MULTIPLE-CHOICE QUESTIONS WITH ANSWERS RELATED TO DEFLATION: CAUSES AND EFFECTS OF DEFLATION; DEFLATIONARY GAP; MEASURES TO CONTROL DEFLATION; DEFICIT FINANCING
Which of the following is a potential consequence of deflation on borrowers?
a) Decreased burden of debt
b) Increased purchasing power
c) Lower interest rates
d) Difficulty in repaying loans
Answer: d) Difficulty in repaying loans
What role does the Reserve Bank of India (RBI) play in controlling deflation?
a) Implementing expansionary fiscal policy
b) Regulating the money supply
c) Setting government expenditure targets
d) Controlling inflation expectations
Answer: b) Regulating the money supply
How does deflation impact the real estate market in India?
a) Increased demand for property
b) Rising property prices
c) Decline in housing affordability
d) Expansion of mortgage lending
Answer: c) Decline in housing affordability
Which sector of the economy is most vulnerable to the effects of deflation?
a) Manufacturing
b) Agriculture
c) Services
d) Export
Answer: a) Manufacturing
What effect does deflation typically have on wages in India?
a) Increase in nominal wages
b) Decrease in real wages
c) Stability in wage levels
d) Rise in wage inequality
Answer: b) Decrease in real wages
Which monetary policy tool can the RBI use to combat deflation?
a) Quantitative easing
b) Open market operations
c) Decreasing reserve requirements
d) Fiscal stimulus
Answer: a) Quantitative easing
How does deflation impact government revenue in India?
a) Decreased tax revenue
b) Increased government spending
c) Expansion of public services
d) Higher budget deficits
Answer: a) Decreased tax revenue
What impact does deflation have on the stock market in India?
a) Increased stock prices
b) Growth in market capitalization
c) Decline in corporate profits
d) Expansion of investment opportunities
Answer: c) Decline in corporate profits
Which factor can exacerbate deflationary pressures in India?
a) High population growth
b) Expansionary monetary policy
c) Strong consumer demand
d) Decreased trade deficits
Answer: a) High population growth
How does deflation affect consumer behavior in India?
a) Increased saving and investment
b) Higher levels of borrowing and spending
c) Decreased consumer confidence
d) Expansion of credit availability
Answer: c) Decreased consumer confidence
Which of the following is a potential consequence of deflation on investment in India?
a) Increased risk-taking behavior
b) Expansion of capital expenditure
c) Decline in business profitability
d) Rise in stock market volatility
Answer: c) Decline in business profitability
How does deflation impact the banking sector in India?
a) Expansion of lending activities
b) Decrease in non-performing loans
c) Compression of interest margins
d) Increase in liquidity reserves
Answer: c) Compression of interest margins
Which policy measure is typically employed to stimulate demand during deflation in India?
a) Reduction of import tariffs
b) Implementation of supply-side reforms
c) Expansionary monetary policy
d) Increase in corporate taxes
Answer: c) Expansionary monetary policy
What is the relationship between deflation and economic growth in India?
a) Deflation leads to higher economic growth
b) Deflation has no impact on economic growth
c) Deflation is associated with lower economic growth
d) Deflation accelerates technological innovation
Answer: c) Deflation is associated with lower economic growth
How does deflation impact the value of the Indian rupee in international markets?
a) Appreciation of the rupee
b) Depreciation of the rupee
c) Stability of the rupee exchange rate
d) Increase in foreign currency reserves
Answer: a) Appreciation of the rupee
Which of the following is a potential consequence of deflation on exports from India?
a) Increase in export demand
b) Expansion of trade surplus
c) Decline in competitiveness
d) Growth in export-oriented industries
Answer: c) Decline in competitiveness
How does deflation impact the balance of payments in India?
a) Increase in foreign investment inflows
b) Expansion of current account deficit
c) Decrease in foreign exchange reserves
d) Rise in trade deficits
Answer: c) Decrease in foreign exchange reserves
Which economic indicator is often used to measure the severity of deflation in India?
a) Gross Domestic Product (GDP) growth rate
b) Consumer Price Index (CPI)
c) Purchasing Managers’ Index (PMI)
d) Wholesale Price Index (WPI)
Answer: d) Wholesale Price Index (WPI)
What effect does deflation typically have on the banking sector’s willingness to lend in India?
a) Increase in lending rates
b) Expansion of credit availability
c) Decrease in loan defaults
d) Growth in financial inclusion
Answer: a) Increase in lending rates
How does deflation impact the cost of borrowing for businesses in India?
a) Decrease in interest rates
b) Increase in credit availability
c) Rise in borrowing costs
d) Expansion of capital investment
Answer: c) Rise in borrowing costs
Which sector of the Indian economy is likely to experience reduced demand during deflation?
a) Information technology
b) Healthcare
c) Consumer goods
d) Infrastructure
Answer: c) Consumer goods
What role does inflationary expectations play in exacerbating deflationary pressures in India?
a) It encourages higher consumer spending
b) It leads to tighter monetary policy
c) It reduces the effectiveness of fiscal stimulus
d) It discourages investment
Answer: b) It leads to tighter monetary policy
Which of the following is NOT a potential consequence of deflation on asset prices in India?
a) Decrease in real estate values
b) Decline in stock market valuations
c) Increase in gold prices
d) Compression of profit margins
Answer: c) Increase in gold prices
How does deflation affect government debt sustainability in India?
a) It decreases the real value of government debt
b) It increases the likelihood of default
c) It reduces the need for deficit financing
d) It boosts investor confidence
Answer: b) It increases the likelihood of default
Which policy tool can the Indian government use to stimulate consumer spending during deflation?
a) Increasing personal income taxes
b) Implementing austerity measures
c) Providing direct cash transfers
d) Tightening credit regulations
Answer: c) Providing direct cash transfers
How does deflation impact the cost of living for households in India?
a) Decrease in prices of essential goods
b) Increase in disposable income
c) Rise in real wages
d) Compression of household budgets
Answer: d) Compression of household budgets
Which economic indicator is often used to measure the severity of deflation in India?
a) Consumer Confidence Index (CCI)
b) Producer Price Index (PPI)
c) Retail Sales Index (RSI)
d) Gross Domestic Product (GDP)
Answer: b) Producer Price Index (PPI)
What is the role of expectations in perpetuating deflationary pressures in India?
a) Expectations of future price declines spur current consumption
b) Expectations of lower profits lead to increased investment
c) Expectations of government intervention mitigate deflationary effects
d) Expectations of currency appreciation boost export demand
Answer: a) Expectations of future price declines spur current consumption
How does deflation affect the level of innovation in industries in India?
a) Decrease in research and development spending
b) Expansion of investment in new technologies
c) Rise in entrepreneurial activity
d) Compression of profit margins discourages innovation
Answer: d) Compression of profit margins discourages innovation
Which factor can contribute to the persistence of deflationary trends in India?
a) Expansionary fiscal policy
b) Increased government spending
c) Liquidity injections by the central bank
d) Weak consumer demand
Answer: d) Weak consumer demand
How does deflation typically impact the rate of investment in India?
a) Stimulates higher levels of investment
b) Encourages risk-averse behavior among investors
c) Leads to increased borrowing for investment purposes
d) Results in decreased capital expenditure
Answer: d) Results in decreased capital expenditure
What role does the exchange rate play in influencing deflationary pressures in India?
a) Appreciation of the currency exacerbates deflation
b) Depreciation of the currency mitigates deflation
c) Stable exchange rates have no impact on deflation
d) Fluctuating exchange rates increase investor confidence
Answer: a) Appreciation of the currency exacerbates deflation
How does deflation affect the demand for credit among Indian businesses?
a) Increases demand for credit due to lower interest rates
b) Decreases demand for credit due to reduced investment opportunities
c) Leads to a shift towards equity financing
d) Encourages banks to tighten lending standards
Answer: b) Decreases demand for credit due to reduced investment opportunities
Which sector of the Indian economy is particularly vulnerable to deflationary pressures?
a) Information technology
b) Agriculture
c) Pharmaceuticals
d) Renewable energy
Answer: b) Agriculture
What is the likely impact of deflation on government spending priorities in India?
a) Increase in social welfare spending
b) Expansion of infrastructure investment
c) Reduction in defense spending
d) Growth in subsidies for key industries
Answer: c) Reduction in defense spending
How does deflation typically affect the profitability of Indian businesses?
a) Boosts profit margins due to lower input costs
b) Reduces profitability due to decreased consumer spending
c) Stimulates innovation leading to higher profits
d) Increases export demand resulting in higher profits
Answer: b) Reduces profitability due to decreased consumer spending
What impact does deflation have on the rate of economic growth in India?
a) Accelerates economic growth
b) Stagnates economic growth
c) Leads to recessionary conditions
d) Has no effect on economic growth
Answer: c) Leads to recessionary conditions
How does deflation affect the level of household savings in India?
a) Encourages higher levels of savings
b) Leads to a decrease in savings due to uncertainty
c) Increases spending as households expect lower prices
d) Has no impact on household savings
Answer: b) Leads to a decrease in savings due to uncertainty
Which policy measure can the Indian government implement to counter deflationary pressures?
a) Increasing interest rates
b) Implementing supply-side reforms
c) Reducing taxation
d) Expanding government expenditure
Answer: d) Expanding government expenditure
How does deflation affect income inequality in India?
a) Decreases income inequality
b) Increases income inequality
c) Leads to income redistribution
d) Has no impact on income distribution
Answer: b) Increases income inequality
