JAIIB Paper 1 Module B Quiz 2

Scarcity means that resources such as income, time and productive inputs are limited relative to wants. Because the household cannot satisfy both wants with its available income, it must make a choice. The next-best alternative forgone is the opportunity cost of that choice.

Microeconomics studies decisions of individual consumers, firms and particular markets, such as the pricing decision of one bakery. Macroeconomics studies economy-wide aggregates such as total output, overall inflation and national unemployment.

A command economy relies primarily on central planning and administrative decisions to direct production and resource allocation. A market economy relies more heavily on prices and decentralised decisions, while a mixed economy combines market mechanisms with government intervention.

For a normal good, higher consumer income increases demand at each possible price, shifting the demand curve to the right. This is different from a movement along the curve, which is caused by a change in the good’s own price. For an inferior good, the income effect can be the opposite.

Lower production costs make supplying the product more profitable at each price, so the supply curve shifts to the right. At the original demand curve, the new equilibrium will generally have a lower price and a higher quantity, assuming ordinary downward-sloping demand and upward-sloping supply.

An increase in demand shifts the demand curve to the right. With supply unchanged and normally upward sloping, buyers compete for the available quantity, causing equilibrium price and equilibrium quantity to rise.

In the conventional RBI definition, M1 includes currency with the public, demand deposits with the banking system and other deposits with the RBI. Time deposits with banks are included in broader aggregates such as M3, not in M1. For examination use, follow the definition specified in the applicable study material and RBI statistical series.

Demand-pull inflation occurs when aggregate demand rises relative to the economy’s productive capacity, putting upward pressure on the general price level. Cost-push inflation instead begins with higher production costs or supply shocks, such as a sharp rise in input prices.

Disinflation means the rate of inflation has slowed, but prices are still rising. Deflation means the general price level is falling. A decline in inflation therefore does not necessarily mean that goods and services have become cheaper; it means they are becoming more slowly expensive on average.

In the classical theory, the interest rate is determined by the demand for investment funds and the supply of savings. A higher interest rate tends to encourage saving and discourage investment, helping balance saving and investment in the model. Keynes’ liquidity-preference theory instead emphasises money demand and money supply.

Keynes identified transactions, precautionary and speculative motives for holding money. People need cash for routine payments, unexpected needs and portfolio decisions under uncertainty about future interest rates and bond prices. Liquidity preference links the demand for money with the interest rate.

The peak marks the high point of economic activity in a cycle. It is followed by a contraction, during which output and activity weaken, and then by a trough, the low point before recovery. The duration and severity of cycles vary across economies and episodes.

An open-market purchase by the central bank pays funds into the banking system, increasing reserves and system liquidity. This is generally an expansionary liquidity operation. An open-market sale withdraws liquidity from the banking system, other things equal.

A higher policy rate can raise market borrowing costs, restrain interest-sensitive consumption and investment, and thereby reduce aggregate demand and inflationary pressure over time. The strength and timing of transmission depend on financial conditions, expectations and other factors; it is not instantaneous or mechanically identical for every borrower.

Fiscal deficit broadly measures the excess of total government expenditure over receipts excluding borrowings. It indicates the government‘s borrowing requirement for the period and is monitored because persistent or high deficits can affect public debt, interest costs and macroeconomic stability. The exact statutory targets and escape clauses depend on applicable law and policy updates.

Nominal GDP reflects both changes in real output and changes in prices. A rough approximation subtracts inflation from nominal growth, suggesting real GDP growth of about 4%. Exact real growth is calculated using the appropriate deflator index and compounding relationship, so the subtraction is an approximation.

Value added is output value minus the value of intermediate goods and services consumed in production. Deducting intermediate inputs avoids double counting the same value at multiple stages of production. Summing value added across producers gives a measure consistent with final output, subject to the national-accounting framework.

Disinvestment proceeds are non-debt capital receipts because the government receives funds by selling an asset or equity stake rather than by taking a loan that creates a repayment obligation. Borrowings are debt capital receipts, while tax revenue is a revenue receipt. Classification should be read in the context of the applicable Budget documents.

Revenue deficit is the excess of revenue expenditure over revenue receipts. It indicates that revenue receipts are insufficient to meet revenue expenditure. Fiscal deficit is a broader measure of the government’s overall borrowing requirement, while primary deficit is fiscal deficit minus interest payments.

The money multiplier measures how much the money supply increases for every unit increase in the high-powered money (reserve money or M0) managed by the central bank. It is typically expressed as M3 / M0.