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Q102 (CDS-I/2024) Economy › Money, Banking & Inflation › Inflation measurement Answer Verified

Which of the following statements is/are correct? 1. A price index captures the change in the average price of a constant basket of commodities. 2. If the price index takes values 100, 110 and 121 in three consecutive years respectively, then the inflation rates in the 2nd and 3rd years are 10% and 21% respectively. Select the correct answer using the code given below.

Result
Your answer: —  Â·  Correct: A
Explanation

Statement 1 is correct as a price index is a normalized average of price changes for a specific basket of goods and services over time [5]. It measures the cost of a representative basket relative to a base period [4]. Statement 2 is incorrect due to a calculation error in the third year. Inflation is the percentage change in the index from the previous period [4]. In the 2nd year, the inflation rate is ((110-100)/100) * 100 = 10%. However, in the 3rd year, the inflation rate is ((121-110)/110) * 100 = 10%, not 21% [1]. While the index value 121 represents a 21% cumulative increase from the base year (Year 1), the annual inflation rate for the 3rd year specifically is 10%. Therefore, only the first statement is accurate.

Sources

  1. [3] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 2: National Income Accounting > 2.4 NOMINAL AND REAL GDP > p. 29
  2. [5] https://www.investopedia.com/terms/c/consumerpriceindex.asp
  3. [2] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > INFLATION > p. 62
  4. [4] https://en.wikipedia.org/wiki/Price_index
  5. [1] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > 1.18 Inflation Indices > p. 30
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