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The 'Paradox of Thrift' states that if everyone tries to increase their savings simultaneously during a recession, the ultimate result will be:
- A massive increase in total national wealth
- A decrease in aggregate demand and total savings
- High economic growth
- Zero inflation
Answer: A decrease in aggregate demand and total savings
Proposed by Keynes, the paradox illustrates that while saving is virtuous for an individual, a collective increase in savings reduces consumption. This drops aggregate demand, leading to lower production, job losses, and ultimately a lower total income, meaning the economy's actual total savings end up falling.
When a country's currency depreciates, its exports become ___ expensive for foreign buyers, theoretically improving the trade balance.
- less
- rivalrous (or unregulated common)
- 40
- public
Answer: less
Currency depreciation means it takes fewer units of foreign currency to buy the domestic currency. Consequently, domestic goods become cheaper in international markets, boosting export volumes. However, this relies on the Marshall-Lerner condition, which requires the sum of export and import elasticities to be greater than one.
The Office of the Economic Adviser (OEA), Ministry of Commerce and Industry, is responsible for compiling the Consumer Price Index (CPI).
- True
- False
Answer: False
The OEA compiles and publishes the Wholesale Price Index (WPI). The Consumer Price Index (CPI) is compiled by the National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI), while the Labour Bureau compiles CPI for specific industrial and agricultural workers.
The Urjit Patel Committee, constituted by the RBI in 2013, is best known for recommending the adoption of the ___ as the key anchor for monetary policy formulation.
- below
- Outcome
- first
- Consumer Price Index (CPI)
Answer: Consumer Price Index (CPI)
Prior to this, the RBI used the Wholesale Price Index (WPI) to gauge inflation. The Urjit Patel Committee argued that CPI better reflects the actual cost of living for consumers and recommended shifting the monetary policy focus entirely to CPI, leading to the formalization of the inflation-targeting framework.
The Narasimham Committee (1998) is primarily associated with the comprehensive reform of the Indian banking sector, including prudential norms and asset classification.
- True
- False
Answer: True
The second Narasimham Committee laid the blueprint for strengthening the Indian banking system. It recommended tighter income recognition and provisioning norms, the reduction of the SLR and CRR, and the deregulation of interest rates to make Indian banks globally competitive.
What is the specific sub-target for lending to the Agriculture sector under the Priority Sector Lending (PSL) guidelines for domestic banks?
- 10%
- 18%
- 25%
- 32%
Answer: 18%
Within the overall 40% PSL target, banks must allocate at least 18% of ANBC specifically to agriculture. Furthermore, 10% of ANBC must be directed towards small and marginal farmers, ensuring that the most vulnerable agrarian sections receive adequate institutional credit.
Operation Twist is a monetary policy tool where the RBI simultaneously sells short-term securities and buys long-term securities to flatten the yield curve.
- True
- False
Answer: True
By buying long-term bonds, the RBI increases their price and lowers their yield (interest rate), making long-term borrowing cheaper for infrastructure and housing. Simultaneously selling short-term paper prevents excess overall liquidity from building up in the system.
The ___ Curve hypothesizes an inverted-U shaped relationship between income inequality and economic development.
- Lewis
- trust (or confidence / faith)
- Engel's
- Kuznets
Answer: Kuznets
Simon Kuznets theorized that as an economy develops from agrarian to industrial, inequality initially rises as people move to higher-paying urban jobs. However, as the economy matures and welfare mechanisms, education, and democratization spread, inequality eventually decreases.
The ___ model of economic development describes the transition of an economy from a traditional, agrarian sector with surplus labor to a modern, industrial capitalist sector.
- Lewis
- C2 (or Comprehensive)
- frictional
- isoquant
Answer: Lewis
W. Arthur Lewis proposed the dual-sector model, explaining how developing economies can grow by transferring 'surplus' or disguisedly unemployed labor from the subsistence agricultural sector to the higher-productivity industrial sector, keeping wages low and profits high for reinvestment.
The Harrod-Domar growth model emphasizes technological progress as the primary driver of long-term economic growth, whereas the Solow model focuses solely on savings rates.
- True
- False
Answer: False
The reverse is true. The Harrod-Domar model posits that economic growth depends heavily on the national savings rate and the capital-output ratio, assuming fixed technology. The Solow-Swan model introduced exogenous technological progress as the critical factor for sustaining long-term per capita growth beyond mere capital accumulation.
The Incremental Capital-Output Ratio (ICOR) is used to measure:
- The marginal efficiency of capital
- The efficiency of investment in generating additional output
- The depreciation rate of capital assets
- The ratio of foreign to domestic capital
Answer: The efficiency of investment in generating additional output
ICOR indicates how much additional capital is needed to produce one additional unit of output. A lower ICOR signifies high efficiency and productivity of investments, whereas a high ICOR indicates inefficiency, poor infrastructure, or technological bottlenecks in the economy.
When a monopolist charges a different price for every single unit sold to every individual consumer based on their exact willingness to pay, it is called ___ degree price discrimination.
- InvITs (or Infrastructure Investment Trusts)
- quantitative
- first
- balance (or sum to zero)
Answer: first
First-degree (or perfect) price discrimination allows the monopolist to capture the entire consumer surplus, converting it into producer surplus. While theoretically efficient, it is practically impossible to implement because it requires perfect knowledge of every consumer's reservation price.
In Game Theory, a situation where no player has an incentive to change their strategy, given the strategy chosen by the other player, is called a:
- Zero-sum game
- Prisoner's Dilemma
- Nash Equilibrium
- Dominant Strategy
Answer: Nash Equilibrium
Named after mathematician John Nash, this equilibrium concept describes a stable state in a strategic interaction. Each player is making the best possible decision they can, taking into account the decisions of the other players, meaning no unilateral deviation is profitable.
The ___ Theorem states that if property rights are well-defined and transaction costs are low, private parties can bargain to solve the problem of externalities without government intervention.
- Coase
- NaBFID (or National Bank for Financing Infrastructure and Development)
- IDRCL (or India Debt Resolution Company Ltd)
- technological
Answer: Coase
Ronald Coase argued that the initial allocation of property rights doesn't matter for efficiency, as long as rights are clear and parties can negotiate costlessly. They will naturally trade rights until the externality is internalized at the socially optimal level.
Moral hazard occurs before a transaction takes place, whereas adverse selection occurs after the transaction is completed.
- True
- False
Answer: False
The reverse is true. Adverse selection happens before the transaction (e.g., high-risk individuals are more likely to buy insurance). Moral hazard occurs after the transaction, when one party changes their behavior and takes more risks because they are protected from the consequences (e.g., driving recklessly after buying full-coverage insurance).
The 'Market for Lemons' theory, which won George Akerlof a Nobel Prize, illustrates the concept of:
- Moral Hazard
- Adverse Selection
- Principal-Agent Problem
- Tragedy of the Commons
Answer: Adverse Selection
Akerlof used the used-car market to show how asymmetric information (sellers knowing more than buyers) leads to adverse selection. Buyers, fearing they will get a 'lemon' (bad car), offer low prices, which drives sellers of good cars out of the market, potentially causing market collapse.
Under the WTO Agreement on Agriculture, subsidies that cause no or minimal trade distortion and are kept in the '___ Box' are permitted without any limits.
- Okun's
- Green
- inflation
- employment elasticity (or labor market)
Answer: Green
The WTO categorizes agricultural subsidies into Amber (trade-distorting, subject to limits), Blue (production-limiting programs), and Green boxes. Green Box subsidies include government funding for research, pest control, and direct income support decoupled from production, which are fully permitted.
The Real Effective Exchange Rate (REER) adjusts the Nominal Effective Exchange Rate (NEER) for inflation differentials between the home country and its trading partners.
- True
- False
Answer: True
While NEER measures the weighted average of a currency relative to a basket of others, REER adjusts this for relative inflation rates. REER is a superior indicator of a country's actual trade competitiveness, as high domestic inflation can erode the benefits of a nominally depreciated currency.
The economic condition characterized by stagnant economic growth, high unemployment, and simultaneously high inflation is known as ___.
- stagflation
- drives out
- National Income
- rivalrous (or unregulated common)
Answer: stagflation
Stagflation is a portmanteau of stagnation and inflation. It presents a severe dilemma for policymakers because traditional monetary tools used to curb inflation (like raising interest rates) will further depress growth and worsen unemployment.
What does the term 'Skewflation' refer to in economics?
- Continuous hyperinflation across all sectors
- Simultaneous inflation in some sectors and deflation in others
- Deflation accompanied by high unemployment
- Inflation caused solely by currency printing
Answer: Simultaneous inflation in some sectors and deflation in others
Skewflation describes a scenario where prices rise persistently in specific sectors (like food or energy) while remaining stable or even falling in others. This makes monetary policy challenging, as raising interest rates to curb sector-specific inflation might hurt the broader, non-inflating economy.