Question

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

• A. It is the impact of drastic deficiency in supply due to failure of crops
• B. It is the impact of the surge in demand due to rapid economic growth
• C. It is the impact of the price levels of previous year on the calculation of inflation rate
• D. None of the statements (a), (b) and (c) ‘given above is correct in this context

Answer 1

The correct option is C It is the impact of the price levels of previous year on the calculation of inflation rate

The base effect relates to inflation in the corresponding period of the previous year, if the inflation rate was too low in the corresponding period of the previous year, even a smaller rise in the Price Index will arithmetically give a high rate of inflation now