UPSC Prelims 2011 · GS Paper I

Question 13: Economy and Social Development

A rapid increase in the rate of inflation is sometimes attributed to the "base effect". What is "base effect" ?

aIt is the impact of drastic deficiency in supply due to failure of crops

bIt is the impact of the surge in demand due to rapid economic growth

cIt is the impact of the price levels of previous year on the calculation of inflation rate

dNone of the statements (a), (b) and (c) given above is correct in this context

AnswerThe answer is (c).

Base effect is the impact of the previous year's price level on this year's inflation rate. Inflation is measured against the same period a year earlier, so if prices had barely moved or had fallen in that base period, the same price rise now shows up as a sharply higher rate, while a very high base does the opposite. It is a statistical effect of the comparison base, not a result of crop failure or a demand surge.

Why each option is right or wrong

(a) Describes a supply shock from crop failure, a cause of inflation, not base effect.
(b) Describes demand-pull inflation.
(c) Right: the previous year's price level influences the measured rate.
(d) Option (c) is a correct description, so this fails.

Explanation: written by UPSC Grade, not by UPSC.

Practise this paper timedPrevious question Next question

Source: UPSC, Civil Services (Preliminary) Examination 2011, General Studies Paper I, Series A. The paper on upsc.gov.in.