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    Question

    Which of the following is/are challenge of the monetary

    policy in India? i. Ineffective transmission of monetary policy ii. Inflation expectations are very difficult to assess iii. Use of CPI has increased the time lag in measurement of inflation
    A Only i Correct Answer Incorrect Answer
    B Only ii Correct Answer Incorrect Answer
    C Only i and ii Correct Answer Incorrect Answer
    D Only ii and iii Correct Answer Incorrect Answer
    E All of the above Correct Answer Incorrect Answer

    Solution

    Effectiveness of the transmission channels of monetary policy is not known in India at this point in time. Not unsurprisingly, transmission mechanisms are found to be not effective even in most advanced economies (AEs). For measuring inflation expectations, expectation surveys are often used, for example, in giving a forecast or a rough approximation to a forecast of inflation. But the stated expectations may not be the same as what might be called ‘functional’ expectations. Wholesale price index (WPI) was the preferred inflation anchor till recently because of its wider coverage, a short time lag and weekly (it became a monthly index from 2011) availability. CPI has more time lag.

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