JAIIB Paper 1 Module B Quiz 5

When income rises while the general price level is stable, households can generally buy more goods and services. This is an increase in real purchasing power. It is not inflation, because inflation means a sustained rise in the general price level. The scenario alone does not establish that aggregate supply has fallen or that opportunity cost has changed for every activity.

In a command economy, central authorities make major decisions about what is produced, how resources are allocated and often the quantities and prices involved. Market economies rely more heavily on decentralised decisions by buyers and sellers. Real-world economies may combine market and government mechanisms, but the question specifically asks about a simplified command economy.

When only the good’s own price changes, the resulting change in quantity demanded is represented by movement along the same demand curve. A shift of the demand curve requires a non-price determinant—such as income, tastes, expectations or prices of related goods—to change. The figures show the usual inverse relationship between price and quantity demanded, other things being equal.

When the price of a substitute such as tea rises, consumers may switch to coffee. This increases demand for coffee and shifts its demand curve to the right. It is not merely a movement along the coffee demand curve because coffee’s own price has not been stated to change. The supply curve is unaffected by this demand-side change alone.

A price ceiling below the equilibrium price prevents the price from rising to the market-clearing level. At the artificially low price, consumers generally want to buy more while producers are willing to supply less, creating excess demand or a shortage. The result may also include non-price rationing, queues or informal-market activity.

India’s M1 is a narrow monetary aggregate. It comprises currency with the public, demand deposits with the banking system and other deposits with the Reserve Bank of India. Broader aggregates include additional deposit categories, such as time deposits, and are therefore larger in scope. M1 is not the same as bank credit or currency alone.

A broad increase in production costs—such as a rise in imported fuel prices—can push firms’ costs upward and lead to higher selling prices. This is cost-push inflation. Demand-pull inflation originates from aggregate demand rising faster than productive capacity. Deflation is a sustained fall in the general price level, while disinflation means the rate of inflation is slowing but remains positive.

Disinflation is a reduction in the rate at which prices are rising. Inflation remains positive at 4%, so the overall price level is still increasing, just more slowly than before. Deflation would require a sustained fall in the general price level, not merely a lower positive inflation rate.

In the classical loanable-funds framework, saving is the supply of funds and investment is the demand for funds. An increase in saving at every interest rate shifts the supply of loanable funds to the right. With investment demand unchanged, the equilibrium interest rate tends to fall, encouraging additional investment. The result assumes other determinants remain unchanged.

A liquidity trap is a situation in which interest rates are very low and market participants expect rates to rise later. Because bond prices move inversely to yields, they may fear capital losses on bonds and prefer holding liquid money. In this range, additional money supply may be willingly held rather than causing a substantial fall in interest rates. Money demand does not become zero.

The LM curve represents money-market equilibrium. With the price level fixed, an increase in nominal money supply raises real money balances. For any given level of income, equilibrium can then occur at a lower interest rate, so the LM curve shifts to the right/downward. The IS curve describes goods-market equilibrium and does not shift solely because the money supply changes.

New orders can signal future production and business activity, so they are often treated as a leading indicator. They may turn before the broader economy because firms receive orders before producing and delivering goods. Historical GDP is a lagging or retrospective measure, while existing infrastructure and the retired population do not generally serve as short-term leading indicators in this sense.

When the RBI buys government securities, it pays for them, adding funds to the banking system and generally increasing bank reserves and liquidity. Selling securities normally withdraws liquidity. An open-market purchase does not automatically change the CRR and cannot by itself eliminate the government’s fiscal deficit.

A higher policy rate can raise lending rates and the cost of credit, moderating borrowing, consumption and investment. Weaker aggregate demand can reduce inflationary pressure over time. The strength and timing of transmission depend on financial conditions and expectations; a policy-rate decision does not directly set all prices or change tax rates automatically.

In the simple Keynesian model, the expenditure multiplier is 1/(1 − MPC), where MPC is the marginal propensity to consume. A higher MPC means households spend a larger share of each additional unit of income, creating larger successive rounds of consumption and income. Therefore, the multiplier rises, assuming other leakages and conditions remain unchanged.

The GDP deflator is calculated as nominal GDP divided by real GDP, multiplied by 100. Here, (₹330 lakh crore ÷ ₹300 lakh crore) × 100 = 110. A deflator of 110 means the current-price value is 10% above the value measured at the chosen base-year prices. It is not itself an inflation rate for the period unless compared with the previous period’s deflator.

Value added at each stage is the value of output minus the value of intermediate inputs purchased from the previous stage. The farmer adds ₹20,000, the mill adds ₹12,000 (₹32,000 − ₹20,000), and the bakery adds ₹18,000 (₹50,000 − ₹32,000). Total value added is ₹50,000, equal to the final bread value in this simplified example. Adding all sales values would double-count intermediate goods.

A newly produced machine purchased for use in a factory is a capital good. Its purchase is recorded as gross fixed capital formation (investment) in expenditure-side GDP, even though the buyer is another domestic firm. It is not household consumption or a transfer payment. In the production approach, care is taken to avoid double-counting intermediate inputs.

Revenue expenditure generally covers the government’s day-to-day functioning and transfers, such as salaries, subsidies and interest payments; it does not normally create a physical asset directly. Capital expenditure generally creates assets or reduces liabilities, such as spending on roads or repayment of certain liabilities. Classification depends on the nature of the transaction, not simply whether cash is paid.

Primary deficit is fiscal deficit minus interest payments. Thus, ₹7 lakh crore − ₹2 lakh crore = ₹5 lakh crore. It measures the current year’s fiscal imbalance excluding the interest burden arising from past debt. The fiscal deficit itself remains ₹7 lakh crore in the question.