Daily Quiz: UPSC Prelims Marathon – December 18, 2018

1. Monopoly- Companies that achieve a monopoly over an industry create cost-push inflation. A monopoly reduces supply to meet its profit goal.
2. Wage inflation- Wage inflation occurs when workers have enough leverage to force through wage increases. Companies then pass higher costs through to consumers
3. Natural disasters cause inflation by disrupting supply. A good example is right after Japan’s earthquake in 2011. It disrupted the supply of auto parts.
4. Black money is a factor of Demand pull inflation. Growth in unaccounted money leads to more demand for goods.

Post Office in India is becoming high tech today. Post office is not only medium of sending letters. People can avail multiple financial services at Post Offices such as

1. ATM: Some selected post office also offers ATM services. Postal department is issuing separate ATM card to customer for this services. Postal department is planning to extend this facility to every city.
2. Small Saving Schemes : Customers can also invest in small saving schemes using post office. NSC, MIS and Sukanya Samrriddhi Account are most popular small saving investment option offered by post office.
3. Reverse E-commerce: Indian Post office is working on Reverse E-commerce platform. Using this model anyone can sell their products to other company via postal department. This means post office will act as seller for them.
4. Mutual Fund Investment: Only few selected mutual funds schemes are available for investment through post office. Principal, SBI, UTI, Franklin Templeton and Reliance Mutual are some of them.
5. India Post Payment Bank has been set up as a Public Limited Company under Department of Posts with 100% Government of India (GOI) equity. It leverages DoPs network, resources and reach to make low-cost, quality and simple financial services easily accessible to customers in the country.

Option (b) is the answer. Headcount ratio is a measure of all the people below a poverty line, in a given population, and considers them equally poor. The poverty gap index is a measure of the intensity of poverty. The poverty gap index is an improvement over the poverty measure headcount ratio. Poverty gap index estimates the depth of poverty by considering how far, on the average, the poor are from that poverty line.

Option (b) is correct. The Gross Budgetary Support (GBS) is an important component of the Central Plan of the Government of India. The Government’s support to the Central plan is called the Gross Budgetary Support. The GBS includes the tax receipts and other sources of revenue raised by the Government.

Option (c) is the answer. Cash Deposit ratio (CDR) is the ratio of how much a bank lends out of the deposits it has mobilised. It indicates how much of a banks core funds are being used for lending, the main banking activity. Cash Deposit Ratio (cdr) increases during the festive season as people convert deposits to cash balance for meeting extra expenditure during such periods.

The main causes of Demand-Pull Inflation:

1. A depreciation of the exchange rate increases the price of imports and reduces the foreign price of a country’s exports. If consumers buy fewer imports, while exports grow, AD in will rise  and there may be a multiplier effect on the level of demand and output
2. Higher demand from a fiscal stimulus e.g. lower direct or indirect taxes or higher government spending. If direct taxes are reduced, consumers have more disposable income causing demand to rise. Higher government spending and increased borrowing creates extra demand in the circular flow
3. Monetary stimulus to the economy: A fall in interest rates may stimulate too much demand  for example in raising demand for loans or in leading to house price inflation. Monetarist economists believe that inflation is caused by too much money chasing too few goods” and that governments can lose control of inflation if they allow the financial system to expand the money supply too quickly.

The main causes of Cost Push Inflation

1. Component costs: e.g. an increase in the prices of raw materials and other components. This might be because of a rise in commodity prices such as oil, copper and agricultural products used in food processing. A recent example has been a surge in the world price of wheat.
2. Rising labour costs – caused by wage increases, which are greater than improvements in productivity. Wage costs often rise when unemployment is low because skilled workers become scarce and this can drive pay levels higher. Wages might increase when people expect higher inflation so they ask for more pay in order to protect their real incomes. Trade unions may use their bargaining power to bid for and achieve increasing wages, this could be a cause of cost- push inflation
3. Expectations of inflation are important in shaping what actually happens to inflation. When people see prices are rising for everyday items they get concerned about the effects of inflation on their real standard of living. One of the dangers of a pick-up in inflation is what the Bank of England calls second-round effects” i.e. an initial rise in prices triggers a burst of higher pay claims as workers look to protect their way of life. This is also known as a wage-price effect”
4. Higher indirect taxes  for example a rise in the duty on alcohol, fuels and cigarettes, or a rise in Value Added Tax. Depending on the price elasticity of demand and supply for their products, suppliers may choose to pass on the burden of the tax onto consumers.
5. A fall in the exchange rate  this can cause cost push inflation because it leads to an increase in the prices of imported products such as essential raw materials, components and finished products
6. Monopoly employers/profit-push inflation  where dominants firms in a market use their market power (at whatever level of demand) to increase prices well above costs

Statement A is Incorrect In economics, the ‘J curve’ refers to the trend of a country’s trade balance following a devaluation or depreciation under a certain set of assumptions.

Statement B is correct

In microeconomics, an Engel curve describes how household expenditure on a particular good or service

varies with household income. Note: In economics, the Lorenz curve is a graphical representation of the distribution of income or of wealth. It was developed by Max O. Lorenz in 1905 for representing inequality of the wealth distribution.