Inflation, GDP and National Income MCQs for UPSC Prelims

This Inflation, GDP and National Income MCQ practice paper for UPSC Prelims has 15 carefully selected questions on GDP, GNP, GVA, price indices, types of inflation and the inflation targeting framework. Each answer comes with a simple explanation, so you can strengthen your concepts while you practise.

Why Inflation and National Income Matters

Inflation and national income are the basic ideas of macroeconomics. UPSC asks conceptual questions on them every year, often in statement form, and also uses them in the Mains and in the Essay. Since the data on GDP and inflation appears daily in the news, a student who knows the definitions can understand the whole economy section of the newspaper.

Instructions

• Total questions: 15. Suggested time: 15 minutes.
• Each correct answer gives 2 marks and each wrong answer deducts 0.66 marks, as in the real Prelims.
• Attempt the questions first and check the answer key only after you finish.

Practice Questions

Q1. GDP at market price is equal to:
(a) GVA at basic prices plus taxes minus subsidies on products
(b) GNP minus depreciation
(c) NNP at factor cost
(d) Total exports minus imports

Q2. Gross National Product (GNP) is equal to:
(a) GDP minus net factor income from abroad
(b) GDP plus net factor income from abroad
(c) GDP minus depreciation
(d) GDP plus indirect taxes

Q3. Net National Product (NNP) is calculated by:
(a) GNP minus depreciation
(b) GNP plus depreciation
(c) GDP minus indirect taxes
(d) GDP plus subsidies

Q4. Which agency releases the GDP estimates in India?
(a) RBI
(b) NITI Aayog
(c) National Statistics Office (NSO), under MoSPI
(d) Finance Commission

Q5. The 'GDP deflator' is a measure of:
(a) Real growth
(b) Price changes in all goods and services in the economy
(c) Exchange rate
(d) Fiscal deficit

Q6. Real GDP is calculated by:
(a) Using the current year prices
(b) Using the constant base year prices
(c) Adding the exports
(d) Excluding services

Q7. Inflation caused by an increase in aggregate demand is called:
(a) Cost-push inflation
(b) Demand-pull inflation
(c) Stagflation
(d) Deflation

Q8. Stagflation is a situation of:
(a) High growth with low inflation
(b) High inflation with high unemployment and low growth
(c) Falling prices with high growth
(d) Falling prices with falling output

Q9. The inflation target set under the monetary policy framework in India is:
(a) 2 per cent
(b) 4 per cent with a band of plus or minus 2 per cent
(c) 6 per cent
(d) 8 per cent

Q10. The inflation targeting in India is based on which index?
(a) Wholesale Price Index (WPI)
(b) Consumer Price Index - Combined (CPI)
(c) Index of Industrial Production
(d) GDP deflator

Q11. The Consumer Price Index (CPI) in India is released by:
(a) RBI
(b) NSO (MoSPI)
(c) Office of the Economic Adviser
(d) NITI Aayog

Q12. Which of the following is NOT included in the Wholesale Price Index?
(a) Primary articles
(b) Fuel and power
(c) Manufactured products
(d) Services

Q13. Disinflation means:
(a) A fall in the price level
(b) A fall in the rate of inflation
(c) A rise in inflation
(d) No change in prices

Q14. Which of the following will most likely reduce demand-pull inflation?
(a) Increase in the repo rate
(b) Decrease in the repo rate
(c) Increase in government spending
(d) Reducing taxes

Q15. Per capita income is calculated as:
(a) National income divided by population
(b) GDP multiplied by population
(c) Exports divided by imports
(d) Savings divided by income

Answer Key with Explanations

1. Q1: (a) GDP at market prices = GVA at basic prices + product taxes - product subsidies.
2. Q2: (b) GNP = GDP + Net Factor Income from Abroad (NFIA).
3. Q3: (a) NNP = GNP - depreciation (consumption of fixed capital).
4. Q4: (c) The National Statistics Office under the Ministry of Statistics and Programme Implementation (MoSPI) releases the national income estimates.
5. Q5: (b) The GDP deflator = (Nominal GDP / Real GDP) x 100, and shows the price level change of all domestically produced goods and services.
6. Q6: (b) Real GDP is measured at constant prices of a base year, so it removes the effect of inflation.
7. Q7: (b) When the demand is more than the supply, prices rise, which is called demand-pull inflation.
8. Q8: (b) Stagflation combines stagnant growth, high unemployment and high inflation.
9. Q9: (b) The RBI Act was amended in 2016 to adopt flexible inflation targeting. The target is 4 per cent, with a tolerance band of 2 to 6 per cent, based on the CPI.
10. Q10: (b) The CPI (Combined) is the basis of the inflation target. The WPI is not used for the target.
11. Q11: (b) The CPI (Combined) is released by the NSO under MoSPI. The WPI is released by the Office of the Economic Adviser, DPIIT.
12. Q12: (d) The WPI covers goods only (primary articles, fuel and power, and manufactured products) and does not include services.
13. Q13: (b) Disinflation is a slowing down of the rate of inflation, while prices are still rising, whereas deflation is a fall in the general price level.
14. Q14: (a) A higher repo rate makes borrowing costlier, which reduces demand and brings inflation down.
15. Q15: (a) Per capita income = National income (or GDP) / total population.

Key Concepts to Revise After This Test

Quick Fact Sheet

• The base year for the new GDP series is 2011-12.
• GVA at basic prices = GDP minus product taxes plus product subsidies.
• The Monetary Policy Committee has six members, including the RBI Governor, and is set up under the RBI Act.
• The headline inflation is based on the total CPI, and the core inflation excludes food and fuel.
• The NSO publishes quarterly GDP estimates, and the advance estimates are given at the end of the financial year.
• The WPI is released monthly, and the CPI is released on the 12th of every month, normally.
• Per capita income is only an average and does not show the distribution of income.

How to Prepare Inflation and National Income for the Prelims

For national income and inflation, first master the definitions and the formulas with a small numerical example. Then link them with the news: read the monthly CPI release, the quarterly GDP release and the RBI policy statement. Make a one-page chart of the indices with their base year, the agency and the coverage. Solve statement-based questions to check clarity. You can also read our free Indian Economy notes for simple revision, and use our other practice papers on the site for mixed practice.

Tricks for Solving Inflation and National Income Questions

• Draw the relation chain. GDP, then plus NFIA to get GNP, then minus depreciation to get NNP.
• Know the agency. CPI by NSO, WPI by the Office of the Economic Adviser, and the target by the RBI-MPC.
• Think of the cause. Demand-pull needs a demand fix, and cost-push needs a supply-side fix.

Common Mistakes to Avoid

• Mixing up GDP and GNP.
• Confusing the CPI and the WPI in terms of coverage and agency.
• Thinking that disinflation is the same as deflation.
• Forgetting that the inflation target uses the CPI and not the WPI.

Frequently Asked Questions (FAQ)

How many questions come from Economy in the UPSC Prelims?

Economy usually gives 12 to 18 questions, with many from the basic concepts such as inflation and national income.

What is the difference between GDP and GNP?

GDP is the value of the goods and services produced within the country, and GNP adds the net income earned from abroad by the residents.

What is GVA?

Gross Value Added is the value of output minus the value of the intermediate inputs, and it shows the contribution of each sector.

What is the difference between CPI and WPI?

The CPI measures the retail prices paid by consumers and includes services, while the WPI measures the wholesale prices of goods only.

What is the inflation target in India?

The target is 4 per cent with a tolerance band of 2 to 6 per cent, based on the CPI.

What is core inflation?

It is the inflation that excludes the volatile items such as food and fuel.

Is Economy useful for the Mains?

Yes. It is a major part of GS III, and it supports the Essay as well.