- In the IS-LM model, a fiscal expansion shifts the –
(A) LM curve right
(B) IS curve right
(C) LM curve left
(D) IS curve left
Answer: (B)
Explanation: Fiscal expansion, such as increased government spending in India, boosts aggregate demand, shifting the IS curve right in the IS-LM model. This reflects higher output at given interest rates, unlike money supply changes affecting the LM curve. - Taylor Rule is used to determine –
(A) Tax rates
(B) Government spending
(C) Optimal interest rates
(D) Import duties
Answer: (C)
Explanation: The Taylor Rule guides central banks in setting optimal interest rates based on inflation and output gaps. In India, the RBI could use it to adjust rates, raising them if inflation exceeds targets, unlike tax or trade policies. - Bounded rationality refers to –
(A) Full information decision-making
(B) Rational behavior under limited information and time
(C) Irrational consumer behavior
(D) Automated pricing
Answer: (B)
Explanation: Bounded rationality describes decision-making with limited information and time, leading to satisficing rather than optimizing. In India, consumers choosing phones under time constraints exhibit this, balancing rationality with constraints. - A public good is –
(A) Excludable and rival
(B) Excludable and non-rival
(C) Non-excludable and non-rival
(D) Non-excludable and rival
Answer: (C)
Explanation: Public goods, like India’s national defense, are non-excludable (no one can be barred) and non-rival (one’s use doesn’t reduce others’). This distinguishes them from private goods (excludable, rival) or club goods (excludable, non-rival). - In input-output analysis, the coefficient matrix represents –
(A) Trade imbalance
(B) Factor productivity
(C) Inter-industry relationships
(D) Income elasticity
Answer: (C)
Explanation: The coefficient matrix in input-output analysis shows inter-industry relationships, detailing how much one sector’s output is used as input by another. In India, it maps how steel production supports agriculture or construction, guiding economic planning. - A tariff imposed on imports is likely to –
(A) Lower domestic prices
(B) Increase domestic demand
(C) Protect domestic producers
(D) Boost exports
Answer: (C)
Explanation: Tariffs, like India’s duties on Chinese electronics, protect domestic producers by raising import prices, making local goods competitive. This may raise domestic prices, not lower them, and doesn’t directly boost exports or demand. - The real interest rate becomes negative when –
(A) Inflation is higher than nominal interest rate
(B) Tax rate increases
(C) GDP falls
(D) RBI raises repo rate
Answer: (A)
Explanation: The real interest rate (r = i – π) is negative when inflation (π) exceeds the nominal interest rate (i). In India, if inflation is 7% and nominal rates are 4%, real rates are -3%, encouraging borrowing over saving. - A regressive tax example is –
(A) Excise duty
(B) Corporate tax
(C) Income tax
(D) Wealth tax
Answer: (A)
Explanation: Excise duties, like taxes on fuel in India, are regressive, as they burden low-income households more relative to income. Income and wealth taxes are progressive, while corporate tax targets firms, not individuals. - Money illusion is the tendency to –
(A) Ignore real values and focus on nominal values
(B) Overestimate inflation
(C) Avoid currency
(D) Demand barter
Answer: (A)
Explanation: Money illusion occurs when people focus on nominal values (e.g., salary) rather than real values adjusted for inflation. In India, workers may feel richer with a nominal wage hike despite unchanged purchasing power due to inflation. - Menu costs are associated with –
(A) Changing government policies
(B) Repricing products during inflation
(C) Inventory shortage
(D) Public finance
Answer: (B)
Explanation: Menu costs are expenses firms incur when repricing products during inflation, like updating price tags or menus. In India, restaurants adjusting prices due to rising food costs face menu costs, contributing to price stickiness. - A moral hazard occurs when –
(A) Agents take more risks after being insured
(B) Interest rates rise
(C) Government defaults
(D) Subsidies are withdrawn
Answer: (A)
Explanation: Moral hazard arises when insured agents take riskier actions, expecting coverage. In India, farmers with crop insurance may plant riskier crops, knowing losses are covered, unlike scenarios involving interest rates or subsidies. - Veblen goods are characterized by –
(A) Demand falling as price rises
(B) Demand rising as price rises
(C) Perfect elasticity
(D) Inferior quality
Answer: (B)
Explanation: Veblen goods, like luxury cars in India, see demand rise with price due to their status value. Higher prices signal exclusivity, defying the law of demand, unlike inferior goods or elastic demand scenarios. - The Engel curve shows the relationship between –
(A) Price and demand
(B) Income and consumption
(C) Supply and production
(D) Tax and revenue
Answer: (B)
Explanation: The Engel curve plots consumption of a good against income. In India, as income rises, households spend more on quality food (upward-sloping Engel curve), reflecting income’s impact on consumption patterns. - Pareto efficiency is achieved when –
(A) Output is maximized
(B) No reallocation can improve one’s welfare without reducing another’s
(C) Government spending is zero
(D) GDP growth is constant
Answer: (B)
Explanation: Pareto efficiency occurs when resources can’t be reallocated to benefit one person without harming another. In India, efficient market trades may reach this state, but it doesn’t ensure equality or maximal output. - Cross-border externalities are best addressed by –
(A) Fiscal deficit
(B) Global institutions or treaties
(C) Local governments
(D) Free markets
Answer: (B)
Explanation: Cross-border externalities, like carbon emissions affecting India and neighbors, require global institutions (e.g., UNFCCC) or treaties (e.g., Paris Agreement) to coordinate solutions, as local governments or markets lack jurisdiction. - Shadow economy includes –
(A) Government services
(B) Informal and unreported economic activities
(C) Agricultural subsidies
(D) Global trade
Answer: (B)
Explanation: The shadow economy encompasses informal, unreported activities, like unregistered street vendors in India. These transactions evade taxes and regulations, unlike government services or subsidized agriculture. - Autonomous consumption refers to –
(A) Consumption dependent on income
(B) Zero consumption
(C) Consumption when income is zero
(D) Long-term saving
Answer: (C)
Explanation: Autonomous consumption is the baseline consumption level when income is zero, funded by savings or borrowing. In India, households maintain basic food spending even without income, reflecting essential needs. - The credit multiplier works on the principle of –
(A) Inflation reduction
(B) Fractional reserve banking
(C) Zero-based budgeting
(D) Full reserve system
Answer: (B)
Explanation: The credit multiplier operates via fractional reserve banking, where banks lend multiples of deposits based on reserve ratios. In India, with a 4% reserve ratio, a ₹100 deposit creates up to ₹2500 in credit, amplifying money supply. - Transaction motive of money demand is primarily driven by –
(A) Inflation
(B) Interest rates
(C) Income
(D) Investment
Answer: (C)
Explanation: The transaction motive for holding money is driven by income, as higher income increases spending needs. In India, rising household income boosts cash demand for daily transactions, unlike interest rates or inflation effects. - Phillips curve flattens when –
(A) Labor market is tight
(B) Expectations are adaptive
(C) Inflation expectations are anchored
(D) Demand rises sharply
Answer: (C)
Explanation: The Phillips curve flattens when inflation expectations are anchored, reducing the unemployment-inflation trade-off. In India, RBI’s credible inflation targeting stabilizes expectations, limiting price surges even at low unemployment. - The twin balance sheet problem involves –
(A) Households and corporates
(B) Banks and corporates
(C) Banks and households
(D) Government and public sector
Answer: (B)
Explanation: The twin balance sheet problem in India involves banks’ non-performing assets (NPAs) and corporates’ high debt, mutually reinforcing financial stress. Stressed corporate loans weaken banks, limiting lending, unlike household or government issues. - Net factor income from abroad is the difference between –
(A) Domestic and foreign investment
(B) Export and import of services
(C) Income earned by nationals abroad and foreigners domestically
(D) GDP and GNP
Answer: (C)
Explanation: Net factor income from abroad is income earned by Indian nationals abroad (e.g., remittances) minus income earned by foreigners in India. It bridges GDP and GNP, reflecting cross-border factor flows. - Vertical equity in taxation implies –
(A) Equal tax treatment for all
(B) Tax proportional to income
(C) Rich should pay more
(D) Tax on foreign firms
Answer: (C)
Explanation: Vertical equity means higher-income individuals pay more tax, reflecting ability to pay. In India, progressive income tax rates (e.g., 30% for high earners) embody this, unlike proportional or equal tax systems. - A Lorenz curve closer to the line of equality shows –
(A) More inequality
(B) Less inequality
(C) Constant inequality
(D) Perfect inequality
Answer: (B)
Explanation: A Lorenz curve near the line of equality indicates less income inequality, as income is more evenly distributed. In India, policies reducing disparity (e.g., welfare) bring the curve closer to this line. - Ricardo-Barro equivalence suggests that –
(A) Consumers offset government spending by saving
(B) Deficits always lead to inflation
(C) Money supply is irrelevant
(D) Taxes reduce productivity
Answer: (A)
Explanation: Ricardo-Barro equivalence posits that consumers save to offset government deficit spending, anticipating future taxes. In India, a bond-financed infrastructure project may not boost demand if households save more. - A sunk cost is –
(A) A cost that can be recovered
(B) A future cost
(C) An irrecoverable past cost
(D) A variable cost
Answer: (C)
Explanation: Sunk costs are irrecoverable past expenses, like funds spent on failed projects in India. They should not influence future decisions, unlike recoverable, variable, or future costs. - The Coase theorem deals with –
(A) Tax incentives
(B) Optimal pricing
(C) Private solutions to externalities
(D) Monopoly regulation
Answer: (C)
Explanation: The Coase theorem suggests private negotiations can resolve externalities if property rights are clear and transaction costs low. In India, farmers and factories could negotiate pollution disputes, avoiding government intervention. - The LM curve becomes vertical when –
(A) Liquidity preference is high
(B) Interest elasticity of money demand is zero
(C) Investment is insensitive to interest rates
(D) Tax rates rise
Answer: (B)
Explanation: The LM curve is vertical when money demand is perfectly interest-inelastic, as money supply fixes income levels. In India, if money demand ignores interest rates, monetary policy strongly determines output. - Real business cycle theory attributes fluctuations to –
(A) Monetary shocks
(B) Government policy
(C) Technology shocks
(D) Interest rate changes
Answer: (C)
Explanation: Real business cycle theory attributes economic fluctuations to technology shocks, like productivity changes. In India, IT advancements drive growth, while disruptions (e.g., tech failures) cause downturns, unlike monetary or policy shocks. - Revealed preference theory was developed by –
(A) Alfred Marshall
(B) Paul Samuelson
(C) Amartya Sen
(D) Adam Smith
Answer: (B)
Explanation: Paul Samuelson’s revealed preference theory infers consumer preferences from observed choices. In India, analyzing purchase patterns (e.g., choosing tea over coffee) reveals preferences without needing utility functions. - Triffin dilemma is a conflict between –
(A) Domestic monetary policy and global reserve currency role
(B) Trade and fiscal policy
(C) Growth and environment
(D) Taxation and productivity
Answer: (A)
Explanation: The Triffin dilemma highlights tensions between domestic monetary policy and maintaining a global reserve currency. While not directly applicable to India, the US faces this with the dollar, balancing domestic needs against global liquidity. - Backward bending supply of labor indicates –
(A) Negative wage elasticity
(B) High unemployment
(C) Full employment
(D) Sticky wages
Answer: (A)
Explanation: A backward bending labor supply curve shows negative wage elasticity at high wages, where workers reduce hours. In India, high-paid tech workers may work less if salaries rise, prioritizing leisure. - Involuntary unemployment exists when –
(A) People choose not to work
(B) Jobs exceed labor supply
(C) Willing workers can’t find jobs at prevailing wage
(D) All workers are temporary
Answer: (C)
Explanation: Involuntary unemployment occurs when willing workers can’t find jobs at current wages, often due to rigidities. In India, surplus rural labor faces this, unable to secure jobs despite willingness to work. - A unit tax causes a parallel shift in –
(A) Demand curve
(B) Supply curve
(C) Marginal cost curve
(D) Budget line
Answer: (B)
Explanation: A unit tax, like a fixed tax per unit sold in India, raises production costs, shifting the supply curve leftward parallelly. This increases prices, unlike demand or budget line shifts. - Nominal rigidity refers to –
(A) Sticky prices and wages
(B) Supply side shocks
(C) Inflation expectations
(D) Fixed exchange rates
Answer: (A)
Explanation: Nominal rigidity describes sticky prices and wages that adjust slowly to economic changes. In India, labor contracts with fixed wages cause rigidity, delaying market adjustments during inflation or recessions. - A public debt trap occurs when –
(A) Borrowing is used for capital formation
(B) Debt servicing exceeds new borrowings
(C) Exports fall sharply
(D) Budget surplus rises
Answer: (B)
Explanation: A public debt trap happens when debt servicing costs (interest payments) exceed new borrowings, limiting fiscal space. In India, high interest payments could trap the government, reducing funds for development. - The recessionary gap is when –
(A) Actual GDP exceeds potential GDP
(B) Full employment is reached
(C) Actual GDP is below potential GDP
(D) Exports exceed imports
Answer: (C)
Explanation: A recessionary gap occurs when actual GDP is below potential GDP, indicating underutilized resources. In India, this signals unemployment and idle capacity, prompting stimulus measures to close the gap. - Barter system fails due to –
(A) Lack of trust
(B) Double coincidence of wants
(C) High taxation
(D) Informal labor
Answer: (B)
Explanation: The barter system fails due to the double coincidence of wants, requiring both parties to desire each other’s goods. In India, trading rice for cloth only works if both parties agree, making money a more efficient medium. - Stagflation combines –
(A) Inflation and stagnation
(B) Growth and deflation
(C) Deflation and unemployment
(D) Investment and saving
Answer: (A)
Explanation: Stagflation is high inflation combined with economic stagnation (low growth, high unemployment). In India’s 1970s, oil price shocks caused stagflation, challenging policymakers to balance price control and growth. - Inflation targeting in India is managed by –
(A) Ministry of Finance
(B) RBI under Monetary Policy Framework
(C) NITI Aayog
(D) SEBI
Answer: (B)
Explanation: The RBI manages inflation targeting under the Monetary Policy Framework, aiming for 4% ± 2% CPI inflation. The Monetary Policy Committee, established in 2016, guides this, independent of NITI Aayog or SEBI. - Expenditure switching policy aims to –
(A) Reduce tax burden
(B) Encourage savings
(C) Shift consumption from foreign to domestic goods
(D) Control inflation
Answer: (C)
Explanation: Expenditure switching policies, like currency devaluation in India, make imports costlier and exports cheaper, shifting consumption to domestic goods. This improves trade balances, unlike tax or inflation policies. - Lump-sum tax is –
(A) Proportional to income
(B) Varies with consumption
(C) Fixed amount regardless of income
(D) Based on imports
Answer: (C)
Explanation: A lump-sum tax is a fixed amount, regardless of income or consumption, like a poll tax. In India, such taxes are rare but would affect all equally, unlike income-proportional or consumption-based taxes. - The Monetary Policy Framework Agreement (MPFA) was signed between –
(A) RBI and SEBI
(B) RBI and IMF
(C) RBI and Government of India
(D) NITI Aayog and Finance Commission
Answer: (C)
Explanation: The MPFA, signed in 2015 between the RBI and Government of India, formalized inflation targeting (4% ± 2%). It established the MPC, aligning monetary policy with national economic goals, excluding external bodies like the IMF. - Capital account convertibility refers to –
(A) Free trade in goods
(B) Free movement of capital across borders
(C) Open fiscal deficit
(D) Floating interest rates
Answer: (B)
Explanation: Capital account convertibility allows free cross-border capital flows, like FDI or portfolio investments. India maintains partial convertibility, controlling outflows to stabilize the rupee, unlike trade or fiscal policies. - Ceteris paribus is a Latin phrase meaning –
(A) Demand is constant
(B) All other things being equal
(C) Price elasticity
(D) Only output varies
Answer: (B)
Explanation: Ceteris paribus means “all other things being equal,” isolating one variable’s effect. In India, assuming ceteris paribus, a price rise reduces demand, holding income and preferences constant. - Tax buoyancy measures –
(A) Growth of tax revenue in relation to GDP
(B) Elasticity of tax to price
(C) Tax collection efficiency
(D) Deficit reduction
Answer: (A)
Explanation: Tax buoyancy measures how tax revenue grows relative to GDP. In India, a buoyancy above 1 indicates taxes grow faster than GDP, reflecting effective tax systems, unlike efficiency or deficit metrics. - A higher Gini coefficient implies –
(A) Lower inflation
(B) Greater income inequality
(C) More exports
(D) Efficient taxation
Answer: (B)
Explanation: A higher Gini coefficient (e.g., 0.35 in India) indicates greater income inequality, as income concentrates among fewer people. It’s unrelated to inflation, exports, or tax efficiency, focusing solely on distribution. - Real wage is calculated as –
(A) Nominal wage × price index
(B) Nominal wage / price index
(C) GDP / wage
(D) Wage × inflation
Answer: (B)
Explanation: Real wage is nominal wage divided by the price index (e.g., CPI), reflecting purchasing power. In India, if nominal wages are ₹100 and CPI is 1.2, real wages are ₹83.33, adjusting for inflation. - Import quota is a –
(A) Price control
(B) Non-tariff barrier
(C) Direct tax
(D) Monetary instrument
Answer: (B)
Explanation: An import quota, limiting import quantities (e.g., on foreign cars in India), is a non-tariff barrier, restricting trade without price-based taxes. It protects domestic industries, unlike price controls or taxes. - A deflationary gap can be closed by –
(A) Increasing taxes
(B) Reducing government expenditure
(C) Expansionary fiscal policy
(D) Raising interest rates
Answer: (C)
Explanation: A deflationary gap, where actual output is below potential, is closed by expansionary fiscal policy, like increased government spending in India. This boosts demand, unlike tax hikes or rate increases, which worsen the gap.