Economics · Inflation and Monetary Policy
Inflation management in India has transitioned to a flexible inflation targeting framework. In the event of a persistent supply-side shock, such as a global oil price surge combined with a domestic monsoon failure, what is the primary challenge faced by the Monetary Policy Committee (MPC)?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The government automatically fixes the price of all essential commodities through the central bank, making monetary policy irrelevant.
- 2Inflation targeting only applies to the prices of gold and real estate, so supply shocks in food and fuel are ignored.
- 3The MPC must decide whether to raise rates to prevent second-round effects on inflation expectations or to keep rates low to support growth.✓
- 4Supply-side shocks always lead to immediate deflation because consumers stop spending money on discretionary items.
Correct answer
The MPC must decide whether to raise rates to prevent second-round effects on inflation expectations or to keep rates low to support growth.
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