Discussion
Which of the following factors could potentially contribute to stagflation in the Indian economy?
1. High inflationary pressures due to increased Government spending
2. Decline in industrial production and sluggish economic growth
3. Decrease in aggregate demand and consumer spending
4. Appreciation of the domestic currency leading to reduction of export competitiveness
Select the correct answer using the codes given below.
Answer: D
The key gives 1, 2, 3 and 4.
Stagflation is the combination of high inflation with stagnant output and rising unemployment. Inflationary pressure from heavy government spending (1) supplies the inflation, while a decline in industrial production and sluggish growth (2) is the stagnation itself.
A fall in aggregate demand and consumer spending (3) deepens the slowdown, and an appreciating rupee that hurts export competitiveness (4) further weakens output and growth. The Commission's remarks treat all four as factors that could contribute to stagflation, so every narrower option is incomplete.
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