Economy MCQs for Prelims – 2nd July 2025

Welcome to today’s curated set of MCQs from the Economy segments, specially aligned with the evolving trend of the UPSC Civil Services Preliminary Examination. These questions are not just a quiz, but a resource designed to familiarize you with the exact nature of questions asked in Prelims — where static concepts are tested through a current affairs lens.

Each question below is framed using recent developments in the news and backed by clear, concise explanations to help you link dynamic events with foundational knowledge.

Use this as a daily revision tool to refine your understanding, build context, and learn how UPSC frames conceptual questions from contemporary issues.

 Click Here to read the Current Affairs Total (CAT) Magazine for January 2025- April 2025.

 

Q1. Which of the following best describes inflation?

1. A temporary rise in the prices of select commodities in an economy
2. A sustained increase in the general price level of goods and services over time
3. A fall in the production of goods and services in an economy
4. An increase in the value of money due to high exports

Answer: b

Explanation

Inflation refers to a sustained rise in the general price level of goods and services in an economy over a period. It implies a decrease in purchasing power, as each unit of currency buys fewer goods and services. It is not limited to temporary or specific price rises. Inflation is usually measured through indicators like the Consumer Price Index (CPI) or the GDP deflator.

 

Q2. Consider the following pairs:

Types of Inflation	Description
1. Creeping Inflation	Annual price rise less than 3%
2. Walking Inflation	Annual price rise between 3% and 10%
3. Galloping Inflation	Monthly price rise above 50%
4. Hyperinflation	Extremely rapid price rise over 50% per month

Which of the pairs given above are correctly matched?

1. 1 and 2 only
2. 1, 2 and 4 only
3. 1, 3 and 4 only
4. 2, 3 and 4 only

Answer: b

Explanation

Pair 1 is correct: Creeping Inflation refers to a mild, gradual increase in prices, typically less than 3% annually.

Pair 2 is correct: Walking Inflation involves a moderate rise in prices, around 3% to 10% per year.

Pair 3 is incorrect: Galloping Inflation is characterized by rapid annual price increases in the range of 10% to 50%, not monthly.

Pair 4 is correct: Hyperinflation involves extreme price rises of over 50% per month, leading to currency collapse, as in Zimbabwe and Weimar Germany.

 

Q3. Consider the following statements regarding different types of inflation based on their causes

1. Demand-pull inflation arises when demand outpaces supply due to increased money supply and credit.
2. Cost-push inflation can occur due to supply shocks or rising input costs like oil or raw materials.
3. Built-in inflation is linked to inflationary expectations that influence future wage and price settings.

Which of the statements given above is/are correct?

1. 1 only
2. 1 and 2 only
3. 1 and 3 only
4. 1, 2 and 3

Answer: d

Explanation

Statement 1 is correct: Demand-pull inflation occurs when aggregate demand exceeds supply, often due to expansionary monetary and fiscal policies.

Statement 2 is correct: Cost-push inflation is driven by rising input costs or supply-side shocks, such as increases in wages or raw material prices.

Statement 3 is correct: Built-in inflation results from adaptive expectations where businesses and workers expect future inflation and adjust prices and wages accordingly.

 

Q4. Which of the following are commonly identified causes of inflation in an economy?

1. Demand-pull factors
2. Cost-push factors
3. Supply shocks
4. Wage-price spiral
5. Inflation expectations
6. Increase in money supply
7. Contractionary fiscal policy

Select the correct answer using the code below:

1. 1, 2, 3, 4, 5 and 6 only
2. 1, 2, 4, 5, 6 and 7 only
3. 1, 2, 3, 5, 6 and 7 only
4. 1, 2, 3, 4, 5, 6 and 7

Answer: a

Explanation

1. Demand-pull factors: When aggregate demand exceeds the productive capacity of the economy, prices rise. This is a primary driver of inflation and is often caused by an increase in money supply, credit, or public spending.
2. Cost-push factors: Inflation can also be caused by rising input costs (e.g., raw materials, energy, labor). Producers pass on these costs to consumers through higher prices.
3. Supply shocks: Sudden disruptions like pandemics, natural disasters, or geopolitical conflicts can reduce the supply of essential goods, leading to price spikes.
4. Wage-price spiral: When wages increase to keep up with inflation, businesses raise prices to cover higher wage costs. This cycle can sustain or accelerate inflation.
5. Inflation expectations: If consumers and businesses expect prices to rise, they adjust their behavior (e.g., demanding higher wages, buying early), which can contribute to actual inflation.
6. Increase in money supply: More money in circulation, without a corresponding increase in output, leads to too much money chasing too few goods, driving prices up.
7. Contractionary fiscal policy: This policy involves reducing government spending or increasing taxes. It lowers demand in the economy and is typically used to control inflation, not cause it.

 

Q5. Consider the following statements regarding inflation measurement indices:

1. The Wholesale Price Index (WPI) in India includes both goods and services traded at the wholesale level.
2. The Consumer Price Index (CPI) includes services and is published by the Central Statistics Office.
3. The Producer Price Index (PPI) captures price changes from the producer's perspective and may serve as a lead indicator for retail inflation.

Which of the statements given above is/are correct?

1. 2 only
2. 1 and 3 only
3. 2 and 3 only
4. 1, 2 and 3

Answer: c

Explanation

Statement 1 is incorrect: WPI excludes services and focuses only on goods traded at the wholesale level.

Statement 2 is correct: CPI includes both goods and services and is published by the Central Statistics Office under MoSPI.

Statement 3 is correct: PPI measures price changes from the producer’s perspective, and rising PPI may signal future increases in consumer prices.