| Consider the following statements: |
| 1. A base year is the year used only for comparison for the level of a particular economic index and hence it is used to determine inflation. |
| 2. A base effect can make it difficult to accurately assess inflation levels over time and the base effect wears off over time if inflation levels are relatively constant. Select the correct answer using the codes given below: |
A) 1 only
B) 2 only
C) Both 1 and 2
D) neither 1 nor 2
Correct Answer: C
Solution :
[c] A base year is normally set to an arbitrary level of 100. Any year can be chosen as a base year, but typically recent years are chosen. New, more up-to-date base years are periodically introduced to keep data current in a particular index. For example, to find that rate of inflation (or any other economic index) between 2005 and 2010, one would make calculations using 2005 as the base year, or the first year in the time set. 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.
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