[Mission 2022] QUIZ – 2022: INSIGHTS STATIC QUIZ, 3 March 2022 – Economy

Solution: d)

PI is not the income over which the households have complete say. They have to pay taxes from PI. If we deduct the Personal Tax Payments (income tax, for example) and Non-tax Payments (such as fines) from PI, we obtain what is known as the Personal Disposable Income. Thus Personal Disposable Income (PDI) = PI – Personal tax payments – Non-tax payments.

Personal Disposable Income is the part of the aggregate income which belongs to the households. They may decide to consume a part of it, and save the rest.

Solution: c)

In order to compare the GDP figures (and other macroeconomic variables) of different countries or to compare the GDP figures of the same country at different points of time, we cannot rely on GDPs evaluated at current market prices. For comparison we take the help of real GDP. Real GDP is calculated in a way such that the goods and services are evaluated at some constant set of prices (or constant prices).

Since these prices remain fixed, if the Real GDP changes, we can be sure that it is the volume of production which is undergoing changes. Nominal GDP, on the other hand, is simply the value of GDP at the current prevailing prices.

Solution: b)

A Lorenz curve is a graphical representation of income inequality or wealth inequality developed by American economist Max Lorenz in 1905.

• A Lorenz curve is a graphical representation of the distribution of income or wealth within a population.

Solution: d)

An economy tries to come out of the low production phase to survive. The low production phase might be depression, recession or slowdown. Governments take many new fiscal and monetary measures to boost demand and production and ultimately a recovery in an economy is managed. The business cycle of recovery may show the following major economy traits:

(i) an upturn in aggregate (total) demand which has to be accompanied by increase in the level of production;

(ii) production process expands and new investments become attractive;

(iii) as demand goes upward, inflation also moves upward making borrowing cheaper for investors;

(iv) with an upturn in production, new employment avenues are created and unemployment rate starts declining; etc.

Solution: a)

GDP deflator:

This 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. If GDP deflator is found to be 2, it implies rise in price level by a factor of 2, and if GDP deflator is found to be 4, it implies a rise in price level by a factor of 4.

GDP deflator is acclaimed as a better measure of price behaviour because it covers all goods and services produced in the country.