflation is allowed to go on a high rate, it will affect growth adversely, and if it is controlled,
it will affect employment adversely and there may be a high rate of unemployment. The policy-
makers are therefore required to find a trade-off between inflation and unemployment. This issue
has received a great deal of attention in recent times.
Self -Assessment
1. Choose the correct option
(i) Which of the following statements best describes inflation:
(a) Any increase in the price level.
(b) An increase in price of a major industry.
(c) An increase in the rate of upward change of the price level.
(d) A decrease in the rate of upward change of the price level.
(e) An increase in the rate of downward change of the price level.
(ii) The price level is the :
(a) weighted average price of all goods
(b) weighted average price of all goods and services
(c) weighted average price of all services
(d) weighted average price of exported goods and services
(e) weighted average price of all non-agricultural products and services
(iii) Unexpected inflation:
(a) creates less problems for an economy than expected inflation.
(b) hurts all individuals in an economy.
(c) helps banks and individuals who have loaned money.
(d) helps debtors.
(e) effects all assets equally.
(iv) Inflation always has a negative affect on:
(a) currency (b) gold
(c) debtors (d) wages with cost of living adjustments
(e) gold speculators
(v) When events such as 9/11 occur the price of gold will frequently increase. The most plausible
explanation of this increase in gold is:
(a) People fear that the production of gold will decrease and sell their gold.
(b) People expect inflation to occur and sell their gold.
(c) People fear the loss of purchasing power and hold more paper money.
(d) People expect deflation to occur and buy gold.
(e) People expect inflation to occur and buy more gold
(vi) Which of the following is the best measure of how inflation affects consumers?
(a) The increase in the price of gold
(b) The increase in the consumer price index
(c) The increase in the price of a single product
(d) The decrease in the consumer price index
(e) The increase in the purchasing power of the dollar

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