- Input subsidies (like fertilizer subsidies) are a part of –
(A) Capital expenditure
(B) Revenue expenditure
(C) Public debt
(D) Transfer payments only
Answer: (B)
Explanation: Input subsidies, such as fertilizer subsidies in India, are revenue expenditure, as they fund recurring costs to support agriculture without creating assets. Unlike capital expenditure or public debt, they are part of the government’s current spending. - The law of diminishing marginal utility implies –
(A) Total utility always decreases
(B) Marginal utility of consumption decreases as more is consumed
(C) Price increases with utility
(D) Consumption always decreases
Answer: (B)
Explanation: The law of diminishing marginal utility states that additional units of a good yield less additional satisfaction. In India, eating more mangoes reduces the extra pleasure from each, guiding consumer behavior, unlike total utility or price changes. - Sustainable fiscal deficit means –
(A) One that finances only revenue expenditure
(B) One that can be maintained without future debt stress
(C) Equal to tax-GDP ratio
(D) Funded by printing money
Answer: (B)
Explanation: A sustainable fiscal deficit can be maintained without risking debt crises. In India, a deficit below 4% of GDP is often targeted to ensure long-term fiscal stability, unlike deficits tied to revenue spending or money printing. - The Broad Money (M3) includes –
(A) Currency + demand deposits
(B) M1 + time deposits
(C) Only savings
(D) Treasury bonds
Answer: (B)
Explanation: M3, a broad money measure in India, includes M1 (currency and demand deposits) plus time deposits (e.g., fixed deposits). It reflects total liquidity, unlike savings alone or treasury bonds. - The effective demand curve intersects –
(A) Aggregate demand and supply curve
(B) Marginal utility curve
(C) IS-LM curve
(D) Supply curve horizontally
Answer: (A)
Explanation: Effective demand in Keynesian economics is where aggregate demand (AD) equals aggregate supply (AS), determining output. In India, this intersection guides policies to boost demand during slowdowns, unlike utility or IS-LM frameworks. - Trade liberalization usually leads to –
(A) Increased protection
(B) Reduced competition
(C) Greater market efficiency
(D) More state monopolies
Answer: (C)
Explanation: Trade liberalization, like India’s 1991 reforms, reduces tariffs, enhancing market efficiency through competition and resource allocation. It contrasts with protectionism or state-controlled markets. - The GDP deflator is a measure of –
(A) Core inflation
(B) Ratio of nominal to real GDP
(C) Wholesale inflation
(D) Fiscal surplus
Answer: (B)
Explanation: The GDP deflator, the ratio of nominal to real GDP, measures price level changes across all goods and services. In India, it tracks broader inflation trends, unlike core or wholesale inflation metrics. - The paradox of thrift suggests –
(A) More saving always increases output
(B) Excess saving can reduce demand and output
(C) Saving equals investment
(D) Inflation rises with saving
Answer: (B)
Explanation: The paradox of thrift, per Keynes, shows that excessive saving reduces aggregate demand, lowering output. In India, high household savings during recessions can shrink consumption, worsening slowdowns, unlike investment-equality assumptions. - Factor cost differs from market price by –
(A) Subtracting depreciation
(B) Subtracting net indirect taxes
(C) Subtracting trade deficit
(D) Adding fiscal deficit
Answer: (B)
Explanation: Factor cost excludes net indirect taxes (taxes minus subsidies) from market prices. In India, GDP at factor cost reflects producer incomes, adjusting for GST and subsidies, unlike depreciation or trade deficits. - Natural rate of interest is –
(A) Fixed rate
(B) Rate compatible with full employment and stable inflation
(C) Repo rate
(D) Prime lending rate
Answer: (B)
Explanation: The natural rate of interest balances full employment and stable inflation. In India, it guides RBI’s policy to maintain growth without overheating, unlike fixed or bank-specific rates. - IS curve becomes steeper when –
(A) Investment is highly sensitive to interest rate
(B) Investment is insensitive to interest rate
(C) Savings are unstable
(D) Taxes rise
Answer: (B)
Explanation: The IS curve is steeper when investment is less sensitive to interest rate changes, requiring larger rate shifts to affect output. In India, capital-intensive sectors like infrastructure show this insensitivity, unlike tax or savings effects. - Pigou’s Real Balance Effect shows –
(A) Real wealth decreases with inflation
(B) Saving is income-inelastic
(C) Consumption increases with real balances
(D) Money is neutral
Answer: (C)
Explanation: Pigou’s Real Balance Effect suggests falling prices increase real wealth, boosting consumption. In India, deflation could raise purchasing power, stimulating spending, unlike neutral money or inelastic savings. - The Heckscher-Ohlin model predicts that countries export goods –
(A) That require intensive use of abundant factors
(B) With low production
(C) With high inflation
(D) Based on technology only
Answer: (A)
Explanation: The Heckscher-Ohlin model predicts countries export goods using abundant factors. India, labor-abundant, exports labor-intensive textiles, leveraging its workforce, unlike technology or inflation-driven exports. - A deflationary gap results when –
(A) AD < AS at full employment
(B) Prices rise
(C) Consumption exceeds income
(D) Exports increase
Answer: (A)
Explanation: A deflationary gap occurs when aggregate demand (AD) is less than aggregate supply (AS) at full employment, causing unemployment. In India, low demand prompts stimulus like tax cuts to close this gap. - Phillips curve breaks down in long run due to –
(A) Rational expectations
(B) Sticky prices
(C) Wage controls
(D) Trade unions
Answer: (A)
Explanation: The Phillips Curve breaks down in the long run as rational expectations lead agents to anticipate inflation, eliminating the unemployment-inflation trade-off. In India, adaptive expectations align with RBI’s 4% inflation target. - The LM curve becomes horizontal when –
(A) Investment is zero
(B) Interest rate reaches liquidity trap level
(C) Inflation is high
(D) Tax rate is fixed
Answer: (B)
Explanation: The LM curve is horizontal in a liquidity trap, where low interest rates make money demand perfectly elastic. In India, near-zero rates may fail to boost spending, limiting monetary policy effectiveness. - Price mechanism fails under –
(A) Perfect information
(B) Externalities and public goods
(C) Free entry
(D) Rational consumers
Answer: (B)
Explanation: The price mechanism fails with externalities (e.g., pollution) and public goods (e.g., roads), as prices don’t reflect social costs or benefits. In India, air pollution requires regulation beyond market pricing. - A positive externality leads to –
(A) Overproduction
(B) Underconsumption
(C) Overconsumption
(D) Underproduction
Answer: (D)
Explanation: Positive externalities, like education, cause underproduction as markets undervalue social benefits. In India, government subsidies for schools address this, encouraging production, unlike overconsumption scenarios. - Social cost is –
(A) Private cost – external cost
(B) Private cost + external cost
(C) Only private cost
(D) Equal to marginal cost
Answer: (B)
Explanation: Social cost combines private costs (e.g., production) and external costs (e.g., pollution). In India, coal plants’ private costs plus environmental damage reflect total social costs, guiding policy interventions. - Intermediate goods are –
(A) Counted in GDP
(B) Used for final consumption
(C) Used for resale or further processing
(D) Final capital goods
Answer: (C)
Explanation: Intermediate goods, like steel in India’s car manufacturing, are used for resale or further processing, excluded from GDP to avoid double-counting, unlike final or capital goods. - The base year for CPI inflation in India (latest) is –
(A) 2004–05
(B) 2010
(C) 2011–12
(D) 2012
Answer: (C)
Explanation: The base year for India’s CPI inflation is 2011–12, used to calculate price changes in consumer goods. This reflects updated consumption patterns, ensuring accurate inflation tracking. - The Kaldor-Hicks criterion is satisfied when –
(A) No one is worse off
(B) Gains exceed losses and losers could be compensated
(C) Utility increases equally
(D) Equal income distribution
Answer: (B)
Explanation: The Kaldor-Hicks criterion justifies policies where gains outweigh losses, with potential compensation. In India, infrastructure projects displacing farmers pass this if benefits allow compensation, unlike equal utility scenarios. - Revenue neutral tax reform is designed to –
(A) Eliminate fiscal deficit
(B) Maintain total tax revenue post-reform
(C) Shift burden to consumers
(D) Promote inequality
Answer: (B)
Explanation: Revenue neutral tax reform, like India’s GST, maintains total tax revenue by restructuring rates, ensuring fiscal stability without shifting burdens or increasing inequality. - Capital intensive technique implies –
(A) High labor use
(B) Low capital use
(C) High capital per unit output
(D) No technology use
Answer: (C)
Explanation: Capital-intensive techniques use high capital per output unit, like India’s automated factories. This contrasts with labor-intensive methods, common in agriculture, and involves technology, not its absence. - Inverted duty structure means –
(A) Import duties are higher than domestic duties
(B) Final goods taxed less than inputs
(C) Export subsidies exceed imports
(D) Duties are negative
Answer: (B)
Explanation: An inverted duty structure taxes final goods less than inputs, discouraging domestic production. In India, high duties on raw materials versus finished electronics hamper manufacturing, addressed by tariff reforms. - Indifference curve is convex to the origin because of –
(A) Rising MRS
(B) Diminishing marginal rate of substitution
(C) Increasing returns
(D) Constant cost
Answer: (B)
Explanation: Indifference curves are convex due to diminishing marginal rate of substitution (MRS), where consumers trade less of one good for another as they consume more. In India, substituting rice for wheat shows this pattern. - Opportunity cost is –
(A) Net profit
(B) Next best alternative foregone
(C) Market price
(D) Transaction cost
Answer: (B)
Explanation: Opportunity cost is the value of the next best alternative foregone. In India, choosing to build a highway over a hospital means the cost is the healthcare benefits lost, unlike profit or market price. - Tax buoyancy reflects –
(A) Tax as % of imports
(B) Growth rate of tax revenue relative to GDP growth
(C) Revenue deficit
(D) Black money
Answer: (B)
Explanation: Tax buoyancy measures how tax revenue grows relative to GDP. In India, a buoyancy above 1 indicates taxes grow faster than GDP, reflecting efficient collection, unlike deficits or black money. - Disposable income =
(A) National income – taxes + transfers
(B) Personal income – direct taxes
(C) GDP – depreciation
(D) GNP – subsidies
Answer: (B)
Explanation: Disposable income is personal income minus direct taxes, like income tax in India. It represents what households can spend or save, unlike national income or GDP-based measures. - Net Indirect Taxes (NIT) =
(A) Indirect taxes + subsidies
(B) Indirect taxes – subsidies
(C) Direct taxes – subsidies
(D) Corporate tax
Answer: (B)
Explanation: Net indirect taxes are indirect taxes (e.g., GST) minus subsidies. In India, NIT adjusts GDP from market prices to factor cost, reflecting true production value, unlike direct tax or corporate tax metrics. - Bond yield rises when –
(A) Bond price increases
(B) Bond price falls
(C) Interest rate falls
(D) Maturity reduces
Answer: (B)
Explanation: Bond yield rises when bond prices fall, as investors demand higher returns. In India, if RBI hikes rates, government bond prices drop, increasing yields to attract buyers. - Transaction motive for holding money is directly proportional to –
(A) Investment
(B) Taxation
(C) Income
(D) Interest
Answer: (C)
Explanation: The transaction motive for holding money rises with income, as higher earnings increase spending needs. In India, growing incomes boost demand for cash for daily purchases, unlike investment or interest effects. - LM curve shifts with changes in –
(A) Consumption
(B) Money supply
(C) Fiscal deficit
(D) Wage level
Answer: (B)
Explanation: The LM curve shifts with money supply changes, as RBI’s actions (e.g., increasing money supply) lower interest rates for a given output, unlike consumption or deficit-driven shifts. - Monetary policy can reduce inflation by –
(A) Cutting spending
(B) Raising interest rate
(C) Reducing taxes
(D) Increasing wages
Answer: (B)
Explanation: Raising interest rates via monetary policy reduces inflation by curbing demand. In India, RBI’s repo rate hikes increase borrowing costs, slowing spending and price rises, unlike fiscal or wage measures. - A direct tax includes –
(A) Customs duty
(B) GST
(C) Excise
(D) Income tax
Answer: (D)
Explanation: Direct taxes, like income tax in India, are levied on individuals’ earnings, unlike indirect taxes such as GST, customs, or excise, which are applied to goods and services. - The ability to pay principle justifies –
(A) Indirect taxation
(B) Proportional taxes
(C) Progressive taxation
(D) Regressive taxation
Answer: (C)
Explanation: The ability-to-pay principle supports progressive taxation, where higher earners pay a larger share. In India, income tax slabs (e.g., 30% for high incomes) align with this, promoting equity, unlike regressive taxes. - GNP at market prices =
(A) GDP + Net factor income from abroad
(B) GDP – depreciation
(C) NNP – fiscal deficit
(D) GDP – inflation
Answer: (A)
Explanation: GNP at market prices is GDP plus net factor income from abroad (e.g., remittances). In India, IT workers’ earnings abroad boost GNP, unlike depreciation or deficit-based measures. - Economic rent arises due to –
(A) Perfect competition
(B) Surplus over transfer earnings
(C) Minimum wage
(D) Subsidy
Answer: (B)
Explanation: Economic rent is the surplus earned above transfer earnings (minimum needed to retain a resource). In India, fertile land earns higher rent than marginal land, reflecting this surplus. - Backward-bending labor supply curve shows –
(A) Wages and labor supplied always rise
(B) At higher wages, labor supplied may fall
(C) Labor supply is fixed
(D) Demand drives wage
Answer: (B)
Explanation: A backward-bending labor supply curve shows that at high wages, workers may supply less labor, valuing leisure. In India, high-paid professionals may work less if wages rise significantly. - Crowding-in effect means –
(A) Private investment decreases with public spending
(B) Private investment increases with public investment
(C) Government spending displaces exports
(D) Taxes reduce consumption
Answer: (B)
Explanation: Crowding-in occurs when public investment (e.g., India’s highway projects) boosts private investment by improving infrastructure, unlike crowding-out or export displacement. - Productive efficiency is achieved when –
(A) Marginal utility is maximized
(B) Output is produced at lowest cost
(C) Prices are equal
(D) Demand equals supply
Answer: (B)
Explanation: Productive efficiency occurs when goods are produced at the lowest cost. In India, efficient factories minimize costs, maximizing output per resource, unlike utility or demand-supply balances. - Economic growth is best measured by –
(A) Inflation
(B) Per capita real GDP
(C) Tax-GDP ratio
(D) Investment level
Answer: (B)
Explanation: Per capita real GDP measures economic growth, reflecting living standards. In India, rising real GDP per person signals improved prosperity, unlike inflation or investment metrics alone. - Underdeveloped economies typically exhibit –
(A) High income
(B) Low per capita income and productivity
(C) High HDI
(D) Stable inflation
Answer: (B)
Explanation: Underdeveloped economies, like parts of rural India, have low per capita income and productivity, limiting growth. This contrasts with high HDI or stable inflation in developed nations. - The subsistence wage theory was proposed by –
(A) Ricardo
(B) Keynes
(C) Adam Smith
(D) Malthus
Answer: (A)
Explanation: Ricardo’s subsistence wage theory suggests wages tend toward a level sustaining basic needs. In historical India, agricultural wages often aligned with this, ensuring minimal living standards. - Engel curve for inferior goods slopes –
(A) Upward
(B) Backward
(C) Downward after a point
(D) Horizontal
Answer: (C)
Explanation: The Engel curve for inferior goods slopes downward after a point, as higher income reduces demand. In India, demand for low-quality grains falls as incomes rise, favoring better substitutes. - Speculative motive for holding money is based on –
(A) Wage rate
(B) Income level
(C) Expected changes in interest rates
(D) Tax rate
Answer: (C)
Explanation: The speculative motive for holding money depends on expected interest rate changes. In India, if rates are expected to fall, investors hold cash to buy bonds later, unlike wage or income-driven motives. - GDP per capita (PPP) adjusts for –
(A) Exchange rate
(B) Cost of living and inflation
(C) Only tax burden
(D) Domestic output
Answer: (B)
Explanation: GDP per capita (PPP) adjusts for cost of living and inflation, reflecting real purchasing power. In India, PPP GDP shows higher living standards than nominal GDP, unlike tax or output-only measures. - A vertical supply curve indicates –
(A) Perfectly elastic supply
(B) Perfectly inelastic supply
(C) Infinite supply
(D) Unit elasticity
Answer: (B)
Explanation: A vertical supply curve shows perfectly inelastic supply, where quantity doesn’t change with price. In India, land supply is fixed in the short run, exemplifying this, unlike elastic or infinite supply. - Government final consumption expenditure includes –
(A) Interest payments
(B) Wages and salaries to public servants
(C) Capital grants
(D) Repayment of loans
Answer: (B)
Explanation: Government final consumption expenditure includes wages and salaries to public servants, like teachers in India, reflecting current spending, unlike capital grants or loan repayments. - Infant industry argument supports –
(A) Deregulation
(B) Protectionism for emerging sectors
(C) Free trade
(D) High tariffs on exports
Answer: (B)
Explanation: The infant industry argument justifies protectionism for emerging sectors. In India, tariffs on nascent solar panel manufacturing protect local firms until they compete globally, unlike free trade or export tariffs.