A rapid increase in the rate of inflation is sometimes attribute to the bass effect. What is base effect?

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Q: 13 (IAS/2011)
A rapid increase in the rate of inflation is sometimes attribute to the “bass effect”. What is “base effect”?

question_subject: 

Economics

question_exam: 

IAS

stats: 

0,208,82,24,31,208,27

keywords: 

{'inflation rate': [0, 0, 0, 3], 'base effect': [0, 0, 0, 1], 'bass effect': [0, 0, 0, 1], 'inflation': [0, 1, 0, 3], 'rapid economic growth': [0, 0, 0, 2], 'rapid increase': [0, 0, 0, 2], 'impact': [3, 0, 1, 7], 'rate': [2, 3, 13, 20], 'demand': [0, 0, 0, 3], 'price levels': [0, 0, 0, 3], 'calculation': [0, 0, 2, 2]}

The correct answer is: It is the impact of the price levels of the previous year on the calculation of the inflation rate.

Base effect refers to the impact of the price levels of the previous year on the calculation of the current inflation rate. Inflation is calculated as the percentage change in the price level of a basket of goods and services over a period of time. The base effect occurs when the current inflation rate appears to be high because it is being compared to a low inflation rate in the previous year, which can distort the actual inflation rate.

For example, if the price of a good increased by 10% this year, but decreased by 5% in the previous year, the current inflation rate would appear to be higher due to the low base effect. On the other hand, if the price of the same good decreased by 10% this year but increased by 5% in the previous year, the current inflation rate would appear to be lower due to the high base effect.

Therefore, the correct answer is "It is the impact of the price levels of the previous year on the calculation of the inflation rate."