JAIIB Paper 1 Module B Quiz 4

An inferior good is one for which demand tends to fall as consumer income rises, other things equal, because consumers switch toward preferred alternatives. This is an income-related shift in demand, not a movement along the same demand curve caused by a change in the good’s own price. Inferior does not mean poor quality in every ordinary-language sense.

A binding price floor above equilibrium keeps the price higher than the market-clearing level. At that price, sellers wish to supply more than buyers wish to purchase, so a surplus arises. A minimum support price can have wider policy objectives, and the actual amount procured depends on implementation; the surplus conclusion is the basic model result.

Cross-price elasticity measures the percentage change in demand for one good relative to the percentage change in the price of another. A positive value generally indicates substitutes: when margarine becomes more expensive, demand for butter tends to increase. A negative value is typically associated with complements, while a value near zero suggests little relationship.

Disinflation means prices are still rising but at a slower rate than before. Deflation means the general price level is falling over the relevant period, implying a negative inflation rate. For example, a fall in inflation from 6% to 4% is disinflation, not deflation, if the index continues to rise.

Cost-push inflation arises when production costs increase and businesses pass some of the increase into selling prices. Wage increases can contribute when they exceed productivity growth, although the final price effect depends on margins, demand, competition and expectations. Demand-pull inflation, by contrast, is associated with aggregate demand rising faster than productive capacity.

The Fisher effect describes the approximate relationship between nominal interest, real interest and expected inflation: nominal interest is approximately the real rate plus expected inflation. If expected inflation rises by, for example, two percentage points and the real rate is unchanged, the nominal rate tends to rise by roughly two percentage points. The relationship is a theoretical guide; actual rates can also reflect risk, policy and market frictions.

Transactions demand reflects the need to hold money for routine payments and is commonly related to the level of income and expenditure. In the basic Keynesian formulation it is relatively insensitive to the interest rate compared with speculative demand. Precise behaviour can vary with payment technology and financial arrangements, but income is the core textbook determinant.

With a fixed downward-sloping money-demand curve, an increase in nominal money supply shifts the money-supply line to the right. At the original interest rate, money balances exceed desired holdings; people try to acquire interest-bearing assets, raising bond prices and lowering yields. The new money-market equilibrium is therefore associated with a lower interest rate, subject to the model’s assumptions.

The IS curve represents equilibrium in the goods market: planned expenditure equals output. The LM curve represents money-market equilibrium, where money demand equals money supply. Fiscal changes often shift IS, while changes in real money balances or money demand can shift LM in the basic model. The curves jointly determine equilibrium income and interest rate.

A contraction or recession phase is marked by declining economic activity, including output and employment. The trough is the low point at which contraction ends and recovery may begin. A peak is the high point before activity turns down, while expansion is the period of rising activity. Exact recession dating may use several indicators, not one measure alone.

Automatic stabilisers change the budget balance without requiring a new discretionary policy decision each time the economy changes. In a downturn, tax payments often decline as incomes fall and unemployment-related benefits may rise, supporting disposable income. A new infrastructure package or a one-time tax cut normally requires a deliberate policy decision and is discretionary rather than automatic.

When the central bank sells securities, purchasers pay for them and funds are transferred out of the banking system toward the central bank. This tends to absorb reserves and tighten liquidity, other things equal. An open-market purchase generally injects liquidity. The ultimate effect on credit, rates and inflation depends on the operating framework and subsequent actions.

An increase in government expenditure is an expansionary fiscal action when other budget items are unchanged. It raises aggregate demand directly through government purchases and may also create multiplier effects as recipients spend part of their additional income. The size of the effect depends on spare capacity, monetary conditions, import leakage, expectations and how the spending is financed.

Counting intermediate goods separately in addition to the final product would double-count the value of inputs embodied in that final product. GDP can be measured by summing value added at each production stage, or by counting final goods and services. Both approaches aim to measure current domestic production without repeated counting of the same value.

Real GDP growth adjusts nominal GDP growth for changes in the prices of domestically produced final output. Using the approximate relationship, real growth is about nominal growth minus inflation measured by the GDP deflator: 8% − 5% = 3%. The exact calculation using index ratios is (1.08/1.05) − 1, or about 2.86%, so 3% is the closest approximate answer.

GDP measures production within a country’s domestic territory. GNI adjusts GDP for net primary income from abroad, including income residents receive from abroad minus income non-residents earn domestically. Therefore, net income from abroad can make GNI differ from GDP. It is not the same as remittances or the trade balance alone.

Revenue deficit equals revenue expenditure minus revenue receipts. Here, ₹32 lakh crore − ₹29 lakh crore = ₹3 lakh crore. It indicates that revenue receipts are insufficient to meet revenue expenditure. It is distinct from fiscal deficit, which compares total expenditure with receipts excluding borrowings, and from primary deficit, which subtracts interest payments from fiscal deficit.

Proceeds from selling government equity in a public-sector enterprise are generally classified as non-debt capital receipts. They are not tax revenue and do not, by themselves, create a repayment obligation like borrowing. However, disinvestment changes the government’s ownership stake and can affect future dividends or other public-asset considerations.

The side of the market that is less responsive to price changes generally bears more of a per-unit tax burden. With relatively inelastic demand and relatively elastic supply, consumers have fewer alternatives or are less able to reduce purchases, while producers can more readily adjust supply. Therefore consumers are likely to bear the larger share, although the precise incidence depends on the relative elasticities.

Opportunity cost is the value of the next-best alternative sacrificed when a choice is made. Because resources such as money, labour and time are limited, selecting the hospital means giving up the benefit that the same resources could have produced through the road, or vice versa. It is not necessarily the total value of every rejected option.