UPSC CDS GS Economy Questions Part 2

Inflation refers to a situation when there is continuous rise in the prices of goods and services. Inflation causes decrease in the purchasing power of currency due to a rise in prices across the economy. To contain inflation, the RBI employs various tools under its monetary and credit policies. Generally, RBI sticks to monetary tightening to control the liquidity in the economy by raising interest rates, which, in turn, discourages the borrowers. Bondholders are lenders and during inflation, the effective cost of their currency decreases as purchasing power declines. Export gets less competitive as the input cost increases and import becomes costlier as our currency depreciates against foreign currency, though other reasons have their role to play. So, the first and second statements are correct.