Republishing two old articles on Inflation, after they got deleted due to a technical upgrade of the website. In the previous article, we saw about “demand-pull” theory of Inflation.
Now time for the second one.

1. Theory #2: cost push inflation
2. What are the factors responsible?
3. Increased wages
4. Increase in the tax
5. Reduced availability of raw material
6. To get Higher profit margin
7. Theory 3: Mixed Demand Pull Cost Push inflation
8. Misc GK Stuff
9. Mock Questions
10. Question number one
11. Question number two
12. question number three
13. Question number four
14. Question number five
15. question number six
16. Question number seven
17. Previous years questions
18. Question from passage

Theory #2: cost push inflation

• Also known as supply side inflation.
• it means the cost of production has increased hence the price of products have increased.

What are the factors responsible?

Increased wages

• Maruti is producing 1000 cars per month, but the union workers of Maruti go on a strike and demand higher salary.
• Ultimately, Maruti agrees to the union demand, every worker will now get more salary. But of course the company never pays out of its own pocket and wants to keep the profit margin same so, the increased cost of car-production is always transferred to the customers. So the car that used to sell for two lakh rupees, will now sell for 2.17.

Increase in the tax

• Finance Minister reads the newspaper headline – Indians have more mobile phones than toilets. So he thinks, why not increase the excise duty on the mobile phones and use that Revenue to give more funds under  “total sanitation campaign “ (TSC). That’ll help in building more toilets on the villages.
• But of course, the CEOs of Nokia, Samsung or Motorola are not going to pay the money out of their pockets to finance the toilet building in Indian villages, they'll pass the increased cost to the customers. MRP of Nokia Lumia is increased.
• The cash in your hands is same as earlier, but the MRP has been increased by the supplier’s side.

Reduced availability of raw material

Consider the case of onion

• Bad weather= less production of onion or
• the blackmarketeers are intentionally stocking up or hoarding onions for better prices in future.
• Government declared attractive MSP (minimum support price) for Pulses (daal, Moong) so, farmers have shifted to producing those pulses instead of onions.
• UAE businessman is paying higher prices for Indian onions, because of bad weather conditions there. So our middlemen, find it lucrative to export onions to UAE rather than to local vegetable market in city.

In all four cases, because the supply of onions is reduced, the restaurant owner will

• A. Increase the per plate price of pau-bhaaji or
• B. Keep the per plate price same as usual but reduce the quantity of onion given, so that you’ve to pay extra for the extra ‘supply’ of onion salad.

What happened? Supply of onion reduced, so restaurant owner’s input cost increase and he had to push the menu prices higher.

To get Higher profit margin

• The Supply of rice is same, the disposable income in your wallet is same, but the restaurant owner wants higher profit margin, so he decreases the size of  every Idli , but your hunger remains the same, so you’ll order more idlies and end up paying higher bill.= Inflation.
• The restaurant owner may not be the real-culprit here. Perhaps he is that daddy from the “demand pull pulsar bike” case: He had to increase the pocketmoney of his kid for that axe-perfume, SRK’s skin whitening cream and John Abraham’s sun-screen lotion.
• That’s why he has to increase his profit margin to pay for those unnecessary products.
• Or perhaps but real-estate market has gone up thanks to that Ministers in “Demand pull” inflation case. And so, restaurant owner has to increase his profit margin to pay for the house-loan.
• As you can see in ^this case, there is never a totally “demand pull” inflation or totally “cost-push” inflation. The final inflation that we feel in our real life, is resulted because of both of them. (Minister increased demand pull hence Restaurant owner had to increase the cost-push.) So this brings us to the third theory

Theory 3: Mixed Demand Pull Cost Push inflation

Self-explanatory.

Misc GK Stuff

Mock Questions

Time for some Mock Demo CSAT questions for General Studies paper 1.

Question number one

Inflation in theory occurs

• A. When the price of essential commodities outstrip the income
• B. When money supply grows at a higher rate than GDP in real terms.
• C. When the exchange rate of currency falls
• D. When fiscal deficit exceeds the balance of payments deficit

Question number two

Which of the following is not a reason for cost push inflation

• A. The payment of dearness allowance to employees.
• B. The existence of large parallel economy (black money)
• C. Fluctuations in the agricultural and industrial output
• D. Excessive indirect taxation

question number three

Among the supply-side measures to contain inflation is.

• A. Postponing the public expenditure.
• B. Mopping up excessive liquidity through taxation
• C. Credit control measures of RBI
• D. Maintaining price levels through an effective public distribution system.

Question number four

Temporary control of inflation can be affected by

• Reducing prices.
• Increasing prices.
• Increasing the taxation rate.
• Restricting the growth of money supply.

Question number five

Out of the items given below, which can cause demand pull inflation?

• Increasing interest rates.
• Increasing investment.
• Increasing money supply.
• Increased cost of materials

question number six

inflation results from an excessive demand over the availability of supply, is known as

• A.cost push inflation.
• B.Demand pull inflation.
• C.Either a or B.
• D.None of these.

Question number seven

inflation is the result of increasing the cost of production. This kind of inflation is known as

• A.cost push inflation.
• B.Demand pull inflation.
• C.Either a or B.
• D.None of these.

Previous years questions

A rise in general level of prices may be caused by

• 1. Increasing money supply
• 2. Decreasing aggregate level of output
• 3. Increasing effective demand

which of these given statements are correct.

• Only one
• only one and two
• only two and three
• all of them

match the list “A” with list “B”

Question from passage

Consider the following passage.
Price is not the same thing as value. Suppose that on a day, the price of everything: coal, bread, postage stamp, labour, rent of house, et cetera where to double- price, then, would certainly rise, but the values of all things except one would not.
The writer wants to see that if price of all things were doubled

• A.the value of all things would remain constant
• B.the values of thing sold would be doubled
• C.the values of things bought would be halved
• D.the value of money only would be halved.

Stagflation refers to a situation which is characterized by

• deflation and rising unemployment.
• Inflation and rising employment
• inflation and rising unemployment.
• Stagnant employment and deflation.

Stagflation refers to.

• high inflation in periods of high unemployment.
• Deflation in the periods of stagnant employment.
• Deflation in the periods of high unemployment.
• High inflation in the periods of full employment.

What does the term benign inflation imply?

• mild the rate of inflation.
• An unexpected rate of inflation.
• The markup inflation.
• A spiraling inflation

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