Economics – Medium Level – GK Questions

Proposed by Arthur Okun, this law states that for every 1% increase in the unemployment rate, a country's GDP will be roughly 2% lower than its potential GDP. It highlights the severe economic cost of joblessness in terms of lost national output.

A.W. Phillips observed that when unemployment is low, wages tend to rise faster, leading to higher inflation. Conversely, high unemployment suppresses wage growth and inflation. However, Milton Friedman later argued this trade-off only exists in the short run, becoming vertical in the long run.

In India's CPI indices, particularly for rural areas, the 'Food and Beverages' category holds the highest weightage (over 54% in CPI-Rural). This reflects the Engel's Law principle, where lower-income rural households spend a disproportionately large share of their income on basic sustenance.

Headline inflation represents the raw, overall inflation rate in the economy, which can be skewed by temporary supply shocks in food or energy. Central banks often focus on core inflation (CPI excluding food and fuel) to make long-term monetary policy decisions, as it reflects sustained demand pressures.

The 15th Finance Commission, chaired by N.K. Singh, recommended a 41% share for the states. This is 1% lower than the 42% recommended by the 14th FC, with the adjustment made to account for the creation of the new Union Territories of Jammu & Kashmir and Ladakh.

The Finance Commission is an advisory constitutional body under Article 280. While its recommendations carry immense weight and are generally accepted by the government, they are technically advisory in nature and not legally binding on the Parliament or the Executive.

Article 279A empowers the President to constitute the GST Council, a federal forum comprising the Union Finance Minister (as Chairperson) and state finance ministers. It ensures cooperative federalism by requiring a 3/4th majority for decisions, balancing central and state interests.

A cess is earmarked for a specific developmental purpose (like education or health) and ceases when the purpose is fulfilled. A surcharge is an additional tax on the existing tax of high-income earners. Crucially, the proceeds of both cess and surcharge are retained exclusively by the Centre and are not shared with states via the Finance Commission.

Article 112 forms the constitutional basis of the Union Budget, requiring the government to present a detailed statement of its estimated receipts and expenditures for the upcoming financial year. It distinguishes between revenue and capital accounts to ensure fiscal transparency.

The Pension Fund Regulatory and Development Authority (PFRDA) was established by the Government of India in 2003 and later given statutory status in 2013. Its mandate is to regulate pension funds, protect the interests of subscribers, and promote old-age income security.

T-bills are zero-coupon, short-term debt instruments issued by the Reserve Bank of India on behalf of the Government of India to manage short-term liquidity mismatches. They are currently issued in tenures of 91 days, 182 days, and 364 days.

Unlike Commercial Papers issued by corporates, Certificates of Deposit are negotiable term deposits issued specifically by commercial banks and select financial institutions. They are issued at a discount to face value and are subject to the RBI's monetary policy directives.

Commercial Papers are issued by large, highly-rated corporate entities, primary dealers, and financial institutions to meet their short-term working capital needs. The government issues Treasury Bills (T-bills), not CPs, for its short-term borrowing requirements.

The Prompt Corrective Action (PCA) framework is triggered when banks breach certain regulatory thresholds like high NPAs, low capital adequacy, or negative return on assets. It imposes mandatory and non-mandatory restrictions on the bank to restore its financial health.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act empowers banks and financial institutions to enforce their security interest directly. This bypasses the lengthy judicial process, enabling faster recovery of bad loans from defaulting borrowers.

The MSF is a penal rate at which banks can borrow overnight funds from the RBI against their SLR portfolio when inter-bank liquidity dries up completely. It is typically kept 25 basis points (0.25%) higher than the Repo Rate to discourage routine borrowing.

Engel's Law is an observation in economics stating that the proportion of income spent on food is inversely related to income levels. This implies that lower-income families spend a much larger fraction of their earnings on basic sustenance compared to wealthier families.

The line of perfect equality is a 45-degree diagonal line on the Lorenz curve graph. If the actual Lorenz curve perfectly overlaps this diagonal line, it means income is distributed absolutely equally among the population. The further the curve bows away from the diagonal, the higher the inequality.

The Oxford Poverty and Human Development Initiative (OPHI) collaborates with the UNDP to release the MPI. Unlike traditional income-based measures, the MPI evaluates deprivation across three dimensions: health, education, and standard of living.

The Tendulkar Committee shifted the poverty estimation away from calorie consumption to a broader basket including health and education. For 2011-12, it set the rural poverty line at Rs. 816 per month and the urban poverty line at Rs. 1000 per month.