ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Summary: Higher inflation reduces the real value of the government’s outstanding debt while increasing the tax burden on capital investment due to lack of inflation indexing. Increasing the current annual inflation target regime from 2 percent to 3 percent inflation reduces debt while lowering GDP.

Detailed explanation-2: -Real GDP takes into consideration adjustments for changes in inflation. This means that if inflation is positive, real GDP will be lower than nominal, and vice versa.

Detailed explanation-3: -The Relationship Between Inflation and GDP However, too much GDP growth is also dangerous, as it will most likely come with an increase in inflation, which erodes stock market gains by making our money (and future corporate profits) less valuable.

Detailed explanation-4: -If GDP is falling, then the economy is shrinking-bad news for businesses and workers. If GDP falls for two quarters in a row, that is known as a recession, which can mean pay freezes and lost jobs.

Detailed explanation-5: -If real GDP falls short of potential GDP (i.e., if the output gap is negative), it means demand for goods and services is weak. It’s a sign that the economy may not be at full employment.