Correct Option
The base effect refers to the impact of the price level in the corresponding period of the previous year (the base year) on the calculation of the current year's inflation rate. Inflation is typically measured as the percentage change in a price index over a period, usually year-on-year. If the price level in the base period was unusually low, even a moderate increase in prices in the current period can result in a high percentage change, thus showing a high inflation rate. Conversely, if the base period had unusually high prices, a similar price increase in the current period might result in a lower calculated inflation rate. This statistical phenomenon can sometimes distort the perception of actual price changes.
Incorrect Options
Option (a) describes a supply-side cause of inflation, specifically a supply shock due to crop failure, leading to a drastic deficiency in supply. This is a real economic factor influencing prices, not a statistical effect on inflation calculation.
Option (b) describes a demand-side cause of inflation, where rapid economic growth leads to a surge in demand, pushing up prices. This is a demand-pull inflation scenario, not the base effect.
Option (d) is incorrect because option (c) accurately defines the base effect.