The worked question on this page is original educational practice. It is not represented as a question from an official previous-year examination paper.
01 / UNDERSTANDING
Review the question
Invent a four-index base-effect exercise in which the annual rate falls while the current index increases. Keep the current index rising while changing the earlier base enough to reduce inflation. An original checkpoint is: What is the second annual inflation rate in the example? Supported answer: 10%. Explain the decisive fact, then alter one condition and solve again. This is an original practice method, not a claim that the question appeared in an official past paper.
02 / UNDERSTANDING
The concept in context
A base effect is an arithmetic feature of comparison, not by itself an explanation of the economic forces changing current prices. A useful study check is to align each observation with its year-earlier base, then explain the arithmetic before suggesting economic causes. Explain why the method fits the stated facts before applying it to a changed situation.
03 / UNDERSTANDING
A worked learning case
At one comparison date an invented index is 120 against a year-earlier 100, giving 20% annual inflation. At the next date it is 121 against an earlier base of 110, giving 10%. The current index has risen from 120 to 121, yet the annual rate has dropped because the comparison base is substantially higher.
ORIGINAL EDUCATIONAL PRACTICE
Try it before you check.
What is the second annual inflation rate in the example?
Show the answer and reasoning
10%.
The second comparison uses 121 as the current index and 110 as the year-earlier base. Their difference is 11, and 11 divided by 110 equals 10%. Comparing 121 with 100 would use the wrong period. The lower annual rate can coexist with a rise in the current index.
Two traps to watch for.
- Using the previous month as the base for an annual comparison.
- Treating a favourable base effect as proof of falling current prices.
YOUR TOPIC-SPECIFIC LEARNING MAP
Learn from the attempt
Align each observation with its year-earlier base.
Calculate annual and sequential changes separately.
Explain the arithmetic before suggesting economic causes.
Explain the idea, apply it to a new situation, then check what changed in your reasoning.
BANKERS TUTORIAL · SOURCE NOTES
Keep the source alongside your notes.
Official links provide subject context and authoritative reference material. This guide’s explanation, scenario and question are original Bankers Tutorial learning content.
- ncert.nic.in https://ncert.nic.in/textbook.php?leec1=ps-6
- www.rbi.org.in https://www.rbi.org.in/scripts/DataDefinition.aspx
For RBI preparation, check the current official notice before relying on changing dates, rules or examination requirements.
