JAIIB Paper 1 Module B Quiz 10

This is a normative statement because it expresses a value judgement about what the government should do and what is fair. Positive economics describes or predicts economic relationships that can be tested against evidence; normative economics makes recommendations based on values or objectives.

A point inside the PPF represents an attainable combination but indicates that resources are underused or production is inefficient. A point on the frontier is productively efficient given resources and technology; a point outside it is unattainable with current resources and technology.

Printers and ink cartridges are complementary goods because they are often used together. A lower price of printers increases demand for printers and, consequently, demand for complementary ink cartridges. Substitutes are alternatives that can replace one another.

Price elasticity of demand is percentage change in quantity demanded divided by percentage change in price. Here the magnitude is 10% ÷ 10% = 1, so demand is unit elastic over the stated range. The negative sign normally reflects the inverse price–quantity relationship.

Consumer surplus is the difference between the maximum amount a consumer is willing to pay and the price actually paid. It measures the consumer’s net benefit from the transaction, not the producer’s receipt above cost.

A monopoly is characterised by one seller and barriers that prevent or limit entry by competitors. A monopolist has market power, although demand conditions and regulation still constrain pricing. Oligopoly has a small number of major firms; monopolistic competition has many firms selling differentiated products.

Constant returns to scale occur when output changes in the same proportion as all inputs. Increasing returns occur when output rises by a greater proportion; decreasing returns occur when it rises by a smaller proportion.

A household’s purchase of a newly produced final good is included in private final consumption expenditure (consumption, C). It is not counted as investment merely because the good is durable; national accounts generally classify household purchases of consumer durables as consumption.

GNI equals GDP plus net factor income from abroad. Therefore, ₹250 lakh crore + ₹4 lakh crore = ₹254 lakh crore. GDP measures production within the domestic territory; GNI adjusts it for net primary income received from and paid to the rest of the world.

Real GDP growth is approximately nominal GDP growth minus inflation measured by the GDP deflator. If both rise by about 7%, real output growth is approximately zero. The exact relationship is multiplicative, so this subtraction is an approximation for modest rates.

In the simplified model, the deposit multiplier is 1 divided by the required reserve ratio. With a ratio of 0.20, the multiplier is 1/0.20 = 5. This is a theoretical maximum under restrictive assumptions; actual money creation depends on bank behaviour, public currency preferences and other constraints.

Monetary-policy transmission is the process through which a policy-rate change affects market rates, bank funding and lending rates, spending, output and inflation. Pass-through may be incomplete or delayed because of deposit repricing, loan reset dates, risk premia, competition and balance-sheet conditions.

Crowding out describes the possibility that government borrowing increases competition for loanable funds or raises interest rates, thereby reducing private investment. Its size depends on monetary conditions, economic slack, capital mobility and how the borrowing is financed; it is not inevitable in every situation.

Automatic stabilisers are features of the tax-and-transfer system that cushion fluctuations without requiring a fresh discretionary measure. Progressive taxes collect less as incomes fall, while eligible unemployment benefits support household income during downturns.

If all households cut consumption simultaneously, aggregate demand and national income may fall. Because saving is a function of income, the fall in income can offset the attempt to save more, leaving total realised saving little changed in the simplest model. The concept is known as the paradox of thrift; it does not mean individual saving is always undesirable.

The traditional short-run Phillips curve describes an inverse relationship between inflation (or wage inflation in the original formulation) and unemployment. It is not a permanent policy trade-off: expectations and supply shocks can shift the curve, and the long-run relationship is different in standard modern treatments.

A lending spread is the difference between a lending rate and a relevant benchmark or funding rate. The exact benchmark depends on the context—for example, a policy rate, market reference rate or the bank’s cost of funds. A narrower spread means a smaller margin over that reference rate.

Tax incidence depends on the relative price elasticities of demand and supply, not simply on who legally remits the tax. The side of the market that is less responsive to price changes generally bears a larger share of the economic burden.

A stock is measured at a point in time, such as public debt outstanding on 31 March. A flow is measured over a period, such as government borrowing during a financial year. Flows can change stocks, but the concepts are not interchangeable.

The arithmetic is ₹8 lakh crore − ₹3 lakh crore = ₹5 lakh crore. This is the revenue deficit net of interest payments, sometimes described as the primary revenue deficit. It should not be confused with the primary fiscal deficit, which is fiscal deficit minus interest payments.