Important Concepts in Economy: UPSC Previous Year Questions (Indian Economy)

Explanation

Economic growth is an increase in the production of goods and services in an economy, is often accompanied by some degree of inflation because:

Increased Demand: Economic growth typically leads to increased demand for goods and services. This increased demand can put upward pressure on prices, leading to inflation. Increased Employment and Wages: Growth often involves increased employment and higher wages. Higher wages can lead to increased purchasing power, further fueling demand and potentially contributing to inflation.

Option (a), (c) and (d) are incorrect:

Deflation is a decrease in the general price level. It’s the opposite of inflation and is generally associated with economic slowdown or recession and not robust economic growth. Stagflation is a combination of slow economic growth, high unemployment, and high inflation. While inflation is present, the slow growth component makes it less directly associated with economic growth in the way that just inflation is. Hyperinflation is a very rapid and uncontrolled increase in the price level. While high inflation can sometimes accompany rapid growth, hyperinflation is generally associated with severe economic instability and is not a typical outcome of normal economic growth.

Explanation

The bank rate (also known as the discount rate) is the interest rate at which commercial banks can borrow money directly from the central bank (in India’s case, the Reserve Bank of India or RBI). When the RBI lowers the bank rate, it be-comes cheaper for commercial banks to borrow funds. Lower bank rate means banks can borrow from the RBI at a lower interest rate. To maintain their profit margins, commercial banks then lower their own lending rates (the interest rates they charge on loans to businesses and individuals). Lower lending rates encourage borrowing by businesses and individuals. This leads to an increase in credit availability and money supply in the market.

Option (b),(c) and (d) are incorrect:

A lower bank rate leads to more, not less, liquidity. A change in the bank rate has a direct impact on market liquidity. While lower interest rates on loans might indirectly influence deposit behavior over the long term, the direct and immediate effect of a lower bank rate is on borrowing and lending, and thus liquidity. Deposit mobilization is a separate function of commercial banks.

Explanation

A ‘stimulus’ is an attempt by policymakers of a coun-try to kickstart a sluggish economy through a package of measures. The central bank will use a monetary stimulus to boost consumer spending by increasing the money supply or lowering interest rates. A fiscal stimulus is when the government increases spending out of its own funds or lowers tax rates. Consumer spending increases as a result of stimulus measures, which boosts demand and growth. It’s common to refer to a stimulus as "priming the pump" or "pump priming."

Explanation

The "base effect" refers to how unusually high or low inflation in the previous period can affect the calculation and interpretation of the inflation rate in the current period. It’s a statistical phenomenon, not a real economic event. Low Base Effect: If inflation was very low or even negative in the previous year (the "base" period), even a moderate increase in prices in the current year can appear as a high inflation rate simply because the comparison is being made against a very low base. This can give the impression of a rapid acceleration of inflation, even if the price increases are not exceptionally large in absolute terms. High Base Effect: Conversely, if inflation was very high in the previous year, even a substantial increase in prices in the current year might appear as a low inflation rate because the comparison is being made against a high base. This can mask the true extent of current price increases.

Explanation

Option (b) is correct: According to United Nations Population Fund (UNFPA), demographic dividend means, "the economic growth potential that can result from shifts in a population’s age structure, mainly when the share of the working-age population (15 to 64) is larger than the non-work-ing-age share of the population (14 and younger, and 65 and older)".

Explanation

Closed Economy Does not have economic relations with the rest of the world. Activities taking place outside the territory do not affect the economic activities. There is no difference b/w national income and domestic income. It is an imaginary economy. A closed economy is completely self-sufficient, which means that no imports enter and no exports leave the country. Open Economy An open economy has economic relations with other countries. Economic activities of such an economy are affected by international fluctuations. The size of national income may be greater or smaller than the domestic income. It is a realistic economy. Eg: USA, Singapore, Finland, etc.