Question

Q. Suppose if India witnesses six consecutive quarters of slowing growth and at the same time high retail inflation. Which one of the following types of inflations probably could be referred?

• A.
  Skewflation
• B.
  Creeping inflation
• C.
  Stagflation
• D.
  Disinflation

Answer 1

The correct option is C

Stagflation
Explanation:

Option (a) is incorrect: Skewflation involves an increase in the price levels in a particular sector while other sectors do not experience such a change.

Option (b) is incorrect: Creeping inflation occurs when inflation levels of a nation increases gradually, but continually, over the time and when viewed long-term, it actually adds up to a significant increase in the cost of living.

Option (c) is correct: Stagflation is said to occur when an economy faces both high inflation and low growth or high levels of unemployment at the same time.
This makes the hands of the government and the central bank to get tied from taking any countercyclical policy steps.

This is because if the central bank tends to inject money into the economy in order to increase the economic activity (thus stimulate the growth) there will be a backslash in the form of increased inflation. In a similar way the government also can’t go for the fiscal stimulus packages.

Option (d) is incorrect: Disinflation means decrease in the rate of inflation. It is to be noted here that deflation means a decrease in general price levels i.e. opposite of the inflation.