Multiple choice

A rapid increase in the rate of inflation is sometimes attribute to the “bass effect”. What is “base effect”?

  1. It is the impact of drastic deficiency in supply due to failure of crops.

  2. It is the impact of the surge in demand due to rapid economic growth.

  3. It is the impact of the price levels of previous year on the calculation of inflation rate.

  4. None of the statements (1), (2) and (3) given above is correct in this context.
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

The base effect pertains to low inflation numbers a year ago, which makes even a small increase in the price index now appear much larger. The index is higher this year then the next year inflation figures may be lesser (as base is higher).

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