Daily JAIIB Quiz 04 Nov 2026

Macroeconomics studies economy-wide variables such as aggregate output, general price levels, unemployment and economic growth. The pricing decision of one firm, demand for a particular product and a single consumer‘s purchase decision are primarily microeconomic topics.

A mixed economy combines private economic activity with government ownership, regulation and provision of public goods. The relative role of the State and markets varies across countries and over time. A purely command economy relies predominantly on central planning, while a market economy relies more heavily on decentralised market decisions.

The law of demand states that, generally, quantity demanded falls when a good‘s own price rises and increases when its price falls, other things being equal. This produces an inverse relationship between price and quantity demanded. Changes in income, tastes or prices of related goods can shift the demand curve rather than cause movement along it.

For a normal good, higher consumer income increases demand at each price, shifting the demand curve to the right. This is distinct from a movement along the same demand curve, which is caused by a change in the product‘s own price. For an inferior good, demand may instead decline as income rises.

Market equilibrium occurs where quantity demanded equals quantity supplied. At a price above equilibrium, a surplus tends to arise; at a price below equilibrium, a shortage tends to arise, assuming the usual demand and supply relationships. Equilibrium does not mean that the price is necessarily affordable to every consumer.

Lower production costs make supplying the product more profitable at each price, shifting the supply curve to the right. If demand remains unchanged, the new equilibrium generally has a lower price and a higher quantity. This is a shift in supply, not merely movement along the existing supply curve.

Money serves as a unit of account by providing a common measure in which prices, debts and economic values can be expressed. A medium of exchange is used to make payments, a store of value transfers purchasing power over time, and a standard of deferred payment facilitates the expression of future obligations.

In the RBI‘s traditional monetary aggregates, M1 comprises currency with the public, demand deposits with the banking system, and other deposits with the Reserve Bank of India. Time deposits are included in broader measures such as M3, not in traditional M1. For exam purposes, use the aggregate definitions prescribed by the syllabus and RBI statistical framework.

Demand-pull inflation occurs when aggregate demand grows faster than the economy‘s capacity to supply goods and services, putting upward pressure on the general price level. Cost-push inflation, by contrast, may result from higher input costs such as fuel or raw materials. A fall in aggregate demand generally reduces, rather than creates, demand-side price pressure.

The Consumer Price Index (CPI) is the principal inflation measure used for India‘s flexible inflation-targeting framework. It tracks changes in the prices of a basket of goods and services consumed by households. The Wholesale Price Index measures price changes at the wholesale level and is not the inflation target measure specified for the RBI‘s framework.

In the classical theory, the interest rate is determined by the supply of savings and the demand for investment funds. A higher interest rate tends to encourage saving and discourage some investment, while a lower rate tends to do the opposite. Keynes‘s liquidity preference theory instead emphasises money demand and money supply in determining the interest rate.

Keynes identified transactions, precautionary and speculative motives for holding money. Transactions balances meet routine payments, precautionary balances cover unexpected needs, and speculative balances reflect views about future interest rates and bond prices. The theory links the interest rate to money demand and money supply, especially through liquidity preference.

The LM curve represents combinations of income/output and interest rates at which the money market is in equilibrium, given real money supply and money demand. The IS curve represents equilibrium in the goods market. Their intersection indicates simultaneous equilibrium in the goods and money markets in the basic model.

A contraction or recession is associated with declining economic activity, often including lower output and investment and higher unemployment. The peak marks a high point before contraction, while a trough is the low point before recovery. Expansion is characterised by rising activity.

An increase in the policy repo rate generally raises the cost of short-term funds for banks and can transmit into higher lending rates, moderating credit growth and demand over time. The effect depends on transmission and economic conditions. A repo-rate increase is not a fiscal-policy measure, because fiscal policy concerns government taxation and spending.

Expansionary fiscal policy seeks to support aggregate demand, commonly through higher government expenditure, lower taxes, or both. It may be used to counter weak economic activity, though it can increase the fiscal deficit if not offset by revenue or spending changes. Monetary policy is conducted by the central bank and uses tools such as policy rates and liquidity operations.

The FRBM framework aims to promote fiscal discipline, transparency and prudent management of government finances, including a framework for managing deficits and public debt. Targets and escape clauses can be revised or applied under the law and subsequent amendments. It does not prohibit all government borrowing or require a zero fiscal deficit every year.

The expenditure approach adds private final consumption expenditure, gross capital formation/investment, government final consumption expenditure and net exports (exports minus imports). Imports are subtracted because they are included in domestic expenditure but are produced abroad. In formal national accounts, statistical adjustments and the precise treatment of inventories and valuables follow the applicable accounting framework.

Nominal GDP is measured at current prices, while real GDP adjusts for price changes. If nominal GDP grows faster than the price level, real output has generally increased. Using the simple approximate subtraction gives real growth of about 3%; the exact rate depends on the index and calculation method used.

Fiscal deficit broadly measures the excess of total government expenditure over receipts excluding debt-creating borrowings. It indicates the government‘s total borrowing requirement for the year, subject to accounting adjustments. Revenue deficit is the excess of revenue expenditure over revenue receipts, while the primary deficit is fiscal deficit minus interest payments.