Q. Consider the following statements:
1.High inflation reduces purchasing power.
2.Contractionary policies help in reducing inflation.
3.When high inflation hits an economy, policies supporting deflation can be adopted.
Which of the statements given above is/are correct?

[A] 1 only

[B] 1 and 2 only

[C] 2 and 3 only

[D] 1, 2 and 3

Answer: B
Notes:

Explanation –

Statement 1 and 2 are correct. High inflation reduces purchasing power. contractionary policies that control aggregate demand usually by raising interest rates can help in reducing inflation.

Statement 3 is incorrect. Even though an economy witnesses high inflation it is not advisable to adopt deflation policies because when prices are falling, consumers delay making purchases anticipating lower prices in the future. For the economy this means less economic activity, less income generated by producers, and lower economic growth.

Source: The Times of India