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Ratios and OMO

A rapid incre...

Question

A rapid increase in the rate of inflation is sometimes attributed to the 'Base Effect'. What is the 'Base Effect'?

A

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

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B

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

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C

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

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D

None of the above

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Solution

The correct option is C It is the impact of price levels of the previous year on the calculation of inflation rate.
If the prices in the previous year are low then the inflation in the corresponding year spikes. This higher level of inflation can be attributed to much lower inflation in the previous year compared to the base year or base effect.

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