Practice MCQs Optional & Subjects

Inflation in India: CPI, WPI and GDP Deflator — MCQs with Answers

Test what you know about Inflation in India: CPI, WPI and GDP Deflator with 10 UPSC Prelims-style questions. Try each one first, then tap “Show answer” for the correct option and its explanation.

Read the full article
  • 10 practice questions
  • ≈ 10 min
  • Answers & explanations

Answers revealed

Try each question yourself first, then check the answer.

  1. Q1. A price index rises from 150 to 156 over one year. What is the year-on-year inflation rate?

    1. 6 per cent
    2. 56 per cent
    3. 4 per cent
    4. 156 per cent
    Show answer

    Correct answer: (C) 4 per cent

    Explanation

    Correct Answer: (C). The rate is (156 divided by 150 minus one) multiplied by 100, giving 4 per cent. Six is the index-point increase, not the percentage change. Fifty-six compares the level with a base of 100 rather than last year. The index level 156 itself is not an inflation rate.

  2. Q2. Consider these statements: 1. Disinflation means the general price level is falling. 2. Deflation means the general price level is falling. Which is correct?

    1. 2 only
    2. 1 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Show answer

    Correct answer: (A) 2 only

    Explanation

    Correct Answer: (A). Statement 2 is correct: deflation is a fall in the general price level. Disinflation instead means prices continue rising at a slower rate, making statement 1 incorrect. Accepting both confuses slower inflation with falling prices. Rejecting both discards the correct definition of deflation. A single cheaper commodity establishes neither general condition.

  3. Q3. Why can equal percentage price increases in two CPI items have different effects on the overall index?

    1. Every item necessarily has the same expenditure weight
    2. CPI measures only wholesale goods without household weights
    3. The item with the smaller weight always has the larger effect
    4. Their expenditure weights can differ
    Show answer

    Correct answer: (D) Their expenditure weights can differ

    Explanation

    Correct Answer: (D). CPI weights reflect relative importance in household expenditure. With other factors unchanged, the same percentage price increase generally has a larger effect for a more heavily weighted item. Equal weights are not guaranteed. Wholesale-only coverage misidentifies CPI, while automatically giving the smaller-weight item more influence reverses the weighting logic.

  4. Q4. Consider these institutional pairs: 1. National CPI — NSO under MoSPI 2. WPI — Office of the Economic Adviser under DPIIT Which are correctly matched?

    1. 1 only
    2. Both 1 and 2
    3. 2 only
    4. Neither 1 nor 2
    Show answer

    Correct answer: (B) Both 1 and 2

    Explanation

    Correct Answer: (B). Both pairs match the article institutional description. NSO under MoSPI compiles the national CPI, while the Office of the Economic Adviser under DPIIT compiles WPI. Accepting only one rejects another valid pairing. Rejecting both confuses the statistical compilers. These compilation roles should also be distinguished from the MPC policy-rate decision function.

  5. Q5. Which coverage distinction between CPI and WPI is correct according to the article?

    1. CPI covers household retail goods and services; WPI covers wholesale goods and excludes services in the described series
    2. Both cover only household services
    3. WPI is a personalised cost-of-living measure for every family
    4. CPI excludes all services while WPI includes only services
    Show answer

    Correct answer: (A) CPI covers household retail goods and services; WPI covers wholesale goods and excludes services in the described series

    Explanation

    Correct Answer: (A). CPI follows a weighted retail consumption basket of goods and services. WPI tracks wholesale goods and excludes services in the series described. The alternatives restrict both to services, personalise WPI or reverse their coverage. Neither index exactly reproduces every household experience, because households can have different spending patterns.

  6. Q6. Nominal GDP is 240 units and real GDP is 200 units. Using the formula in the article, what is the GDP deflator?

    1. 20
    2. 83.33
    3. 120
    4. 440
    Show answer

    Correct answer: (C) 120

    Explanation

    Correct Answer: (C). The GDP deflator equals nominal GDP divided by real GDP, multiplied by 100. Thus 240 divided by 200 times 100 gives 120. Twenty is the percentage excess over a reference value of 100, not the index itself. Reversing the ratio gives about 83.33, while adding the GDP figures gives an unrelated 440.

  7. Q7. Consider these statements: 1. CPI can include imported consumer goods. 2. The GDP deflator covers domestic output rather than imported goods as domestic production. Which are correct?

    1. 1 only
    2. Both 1 and 2
    3. 2 only
    4. Neither 1 nor 2
    Show answer

    Correct answer: (B) Both 1 and 2

    Explanation

    Correct Answer: (B). Both statements are correct. CPI follows household consumption, which can include imported consumer items. The GDP deflator follows final goods and services produced domestically within GDP. Choosing only one omits another valid coverage distinction. Rejecting both ignores why the measures can diverge even when each is compiled correctly for its intended scope.

  8. Q8. Assertion: Higher wholesale prices need not pass immediately and fully into consumer prices. Reason: Firms may absorb costs in margins, offset them through productivity or pass them on with a lag. Choose the correct relationship.

    1. Both are true, but the reason does not explain the assertion
    2. The assertion is true, but the reason is false
    3. The assertion is false, but the reason is true
    4. Both are true, and the reason explains the assertion
    Show answer

    Correct answer: (D) Both are true, and the reason explains the assertion

    Explanation

    Correct Answer: (D). Both statements are true and the reason explains incomplete or delayed transmission. Cost pressures can be absorbed, offset or passed on later, especially under weak demand. The other options deny the mechanism or disconnect it from the price outcome. Consequently, WPI and CPI movements need not coincide in size or timing.

  9. Q9. Which pairing correctly identifies inflationary mechanisms?

    1. Demand-pull: demand outpaces supply capacity; cost-push: production or distribution costs rise
    2. Demand-pull: the general price level falls; cost-push: prices rise more slowly
    3. Demand-pull: only one imported item gets cheaper; cost-push: output prices never change
    4. Demand-pull and cost-push are identical names for index rebasing
    Show answer

    Correct answer: (A) Demand-pull: demand outpaces supply capacity; cost-push: production or distribution costs rise

    Explanation

    Correct Answer: (A). Demand-pull pressure arises when demand grows faster than supply capacity, whereas cost-push pressure reflects higher production or distribution costs. The other options confuse these mechanisms with deflation, disinflation, an isolated price change or rebasing. Both forces can operate together, and a single monthly inflation number cannot diagnose the cause by itself.

  10. Q10. What is a base effect in an annual inflation comparison?

    1. A guarantee that current prices have fallen whenever inflation slows
    2. A rule that raw levels from different base-year series are directly comparable
    3. An unusually high or low earlier comparison value changes the measured annual rate
    4. The difference between the number of goods and services in every basket
    Show answer

    Correct answer: (C) An unusually high or low earlier comparison value changes the measured annual rate

    Explanation

    Correct Answer: (C). A base effect arises from the earlier comparison period being unusually high or low. It can change the annual rate without explaining current price movements alone. Slower inflation need not mean falling prices. Different-base raw indices require valid linking, and item counts do not define the comparison-base effect described in the article.

More practice MCQ sets

All MCQ sets