Question

Inflation rose by 5% over the second quarter, by 4% during the first quarter and higher than 3% recorded during the same time last year. However, the higher price index did not seem to alarm National stock Index as stock prices remain steady. Which of the following, if true, could explain the reaction of National stock Index?

• A. RBI announced that it will take necessary corrective measures
• B. Stock prices were steady because of a fear that inflation would continue.
• C. Economists warned that inflation would continue.
• D. Much of the quarterly increase in the price level was due to a summer drought effect on food price.

Answer 1

The Correct Option is D

To explain the steady reaction of the National stock Index despite rising inflation, we need to identify a factor that would mitigate concern for investors about inflation negatively impacting the stock market. The key lies in understanding how different factors affect stock prices and investor sentiment. Here are the explanations for each option regarding their impact on the National stock Index:

Option	Explanation
RBI announced that it will take necessary corrective measures	While this could provide some assurance to investors, it's speculative as it depends on the effectiveness and timing of the measures. Thus, it doesn't directly explain why stock prices remained steady.
Stock prices were steady because of a fear that inflation would continue.	This statement contradicts the lack of alarm in the stock index. If there was a fear of continuous inflation, stocks would likely not remain steady.
Economists warned that inflation would continue.	Similar to the previous option, this statement implies a negative outlook that should cause stocks to fall rather than remain stable.
Much of the quarterly increase in the price level was due to a summer drought effect on food price.	This reason suggests that the inflation was due to a specific, temporary factor (drought). Since droughts are seasonal and do not generally indicate a long-term trend, investors might view this as a temporary situation, hence not affecting their confidence in stocks.

Therefore, the correct answer is that "Much of the quarterly increase in the price level was due to a summer drought effect on food price," as this provides a plausible, temporary explanation for the rise in inflation, allowing investors to remain confident about the stock market's longer-term prospects.