economics medium True/False

The 'Base Effect' refers to a situation where the current year's inflation rate appears artificially high simply because the central bank recently raised the repo rate to tighten monetary policy.

  1. True
  2. False

Answer: False

The Base Effect is a purely mathematical and statistical phenomenon related to the year-on-year comparison of price indices. If the price index in the corresponding month of the previous year (the base) was unusually low due to a temporary shock, the current year's inflation rate will mathematically appear exceptionally high, even if current prices are rising at a normal, steady pace. It has nothing to do with current repo rate actions.

Topic Macroeconomics - Inflation
Exam Relevance UPSC Prelims, SSC CGL, Banking
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