Generative AI refers to algorithms that create new data similar to input data using techniques like GANs, VAEs, and RNNs to generate content like images, text, and music. It is used in applications such as art and design, gaming, and content generation. Some challenges of generative AI include data bias, ethical considerations, and ensuring advancements do not negatively impact privacy or authenticity. The RAG (Retrieval-Augmented Generation) model integrates text generation and retrieval to provide precise responses to queries and is used in conversational AI, information retrieval, and question answering systems.