Read the following report carefully and answer the questions on the basis of the same:
Along with the weakening of global economic activity, inflation the world over also remained muted in 2019. Inflation softened in advanced and emerging economies reflecting a slack in consumer demand. From the supply side, lower energy prices in 2019 also contributed to softening of inflation. In India, inflation rose slightly to 4.1% in April - December 2019, after a sharp decline from 5.9% in 2014 to 3.4% in 2018.
The cause of the above situation is?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Increase in imports.
The situation in the report is a fall in aggregate demand (AD). Of the four options, only an increase in imports lowers AD.
Aggregate demand is consumption (C) + investment (I) + government expenditure (G) + exports (X) − imports (M). Each option is judged by its effect on this total.
Option (1) Increase in government expenditure. — Incorrect. Government expenditure (G) is a part of AD. More of it raises AD.
Option (2) Increase in imports. — Correct. More spending goes to foreign goods. Imports (M) carry a minus sign, so net exports and AD fall.
Option (3) Increase in consumption expenditure. — Incorrect. Consumption (C) is a part of AD. More of it raises AD, the reverse of slack demand.
Option (4) Increase in producer’s investment. — Incorrect. Investment (I) is a part of AD. More of it raises AD.
Note: It seems that there is a mistake in the original NTA question. The report does not name any of these four as the cause. It speaks of slack consumer demand and lower energy prices. A rise in imports is still the only option that lowers aggregate demand.
NCERT (2026-27): “6.1.1 Current Account …Buying foreign goods is expenditure from our country and it becomes the income of that foreign country. Hence, the purchase of foreign goods or imports decreases the domestic demand for goods and services in our country.… National Income Identity for an Open Economy In a closed economy, there are three sources of demand for domestic goods – Consumption (C), government spending (G), and domestic investment (I). We can write Y = C + I + G (6.1) In an open economy, exports (X) constitute an additional source of demand for domestic goods and services that comes from abroad and therefore must be added to aggregate demand. Imports (M) supplement supplies in domestic markets and constitute that part of domestic demand that falls on foreign goods and services. Therefore, the national income identity for an open economy is Y + M = C + I + G + X (6.2) Rearranging, we get Y = C + I + G + X – M (6.3) where, NX is net exports (exports – imports).…” |