For UPSC aspirants, navigating through the vast expanse of study material can be daunting, particularly when it comes to comprehending the intricacies of the Indian economy. In this pursuit, NCERT notes serve as invaluable companions, offering a structured and comprehensive understanding of key concepts. In the realm of money and inflation, these notes elucidate the fundamental principles that underpin the functioning of the economy, exploring the dynamics of monetary policy, inflationary trends, and their ramifications on various sectors. By delving into the nuances of monetary mechanisms and inflationary forces, UPSC aspirants gain not only conceptual clarity but also a nuanced perspective essential for tackling the complexities of economic questions in the examination. Thus, UPSC NCERT notes on Indian Economy – Money and Inflation stand as indispensable resources, guiding aspirants towards a deeper understanding of economic phenomena crucial for their success in the competitive landscape of UPSC examinations.
Money
- Anything widely accepted as a medium of exchange is termed money.
- Money, in a given socio-economic context, is an object or record generally acknowledged for settling payments for goods and services and repaying debts.
- Any object or secure variable record that fulfills these functions qualifies as money, playing a crucial role in our lives. Modern forms of money encompass paper notes and coins.
Functions of Money
- The functions of money can be broadly categorized into two parts:
Primary Functions of Money
These primary functions can be further divided into two subcategories, namely:
- Money as a Medium of Exchange: One of money’s primary functions is serving as a medium of exchange, facilitating transactions where goods or services are bought or sold in exchange for money.
- A Measure of Value: Money can be considered a parameter for measuring the value of a product or service. In simple terms, the value of every product or service can be expressed in monetary terms.
Secondary Functions of Money
- The secondary functions can be further categorized into three parts, as outlined below:
- Store of Value: A vital function of money, it can be stored or conserved for future use, providing an economical and convenient means of savings.
- Standard of Deferred Payments: Money facilitates convenient deferred payments, serving as the standard for settling present or future obligations. For example, when repaying a borrowed amount with interest, money simplifies the process of making deferred payments, contributing to the popularity of lending and borrowing transactions and the establishment of financial institutions.
- Transfer of Value: Money’s utility extends to the transfer of value, allowing for the purchase of goods not only within the country but also across international borders. Money serves as a standard tool for buying and selling goods in both domestic and international markets, contributing to market stability, liquidity, and the essential functions of money markets.
- Contingent Functions: These are functions performed by money in assisting various economic agents, such as consumers and producers, in making economic decisions. Money’s role in influencing consumption decisions based on consumer income and commodity prices, as well as its involvement in the distribution of national income, maximizing profit for producers, ensuring consumer satisfaction, and serving as the basis for credit and liquidity, falls under contingent functions.
Types of Money
- There are many types of money. The important y Ac of money are explained below:
Metallic Money
- Money composed of metal is referred to as metallic tender money, including coins made from metals like gold, silver, nickel, and copper. The right to mint coins is a government monopoly. Metallic money is further classified into:
- Standard Money: Its face value (value as money) equals its intrinsic value (value as a commodity), commonly made of gold and silver.
- Token Money: Its face value is greater than its intrinsic value, often made of cheaper metals like copper and nickel.
- Subsidiary Money: Coins ranging from 50 paise to 10 rupees serve as subsidiary money, supporting token money and holding legal tender status.
Paper Money
- Money made of paper is known as paper money, consisting of currency notes issued by the government or central bank. Paper money is of the following types:
- Representative Paper Money: Fully backed by gold and silver reserves.
- Convertible Paper Money: Can be exchanged for standard coins.
- Inconvertible Paper Money: Not convertible into standard coins or valuable metals.
- Fiat Money: Circulates based on the government’s authority (fiat) and is created and issued by the state. It is a variety of inconvertible paper money.
Acceptable Money:
- Based on general acceptability, money can be categorized into legal tender money and non-legal tender money (optional money). These can be understood as follows:
(i) Legal Tender Money:
- Referring to money accepted by both the state and the public as a means of payment for the discharge of debts, legal tender money is enforced by law. It must be accepted as a means of payment, and two types exist:
- (a) Limited Legal Tender Money: Accepted only up to a specified limit, such as the case with 50 paise coins in India, valid only up to a sum of 20.
- (b) Unlimited Legal Tender Money: Must be accepted as a medium of payment for any amount. In India, 50 paise coins, ₹1, ₹2, ₹5, ₹10, ₹20 coins, and currency notes of all denominations fall under this category.
(ii) Non-Legal Tender Money:
- Also known as optional money, this refers to money that may or may not be accepted as a means of payment. Optional money lacks legal sanction, and no one can be compelled to accept it. Examples include different credit instruments like cheques, bank drafts, bills of exchange, treasury bills, insurance policies, and bonds.
Adjacent Money:
- Not exact money but closely related due to its higher liquidity compared to others. Bonds, government debentures, and similar instruments fall under the category of adjacent money.
Banking Money:
- Money issued by banks, including:
- Cheque: A document ordering a bank to pay a specific amount from a person’s account to the named recipient. Cheques are also known as negotiable instruments.
- Demand Draft: A negotiable instrument similar to a bill of exchange, issued by a bank to pay a specified sum to a designated party.
- Banker’s Cheque: A non-negotiable financial instrument used for making payments within the same city.
- Traveller’s Cheque: A medium of exchange substituting hard currency, denominated in major world currencies and designed for unconditional payment.
- Postal Order: A type of money order intended for sending money through the mail, purchased at a post office, and payable at another post office.
Credit Money:
- Currency used in payments through cheques, including:
- Promissory Note: A legal instrument where one party promises in writing to pay a determinate sum of money to another under specific terms and conditions.
- Bill of Exchange: A written order primarily used in international trade transactions.
| Hundi A Hundi can be defined as a financial instrument or a negotiable bill of exchange that facilitated trade and credit transactions during the medieval period in India. Essentially, a Hundi represents an unconditional contract or order guaranteeing a monetary payment, transferable through valid negotiation. |
Other Types of Money:
- Plastic Money: This term encompasses credit cards, debit cards, and prepaid cards, providing a cashless payment method that allows customers to make purchases conveniently without using physical currency. Plastic money is widely accepted wherever credit cards are welcomed.
- Near Money: Comprising highly liquid assets like gold or silver, near money, or quasi-money, can easily be converted into cash. While not actual cash, these assets hold significant liquidity.
- Fiduciary Money: The value of fiduciary money is determined by the expectation of widespread acceptance as a medium of exchange. Examples include cheques, banknotes, and drafts, and it is not declared legal tender by the government.
- Cheap Money: Refers to loans or credit with low-interest rates or the deliberate setting of low interest rates by a central bank, such as the Federal Reserve. Cheap money facilitates borrowing at a very low cost.
- Expensive Currency: Currency flowing into the government treasury through money bonds is termed expensive currency. This indicates a lack of government funds.
- Hot Money: Signifying currency swiftly moving between financial markets, seeking the highest available short-term interest rates. Hot money regularly shifts between countries with low interest rates to those offering higher rates.
- Hard Money: Currency directly backed by a valuable commodity like the American Dollar, Euro, Pound, etc. This type of money is considered robust, maintaining a stable value relative to goods and services and a consistent exchange rate with softer currencies.
Digital Money:
- Digital money or Digital Currency: Payment means existing in purely electronic form, not physically tangible like traditional currency. It is accounted for and transferred using online systems. Bitcoin is a well-known form of digital money.
- Digital Rupee (e): A tokenized digital version of the Indian Rupee, issued by the Reserve Bank of India as a Central Bank Digital Currency (CBDC). The Digital Rupee was proposed in January 2017 and launched in the 2022-23 financial year, with a pilot initiated in December 2022.
| Cryptocurrency: A cryptocurrency is a digital medium of exchange using encryption techniques to control the creation of monetary units and verify transactions. Bitcoin is the largest by market capitalization, followed by Ethereum. Cryptocurrencies operate on blockchain technology, a digital ledger of transactions, with others like Ethereum, Litecoin, Cardano, Polkadot, Stellar, and Dogecoin. |
Currency Liquidity
- The term liquidity is defined by the ease with which a specific asset can be swiftly bought or sold in the market without significantly impacting its price.
- In simpler terms, money serves as a medium that can take various forms without depreciating, and liquidity denotes the ability to promptly convert assets into cash.
| Money Demand Money functions as a medium of exchange, indirectly fulfilling diverse human needs. Possessing the attribute of purchasing power, money is sought after for acquiring goods and services. The demand for money in a country hinges on the total quantity of goods and services available for exchange. |
Money Supply
- The concept of money supply involves stocks and shares and is commonly perceived as the cumulative effect of the currency held by citizens and the demand deposits in the banks of a country.
- Money supply encompasses the total quantity of currency in a nation’s economy, including both cash and easily usable deposits.
- The government, through the issuance of currency in paper or coin form, and banks, through reserves and credit controls, wield influence over the money supply.
- Money supply significantly impacts a country’s economy, influencing the inflation of commodity prices, changes in demand and supply, and playing a role in interest rates and cash flow.
Measures of Money Supply in India
- Money supply represents the liquid assets held by the public that can be freely exchanged for goods and services.
- The Reserve Bank of India (RBI) calculates four concepts of money supply, referred to as measures of monetary aggregates or money stock measures:
- M0 (M-zero): Currency in circulation + Banker’s deposit with RBI + Other deposits with RBI.
- M1: Currency with the public + Demand deposits with the banking system + Other deposits with the RBI + Savings deposits of Post Office Savings Banks.
- M3: M1 + Time deposits with the banking system.
- M4: M3 + Office Savings of Banks.
- The decreasing order of liquidity for these monetary aggregates is M0 > M1 > M2 > M3. A decline in liquidity signifies a shift from being a ‘medium of exchange’ to a ‘store of value.’ Demand deposits, such as those in current and savings accounts, are payable by the bank upon the customer’s request.
Liquidity Aggregates
- L1: M3 + All deposits with the Post Office Savings Banks (excluding National Savings Certificates).
- L2: L1 + Term deposits with Term Lending Institutions and Refinancing Institutions (FIs) + Term Borrowing by FIs + Certificates of Deposit issued by FIs.
- L3: L2 + Public deposits of Non-Banking Financial Companies.
Indian Currency Symbol (₹):
- The symbol for the Indian rupee was introduced on July 15, 2010. India became the fifth economy, following America, Britain, Japan, and the European Union, to adopt a unique currency symbol.
- D Udaya Kumar, a postgraduate of IIT Mumbai, designed the symbol, and it was officially selected by the Union Cabinet on July 15, 2010. The new symbol is a fusion of Devanagari ‘Ra’ and the Roman ‘R,’ omitting the stem.
Demonetization:
- Demonetization involves canceling the legal tender status of a circulating currency unit. Nations often implement demonetization in anticipation of positive changes in the overall liquidity structure, aiming to counterbalance the current economic conditions.
- Countries worldwide have employed demonetization to control issues like inflation and stimulate economic growth.
- Demonetization strips a currency unit of its legal tender status, ceasing its acceptance for any transaction.
Key features include:
- Restricting and reducing the money supply linked to anti-social activities.
- Promoting a cashless economy.
- Combating tax evasion.
- Eliminating black money and black marketing.
Cashless Economy:
- A cashless economy relies on transactions through debit cards, credit cards, digital wallets, and other electronic modes, minimizing physical cash transactions.
- Post-demonetisation, India initiated card-based and online transactions to promote a cashless economy. The introduction of the Unified Payments Interface (UPI) simplified cashless transactions.
- The COVID-19 pandemic accelerated the shift toward digital transactions in India, with UPI payments reaching an all-time high of 1.34 billion in June 2020, according to National Payments Corporation of India (NPCI) data.
Inflation:
- Inflation denotes a persistent increase in the general price level in a country over time, categorized as monetary or price inflation. Increased money supply during inflation diminishes the currency’s purchasing power, leading to rising prices of goods and services.
- Economic cycles experience periods of inflation, deflation, and stagflation, each impacting the overall economy and potentially leading to prolonged recessions or depressions.
Types of Inflation:
Low Inflation/Creeping Inflation:
- Slow and predictable inflation occurs over a more extended period, typically within single-digit ranges.
Galloping Inflation:
- Very high inflation with double or triple-digit percentages, also known as hopping inflation or running inflation.
Hyperinflation:
- Hyperinflation is an intense and rapidly accelerating form of inflation with annual rates reaching millions. Examples include Germany after the First World War and Bolivia in mid-1985.
Bottleneck Inflation:
- Occurs when the supply dramatically decreases while demand remains constant, resulting from supply-side accidents, hazards, or mismanagement—also known as Structural Inflation.
Chronic Inflation:
- If creeping inflation persists over an extended period, it is termed chronic inflation.
Demand Side Inflation (Demand-Pull Inflation):
- Results from an increase in demand, triggered by factors such as:
- Surge in public expenditure, especially by a government running large fiscal deficits.
- Loose Monetary Policy, leads to low interest rates and increased consumption.
- Rapid GDP growth, creating more employment and higher wages.
- Population growth.
- Exchange rate depreciation, boosting exports and demand.
- Reduction in direct taxes, injecting more money into households.
- Speculation in the commodities market, etc.
Supply Side Inflation (Cost Push Inflation):
- Influenced by factors such as:
- The backward agricultural sector is unable to meet food demands.
- Inefficient storage, transportation, and marketing infrastructure cause wastage.
- Hoarding by traders reduces supply.
- Rise in crude oil and fertilizer prices.
- Increase in labor costs.
- Higher costs of imported materials.
- Elevated capital costs due to credit tightening by the Central Bank.
- Cartelization by big suppliers fixing prices for undue profits.
- The monopoly of a single supplier sets arbitrary prices.
- Management increases prices to boost profits, leading to inflation.
Causes of Inflation:
- Inflation arises from a disparity between demand and supply, occurring when demand surpasses supply. It can be due to changes in both demand and supply.
Effects of Inflation:
- Inflation affects different communities in diverse ways, impacting income and wealth distribution, as well as overall societal production.
On the Business Community:
- Entrepreneurs and businessmen welcome inflation, as rising prices increase the value of their inventories and goods. Prices rising faster than production costs enhance profits.
On Fixed Income Groups:
- Inflation adversely affects wage-earners and salaried individuals. Despite the efforts of trade unions to keep pace with soaring prices, wage-earners often find it challenging to keep up.
- Since wages don’t rise simultaneously with the general price level, the cost of living index increases, leading to a decrease in the real income of wage earners.
On Farmers:
- Farmers typically benefit from inflation as they receive better prices for their produce during periods of rising prices.
On Investors:
- Investors in debentures and fixed-interest securities, such as bonds, face losses during inflation.
- However, equity investors benefit from increased dividends due to higher profits generated by joint-stock companies during inflation.
- Inflation, though, can lead to a deterioration in gross domestic savings, less capital formation, and a lower long-term economic growth rate.
Measures of Inflation:
Inflation, indicating changes in the general price level over time, is measured using three standard indices:
- Wholesale Price Index (WPI)
- Consumer Price Index (CPI)
- GDP Deflator
Wholesale Price Index (WPI):
- WPI gauges weekly changes in wholesale prices, with the average annual WPI calculated based on weekly indices.
- The average annual wholesale prices of the current year are compared to those of the base year (assumed as 100).
- The new WPI series includes additional items and uses 2011-2012 as the base year.
Producer Price Index (PPI):
- PPI covers price changes faced by producers on primary, intermediate, and finished goods and services ready for the market.
- Unlike WPI, PPI measures price changes of transacted goods at the gate, excluding taxes.
- It serves to provide a measure of prices received by producers in various sectors, including industry, public utilities, and sometimes agriculture, mining, transportation, and business services.
- Reflation: Reflation is an economic strategy aimed at reintroducing inflation in a deflationary economy to stimulate growth.
Index of Industrial Production (IIP):
- IIP is a monthly index calculated and published by the Central Statistical Organisation (CSO), indicating the performance of various industrial sectors in the Indian economy. It serves as a composite indicator of the overall level of industrial activity.
Index of Industrial Production (IIP):
- This index reveals the growth rates of various industry groups within the economy over a specified time frame. The measured industry groups fall into two main categories:
- Broad sectors such as manufacturing, mining, and electricity.
- Use-based sectors include capital goods, basic goods, intermediate goods, infrastructure goods, consumer durables, and consumer non-durables.
- The eight core industries in India, representing approximately 40% of the IIP’s weighted items, play a significant role.
Price Stabilisation Fund (PSF):
- Established in 2014-2015, the PSF is a fund designed to withstand excessive volatility in selected commodity prices.
- Commodities are purchased directly from farmers or farmers’ organizations at the farm gate/mandi and then made available to consumers at reduced costs.
- In case of losses, both the Centre and the States share the operational burden. The fund is utilized for activities aimed at regulating high/low prices, such as purchasing specific items and distributing them as needed to maintain prices within a specified range.
Consumer Price Index (CPI):
- CPI measures the monthly change in retail prices, with the average annual CPI calculated based on monthly indices. The average annual retail prices of the current year are compared to those of the base year (assumed as 100), with different goods accorded weights based on their relative significance. Unlike WPI, CPI includes both goods and services and focuses on a homogeneous group of consumers, reflecting the cost of living for the concerned category of consumers. CPI is widely used in India, including for determining dearness allowances for government employees.
New Consumer Price Indices:
- At the retail level, CPI reflects the cost of living conditions and is based on changes in the retail prices of selected goods and services, representing a major portion of consumer spending. The Reserve Bank’s initiative and the subsequent work by the Central Statistical Organisation (CSO) aim to compile new CPIs (Urban and Rural) to address data gaps in price statistics. The CSO has revised the base year of the CPI from 2010 to 2012. The new CPIs will provide a broader view of the cost of living conditions, covering both services and manufacturing products.
Introduction of CPI (Urban) and CPI (Rural):
- The CSO has undertaken the compilation of CPI (Urban) and CPI (Rural) for all states or Union Territories (UTs) and all of India. In urban areas, towns with a population exceeding 9 lakh and state or UT capitals are selected purposively. For rural areas, 1183 villages have been selected nationwide to provide price changes for the entire rural population. The CSO plans to bring out a national CPI by merging CPI (Urban) and CPI (Rural) with appropriate weights, derived from NSSO’s 61st round of Consumer Expenditure Survey (2004-2005) data. Additionally, separate indexes for Agricultural laborers and Rural laborers are calculated by NSO in the Ministry of Statistics and Programme Implementation, with a base year of 2012.
Consumer Price Index for Industrial Workers (CPI-IW):
- Employed in determining Dearness Allowance (DA) for government employees and industrial workers, the CPI-IW also serves to measure inflation in retail prices and revise minimum wages in scheduled employment. The government, in October 2020, opted to update its base year to 2016. Compilation and maintenance of this index fall under the purview of the Labour Bureau, an attached office of the Ministry of Labour and Employment.
Difference between CPI and WPI
| Parameters for Comparison | CPI (Consumer Price Index) | WPI (Wholesale Price Index) |
| Targeted Group | Retail users and general public | Whole sellers and businesses |
| Publishing Agency | Office of Economic Advisor (Ministry of Commerce and Industry) | National Statistics Office (Ministry of Statistics and Programme Implementation and Labour Bureau) |
| Weightage of Food | 50% | 18.8% |
| Number of Indices | One | Four separate categories |
| Measures Prices of | Goods and services both | Goods only |
| Base Year | 2011-2012 | 2012 (CPI), 2016 (CPI-IW) |
| For Producers | CPI (Combined) is used as a measure for inflation by RBI since 2014 | – |
GDP Deflator
- The GDP deflator represents the ratio of GDP at current prices to GDP at constant prices. When GDP at Current Prices equals GDP at Constant Prices, the GDP deflator is 1, indicating no change in the price level. A GDP deflator of 2 signifies a twofold increase in the price level, while a deflator of 4 indicates a fourfold rise.
- Considered a superior measure of price behavior, the GDP deflator encompasses all goods and services produced in the country.
Measures to Control Inflation
Various measures to control inflation include:
Measures by RBI
Measures employed by the Reserve Bank of India (RBI) are as follows:
Monetary Policy
- During periods of high inflation, the RBI opts for higher policy rates, including the Repo Rate, Reverse Repo Rate, Cash Reserve Ratio (CRR), and Statutory Liquidity Ratio (SLR), among others.
- Elevated policy rates raise the cost of borrowing, restricting the supply, availability, and circulation of money in the economy, thereby mitigating inflation.
Open Market Operations (OMOs)
- Higher policy rates may result in a slowdown in economic growth. To address this, the RBI utilizes Open Market Operations (OMOs) to drain excess cash from the economy.
- In an OMO operation, the RBI borrows money from banks in exchange for government securities.
- Conversely, in times of need, the RBI may purchase government securities to infuse cash into the economy.
Moral Suasion
- As the bank’s banker, the RBI may influence banks to raise their interest rates, aligning with a tight monetary policy regime aimed at tempering economic exuberance.
Credit Control
- The RBI has the authority to direct banks to increase lending in one sector while reducing lending in another. For instance, if food inflation is on the rise, the RBI can instruct banks to boost loans in the agricultural sector to alleviate prices over the medium term.
Government Measures
- To combat inflation, the government can strategically utilize its annual budget allocations. For instance, it may invest in expanding cold storage facilities, enhancing transportation routes for faster logistics, and constructing additional warehouses. These efforts aim to prolong storage durations and ensure the availability of essential goods, such as food grains, in times of demand.
- Price stability can be achieved by the government through either its spending (public expenditure) or taxation policies.
- For example, the government might reduce its public expenditure to regulate inflation and manage the surplus money circulating in the economy.
- Additionally, the government can use its regulatory authority to encourage states to facilitate the free movement of fruits and vegetables by excluding them from the APMC Act. This measure helps address shortages of specific items in regional markets.
Fiscal Measures
- Similarly, the government may opt to raise tax rates, such as the personal income tax rate or corporate tax rate, to absorb excess liquidity from the economy and thereby control inflation.
Other Inflation-Related Concepts
| Description | Relation |
| Deflation | Attempt to bring back inflation in an economy to induce growth. |
| Stagflation | Results from a slow economy with high inflation rates and unemployment. |
| Disinflation | Reduction in the rate of inflation over time, despite positive inflation. |
| Skewflation | Inflation is where specific commodity prices rise while the overall price level remains stable. |
| Excess Demand | The situation when Aggregate Demand (AD) exceeds Aggregate Supply (AS) at full employment level. |
| Inflationary Gap | Gap where actual aggregate demand exceeds the demand required for full employment equilibrium. |
| Deflationary Gap | The situation when Aggregate Demand falls short of Aggregate Supply at full employment level. |
| Inflation Tax | Penalty for retaining currency during high inflation, involving a decrease in the value of money. |
| Seigniorage | Profit earned by the government from printing currency, representing the difference in value and cost. |
| Headline Inflation | Total inflation in an economy, including commodities like food and energy in the inflation basket. |
| Core Inflation | Analysis of inflation excluding volatile categories like food and energy prices. |
| Base Effect | Impact on inflation figures caused by exceptionally high or low levels in the previous reference period. |
| Phillips Curve | Economic concept suggests an inverse relationship between inflation and unemployment. |
Prelims Facts
- Foreign currency which has a quick migration tendency is -Hot currency [BPSC (Pre) 2015]
- An illegal income upon which income tax is not paid is known as -Black money (UPPSC (Pre) 2002, 2003)
- Which currency/currencies are considered as artificial? – Special Drawing Rights (IAS (Pre) 2010)
- Indian currency is printed by RBI (MPPSC (Pre) 1991
- Who is authorised to issue coins in India? -Reserve Bank of India (UP UDA/LDA (Pre) 2010)
- In India, money multiplier is defined as-Broad Money / Reserve Money (UP UDA/LDA (Pre) 2010/
- Whose signature is on 1 rupee Indian note? Secretary of Ministry of Finance (UKPSC (Pre) 2012)
- In which cities, coins are minted in India? -Mumbai, Kolkata and Hyderabad (UPPSC (Mains) 2008]
- When did the ‘Naya Paisa’ introduced with the decimal system of coinage become paise? – 1st June, 1964 [UKPSC (Pre) 2005
- Paper currency was first started in India in 1862 [UPPSC (Mains) 2011)
- Note issuing department of the RBI should always possess the minimum gold stock of worth 115 crore [UP Lower 2008)
- If you withdraw 1 lakh in cash from your demand deposit account at your bank, the immediate effect on the aggregate money supply in the economy will be To leave it unchanged [LAS (Pre) 2020
- The Reserve Bank of India has the power to print currency notes of rupees up to 10000 (UPPSC (Pre) 2014
- Reserve Bank of India issues currency notes against – Gold, Foreign Security, and Government of India Securs (MPPSC (Pre) 2022)
- Who benefits most from inflation? – Debtors [UPPSC (Pre) 1999
- Which governmental steps have proved relatively effective in controlling the double-digit rate of inflation in the Indian economy in recent years? Containing budgetary deficit and unproductive expenditure [IAS (Pre) 1994
- Weighted mean of prices of certain items has increased 3.3 times [IAS (Pre) 1993)
- The base of Consumer Price Index (CPI) for industrial workers has been shifted from 1982 to 2001 (LIPPSC (Mains) 2000
- Currency expansion can be best described as Higher prices [RAS/RTS (Pre) 1996
- Due to which prices of goods increase and the value of money falls? – Inflation (CGPSC (Pre) 2012
- What does the Phillips Curve represent? -Inflation and unemployment [UKPSC (Pre) 2013
- The new Wholesale Price Index series was introduced on -14th September, 2010 (UPPSC (Mains) 2009
UPSC NCERT Practice Questions
1. Which one of the following statements correctly describes the legal tender money? (Pre) 2018
(a) The money which is paid in payment of fees for legal matters in the court.
(b) The money which a creditor is under compulsion to accept in settlement of his claims.
(c) Bank currency in the form of cheques, drafts, bills of exchange, etc.
(d) Metal currency in circulation.
2. Concerning ‘Blockchain Technology, consider the following statements.
1. It is a public ledger that everyone can inspect, but which no single user controls.
2. The structure and design of the blockchain are such that all the data in it are about cryptocurrency only.
3. Applications that depend on the basic features of blockchain can be developed without anybody’s permission.
Which of the statement(s) given above is/are correct?
(a) Only 1
(b) 1 and 2
(c) Only 2
(d) 1 and 3
3. Concerning Central Bank digital currencies, consider the following statements. IAS (Pre) 2023
1. It is possible to make payments in a digital currency without using the US dollar or Swift system.
2. A digital currency can be distributed with a condition programmed into it such as a time frame for spending it
Which of the statement(s) given above is/are correct?
(a) Only 1
(b) Only 2
(c) Both 1 and 2
(d) Neither 1 nor 2
4. Consider the following.
1. Currency with the public
2. Demand deposits with banks
3. Time deposits with banks
Which of the following are included in the comprehensive wealth (M3) in India?
(a) 1 and 2
(b) 1 and 3
(c) 2 and 3
(d) All of these
5. Which of the following measures would result in an increases in the money supply in the economy? IAS (Pre) 2012
1. Purchase of government securities from the public by the Central bank
2. Deposit of currency in Commercial Banks by the public.
3. Borrowing by the government from the Central bank.
4. Sale of government securities to the public by the Central bank.
Codes
(a) Only 1
(b) 2 and 4
(c) 1 and 3
(d) 2, 3 and
6. In the Indian economy, the money multiplier increases along with the IAS (Pre) 2019
(a) increase in the cash reserve ratio
(b) increase in the banking habits of the public
(c) increase in fixed cash ratio
(d) increase in the population of the country
7. Money multiplier in India is defined as
(a) Broad Money/ Base Money
(b) Broad Money / Reserve Money
(c) Reserve Money / Base Money
(d) Base Money / Reserve Money
8. Reserve Bank of India issues currency notes against which of the following? MPPSC (Pre) 2022
(a) Gold
(b) Foreign security
(c) Government of India security
(d) All of the above
9. Economic growth is usually coupled with IAS (Pre) 2011
(a) deflation
(c) stagflation
(b) inflation
(d) hyper inflation
10. Consider the following statements.
1. Inflation benefits the debtors.
2. Inflation benefits the bondholders.
Which of the statement(s) given above is/are correct?
(a) Only 1
(c) Both 1 and 2
(b) Only 2
(d) Neither 1 nor 2
11. The rate of inflation in India is measured in respect to
(a) Consumer Price Index
(b) Wholesale Price Index
(c) Money supply
(d) Cost of living index for industrial workers
12. In India, inflation measured by the RPSC (Pre) 2013
(a) Wholesale Price Index number
(b) Consumer Price Index for urban non-manual worker
(c) Consumer Price Index for agriculture labours
(d) National Income defaultor.
13. Which of the following institution/office out the WPI) data in India?
(a) The Reserve Bank of India
(b) The Ministry of Commerce and Industry
(c) The Ministry of Finance.
(d) The Ministry of Consumer Affairs, Food and Public Distribution.
14. Producer Price Index (PPI) measures
(a) the average change in the prices of produced goods and services.
(b) the marginal change in the prices of produced goods and services.
(c) the total change in the prices of produced goods and services.
(d) None of the above
15. Headine inflation refers to the change in value of !! goods on the basket. On which basis is the headline inflation measured?
(a) Wholesale Price Index
(b) Consumer Price Index for industrial worker
(c) Combined Consumer Price Index unilate
(d) Urban Consumer Price Index
16. Which of the following is likely to be the most inflationary in its effect? IAS (Pre) 2021
(a) Repayment of public debt
(b) Borrowing from the public to finance a budget deficit
(c) Borrowing from banks to finance a budget deficit
(d) Creating new money to finance a budget deficit
Know Right Answer
1. (b)
2. (d)
3. (c)
4. (d)
5. (c)
6. (b)
7. (b)
8. (d)
9. (b)
10. (a)
11. (a)
12. (a)
13. (b)
14. (a)
15. (c)
16. (d)
Frequently Asked Questions (FAQs)
FAQ: What is the significance of studying Money and Inflation in the context of UPSC preparation?
Answer: Understanding Money and Inflation is crucial for UPSC aspirants as it forms a fundamental aspect of the Indian economy. Money, as a medium of exchange, and inflation, the rise in the general price level of goods and services, have profound implications on economic policies, financial stability, and overall development. A grasp of these concepts equips candidates with the knowledge to analyze economic trends, interpret monetary policies, and comprehend the impact of inflation on various sectors, making it an essential component of the UPSC syllabus.
FAQ: How do the NCERT Notes on Money and Inflation contribute to UPSC preparation?
Answer: The NCERT Notes on Money and Inflation serve as a comprehensive guide for UPSC aspirants by providing a structured understanding of economic principles. These notes cover key topics such as the functions of money, monetary policy, inflationary measures, and their effects on the economy. By studying these notes, candidates can develop a strong foundation, enabling them to answer UPSC questions with clarity and precision. Moreover, the practical insights gained from the NCERT Notes aid in connecting theoretical knowledge to real-world scenarios, an essential skill for the UPSC examination.
FAQ: How can a candidate relate Money and Inflation to current affairs for UPSC preparation?
Answer: Integrating the study of Money and Inflation with current affairs is vital for UPSC preparation. As economic conditions are dynamic, staying updated on recent developments allows candidates to connect theoretical concepts with real-time scenarios. Regularly reading financial news, analyzing government policies, and understanding global economic trends enable aspirants to appreciate the relevance of Money and Inflation in contemporary times. This multidimensional approach not only enhances the depth of knowledge but also equips candidates to provide insightful answers in the UPSC examination, showcasing a holistic understanding of economic issues.
In case you still have your doubts, contact us on 9811333901.
For UPSC Prelims Resources, Click here
For Daily Updates and Study Material:
Join our Telegram Channel – Edukemy for IAS
- 1. Learn through Videos – here
- 2. Be Exam Ready by Practicing Daily MCQs – here
- 3. Daily Newsletter – Get all your Current Affairs Covered – here
- 4. Mains Answer Writing Practice – here
