Microeconomics focuses on the behavior of individual agents (consumers, firms) and price determination in specific markets. Macroeconomics analyzes the economy-wide phenomena such as total output (GDP), unemployment, and inflation.

Perfectly inelastic demand means the demand curve is a vertical line (quantity demanded does not change with price). If supply increases (supply curve shifts right), the intersection point moves down along the vertical demand line, resulting in a lower price but the exact same quantity.

The Money Multiplier indicates the maximum amount of money the banking system generates with each unit of excess reserves. It decreases if people hold more cash (higher Currency Deposit Ratio) or if banks hold more reserves (higher Reserve Deposit Ratio), as both leakages reduce the bank's ability to lend and create money.

Keynes identified three motives for holding cash: Transaction (for daily needs), Precautionary (for emergencies), and Speculative (to take advantage of future interest rate movements). "Inflationary Motive" is not a component of this theory.

In a recession, aggregate demand falls. Producers are initially unable to cut production fast enough, leading to an involuntary accumulation of inventories (unsold stock), which eventually forces them to cut production and employment.

The GDP Deflator measures the level of prices of all new, domestically produced, final goods and services in an economy. It compares Nominal GDP (current prices) with Real GDP (base year prices).

The Phillips Curve postulates an inverse relationship: lower unemployment is associated with higher inflation (due to wage pressures and demand), and higher unemployment is associated with lower inflation.

Opportunity cost is a fundamental concept representing the benefits an individual, investor, or business misses out on when choosing one alternative over another.

Primary Deficit = Fiscal Deficit - Interest Payments. It shows the gap between the government's spending and receipts for the current year alone, removing the legacy cost of past borrowings.

Core Inflation measures the long-term trend in the price level. It excludes items with volatile prices, specifically Food and Fuel , to give a clearer picture of underlying inflation trends.

In Monopolistic Competition (e.g., toothpaste, soaps), many sellers offer differentiated products. This differentiation allows them to act as price makers to a limited extent, unlike Perfect Competition where products are identical.

For a Giffen good (e.g., staple food like bread/rice for the very poor), the income effect of a price rise is so strong (consumers feel poorer and cut back on expensive foods like meat) that they end up buying MORE of the staple Giffen good, despite the price rise.

Velocity is the rate at which money circulates in the economy. A higher velocity implies a more active economy where the same money is used for multiple transactions.

The IS (Investment-Saving) curve shows combinations of interest rates and output where the goods market is in equilibrium (Investment = Saving). The LM curve represents the Money Market.

GDP measures production within borders. GNP measures production by nationals, regardless of location. Therefore, GNP = GDP + Net Factor Income from Abroad (Income earned by residents abroad minus income earned by foreigners domestically).

In a boom, demand outstrips supply, causing inflation. A "Dear Money Policy" (tight monetary policy) raises interest rates to discourage borrowing and spending, thereby cooling down the economy.

Recovery of Loans is a Capital Receipt because it reduces the government's financial assets (the outstanding loan). The others are Revenue Receipts (Taxes, Dividends, Fees) as they are recurring and create no liability/asset change.

M = Money Supply, V = Velocity of Circulation, P = Price Level, T = Volume of Transactions. The theory states that Money Supply * Velocity = Total Value of Transactions.

Points on the PPF curve represent full efficiency. Points outside are unattainable with current resources. Points inside indicate that resources are idle or inefficiently used.

Real GDP Growth ˜ Nominal GDP Growth - Inflation Rate. (8% - 5% = 3%). Real GDP represents purchasing power growth.

A change in the price of the good causes movement *along* the curve. A change in non-price determinants (Income, Tastes, Price of substitutes) shifts the entire curve left or right.

The Classical Theory posits that interest is the reward for saving (abstinence) and the price paid for the use of capital (investment). It is a real phenomenon determined by real factors: Saving (Supply) and Investment (Demand).

M1 = Currency + Demand Deposits + Other Deposits with RBI. Time Deposits (FDs) are not liquid enough for M1 and are included in M3 (Broad Money).

Keynes argued that fluctuations in Aggregate Demand, particularly Investment demand driven by "animal spirits" (business confidence), are the main drivers of the business cycle.

NDP at Factor Cost represents the total income earned by factors of production within the domestic territory. NNP at Factor Cost is called "National Income".

The Fiscal Responsibility and Budget Management (FRBM) Act requires the government to present three policy statements: Medium-term Fiscal Policy, Fiscal Policy Strategy, and Macro-economic Framework.

While total utility may increase, the *additional* satisfaction gained from consuming each subsequent unit declines. This explains the downward sloping demand curve.

Positive cross elasticity means if the price of Good A rises, the demand for Good B rises. This happens with substitutes (people switch from expensive Tea to cheaper Coffee). For complements, it is negative.

Cost-Push inflation arises from the supply side when production costs increase, forcing firms to raise prices to maintain margins. The others are Demand-Pull factors.

Real Interest Rate represents the true purchasing power gained from an investment. It subtracts the erosion of value caused by inflation from the nominal rate (Fisher Equation approximation).

Market prices include indirect taxes (which increase price) and exclude subsidies (which lower price). To get back to the actual cost of production (Factor Cost), one must remove the tax component (Subtract Indirect Taxes) and add back the government support (Add Subsidies).

WPI measures inflation at the wholesale level and tracks only goods. CPI measures inflation at the retail level and includes both goods and services (like medical care, education, housing). RBI adopted CPI as the key measure for inflation targeting in 2014.

Leading indicators change *before* the economy as a whole changes. "New orders for capital goods" signal future production activity. Unemployment is a lagging indicator (changes after the economy turns), and CPI is often a lagging or coincident indicator.

High Powered Money (H or M0) is the base for money creation. It includes all currency issued by the central bank (held by public and banks) plus the reserves banks keep with the RBI.

In a Liquidity Trap, prevailing interest rates are low and savings rates are high, making monetary policy ineffective. Investors expect interest rates to rise in the future (bond prices to fall), so they hoard cash to avoid capital losses.

Automatic stabilizers cushion the economy without direct government intervention. In a boom, progressive taxes rise (cooling demand). In a recession, taxes fall and benefits rise (boosting demand), automatically countering the cycle.

Operation Twist involves buying long-term securities (raising their price, lowering yield) and selling short-term securities. This flattens the yield curve and reduces the cost of long-term borrowing for investment.

As you produce more of Good A, you have to give up increasingly larger amounts of Good B because resources are not perfectly adaptable. This increasing trade-off creates the concave shape.

Direct monetization involves printing new money (High Powered Money) to fund government spending. This increases the monetary base and money supply, often fueling demand-pull inflation.

A negative cross elasticity means that if the price of X rises, the demand for Y falls. This happens with complementary goods because they are consumed together (e.g., if the price of Petrol rises, demand for Cars may fall).

National Income accounts for production activity. Transfer payments are merely a redistribution of existing income from one group (taxpayers) to another (beneficiaries) without any corresponding economic output.

Stagflation contradicts the standard Phillips Curve trade-off. It involves a stagnant economy (high unemployment) coexisting with rising prices (high inflation), often caused by supply shocks.

One person's spending becomes another's income, who then spends a part of it, creating a chain reaction. Thus, an initial injection of spending raises National Income by a multiple of that amount.

The simple Money Multiplier is calculated as 1/r. If r = 10% (or 0.1), then Multiplier = 1 / 0.1 = 10. This means an initial deposit can create 10 times the money supply.

This theory (Neo-Classical) improved upon the Classical theory by including monetary factors like bank credit and hoarding alongside real factors like saving and investment.

Primary Deficit = Fiscal Deficit - Interest Payments. If PD = 0, then Fiscal Deficit = Interest Payments. This means new borrowing is used solely to service old debt, not for new expenditure.

Currently, the RBI maintains a corridor width where the MSF (ceiling) is 25 bps above the Repo Rate. (Note: This spread can change based on RBI policy, but standard practice is a fixed spread).

The law states that as you add more variable inputs (labor) to a fixed input (land), marginal product will eventually decline. This distinction of fixed vs variable inputs defines the Short Run.

It is not a separate budget but a tool to translate gender commitments into budgetary commitments by inspecting inflows/outflows through a gender lens.

If a consumer is willing to pay ?100 for a product but buys it for ?80, the Consumer Surplus is ?20. It represents the net benefit to consumers.

Green GDP accounts for the environmental consequences of economic growth. It subtracts the value of natural capital loss (pollution, resource depletion) from traditional GDP.

CPI tracks a fixed basket of consumer goods. GDP Deflator tracks price changes in ALL goods and services produced in the economy (investment goods, government services, exports), making it broader.

A depression is an extreme form of recession. It lasts longer (years vs months) and involves a much sharper decline in GDP (e.g., >10%), massive unemployment, and deflation.

If people receive income more frequently (weekly vs monthly), they hold less idle cash and spend money faster, increasing velocity. Saving or hoarding money decreases velocity.

In a liquidity trap, people are willing to hold any amount of money supplied by the central bank (demand curve is horizontal/flat) because opportunity costs are near zero. Injecting more money doesn't lower rates further or stimulate spending.

Due to the pandemic stimulus, the original target of 3% was relaxed. The Union Budget 2021-22 announced a glide path to reduce fiscal deficit to below 4.5% by 2025-26.

Qualitative tools target specific sectors. By increasing the margin (down payment) required for loans against shares or commodities, RBI selectively restricts credit to those sectors without affecting the whole economy. The others are Quantitative tools.

Internal economies are cost advantages that a specific firm reaps as it grows larger (e.g., purchasing bulk raw materials cheaper, specialized machinery). External economies benefit the whole industry.

Under Article 267, the Contingency Fund is held by the Finance Secretary on behalf of the President. It is used for unforeseen expenditure (like disasters) pending parliamentary authorization.

An increase in demand shifts the demand curve to the right. With a fixed upward-sloping supply curve, this leads to a higher equilibrium price and a higher equilibrium quantity.

National Income includes the value of goods and services produced. Imputed rent is the estimated rent a house owner would pay to live in their own house if they were renting it. It represents the value of housing services produced. Transfer payments, second-hand sales, and non-economic activities (housewife services) are excluded.

Money Multiplier (m) is inversely related to the Currency Deposit Ratio (c) and Reserve Deposit Ratio (r). Formula: m = (1+c)/(c+r). If people hold more cash (higher CDR) instead of depositing it in banks, the banks' ability to create credit reduces, lowering the multiplier.

Since the adoption of the Flexible Inflation Targeting framework in 2016 (based on Urjit Patel Committee recommendations), the RBI targets Headline Inflation measured by the CPI-Combined (Rural + Urban).

Expansionary fiscal policy shifts the IS curve to the right. This increases output (Income). However, higher income increases money demand, which pushes up interest rates (assuming money supply is fixed). Thus, both Y and r increase.

The Accelerator theory suggests that net investment is a function of the growth in output. If demand for consumer goods rises, firms need more machines (capital) to produce them, leading to a more than proportionate rise in investment demand.

Expenditures charged on the Consolidated Fund of India (Article 112(3)) include emoluments of the President, Judges of SC/HC, CAG, and debt service charges (interest + sinking fund) of the government. These are not subject to the vote of Parliament.

Public Goods (like national defense, street lights) are non-excludable (you can't stop people from using it) and non-rivalrous (one person's use doesn't reduce availability for others).

Veblen goods are luxury goods for which demand increases as price increases, because the higher price confers status (Conspicuous Consumption). This is an exception to the Law of Demand.

Equation: MV = PY. Here M=500, P=2, Y=1000 (Real GDP). So, 500 * V = 2 * 1000. 500V = 2000. V = 4. Velocity is 4.

Increasing CRR means banks must park more funds with RBI, leaving less money available for lending to the public, thereby contracting the money supply.

The Laffer Curve shows that as tax rates increase, tax revenue increases up to an optimal point, after which further increases in tax rates actually decrease total revenue due to disincentives to work/produce.

Market Price - Net Indirect Taxes = Factor Cost. Therefore, NNP(MP) - NIT = NNP(FC), which is technically defined as National Income.

Joseph Kitchin identified short business cycles of about 40 months driven by lags in information and decision making regarding inventory levels.

DA for central government employees is calculated based on the Consumer Price Index for Industrial Workers (CPI-IW), compiled by the Labour Bureau.

Fisher Equation: Real Interest Rate ˜ Nominal Interest Rate - Inflation Rate. 8% - 3% = 5%.

Positive economics relies on facts and data (descriptive). Normative economics involves value judgments and opinions about economic fairness and goals (prescriptive). Both definitions are correct.

Vote on Account (Article 116) enables the government to meet essential expenses (like salaries) for the first few months of the new fiscal year until the full Appropriation Bill is passed.

Movement along the supply curve (expansion or contraction) is caused ONLY by a change in the price of the good itself. All other factors shift the curve.

PDI is the income actually available to individuals for consumption or saving. It is obtained by subtracting personal direct taxes (like income tax) and fees/fines paid to the government from Personal Income.

During a boom, optimism encourages spending and investment. Money changes hands faster as people buy more goods and services, increasing the velocity of circulation.

Borrowings create debt. Disinvestment (selling government assets) is a capital receipt because it reduces assets, but it does not create any future repayment obligation, hence it is non-debt creating.

Sir John Hicks and Alvin Hansen developed the IS-LM model to summarize Keynesian economics, integrating the real (Goods) and monetary (Money) markets.

Joseph Schumpeter argued that business cycles are caused by waves of innovation (creative destruction). Entrepreneurs introduce new products/processes, causing booms, followed by adjustments.

A decrease in supply shifts the supply curve to the left. With constant demand, this creates a shortage at the old price, pushing the equilibrium price up and quantity down.

The Product Method sums up the Gross Value Added (GVA) by all sectors of the economy to avoid double counting of intermediate goods.

Disinflation is a decrease in the rate of inflation (e.g., from 6% to 4%). Prices are still rising, but slower. Deflation is negative inflation (prices falling).

A Money Bill deals with taxes, borrowing, etc., and can only be introduced in the Lok Sabha with the President's recommendation. Rajya Sabha has limited powers over it.

Unitary elasticity means the percentage change in quantity demanded is exactly equal to the percentage change in price.

M3 = M1 (Currency + Demand Deposits) + Time Deposits (Fixed/Recurring Deposits) with banks. It is the most common measure of money supply.

Expectations Theory explains the term structure of interest rates (Yield Curve), positing that long-term rates are an average of current and expected future short-term rates.

Land is considered a primary factor of production with a fixed supply. Unlike capital or labor, which can be increased or decreased based on demand and investment, the total physical availability of land is geographically limited and cannot be significantly expanded, making its supply curve perfectly vertical (inelastic).

When both demand and supply curves shift to the right by the same magnitude, the upward pressure on price from increased demand is exactly offset by the downward pressure on price from increased supply. However, both shifts contribute to an increase in the quantity traded, resulting in a higher equilibrium quantity at the same price.

M3, or Broad Money, includes Currency with the public, Demand Deposits, and Time Deposits with banks. It is the most comprehensive measure of the money supply that is liquid enough to impact economic activity. The RBI primarily tracks M3 growth to decide on liquidity management and interest rates.

Speculative demand arises from the desire to hold cash to take advantage of future changes in bond prices. When interest rates are high, bond prices are low, so people buy bonds (low cash holding). When rates are low, bond prices are high, so people sell bonds and hold cash (high cash holding), anticipating rates to rise. Thus, it has an inverse relationship.

The Recovery phase starts after the Trough. It is marked by a gradual return of confidence. Firms begin to replace worn-out machinery (investment kicks in), employment starts to pick up slowly, and banking lending begins to ease, leading to a slow rise in aggregate demand.

Policy lags are critical in economics. "Recognition Lag" is the time delay between an economic shock (like a sudden drop in demand) and the moment policymakers identify it from the data. This delay can sometimes lead to policy actions being taken too late, potentially destabilizing the economy further.

The Fiscal Responsibility and Budget Management (FRBM) Act, 2003, originally targeted limiting the Fiscal Deficit to 3% of GDP by 2008. While this target has been amended and relaxed multiple times due to economic crises, the 3% figure remains the benchmark for long-term fiscal prudence.

Standard GDP ignores the environmental costs of production. Green GDP deducts the cost of pollution, depletion of natural resources (like oil or forests), and degradation of ecosystems from the GDP figure. This provides a more sustainable measure of economic welfare.

WPI tracks the price of goods at the wholesale level. The "Manufactured Products" group (including chemicals, metals, textiles, food products) holds the highest weight (approx 64%), followed by Primary Articles (approx 22%) and Fuel & Power (approx 13%). Services are not included in WPI.

Normative economics expresses values, judgments, or opinions about what "should" or "ought" to happen. It involves subjective statements that cannot be proven true or false. The other options are Positive Economics, which state factual or testable relationships.

A Price Ceiling sets a maximum legal price below the equilibrium price. At this lower price, quantity demanded increases (people want more cheap goods) while quantity supplied decreases (producers make less profit), resulting in excess demand or a shortage .

The RBI publishes Liquidity Aggregates in addition to Monetary Aggregates. L1 is defined as New Broad Money (NM3) plus All Deposits with the Post Office Savings Banks (excluding National Savings Certificates). It provides a wider measure of liquidity than M3.

The Classical theory viewed interest purely as a real phenomenon (savings vs investment). The Neo-Classical Loanable Funds theory recognized that the supply of loanable funds also comes from monetary sources like new money created by banks (credit) and dis-hoarding of cash, not just real savings.

A global recession reduces the income and demand in foreign countries. This leads to a fall in demand for Indian exports (software, gems, textiles). Additionally, global investors become risk-averse, often pulling capital (FPI) out of emerging markets like India, affecting the stock market and rupee value.

By buying long-term bonds, the RBI increases their price and lowers their yield (interest rate), making long-term borrowing cheaper for infrastructure and housing. By selling short-term bonds, it keeps short-term rates steady or higher. This simultaneous action twists the yield curve.

The Budget is divided into Revenue and Capital. Capital Budget deals with assets and liabilities. Loans given to States create an asset (receivable) for the Central Government, so they fall under Capital Expenditure. Interest, salaries, and subsidies are recurring expenses (Revenue Expenditure).

Per Capita Income = Total Income / Total Population. For the average person to be better off in real terms, the total economic pie (Real GDP) must expand at a rate higher than the number of people sharing it (Population growth).

Stagflation involves both high inflation and high unemployment (stagnation). Typical tools to fight inflation (raising rates) slow down the economy, worsening unemployment. Tools to fight unemployment (lowering rates, stimulus) can worsen inflation. This trade-off makes it the hardest condition to manage.

The Production Function (Q = f(K, L...)) mathematically shows the maximum amount of output that can be produced from a given set of physical inputs (like capital and labor), assuming a certain level of technology.

Perfect elasticity means that at a specific price, suppliers are willing to supply an infinite amount. Even a tiny drop in price reduces supply to zero. This is depicted by a horizontal line.

In hyperinflation, money loses value almost hourly. People try to get rid of cash immediately by buying goods, leading to a massive increase in the velocity of circulation, which further fuels inflation.

The Fisher Effect states that the Real Interest Rate is independent of monetary measures. Therefore, if expected inflation rises by 1%, the Nominal Interest Rate will also rise by 1% to keep the Real Rate constant.

Paul Samuelson utilized the interaction between the Keynesian Multiplier (consumption effect) and the Accelerator (investment effect) to build a model that explains the oscillatory nature (cycles) of economic activity.

To ensure transparency and accountability, the RBI Act mandates that the MPC must publish the minutes of the proceedings, including the voting record of each member, on the 14th day after the meeting.

Deficit financing increases the money supply in the hands of the public without a corresponding increase in goods supply. This excess money chases limited goods, leading to a rise in aggregate demand and causing Demand-Pull Inflation.

Nominal GDP can be misleading due to exchange rates. PPP adjusts GDP to reflect what that money can actually buy in each country (e.g., a haircut costs less in India than in USA). It provides a better comparison of real living standards.

Skewflation is a skewed inflation. For example, food prices might be skyrocketing (high inflation) while prices of electronics or real estate might be stagnant or falling. It indicates sectoral imbalances.

"For whom to produce" is about distribution. It determines who gets to consume the goods produced, which depends on how income is distributed (wages, rent, interest, profit) among the factors of production.

The Law of Demand states price and quantity are inversely related. Veblen goods (status symbols like diamonds) violate this because people buy MORE of them as their price rises to show off wealth.

Banks create money by lending out deposits. If people hold cash (leakage), less money enters the banking system as deposits. This reduces the banks' ability to lend and create credit, thereby lowering the value of the Money Multiplier.