A rapid increase in the rate of inflation is sometimes attributed to the ldquo base effect rdquo Wha...........

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

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

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

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

None of the statements (a), (b) and (c) given above is correct in this context

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Explanation:

The Base effect relates to inflation in the corresponding period of the previous year, if the inflation rate was too low in the corresponding period of the previous year, even a smaller rise in the Price Index will arithmetically give a high rate of inflation now. A base effect can make it difficult to accurately assess inflation levels over time.

If the prices in the previous year are low then the inflation in the corresponding year spikes. This higher level of inflation can be attributed to much lower inflation in the previous year compared to the base year or base effect. Hence option 3rd is correct.