The correct answer is option 5. Explanation & Key Takeaways: • If inflation is high in an economy, the following problems can arise: • Low income groups are particularly hurt • People on a fixed income (e.g. pensioners, students receiving scholarships) will be worse off in real terms due to higher prices and same income as before inflation discourages exports as domestic sales are attractive . Inflation may erode the external competitiveness of domestic products if it leads to higher production costs such as wage increases, and higher interest rate. • Inflation can drag down growth as the investment climate turns bad due to instability and uncertainty and also as interest rates are raised and cost of credit increases • Inflation may discourage saving and thus hit investment. The savings pattern also gets skewed in favour of unproductive assets like gold as inflation may be higher than interest rates and yield is negative. • Inflation tax is a hidden tax. It is the financial loss in the value of money incurred by holders of cash. Another way of seeing it is: when the government wants to tax people, they resist it. But the government needs the money. So it prints and releases the money into market arid that inflates the economy which means people pay more for the goods and services they consume. The end result is that the tax that they did not pay is paid by way of price rise. • Strikes can take place for higher wages which can cause a wage spiral. Also if strikes occur in-an important industry which has a comparative advantage the nation may see a decrease in productivity, exports and growth. • Govt. fiscal deficit may go up as the need to subsidise is more to make goods and services affordable Related Concepts: • Inflation is defined as a rise in the general level of prices of goods and services in an economy over a period of time. • Inflation Targeting in India: • The RBI has announced a formal review of the policy instrument after six years of the Urjit Patel report (2014) on inflation and the use of inflation targeting. • The primary goal of inflation targeting was to contain inflation at around 4 per cent, within the allowable range of 2 to 6 per cent. • Recently, Inflation faced by Indian consumers shot up to a nearly eight-year high of 7.8% from 6.95%. • The Monetary Policy Committee (MPC) uses Consumer Price Index(CPI) data to control inflation. In April 2014, the Reserve Bank of India (RBI) had adopted the Consumer Price Index(CPI) as its key measure of inflation.