[DAY 21] 60 DAY RAPID REVISION (RaRe) SERIES for UPSC Prelims 2022 – ECONOMICS, CURRENT AFFAIRS & CSAT; Test Series, Videos & Notes!

Solution (a)

Basic Info:

When there is inflation in the economy it leads to loss in the value of currency i.e. currency depreciates. 

Nominal interest rate (deposit rate) = Inflation + real interest rate

When inflation increases banks increase the nominal interest rate and generally real interest rate remains same.

Solution (b)

Basic Info:

• Creditor means the person who has given money to someone
• Debtor means who has taken money from someone
• Depositors means who has deposited money in banks or financial institutions
• Bondholders means person who is holding bonds

When a person holds physical asset whose price is denoted in Rupees then he benefits from price increase or inflation.

But a person who holds financial assets or any financial instrument which guarantees fix return of cash payments in future then he loses from price rise. This is because the purchasing power of the rupee (the fixed money which he is supposed to get) decreases due to inflation.

Therefore inflation benefits debtors whereas depositors, creditors and bondholders will lose. 

Solution (c)

Hint: Use elimination method to eliminate option 2

Basic Info:

Inflation is the increase in the prices of goods and services over time. Inflation is generally
controlled by the Central Bank and/or the government. The main policy used is monetary policy set by Central Banks.

Transfer payments are the receipts which the residents of a country get for ‘free’, without having to provide any goods or services in return. Thus, increasing transfer payments increases spending capacity and lead to increase in demand. Thus, it further increases inflation.

Increase in government stimulus packages increases spending capacity and lead to increase in
demand. Thus, it further increases inflation.

Increase in the GST rates on commodities reduce demand, leading to lower economic growth and lower inflation.

Solution (b)

Hint: Eliminate option 1

Basic Info:

Demand pull inflation is caused by increased demand in the economy, without adequate increase in supply of output. It is mainly an outcome of excess money income with the people. This high money income would be due to increased money supply. The situation of “too much money chasing too few goods” is an instance of demand pull inflation.

Lower interest rate on bank loans encourages people to get more loans from loans. Thus, increases money supply in the economy which leads to increase in demand for goods.

Increase in subsidies increase the disposable income of the households. Thus, it results in increased money supply in economy which leads to increase in demand for goods.

Cost push inflation is caused by rise in the prices of inputs like power, labour, raw materials etc. Price rise of inputs in the form of increased raw material cost, electricity charges or wage
rate (including a rise in profit margin made by the producer) results in increased cost and
ultimately to increased price of the product.

Thus, increase in the cost of raw material causes cost push inflation rather than demand pull

Solution (d)

Basic Info:

Reflation is a situation often deliberately brought by the government to reduce unemployment
and increase demand by going for higher levels of economic growth. Governments go for
higher public expenditures, tax cuts, interest rate cuts, etc. Fiscal deficit rises, extra money is
generally printed at higher level of growth, wages increase and there is almost no improvement
in unemployment.

When the economy is crossing through the cycle of recession (low inflation, high unemployment, low demand, etc.) and government takes some economic policy decisions to revive the economy from recession, certain goods see sudden and temporary increase in their prices, such price rise is also known as reflation.

Solution (c)

Statement Analysis:

Stagflation is a situation in an economy when inflation and unemployment both are at higher
levels, contrary to conventional belief.

Few causes of Staglation:

Volatile Oil Prices: The volatility in oil prices led to a further decrease in spending. This has led to an increase in transportation cost and thus led to an increase in general prices especially of food products.

Decreased credit availability: The RBI’s interest-rate cuts and liquidity pumped into financial markets have done little to spur lending. This is because banks who are already facing the worst stressed-asset ratios, are neither lending much nor transmitting rate cuts to borrowers. This has led to reduced investment and spending leading to reduced industrial activity impacting economic growth.

Rise in structural unemployment: If there is a decline in traditional industries, we may get more structural unemployment and lower output. Thus we can get higher unemployment.

Inflation: With rising input costs and reduction in the aggregate supply, price of various products and services are increasing. Poor monsoon has led to a lower area under cultivation. This, in turn, has led to lower output and consequently lesser supply. As aggregate supply is reduced, there is a fall in output and employment and the price level rises.

Solution (d)

Basic Info:

Inflation premium is the higher return that investors demand in exchange for investing in a long-term security where inflation has a greater potential to reduce the real return.

The inflation premium is the reason that most yield  curves trend upward.

Thus, a bond with a maturity of 30 years almost always has a higher coupon rate than one with a maturity of 30 days.

Solution (b)

Basic Info:

-Core Inflation, also known as underlying inflation, is a measure of inflation which excludes items that face volatile price movement, notably food and energy. It is nothing but Headline Inflation minus inflation that is contributed by food and energy commodities.

– Unlike core inflation, headline inflation also takes into account changes in the price of food and energy. Since food and energy prices are highly volatile, headline inflation fluctuates
more and may not give an accurate picture of how an economy is behaving.

– Whenever core inflation rises, RBI increases policy rates to suck excess liquidity from the market and vice versa.

Solution (d)

Basic Info:

WPI is released by Office of Economic Advisor, Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry. The Base year has been revised to 2011-12 and includes 697 items.

WPI inflation measures the average change in prices of commodities for bulk sale at the level of early stage of transactions pertaining to agriculture, mining, manufacturing and electricity. WPI does not cover services. WPI covers commodities falling under three Major Groups namely:

• “Primary Articles” (weight 22.62%) like agricultural commodities and minerals
• “Fuel and Power” (weight 13.15%) like coal and electricity and
• “Manufactured Products” (weight 64.23%) like textiles, leather, machine tools

The prices tracked are agri-market (mandi) prices for agricultural commodities, ex-factory prices for manufactured products and ex-mines prices for minerals. The prices used for compilation do not include indirect taxes in order to remove the impact of fiscal policy. This is in consonance with best international practices and makes the new WPI conceptually closer to “Produce Price Index” used internationally.

Solution (d)

Basic Info:

Services are not traded or transacted in the wholesale markets. So, WPI data does not include the inflation due to services but CPI includes services and goods both.

When goods are imported in India, first they move to the wholesale mandis and then they come in the retail markets. So, wholesale prices and retail prices both get impacted because of the imported goods.

Solution (c)

Basic Info:

In India, inflation target is set by the government in consultation with the RBI, once every five years.

Inflation targeting primarily focuses on maintaining price stability, but is also believed to support economic growth and stability.

The RBI and the government agreed in 2015 on a policy framework that stipulated a primary objective of ensuring price stability while keeping in mind the objective of growth.

In May 2016, the Reserve Bank of India (RBI) Act, 1934 was amended to provide a Constitutional basis for the implementation of the flexible inflation targeting (FIT) framework.

The Act allows the Centre to set the inflation target in consultation with the RBI once every five years. The inflation target for the period April 1, 2021, to March 31, 2026, under the Reserve Bank of India Act, 1924, has been kept at the same level as it was for the previous five years which is 4% with a tolerance band of +/- 2%.

) Solution (c)

Basic Info:

It is conducted by RBI

The survey seeks qualitative responses from households on price changes (general prices as well as prices of specific product groups) in the three months ahead as well as in the one year ahead period and quantitative responses on current, three months ahead and one year ahead inflation rates.

Solution (a)

Basic Info:

Fiscal policy which deals with taxation, spending by government and borrowing. When the total money supply is increased rapidly than normal, it is called an expansionary policy while a slower increase or even a decrease of the same refers to a contractionary policy.

Tools of fiscal policy:

Direct and Indirect taxes – Direct taxes should be increased and indirect taxes should be reduced.

Public Expenditure should be decreased (should borrow less from RBI and more from other financial institutions)

Supply Management measures

• Import commodities that are in short supply
• Decrease exports
• Government may put a check on hoarding and speculation
• Distribution through Public Distribution System

Solution (b)

Basic Info:

It is an index that monitors the price changes in the production process. It monitors the average change in selling prices that producers get for their goods and services. It measures price change from the perspective of the seller.

It measures the changes in price for goods and services sold to final and intermediate demand.

The main objective of Producer Price Index (PPI) is to address rise in prices at the producers level before they pass on to consumer and it excludes indirect taxes, transport, trade margins

PPI is measured monthly and is released in a report by the Bureau of Labor Statistics

Solution (c)

Basic Info:

The GDP deflator, also called implicit price deflator, is a measure of inflation.

It is the ratio of the value of goods and services an economy produces in a particular year at current prices to that of prices that prevailed during the base year.

This ratio helps show the extent to which the increase in gross domestic product has happened on account of higher prices rather than increase in output.

GDP price deflator measures the difference between real GDP and nominal GDP. Nominal GDP differs from real GDP as the later doesn’t include inflation, while the former does.

GDP price deflator = (nominal GDP ÷ real GDP) x 100

GDP deflator is available only on a quarterly basis along with GDP estimates, whereas CPI and WPI data are released every month.

 Solution (c)

Basic Info:

Deflation is the drop in general price levels in an economy, while disinflation occurs when price inflation slows down temporarily.

Deflation, which is harmful to an economy, can be caused by a drop in the money supply, government spending, consumer spending, and corporate investment.

Central banks will fight disinflation by expanding its monetary policy and lowering interest rates.

Disinflation can be caused by a recession or when a central bank tightens its monetary policy.

Deflation rates can be calculated using the CPI. This index measures the changes in the price levels of a basket of goods and services. They can also be measured using the GDP deflator, which measures the price inflation.

Solution (b) 

Basic Info:

Deflation is bad for economic growth. Because when prices start declining people postpone their purchase decisions and companies postpone their investment decisions. This leads to decrease in demand in the economy which hurts economic growth.

Low and moderate inflation is good for economic growth as it creates demand in the economy and people are also willing to save money in banks which ultimately increases investment.

Galloping or Hyperinflation eats away the savings of the people as they spend too much money in buying goods and services which ultimately decreases investment.

Solution (d)

Basic Info:

Urjit Patel Committee:  It was appointed to examine the current monetary policy framework of the Reserve Bank of India. Its main objective was to strengthen Monetary Policy Framework of RBI.

It recommended to Use CPI as a mean to measure inflation of the country not WPI.

Arun Goel Committee: To strengthen the Capital Goods(CG) Sector and  contribute more actively in the national goal of achieving a USD 5 trillion economy and a USD 1 trillion manufacturing sector

P K Mohanty Committee:  To review present ownership guidelines and corporate structure for Indian Private Sector Banks

Y B Reddy Committee: Review of Income Tax rebates

) Solution (c)

Basic Info:

Inflationary Gap: When Aggregate demand exceeds aggregate supply in an economy the inflationary gap is created as demand for goods exceeds supply. Since full employment is assumed we can’t create additional goods. Thus, Demand Pull creates a inflationary gap.

Reasons:

• Increased money supply
• Increased propensity to consume i.e. amount from income spent by households
• increase in investment expenditure and exports.

Deflationary Gap: When the Aggregate demand is less than aggregate supply we get deflationary trend in economy. The supply has to be reduced to meet the demand.

The reasons for deflationary gap are decreased money supply, reduced government expenditure, increased propensity to save i.e. part of income saved by households, increase imports.

Solution (c)

Basic info:

A brief overview of Consumer Price Index:

1. The Consumer Price Index for the industrial workers (CPI-IW): It has 260 items (plus the
   services) in its basket with 2001 as the base year (the first base year was 1958–59). The data is
   collected at 76 centres with one month’s frequency and the index has a time lag of one month. Basically, this index specifies the government employees (other than banks’ and embassies’ personnel). The wages/salaries of the central government employees are revised on the basis of the changes occurring in this index, the dearness allowance (DA) is announced twice a year.
   When the Pay Commission recommends pay revisions, the base is the CPI (IW).
2. Consumer Price Index for Agricultural Labourers (CPI-AL) has 1986–87 as its base year with 260 commodities in its basket. The data is collected in 600 villages with a monthly frequency and has three weeks time lag.  This index is used for revising minimum wages for agricultural labourers in different states. As the consumption pattern of agricultural labourers has changed since 1986–87 (its base year), the Labour Bureau proposes to revise the existing base year of this index.
3. Consumer Price Index for the Rural Labourers (CPI-RL) with 1983 as the base year, data is collected at 600 villages on monthly frequency with three weeks time lag, its basket contains 260 commodities.
4. CPI Combined: In 2011-12, Government announced a new set of the consumer price indices—CPI-R for the rural market, CPI-U for the urban market, and by combining them a ‘national’ CPI. The national consumer price index is called CPI-C (where ‘C’ stands for Combined).

Of these, the first three are compiled by the Labour Bureau in the Ministry of Labour and Employment. Fourth is compiled by the NSO in the Ministry of Statistics and Programme Implementation.

Solution (b)

Statement Analysis:

Context – Centre has set in motion the process of creating the exclusive body- National Interlinking of Rivers Authority (NIRA)

) Solution (d)

Statement Analysis:

Context – Ministry of Mines has notified the Mineral Conservation and Development (Amendment) Rules, 2021

) Solution (a)

Statement Analysis:

Context – ‘Infrastructure for Resilient Island States’ initiative was launched at COP26 Summit in Glasgow

Solution (c)

Ministry of Commerce and Industry unveiled third LEADS report 2021.  LEADS index was launched in 2018 with the main objective of ranking States and UTs on the efficiency of their logistics ecosystem. It aims to enhance focus on improving logistics performance across states which is key to improving the country’s trade and reducing transaction cost.

Solution (a)

Statement Analysis:

Context – ZYCOV-D, The World’S First Needle-Free COVID-19 Vaccine was in news

Solution (b)

Manoj had money to buy 9 mobile handsets

Sale price of 12 handsets = Marked price of 9 handsets

Sale price of 1 handset = Marked price of 9/12 handsets

Discount % = (Marked price – Sales price)/(Marked price) × 100

Discount % = (1 – 9/12) × 100

Discount % = 25%

Solution (c)

Let the total marks required to pass be X

(35/100)x = 36 + 27

X = (63* 100)/35

X= 180

Solution (d)

5% of A + 4% of B = 2 (6% of A + 8% of B)

(5/100)A + (4/100)B = 2( (6/100)A + (8/100) B)

(1/20)A + (1/25)B = (1/25)A + (4/75)B

( 1/20 – 1/25) A = ( 4/75 – 3/75 ) B

(1/100)A = (1/75)B

A/B = 100/75

A/B = 4/3

Solution (a)

Let the total numbers of voters be 1000

Voters promised to vote for A, (2/5) * 1000 = 400

Remaining promised to vote for B, (3/5)* 1000 = 600

15% of voters went back on their promise to vote for A, (15/100) * 400 = 60

25% of voters went back on their promise to vote for B, (25/100) * 600 = 150

Final votes of A, 400 – 60 + 150 = 490

Final votes of B, 600 – 150 + 60 = 510

Therefore, 510- 490 = 20. A lost by 20 votes.

We have assumed the total number of voters to be 1000 and we got the margin to be 20 votes.

For the margin to be 200 votes, we have to cross multiply

20/1000 : 200/x

(1000/20): (x/200)

X = (1000 * 200)/ 20 = 10,000

Read the following passage and answer the items that follow. Your answer to these items should be based on the passages only 

It is undeniable that some very useful analogies can be drawn between the relational systems of computer mechanism and the relational systems of brain mechanism. The comparison does not depend upon any close resemblance between the actual mechanical links which occur in brains and computers; it depends on what the machines do. Furthermore, brains and computers can both be organized so as to solve problems. The mode of communication is very similar in both the cases, so much so that computers can now be designed to generate artificial human speech and even, by accident, to produce sequences of words which human beings recognize as poetry. The implication is not that machines are gradually assuming human forms, but that there is no sharp break of continuity between what is human, what is mechanical.

Solution (c)

In this passage, the author compares the aspects of organizing and communication between computers and human brains which is similar in both the cases.

Refer to the following line for better illustration:” Furthermore, brains and computers can both be organized so as to solve problems. The mode of communication is very similar in both the cases,”

From this excerpt we can say that option c is correct.