[Mission 2024] STATIC QUIZ, 21 September 2023 – Economy

Solution: c)

• The bonus brought by inflation to the borrowers is known as the inflation premium.
• The interest banks charge on their lending is known as the nominal interest rate, which might not be the real cost of borrowing paid by the borrower to the banks.
• To calculate the real cost a borrower is paying on its loan, the nominal rate of interest is adjusted with the effect of inflation and thus the interest rate we get is known as the real interest rate.
• Real interest is always lower than the nominal interest rate, if the inflation is taking place—the difference is the inflation premium.

Solution: a)

GDP Deflator:

This is the ratio of the GDP at current prices to that of the constant prices.

It is derived by using the following formula—GDP Deflator = GDP at Current Prices ÷ GDP at Constant Prices * 100

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

This is why it is used as a measure of inflation (also known as an ‘implicit price deflator’).

In case of India, while services are not included in the wholesale price index (WPI), the consumer price index (CPI) contains only those goods and services which households purchase for consumption (such as food, cloth, health, education, etc.) and misses several other goods and services (such as intermediate goods, services required by firms, etc.).

Solution: c)

Rupee mostly appreciates against dollar due to higher flows into the market.

We need to avoid the appreciation of the rupee if we are to strengthen the domestic manufacturing industry. Any appreciation of the rupee facilitates more imports and less exports, adversely affecting domestic production.

Solution: d)

Primary Deficit is the difference between the current year’s fiscal deficit and the interest paid on the borrowings of the previous year.

Primary Deficit indicates the borrowing requirements of the government, excluding interest. It is the amount by which the total expenditure of a government exceeds the total income. Note that primary deficit does not include the interest payments made. Also, primary deficit shows the borrowing requirements needed for meeting the expenditure of the government.

Primary deficit is measured to know the amount of borrowing that the government can utilize, excluding the interest payments.

Solution: c)

Double coincidence of wants is a situation where two economic agents have complementary demand for each other’s surplus production.

It is an economic phenomenon where two parties each hold an item the other wants, so they exchange these items directly without any monetary medium. This type of exchange is the foundation of a bartering economy.