UPSC Prelims 2015 · Question 87 of 98
UPSC Prelims 2015 question on Inflation Control Money Circulation
- ExamUPSC CSE
- Year2015
- PaperGeneral Studies Paper I
- SubjectIndian Economy
- TopicInflation
- DifficultyMedium
- TypeDirect
With reference to inflation in India, which of the following statements is correct?
Show answer
Answer: C. Decreased money circulation helps in controlling the inflation
Verdict
The answer is that decreased money circulation helps in controlling inflation. Reducing money supply dampens demand and therefore prices.
Analysis
The third option is CORRECT. The Reserve Bank raises policy rates and reserve requirements to reduce money supply, which cools demand and moderates inflation. The fourth option reverses this, since increased money circulation raises demand and therefore inflation. The first option is INCORRECT because the Reserve Bank plays a central role alongside the government, which is the whole basis of the inflation targeting framework. The second option is INCORRECT for the same reason, since it denies the central bank any role at all.
Source
The Hindu lead article on understanding inflation targeting.
How to crack it
Two of the four options are mirror images and two are absolute denials, which is a common construction. Absolutes that assign responsibility to one actor only, or deny an actor any role, are almost always false in a domain where responsibility is shared, so options one and two fall on wording alone. That leaves a directional pair, and the direction follows from the simplest identity in monetary economics: more money chasing the same goods means higher prices.