Microeconomics
The price of tea rises. Predict and explain the effect on the demand curve for coffee.
Demand for coffee increases; the curve shifts right due to the substitution effect
If the central bank increases interest rates, what’s the most likely short-run effect on consumer spending and investment?
Both typically decrease due to higher borrowing costs.
If the nominal GDP of a country is ₹2,500 crore and the GDP deflator is 125, what is the real GDP?
Real GDP = Nominal GDP / (Deflator/100) = ₹2,500 / 1.25 = ₹2,000 crore.
In early 2024, the Reserve Bank of India (RBI) held the repo rate steady at 6.5%. What is the repo rate used for?
The rate at which RBI lends to banks
If a city imposes a rent ceiling below market equilibrium rent, what is the most likely economic consequence?
It creates excess demand (shortage of rental housing), discouraging landlords from maintaining or building new properties, leading to a housing shortage.
A seller raises prices by 10% and total revenue falls. What does this reveal about the price elasticity of demand, and why?
Demand is elastic; consumers respond strongly to price change, reducing revenue.
A country’s inflation rate is at 2%, unemployment is at 8%, and growth is sluggish. What type of policy would most economists recommend and why?
Expansionary monetary or fiscal policy to stimulate demand and reduce unemployment.
A country’s nominal GDP increased from ₹200 trillion to ₹220 trillion in one year, while the GDP deflator went from 100 to 110. What is the real GDP growth rate?
Real GDP this year = 220 / 1.10 = ₹200 trillion
Real GDP last year = 200 / 1.00 = ₹200 trillion
Real GDP growth = 0%
Despite falling WPI and CPI inflation numbers in 2024, people still report a higher cost of living. Explain the possible disconnect between official inflation measures and consumer sentiment.
Despite falling WPI and CPI inflation numbers in 2024, people still report a higher cost of living. Explain the possible disconnect between official inflation measures and consumer sentiment.
A business operates in a highly competitive market and raises prices slightly above its competitors. What is the most likely outcome?
It will lose customers to competitors and see reduced revenue unless it differentiates its product. In perfect competition, firms are price takers.
A government sets a price ceiling on petrol below the equilibrium price. What are two likely consequences for consumers and producers in the short run?
Shortages and black markets. Producers supply less; consumers demand more.
A government cuts income taxes and increases welfare spending. However, GDP barely rises. What could explain this weak response?
A high marginal propensity to save (MPS) or low consumer confidence, meaning people don’t spend the extra income.
An economy has a working-age population of 100 million, 60 million are in the labor force, and 54 million are employed. What is the unemployment rate?
Unemployed = 60 – 54 = 6 million
Unemployment rate = (6 / 60) × 100 = 10%
Oil prices spiked after OPEC+ supply cuts in late 2024. India, as a major importer, did not raise retail fuel prices. What could be the economic and political rationale behind this decision?
Politically, to prevent voter backlash in an election year. Economically, to control inflation. But it may lead to a higher fiscal burden through fuel subsidies or losses at PSU oil companies.
Why does increasing the minimum wage sometimes reduce employment, especially for low-skilled workers?
Firms face higher labor costs and may cut back on hiring or automate low-skilled jobs. The effect depends on how far the wage is from market equilibrium.
A perfectly competitive firm continues to operate in the short run even though it is incurring losses. Explain under what conditions this decision is rational.
The firm should continue if price ≥ AVC. It can cover variable costs and reduce fixed cost burden, minimizing losses compared to shutting down.
If a nation’s currency suddenly appreciates, how might its exports and imports be affected?
Exports fall, imports rise due to stronger domestic currency making local goods more expensive abroad and foreign goods cheaper at home.
Consider the following linear demand and supply equations for a good:
Demand: QD = 100 – 2P
Supply: QS = –20 + 3P
The government introduces a subsidy of ₹10 per unit to producers. What will be the new equilibrium price paid by consumers in the market after the subsidy is introduced?
(Give your answer to the nearest whole number.)
Price = ₹18
Disruptions in the Red Sea and Suez Canal trade routes have increased global shipping costs. Analyze the possible impact on India’s trade balance and core inflation.
Import costs rise, especially for crude oil and intermediate goods, worsening trade balance. This can increase cost-push inflation, requiring policy tradeoffs between supporting growth and controlling prices.
Why is GDP not a reliable indicator of well-being, especially in low-income countries?
GDP ignores inequality, unpaid labor, environmental degradation, and informal economy contributions. High GDP can coexist with poor health or education outcomes.
A firm is operating in a monopolistic competition market. In the short run, it earns abnormal profits. What is likely to happen in the long run, and why?
New firms will enter the market, reducing demand for the existing firm's product, which will lead to normal profits in the long run.
A country in recession cuts interest rates and increases government spending. Six months later, inflation rises, but unemployment stays high. What kind of macroeconomic trap might this suggest, and why is it so difficult to resolve?
A stagflationary trap. Stimulus increased demand and prices, but structural unemployment (like skill mismatch or automation) prevents job recovery. Demand-side tools worsen inflation without reducing joblessness, requiring long-term supply-side reforms instead.
A government collects ₹4,000 crore in taxes. Its total expenditure is ₹5,000 crore. Out of this, ₹1,000 crore is spent on interest payments, and ₹500 crore is on capital expenditure. The GDP of the country is ₹100,000 crore. What is the primary deficit of the government?
₹0 crore.
The BRICS nations have proposed exploring a joint currency to reduce dependence on the US dollar for trade. Critically assess how this could affect India’s monetary sovereignty and trade competitiveness.
Benefits: reduces dollar risk, boosts South-South trade. Risks: limits RBI's independence, may complicate currency management, India’s forex reserves are still heavily dollar-denominated, and coordination among BRICS may be difficult.
Why might building more highways actually increase traffic congestion in the long run?
Induced demand: more roads reduce travel time temporarily, but encourage more driving and suburban sprawl, ultimately restoring or worsening congestion.