Question:medium
Inflation rose by 5% over the second quarter, by 4% during the first quarter, and higher than the 3% recorded during the same time last year. However, the higher price index did not seem to alarm the National Stock Index, as stock prices remained steady. Which of the following, if true, could explain the reaction of the National Stock Index?
Inflation rose by 5% over the second quarter, by 4% during the first quarter, and higher than the 3% recorded during the same time last year. However, the higher price index did not seem to alarm the National Stock Index, as stock prices remained steady. Which of the following, if true, could explain the reaction of the National Stock Index?
Show Hint
Look for a reason that makes the inflation spike look temporary, since that is what would keep investors calm.
Updated On: Jul 15, 2026
- RBI announced that it will take necessary corrective measures.
- Stock prices were steady because of a fear that inflation would continue.
- Economists warned that inflation would continue.
- Much of the quarterly increase in the price level was due to a summer drought effect on food prices.
Show Solution
The Correct Option is D
Solution and Explanation
Step 1: Understanding the Concept.
We need a reason that makes rising inflation look temporary or non-threatening, since that is what would keep stock prices steady.
Step 2: Check option A.
A promised future RBI action does not by itself explain calm in the present, since the action has not happened yet.
Step 3: Check option B.
Fear of continuing inflation is normally something that would unsettle markets, not steady them, so this option contradicts itself.
Step 4: Check option C.
A warning that inflation will continue should make investors nervous, not calm, so it fails to explain the steady prices.
Step 5: Check option D.
A drought is a one-time, temporary weather event. If most of the price rise traces back to it, investors have good reason to expect prices to normalise once the drought ends, explaining why they are not alarmed.
Step 6: Final Answer.
Option D gives the clearest reason for the market's calm reaction, so it is correct.
We need a reason that makes rising inflation look temporary or non-threatening, since that is what would keep stock prices steady.
Step 2: Check option A.
A promised future RBI action does not by itself explain calm in the present, since the action has not happened yet.
Step 3: Check option B.
Fear of continuing inflation is normally something that would unsettle markets, not steady them, so this option contradicts itself.
Step 4: Check option C.
A warning that inflation will continue should make investors nervous, not calm, so it fails to explain the steady prices.
Step 5: Check option D.
A drought is a one-time, temporary weather event. If most of the price rise traces back to it, investors have good reason to expect prices to normalise once the drought ends, explaining why they are not alarmed.
Step 6: Final Answer.
Option D gives the clearest reason for the market's calm reaction, so it is correct.
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