- Index of Industrial Production (IIP) primarily measures –
(A) Agricultural output
(B) Industrial performance
(C) Employment rate
(D) Wholesale prices
Answer: (B)
Explanation: The IIP measures industrial performance, tracking output in manufacturing, mining, and electricity sectors in India. Compiled with a base year (2011–12), it reflects industrial growth trends, unlike agricultural output or price indices. - Austerity measures refer to –
(A) Expansionary fiscal policy
(B) Cuts in government spending and/or increases in taxes
(C) Loose monetary policy
(D) Investment in infrastructure
Answer: (B)
Explanation: Austerity measures involve reducing government spending or raising taxes to curb deficits. In India, austerity might include cutting subsidies or hiking GST rates to stabilize public finances, contrasting with expansionary policies. - Pigovian subsidy is provided to –
(A) Encourage negative externalities
(B) Discourage production
(C) Promote activities with positive externalities
(D) Reduce foreign investment
Answer: (C)
Explanation: Pigovian subsidies promote activities with positive externalities, like renewable energy in India. Subsidizing solar panels encourages clean energy, offsetting societal benefits not captured by markets, unlike negative externalities or investment curbs. - The balance of invisibles includes –
(A) Oil imports
(B) Machinery exports
(C) Services, remittances, income
(D) Gold imports
Answer: (C)
Explanation: The balance of invisibles covers non-merchandise trade, including services (e.g., IT exports), remittances (e.g., from Indian workers abroad), and income flows. In India, strong IT services and remittances improve this balance, unlike physical goods like oil. - In national income accounting, net exports equal –
(A) Imports – exports
(B) Exports – imports
(C) GDP – GNP
(D) Revenue – expenditure
Answer: (B)
Explanation: Net exports are exports minus imports, reflecting trade balance in GDP calculations. In India, if exports (e.g., textiles) exceed imports (e.g., oil), net exports are positive, contributing to GDP, unlike fiscal or income metrics. - Commodity money has intrinsic value because –
(A) It’s fiat money
(B) It is legal tender
(C) It can be used as a commodity
(D) It is digital
Answer: (C)
Explanation: Commodity money, like gold coins in historical India, has intrinsic value as it can be used as a commodity (e.g., jewelry). Unlike fiat money, its value doesn’t rely solely on legal tender status or digital form. - Voluntary unemployment refers to –
(A) Unemployment due to recession
(B) Workers refusing jobs at prevailing wage
(C) Job loss due to inflation
(D) Structural unemployment
Answer: (B)
Explanation: Voluntary unemployment occurs when workers choose not to work at current wages, preferring leisure or better opportunities. In India, skilled workers may reject low-paying jobs, unlike involuntary unemployment from recessions or structural shifts. - Full capital account convertibility allows –
(A) Free trade in goods
(B) Free movement of capital in and out of a country
(C) Tax-free income
(D) Fixed exchange rate
Answer: (B)
Explanation: Full capital account convertibility permits unrestricted capital flows, like FDI or portfolio investments. India’s partial convertibility restricts outflows to stabilize the rupee, unlike free trade or fixed exchange regimes. - The difference between potential GDP and actual GDP is known as –
(A) Output deficit
(B) Output gap
(C) Fiscal gap
(D) Revenue deficit
Answer: (B)
Explanation: The output gap is the difference between potential GDP (full-capacity output) and actual GDP. In India, a negative gap during slowdowns signals underutilized resources, prompting stimulus, unlike fiscal or revenue deficits. - Wagner’s Law suggests that –
(A) Private investment crowds out public investment
(B) Public expenditure increases as GDP grows
(C) Inflation rises with wages
(D) Government size remains constant
Answer: (B)
Explanation: Wagner’s Law posits that public expenditure grows with GDP as societies demand more services. In India, rising GDP has led to increased spending on health and education, reflecting this trend, unlike crowding out or inflation effects. - Seigniorage is the –
(A) Tax revenue from exports
(B) Profit from issuing currency
(C) Foreign direct investment
(D) Interest on sovereign bonds
Answer: (B)
Explanation: Seigniorage is the profit from issuing currency, as its production cost is less than its value. In India, the RBI earns seigniorage when printing rupees, boosting government revenue, unlike taxes or bond interest. - A normal profit occurs when –
(A) Total cost exceeds total revenue
(B) Total revenue equals total cost
(C) Marginal cost is zero
(D) There’s zero taxation
Answer: (B)
Explanation: Normal profit occurs when total revenue equals total cost, covering opportunity costs but yielding no excess profit. In India, a small shop breaking even earns normal profit, sustaining operations without economic loss. - Cost-push inflation is caused by –
(A) Increased demand
(B) Supply shock like rising wages or raw material costs
(C) Foreign exchange surplus
(D) Government subsidies
Answer: (B)
Explanation: Cost-push inflation results from supply shocks, like rising oil or labor costs, increasing production costs. In India, a fuel price hike raises transport costs, driving inflation, unlike demand or subsidy effects. - Transaction cost economics was introduced by –
(A) Keynes
(B) Adam Smith
(C) Ronald Coase
(D) Ricardo
Answer: (C)
Explanation: Ronald Coase introduced transaction cost economics, analyzing costs of economic exchanges (e.g., contracts). In India, high legal costs for business deals illustrate transaction costs, influencing firm structures and market efficiency. - A depreciated currency makes –
(A) Imports cheaper
(B) Exports more expensive
(C) Exports more competitive
(D) Inflation fall
Answer: (C)
Explanation: Currency depreciation, like a weaker rupee, makes Indian exports (e.g., textiles) cheaper abroad, boosting competitiveness. Imports become costlier, and inflation may rise, not fall, due to higher import costs. - In a bilateral monopoly, there is –
(A) One buyer, many sellers
(B) One seller, many buyers
(C) One buyer and one seller
(D) Many buyers and sellers
Answer: (C)
Explanation: A bilateral monopoly involves one buyer and one seller, like a single employer negotiating with a labor union in India. This creates unique bargaining dynamics, unlike markets with multiple buyers or sellers. - Monetary base (high-powered money) includes –
(A) M3
(B) M2
(C) Currency with public + banks’ deposits with RBI
(D) Demand deposits
Answer: (C)
Explanation: The monetary base comprises currency with the public and banks’ reserves with the RBI. In India, this high-powered money underpins money creation, unlike broader measures like M3 or demand deposits. - The concept of utility in economics refers to –
(A) Revenue from goods
(B) Usefulness of goods
(C) Satisfaction derived from consumption
(D) Number of units sold
Answer: (C)
Explanation: Utility measures satisfaction from consuming goods or services. In India, a consumer derives higher utility from quality food than basic staples, guiding choices, distinct from revenue or sales metrics. - A revenue deficit indicates –
(A) Capital expenditure exceeds capital receipts
(B) Total expenditure exceeds total receipts
(C) Revenue expenditure exceeds revenue receipts
(D) Borrowings exceed taxes
Answer: (C)
Explanation: A revenue deficit occurs when revenue expenditure (e.g., salaries) exceeds revenue receipts (e.g., taxes) in India’s budget. This signals reliance on borrowing for current expenses, unlike capital or total budget deficits. - Disguised unemployment implies –
(A) Workers are visibly idle
(B) Marginal productivity of some workers is zero
(C) Seasonal jobs
(D) High wage pressure
Answer: (B)
Explanation: Disguised unemployment occurs when workers’ marginal productivity is zero, common in Indian agriculture. Extra workers on farms contribute nothing extra, unlike visible idleness or seasonal employment. - A horizontal demand curve means –
(A) Perfectly elastic demand
(B) Perfectly inelastic demand
(C) Unit elastic demand
(D) Backward bending demand
Answer: (A)
Explanation: A horizontal demand curve indicates perfectly elastic demand, where consumers buy only at a fixed price. In India, generic medicines may face this, as slight price increases shift demand to substitutes. - The dual pricing system refers to –
(A) Price ceiling and price floor
(B) Same good sold at different prices in different markets
(C) Monopoly pricing
(D) Import tariffs
Answer: (B)
Explanation: Dual pricing involves selling the same good at different prices in different markets, like subsidized LPG for households versus market rates for commercial use in India, unlike ceilings, floors, or tariffs. - Ad valorem tax is levied –
(A) At a fixed amount per unit
(B) As a percentage of value
(C) On imports only
(D) Per transaction
Answer: (B)
Explanation: An ad valorem tax, like GST in India, is a percentage of a good’s value (e.g., 18% on electronics). Unlike fixed unit taxes or import-specific duties, it scales with price. - The Marginal Rate of Technical Substitution (MRTS) is –
(A) Rate at which output increases with labor
(B) Rate at which one input substitutes another, holding output constant
(C) Average productivity
(D) Ratio of cost to profit
Answer: (B)
Explanation: MRTS measures how one input (e.g., labor) substitutes another (e.g., capital) while maintaining output. In India, a factory may replace workers with machines at a diminishing rate, reflecting MRTS in production. - Inclusive Wealth Index (IWI) includes –
(A) GDP and inflation
(B) Natural, human, and produced capital
(C) Market prices only
(D) Imports and exports
Answer: (B)
Explanation: The IWI measures wealth through natural (e.g., forests), human (e.g., skills), and produced (e.g., infrastructure) capital. In India, it assesses sustainable growth beyond GDP, capturing resource and human development. - Lump-sum tax has –
(A) No impact on aggregate demand
(B) Constant average rate
(C) No marginal tax rate
(D) Zero impact on income
Answer: (C)
Explanation: A lump-sum tax, like a fixed ₹1000 tax in India, has no marginal tax rate, as it doesn’t vary with income. It affects demand but doesn’t incentivize behavioral changes, unlike proportional taxes. - Zero-based budgeting (ZBB) starts from –
(A) Previous year’s data
(B) A fixed baseline
(C) Zero, justifying each item
(D) Revenue targets
Answer: (C)
Explanation: ZBB starts from zero, requiring justification for every budget item. In India, ministries using ZBB must defend all expenditures anew, unlike traditional budgeting relying on past allocations. - A Giffen good must be –
(A) Inferior with strong income effect
(B) Luxury good
(C) Substitutable
(D) Price inelastic
Answer: (A)
Explanation: A Giffen good is inferior, with a strong income effect causing demand to rise with price. In India, poor households may buy more low-cost rice when prices rise, reducing other purchases, unlike luxury or elastic goods. - Twin deficit hypothesis links –
(A) Revenue deficit and trade surplus
(B) Fiscal and current account deficits
(C) Inflation and unemployment
(D) Fiscal deficit and black money
Answer: (B)
Explanation: The twin deficit hypothesis links fiscal deficits (government overspending) to current account deficits (imports exceeding exports). In India, high fiscal deficits may weaken the rupee, worsening trade balances. - The precautionary motive for holding money relates to –
(A) Future price expectations
(B) Unforeseen emergencies
(C) Daily transactions
(D) Speculative buying
Answer: (B)
Explanation: The precautionary motive involves holding money for unforeseen emergencies, like medical expenses in India. It ensures liquidity for unexpected needs, distinct from transaction or speculative motives. - A natural rate of unemployment includes –
(A) Cyclical unemployment
(B) Structural and frictional unemployment
(C) Only disguised unemployment
(D) No unemployment
Answer: (B)
Explanation: The natural rate of unemployment includes structural (mismatched skills) and frictional (job transitions) unemployment. In India, workers shifting jobs or lacking relevant skills contribute to this rate, excluding cyclical unemployment. - The Harrod-neutral technical progress is also known as –
(A) Labor-augmenting
(B) Capital-augmenting
(C) Neutral productivity
(D) Hicks-neutral
Answer: (A)
Explanation: Harrod-neutral technical progress is labor-augmenting, increasing labor productivity while maintaining capital’s role. In India, training programs enhancing worker efficiency exemplify this, unlike capital-focused or Hicks-neutral progress. - Base effect in inflation analysis refers to –
(A) Fluctuation due to previous year’s high or low base
(B) Market failure
(C) Constant prices
(D) Index recalculation
Answer: (A)
Explanation: The base effect occurs when inflation rates fluctuate due to a high or low base in the previous year. In India, a low inflation base (e.g., 2% last year) can exaggerate current inflation rates, affecting perceptions. - Non-performing assets (NPAs) are loans –
(A) That are repaid early
(B) On which interest or principal is overdue for 90+ days
(C) Which are interest-free
(D) Given to large borrowers only
Answer: (B)
Explanation: NPAs are loans overdue for 90+ days on interest or principal, weakening Indian banks’ balance sheets. High NPAs, as seen in public sector banks, limit lending, unlike early-repaid or interest-free loans. - The expenditure method of calculating GDP includes –
(A) C + I + G + (X – M)
(B) W + R + I + P
(C) NI – depreciation
(D) C + S
Answer: (A)
Explanation: The expenditure method calculates GDP as consumption (C), investment (I), government spending (G), plus net exports (X – M). In India, this sums household spending, business investments, and trade balances to measure economic activity. - Repo rate is the rate at which –
(A) RBI lends to banks
(B) Banks lend to RBI
(C) Banks lend to public
(D) RBI lends to government
Answer: (A)
Explanation: The repo rate is the rate at which the RBI lends to commercial banks against securities. In India, a lower repo rate (e.g., 4%) encourages banks to borrow, boosting credit and economic activity. - A current account surplus indicates –
(A) Exports < imports
(B) Exports > imports
(C) Budget deficit
(D) Capital account deficit
Answer: (B)
Explanation: A current account surplus occurs when exports exceed imports, including goods, services, and remittances. In India, strong IT exports and remittances can create a surplus, boosting foreign reserves, unlike fiscal deficits. - Time preference in economics means –
(A) Preference for higher income
(B) Present consumption is preferred over future
(C) Zero interest rate
(D) Inflation bias
Answer: (B)
Explanation: Time preference reflects a preference for present consumption over future, requiring interest to delay consumption. In India, high time preference drives demand for instant loans, reflecting impatience for future gains. - Satisficing behavior was introduced by –
(A) Adam Smith
(B) Herbert Simon
(C) Milton Friedman
(D) Hicks
Answer: (B)
Explanation: Herbert Simon’s satisficing behavior describes choosing satisfactory options under constraints, not optimal ones. In India, consumers picking affordable phones over ideal models due to budget limits exhibit satisficing. - The production possibility curve (PPC) shifts outward due to –
(A) Unemployment
(B) Inflation
(C) Technological advancement
(D) Price ceiling
Answer: (C)
Explanation: The PPC shifts outward with technological advancements, increasing production capacity. In India, new farming techniques expand agricultural output, unlike unemployment or price ceilings, which limit efficiency. - A contractionary fiscal policy is implemented by –
(A) Increasing spending
(B) Reducing taxes
(C) Cutting government expenditure
(D) Printing money
Answer: (C)
Explanation: Contractionary fiscal policy reduces demand by cutting government expenditure or raising taxes. In India, reducing subsidies during high inflation cools the economy, unlike expansionary spending or money printing. - Human Development Index (HDI) was introduced by –
(A) Amartya Sen and Mahbub ul Haq
(B) Adam Smith
(C) Paul Krugman
(D) John Hicks
Answer: (A)
Explanation: Amartya Sen and Mahbub ul Haq developed the HDI, measuring life expectancy, education, and income. In India, HDI improvements reflect better schooling and health, guiding development policies. - In monopolistic competition, firms have –
(A) Perfect substitutes
(B) Identical products
(C) Product differentiation
(D) Price takers only
Answer: (C)
Explanation: Monopolistic competition involves firms selling differentiated products, like Indian restaurants offering unique cuisines. This gives some pricing power, unlike perfect substitutes or identical products in other markets. - The invisible hand metaphor was introduced by –
(A) Ricardo
(B) Keynes
(C) Adam Smith
(D) Marshall
Answer: (C)
Explanation: Adam Smith’s invisible hand metaphor describes how self-interested actions in markets lead to societal benefits. In India, farmers selling crops at market prices unintentionally stabilize food supply, illustrating this concept. - The first country to adopt inflation targeting was –
(A) UK
(B) Canada
(C) New Zealand
(D) India
Answer: (C)
Explanation: New Zealand pioneered inflation targeting in 1990, setting a model for price stability. India adopted it in 2016 (4% ± 2%), with the RBI’s MPC following this approach, inspired by global pioneers. - Subsidies are included in –
(A) GDP at market prices
(B) GDP at factor cost
(C) Net indirect taxes
(D) Transfer payments
Answer: (B)
Explanation: Subsidies are included in GDP at factor cost, which excludes taxes and adds subsidies to market prices. In India, fertilizer subsidies adjust GDP calculations, reflecting production costs, unlike transfer payments. - Global value chains (GVCs) refer to –
(A) Domestic production
(B) Government contracts
(C) International production sharing
(D) Currency manipulation
Answer: (C)
Explanation: GVCs involve international production sharing, where stages of production occur across countries. In India, smartphone assembly using imported components exemplifies GVCs, boosting trade, unlike domestic or currency policies. - Speculative motive of money demand depends on –
(A) Income
(B) Wage
(C) Interest rates
(D) Consumption
Answer: (C)
Explanation: The speculative motive for holding money depends on interest rates, as lower rates reduce the cost of holding cash for investments. In India, low rates encourage holding money for stock market opportunities. - Hysteresis in unemployment means –
(A) It’s purely cyclical
(B) Short-term unemployment
(C) Temporary unemployment becomes permanent
(D) Caused by fiscal deficit
Answer: (C)
Explanation: Hysteresis in unemployment occurs when temporary joblessness becomes permanent due to skill loss or structural changes. In India, prolonged recessions may leave workers unemployable, extending unemployment beyond cycles. - Green bonds are issued to –
(A) Fund military
(B) Fund eco-friendly projects
(C) Encourage FDI
(D) Finance agriculture subsidies
Answer: (B)
Explanation: Green bonds fund eco-friendly projects, like solar energy in India. Issued by governments or firms, they support sustainable initiatives, unlike military, FDI, or agricultural subsidy financing.