Indian Economy For UPSC CSE Exam (Chapter-7) Part-3

Table of Contents

Cycles

Growth is cyclical
- Depression
- Recovery
- Boom
- Recession

Depression

Characterized as a dramatic downturn in economic activity
Depressions are often identified as recessions lasting longer than three years or resulting in a drop in annual GDP of at least 10%
Shrinking Employment
Drop in credit availability
Bankruptcies
Sovereign debt defaults
Reduced trade and global commerce
Bear market in stocks
Sustained asset price volatility and falling currency values
Low to now inflation, or even deflation
Increased savings rate (among those who can save)

Recovery

Upturn in Production
New Investments
Inflation

Boom

Increased commercial activity within either a business, market, industry, or economy as a whole
Economy heats up
Demand Supply Lag
Structural Issues (Capital Shortage, Quality etc)

Recession

Fall in Demand
Low Inflation
Fall in Employment Rate

Growth Recession

Growth recession is an expression coined by economist Solomon Fabricant
To describe an economy that is growing at such a slow pace that more jobs are being lost than are being added.

Growth Recession

A growth recession does not reach the severity of a true recession,
But still involves a rise in unemployment and an economy that is performing below its potential.

Phillips Curve

The Phillips curve is an economic concept developed by A. W. Phillips stating that inflation and unemployment have a stable and inverse relationship.

Natural Rate of Unemployment

Many consider a 4% to 5% unemployment rate to be full employment and not particularly concerning.
The natural rate of unemployment represents the lowest unemployment rate whereby inflation is stable or the unemployment rate that exists with non-accelerating inflation

NAIRU

The non-accelerating inflation rate of unemployment (NAIRU) is the specific level of unemployment that is evident in an economy that does not cause inflation to increase.
In other words, if unemployment is at the NAIRU level, inflation is constant.

NAIRU

NAIRU often represents the equilibrium between the state of the economy and the labor market.
We may say that the NAIRU is the lowest unemployment rate that an economy can sustain without any upward pressure on inflation rate.

Government Policies

Monetary Policy Easing
Tax Rationalization

Q1 Which of the following is/are true about Inflation?

A sustained rise in the general level of prices
A rise in the general level of prices
It the price of one good has gone up, then it is known as inflation

Select the answer using the codes given below

1 Only
1 and 2
2 and 3
1, 2 and 3

Ans: 2
Explanation:

Statement 1 and 2 are some of the most common academic definitions of inflation.
Statement 3: If the price of one good has gone up, it is not inflation; it is inflation only if the prices of most goods have gone up.

Q2. GDP Deflator is the ratio between:

Inflationary tax and rate of GDP
GDP at Current Prices and GDP at Constant Prices
Increasing rate of GDP and increasing rate of GNP
None of the above

Ans: 2
Explanation:

GDP deflator is the ratio between GDP at Current Prices and GDP at Constant Prices.
If GDP at Current Prices is equal to the GDP at Constant Prices, GDP deflator will be 1, implying no change in price level.
GDP deflator is acclaimed as a better measure of price behaviour because it covers all goods and services produced in the country.

Q3 Consider the following statements regarding the method of measuring inflation

The rate of inflation is measured on the basis of price indices – WPI and CPI
It is measured ‘point-to-point’
A price index does not show the exact price rise or fall of a single good

Select the CORRECT statement(s) using the codes given below

1 Only
1 and 3
2 and 3
1, 2 and 3

Ans: 4
Explanation:

All statements are correct.
The rate of inflation is measured on the basis of price indices which are of two kinds—Wholesale Price Index (WPI) and Consumer Price Index (CPI).
A price index is a measure of the average level of prices, which means that it does not show the exact price rise or fall of a single good.
Formula: Rate of inflation (year x) = Price level (year x) –Price level (year x-1) / Price level (year x-1)×100
Inflation is measured ‘point-to-point’. It means that the reference dates for the annual inflation is January 1 to January 1 of two consecutive years.

Q4. Consider the following statements with regard to the demand-pull inflation

It is creation of extra purchasing power to the consumer over the same level of production
It is also describe as “too much money chasing too few goods”

Select the CORRECT statement(s) using the codes given below

1 Only
2 Only
Both 1 and 2
None of the above

Ans: 3
Explanation:

Both the statements are correct.
Cost-Push Inflation and Demand-Pull Inflation are some of the main drivers behind inflation.
Cost-push inflation is the decrease in the aggregate supply of goods and services stemming from an increase in the cost of production.
Demand-pull inflation is the increase in aggregate demand, categorized by the four sections of the macroeconomy: households, business, governments, and foreign buyers.

Q5 A ‘very high inflation’ running in the range of double-digit or triple digit i.e., 20 percent, 100 per cent or 200 per cent in a year) – is known as:

Creeping inflation
Galloping inflation
Hyperinflation
Bottleneck inflation

Ans: 2/3
Explanation:

Galloping Inflation: This is a ‘very high inflation’ running in the range of double-digit or triple digit (i.e., 20 per cent, 100 per cent or 200 per cent in a year).
Creeping Inflation: Low inflation takes place in a longer period and the range of increase is usually in ‘single digit’.
Hyperinflation: This form of inflation is ‘large and accelerating’ which might have the annual rates in million or even trillion.
Bottleneck Inflation: This inflation takes place when the supply falls drastically and the demand remains at the same level.

Q6. Phillips curve is a graphic curve which advocates a relationship between inflation and:

Tax rates
Unemployment
Growth
None of the above

Ans: 2
Explanation:

Philips Curve It is a graphic curve which advocates a relationship between inflation and unemployment in an economy.
According to it there is a inverse relation between the inflation and unemployment.
The curve suggests that lower the inflation, higher the unemployment and higher the inflation, lower the unemployment.

Q7. Which of the following will happen if inflation increases?

lenders will suffer and borrowers will benefit
the currency of the economy appreciates
tax-payers suffer while paying their direct and indirect taxes

Select the INCORRECT statement(s) using the codes given below

2 Only
1 and 2
3 Only
None of the above

Ans: 1
Explanation:

Only statement 2 is incorrect.
Statement 2: With every inflation the currency of the economy depreciates (loses its exchange value in front of a foreign currency) provided it follows the flexible
currency regime.
Tax-payers suffer while paying their direct and indirect taxes. As indirect taxes are
imposed ad valorem (on value), increased prices of goods make tax-payers to pay increased indirect taxes (like cenvat, vat, etc., in India).

Q8 What is ‘shoe leather cost’ of inflation?

People putting maximum money with the banks in their saving accounts
People withdrawing maximum money from the banks
lower supply and higher purchasing capacity among the consumers
None of the above

Ans: 1
Explanation:

While inflation, people visit banks more frequently and try to hold least money with themselves and put maximum with the banks in their saving accounts.
This is also known as the shoe leather cost of inflation (as it consumes the precious time of the people visiting the bank frequently tagging their shoe).

Q9. The phenomenon, in which there is a price rise of one or a small group of commodities over a sustained period of time, without a traditional designation is:

Stagflation
Disinflation
Skewflation
Reflation

Ans: 3
Explanation:

Skewflation’ is a relatively new term to describe this third category of price rise.
It is the phenomenon, namely one in which there is a price rise of one or a small group of commodities over a sustained period of time, without a traditional designation.
The term ‘skewflation’ made an appearance in internal documents of the Government of India, and then appeared in print in the Economic Survey 2009–10 GoI, MoF.