- The Real Effective Exchange Rate (REER) is –
(A) Nominal exchange rate
(B) Trade-weighted exchange rate adjusted for inflation
(C) Exchange rate fixed by RBI
(D) Spot market exchange rate
Answer: (B)
Explanation: REER measures a currency’s value against a basket of trading partners’ currencies, weighted by trade and adjusted for inflation. In India, a rising REER indicates the rupee is overvalued, impacting export competitiveness, unlike nominal or fixed rates. - The Revenue Neutral Rate (RNR) in GST context means –
(A) Rate at which revenue remains constant after GST
(B) Rate that yields no revenue
(C) Rate without tax burden
(D) Fixed subsidy rate
Answer: (A)
Explanation: RNR in India’s GST is the tax rate ensuring revenue matches pre-GST levels from various taxes. Estimated around 15–18% during GST implementation, it balances fiscal stability, unlike zero-revenue or subsidy rates. - Hick’s compensation principle is used to –
(A) Assess government budgets
(B) Compare welfare between two situations
(C) Determine subsidies
(D) Measure inflation
Answer: (B)
Explanation: Hicks’ compensation principle evaluates welfare changes by determining if gainers from a policy (e.g., trade liberalization in India) can compensate losers while remaining better off, unlike budget or inflation metrics. - Capital adequacy ratio (CAR) is the ratio of –
(A) Deposits to loans
(B) Bank’s capital to its risk-weighted assets
(C) Profit to expenditure
(D) Capital to cash reserves
Answer: (B)
Explanation: CAR measures a bank’s capital relative to risk-weighted assets, ensuring stability. In India, RBI mandates a minimum CAR (e.g., 9%) for banks to absorb losses, unlike deposit-loan or profit ratios. - The CRISIL index is associated with –
(A) Stock markets
(B) Credit ratings
(C) Government spending
(D) Agricultural prices
Answer: (B)
Explanation: CRISIL, a leading Indian agency, provides credit ratings assessing firms’ creditworthiness. Its ratings guide investors in India, unlike stock indices (e.g., Sensex) or agricultural price metrics. - A liquidity trap occurs when –
(A) Inflation is high
(B) Interest rate is low and demand for money is perfectly elastic
(C) Money supply is restricted
(D) Budget is in surplus
Answer: (B)
Explanation: A liquidity trap occurs when low interest rates (near zero) make money demand perfectly elastic, rendering monetary policy ineffective. In India, if RBI cuts rates but spending doesn’t rise, it signals a trap. - Effective demand in Keynesian theory is determined by –
(A) AS and AD intersection
(B) Investment only
(C) Wage levels
(D) Full employment
Answer: (A)
Explanation: In Keynesian theory, effective demand is set by the intersection of aggregate supply (AS) and aggregate demand (AD). In India, low AD during slowdowns reduces output, guiding stimulus policies, unlike wage or investment-only focus. - Philips Curve in the long run is –
(A) Downward sloping
(B) Vertical
(C) Horizontal
(D) U-shaped
Answer: (B)
Explanation: In the long run, the Phillips Curve is vertical, indicating no trade-off between inflation and unemployment at the natural rate. In India, anchored inflation expectations (e.g., RBI’s 4% target) align with this, stabilizing unemployment. - Dual economy refers to coexistence of –
(A) Capitalism and socialism
(B) Agriculture and industry
(C) Traditional and modern sectors
(D) Private and public sectors
Answer: (C)
Explanation: A dual economy features traditional (e.g., subsistence farming) and modern (e.g., IT) sectors coexisting. In India, rural agriculture contrasts with urban tech hubs, highlighting this divide, unlike public-private or capitalist-socialist splits. - Incremental Capital Output Ratio (ICOR) measures –
(A) Return on investment
(B) Output generated per unit of additional capital
(C) Total production
(D) Labor efficiency
Answer: (B)
Explanation: ICOR measures additional output per unit of capital invested. In India, a high ICOR (e.g., 4:1) suggests inefficient capital use in infrastructure, requiring more investment for growth, unlike labor or total output metrics. - The Golden Rule of accumulation in growth theory refers to –
(A) Optimal savings rate for maximum consumption
(B) Equal income distribution
(C) Balanced trade
(D) Government spending equals revenue
Answer: (A)
Explanation: The Golden Rule in growth theory identifies the savings rate maximizing per capita consumption. In India, balancing savings for investment (e.g., infrastructure) with consumption ensures sustainable growth, unlike trade or income equality. - Base money does not include –
(A) Currency with public
(B) Bank deposits with RBI
(C) Treasury bills
(D) Vault cash
Answer: (C)
Explanation: Base money includes currency with the public, vault cash, and bank deposits with RBI. Treasury bills, as government securities, are not part of India’s monetary base, which underpins money supply. - Moral suasion is a –
(A) Quantitative tool
(B) Fiscal measure
(C) Qualitative tool of monetary policy
(D) Legal enforcement
Answer: (C)
Explanation: Moral suasion is a qualitative monetary policy tool where the RBI persuades banks to align with policy goals, like lending to priority sectors in India, unlike quantitative tools (e.g., repo rate) or fiscal measures. - Public expenditure multiplier will be higher if –
(A) MPC is high
(B) MPC is low
(C) Tax rate is high
(D) Government savings rise
Answer: (A)
Explanation: The public expenditure multiplier is higher when the marginal propensity to consume (MPC) is high, as more spending circulates. In India, a high MPC (e.g., 0.8) amplifies the impact of government infrastructure spending. - A deadweight loss from taxation occurs due to –
(A) Black money
(B) Market distortion and efficiency loss
(C) Inflation
(D) Transfer payments
Answer: (B)
Explanation: Deadweight loss from taxation arises from market distortions, reducing efficiency. In India, high GST on luxury goods may deter consumption, creating losses in surplus, unlike black money or transfer payments. - The supply of land in the short run is –
(A) Perfectly elastic
(B) Inelastic
(C) Unit elastic
(D) Negative
Answer: (B)
Explanation: Land supply is inelastic in the short run, as its quantity is fixed. In India, limited urban land drives high prices despite demand, unlike elastic or negative supply scenarios for other resources. - Tax incidence depends on –
(A) Legal liability
(B) Price elasticity of demand and supply
(C) Government policy
(D) Revenue deficit
Answer: (B)
Explanation: Tax incidence, or who bears the tax burden, depends on price elasticity of demand and supply. In India, inelastic demand for fuel means consumers bear more of a tax hike, unlike legal or policy factors alone. - General Anti-Avoidance Rule (GAAR) aims to –
(A) Encourage tax exemptions
(B) Prevent aggressive tax planning
(C) Promote FDI
(D) Subsidize exports
Answer: (B)
Explanation: GAAR in India prevents aggressive tax planning, targeting schemes exploiting loopholes. Implemented in 2017, it ensures fair taxation, unlike measures promoting FDI or subsidies. - GDP at factor cost excludes –
(A) Depreciation
(B) Indirect taxes
(C) Subsidies
(D) Gross profit
Answer: (B)
Explanation: GDP at factor cost excludes indirect taxes (e.g., GST) and includes subsidies, reflecting production costs. In India, it captures income to factors like labor and capital, unlike depreciation or profits. - Tragedy of the commons occurs because –
(A) Overexploitation of non-excludable resources
(B) Underuse of technology
(C) High taxes
(D) Budget surplus
Answer: (A)
Explanation: The tragedy of the commons involves overexploitation of non-excludable resources, like fisheries in India. Without ownership, individuals overuse resources, depleting them, unlike tax or technology issues. - Hot money refers to –
(A) Long-term FDI
(B) Speculative capital flows
(C) Government borrowing
(D) Agricultural subsidies
Answer: (B)
Explanation: Hot money is short-term, speculative capital flows chasing high returns. In India, sudden portfolio investment inflows to stocks can destabilize the rupee, unlike FDI or government borrowing. - Adaptive expectations theory assumes –
(A) Perfect foresight
(B) Current expectations based on past data
(C) Rational behavior
(D) Policy consistency
Answer: (B)
Explanation: Adaptive expectations assume people form expectations based on past trends. In India, if inflation was 5% last year, consumers may expect similar rates, adjusting behavior, unlike rational or perfect foresight models. - Structural adjustment programs (SAPs) are linked with –
(A) WTO
(B) UNDP
(C) IMF and World Bank loans
(D) NITI Aayog
Answer: (C)
Explanation: SAPs, tied to IMF and World Bank loans, promote economic reforms like liberalization. India’s 1991 SAP involved deregulation and trade openness to address balance-of-payments crises, unlike WTO or NITI Aayog initiatives. - Primary deficit is calculated as –
(A) Fiscal deficit – interest payments
(B) Revenue deficit – capital expenditure
(C) Total expenditure – capital receipts
(D) Borrowings – subsidies
Answer: (A)
Explanation: Primary deficit is fiscal deficit minus interest payments, reflecting borrowing for non-interest expenses. In India, a lower primary deficit signals better fiscal health, excluding legacy debt burdens. - Net Domestic Product (NDP) =
(A) GDP – Net exports
(B) GDP – Depreciation
(C) GNP – Transfers
(D) GDP – Fiscal deficit
Answer: (B)
Explanation: NDP is GDP minus depreciation, accounting for capital wear. In India, NDP reflects net output after deducting machinery depreciation, unlike net exports or fiscal metrics. - Open market operations are conducted by RBI to –
(A) Manage inflation
(B) Regulate bank capital
(C) Control foreign trade
(D) Finance deficit
Answer: (A)
Explanation: RBI’s open market operations (buying/selling bonds) manage inflation by adjusting money supply. In India, selling bonds reduces liquidity to curb inflation, unlike trade or deficit financing roles. - The working age population in labor force terms refers to –
(A) 0–14 years
(B) 15–59 years
(C) 18–60 years
(D) 25–65 years
Answer: (B)
Explanation: The working-age population in India, typically 15–59 years, is eligible for the labor force. This range captures potential workers, excluding children (0–14) or narrower age groups. - Monetarism emphasizes –
(A) Fiscal policy
(B) Government control
(C) Role of money supply in economic activity
(D) Deficit financing
Answer: (C)
Explanation: Monetarism, led by Milton Friedman, emphasizes money supply’s role in driving economic activity, particularly inflation. In India, RBI’s money supply control aligns with this, unlike fiscal or deficit-focused policies. - Compensating variation measures –
(A) Wage rate changes
(B) Cost to maintain utility after a price change
(C) Savings per capita
(D) GNP deviation
Answer: (B)
Explanation: Compensating variation is the income needed to maintain utility after a price change. In India, if fuel prices rise, households need extra income to maintain consumption levels, reflecting this measure. - Dumping in trade refers to –
(A) Selling below production cost abroad
(B) Buying in bulk
(C) Import bans
(D) Foreign investment restrictions
Answer: (A)
Explanation: Dumping involves selling goods abroad below production cost to capture markets. In India, anti-dumping duties on Chinese steel protect local industries from such predatory pricing, unlike bans or bulk buying. - The money market is a market for –
(A) Long-term securities
(B) Real estate
(C) Short-term funds and instruments
(D) Currency exchange only
Answer: (C)
Explanation: The money market deals with short-term funds and instruments, like treasury bills in India. It facilitates liquidity management, unlike long-term securities or real estate markets. - Sovereign wealth funds (SWFs) are owned by –
(A) Private investors
(B) Central banks
(C) Governments
(D) Corporates
Answer: (C)
Explanation: SWFs are government-owned funds, like Norway’s or UAE’s, investing surplus wealth. India lacks a major SWF, but could create one using forex reserves, unlike private or corporate funds. - Price mechanism under perfect competition ensures –
(A) Excess demand
(B) Government intervention
(C) Efficient resource allocation
(D) Monopolies
Answer: (C)
Explanation: In perfect competition, the price mechanism allocates resources efficiently via supply and demand. In India’s agricultural markets, competitive pricing ensures crops go to highest-value uses, unlike monopolistic or interventionist systems. - Engel’s Law relates income changes to –
(A) Exports
(B) Government spending
(C) Consumption pattern
(D) Output growth
Answer: (C)
Explanation: Engel’s Law states that as income rises, the share spent on food falls, altering consumption patterns. In India, higher incomes shift spending from staples to luxury goods, reflecting this law. - Decoupling in global trade implies –
(A) Increased dependence on global economy
(B) Domestic economy unaffected by global shocks
(C) Higher fiscal deficit
(D) Tightening credit
Answer: (B)
Explanation: Decoupling means a domestic economy grows independently of global shocks. In India, strong domestic demand during global recessions (e.g., 2008) shows partial decoupling, unlike fiscal or credit issues. - A perpetuity is a –
(A) Temporary investment
(B) Fixed annuity
(C) Financial instrument with infinite life
(D) Stock option
Answer: (C)
Explanation: A perpetuity is a financial instrument paying fixed amounts indefinitely, like certain government bonds. In India, perpetual bonds issued by banks provide steady interest, unlike temporary or stock-based investments. - Lumpiness in investment refers to –
(A) Smooth capital flow
(B) Small investments
(C) Investments that require large initial cost
(D) Portfolio diversification
Answer: (C)
Explanation: Lumpiness refers to investments requiring large initial costs, like India’s bullet train project. Such projects can’t be scaled gradually, unlike small or diversified investments. - The gig economy primarily involves –
(A) Contractual and freelance work
(B) Full-time jobs
(C) Government services
(D) Rural employment
Answer: (A)
Explanation: The gig economy involves short-term, freelance work, like drivers for ride-sharing apps in India. Platforms like Uber or Upwork exemplify this, unlike full-time or government jobs. - Accelerator theory relates –
(A) Tax growth
(B) Interest and inflation
(C) Investment to changes in output
(D) Capital gains
Answer: (C)
Explanation: The accelerator theory links investment to output changes. In India, rising consumer demand prompts firms to invest in new factories, amplifying growth, unlike tax or interest dynamics. - Inclusive development focuses on –
(A) GDP only
(B) Equity and participation across sectors
(C) Urban industrialization
(D) Fiscal deficit control
Answer: (B)
Explanation: Inclusive development emphasizes equity and participation, ensuring benefits reach all sectors. In India, schemes like PM-KISAN promote rural inclusion, beyond GDP or urban-focused growth. - Terms of trade improvement occurs when –
(A) Export prices fall
(B) Import prices rise
(C) Export prices rise relative to import prices
(D) GDP falls
Answer: (C)
Explanation: Terms of trade improve when export prices rise relative to import prices, increasing purchasing power. In India, higher software export prices versus stable oil import prices improve trade terms. - Harrod’s model has –
(A) Unique equilibrium
(B) Multiple growth paths
(C) Warranted, actual, and natural growth rates
(D) No capital role
Answer: (C)
Explanation: Harrod’s model includes warranted (required for stability), actual, and natural growth rates. In India, mismatches between these rates cause instability, guiding investment policies, unlike unique or capital-free models. - National income at market prices includes –
(A) Direct taxes
(B) Net indirect taxes
(C) Depreciation
(D) Transfers
Answer: (B)
Explanation: National income at market prices includes net indirect taxes (taxes minus subsidies). In India, GST adds to market price calculations, unlike direct taxes or transfers, which are excluded. - Informal sector is characterized by –
(A) Regular contracts
(B) Legal benefits
(C) No written contracts and limited regulation
(D) Organized employment
Answer: (C)
Explanation: The informal sector in India, like street vendors, lacks written contracts and regulation. Employing over 80% of workers, it contrasts with formal sectors offering legal protections and structured employment. - Bretton Woods Conference (1944) led to creation of –
(A) World Bank and IMF
(B) WTO
(C) OECD
(D) UNDP
Answer: (A)
Explanation: The 1944 Bretton Woods Conference established the IMF and World Bank to stabilize global finance. India, a member, benefits from their loans and support, unlike later institutions like WTO. - Money neutrality means –
(A) Inflation depends on money
(B) Money supply affects only nominal variables
(C) Money causes real growth
(D) Fiscal policy is ineffective
Answer: (B)
Explanation: Money neutrality implies money supply impacts only nominal variables (e.g., prices), not real ones (e.g., output) in the long run. In India, RBI’s money supply hikes raise prices, not real GDP, in neutral conditions. - The digital divide in economics refers to –
(A) Inequality in digital access and use
(B) Trade imbalance
(C) Urban–rural income gap
(D) Global internet governance
Answer: (A)
Explanation: The digital divide reflects unequal access to digital technology, like internet in rural India. Programs like Digital India aim to bridge this gap, enhancing economic participation, unlike trade or governance issues. - Elasticity of intertemporal substitution affects –
(A) Labor mobility
(B) Consumption across time
(C) Investment efficiency
(D) Wages
Answer: (B)
Explanation: Elasticity of intertemporal substitution measures how consumption shifts between periods based on interest rates. In India, high elasticity means lower rates boost current spending over saving, unlike labor or wages. - Effective revenue deficit =
(A) Revenue deficit – grants for capital creation
(B) Revenue deficit – interest
(C) Fiscal deficit – subsidies
(D) Budget deficit – taxes
Answer: (A)
Explanation: Effective revenue deficit is revenue deficit minus grants for capital creation, reflecting non-productive spending. In India, it highlights fiscal health by excluding growth-oriented grants, unlike interest or subsidy adjustments. - The Kuznets curve hypothesizes –
(A) Trade grows with GDP
(B) Inequality first rises, then falls with income
(C) Consumption rises exponentially
(D) Investment always declines
Answer: (B)
Explanation: The Kuznets curve suggests inequality rises with early economic growth, then falls as income rises. In India, initial industrialization increased disparities, but inclusive policies later reduced them, aligning with this hypothesis.