Question

Consider the following statements regarding the “base effect” in inflation calculation: 1. Base effect depends on the price level of the corresponding month in the previous year.  2. Very high prices in the previous year may result in lower current inflation readings.  3. Very low prices in the previous year may create a favorable base effect.  Which of the statements given above is/are correct?

A 1 only
B 1 and 2 only
C 2 and 3 only
D 1 and 3 only
E 1, 2 and 3
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