Economics – GK Questions

The money multiplier is inversely related to the reserve ratio (including CRR). When banks are required to hold a higher percentage of deposits as reserves, they have less money available to lend out. This reduces the credit creation capacity of the banking system, thereby shrinking the overall money multiplier.

M3, widely used for monetary policy analysis, is calculated as M1 plus time deposits held by the public with banks. While time deposits are less liquid than demand deposits because they have a fixed maturity period, they still represent a significant store of purchasing power in the economy.

M1 is the most liquid measure of money supply, comprising coins and currency notes held by the public, net demand deposits held by commercial banks, and 'Other Deposits' (like foreign central bank or IMF deposits) held with the RBI. It represents the money immediately available for transactions.

Fiat money, such as modern paper currency, has zero intrinsic value and is not backed by any physical commodity like gold or silver. Its value derives entirely from government decree (fiat) and the public's trust that it will be accepted as a medium of exchange for goods and taxes.

Gresham's Law states that if there are two forms of money in circulation with the same face value but different intrinsic values, people will hoard the 'good' money (higher intrinsic value, like gold) and spend the 'bad' money (lower intrinsic value). Consequently, the bad money dominates the market.

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.

India is currently experiencing a demographic dividend because its working-age population (15-59 years) is growing faster than its dependent population (children and elderly). To actually reap this dividend, however, the country must invest heavily in education, health, and job creation.

23. 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 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.

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.

GFCF represents the net increase in physical assets (like machinery, buildings, and infrastructure) within the economy during a specific period, minus depreciation. It is a crucial component of GDP and a primary indicator of a nation's investment climate and future productive capacity.

Launched in September 2014, Make in India focuses on 25 key sectors of the economy. It aims to facilitate investment, foster innovation, enhance skill development, and build best-in-class manufacturing infrastructure to increase the manufacturing sector's share in GDP.

The PLI scheme is specifically designed to reward incremental sales from goods manufactured within domestic borders over a defined base year. It aims to boost domestic manufacturing, attract foreign direct investment, and integrate Indian firms into global supply chains by making them globally competitive.

Petroleum refinery products hold the highest weight (approximately 28%) among the core industries, followed by electricity and steel. This reflects the critical dependence of the Indian economy and transportation sector on refined petroleum products.

The Eight Core Industries (Coal, Crude Oil, Natural Gas, Refinery Products, Fertilizers, Steel, Cement, and Electricity) comprise over 40% of the weight of the items included in the IIP. They are considered leading indicators of overall industrial and economic activity.

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.

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.

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.

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).

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.