- Marshallian utility analysis is based on –
(A) Ordinal utility
(B) Cardinal utility
(C) Revealed preferences
(D) Consumer surplus only
Answer: (B)
Explanation: Marshallian utility analysis assumes utility is measurable in cardinal terms (quantifiable units). In India, a consumer might derive 10 units of utility from a mango, guiding demand analysis, unlike ordinal or revealed preference approaches. - Total revenue is maximum when –
(A) Marginal revenue = 0
(B) Price = marginal cost
(C) Marginal revenue = price
(D) Price = 0
Answer: (A)
Explanation: Total revenue peaks when marginal revenue (MR) equals zero, as additional sales no longer increase revenue. In India, a shopkeeper maximizes revenue by selling until adding one more unit yields no extra income, unlike cost or price equality. - Negative income elasticity is a feature of –
(A) Luxury goods
(B) Inferior goods
(C) Normal goods
(D) Giffen goods only
Answer: (B)
Explanation: Inferior goods have negative income elasticity, as demand falls with rising income. In India, low-quality grains are consumed less as incomes grow, unlike luxury or normal goods, though Giffen goods also exhibit this trait. - Trade creation under a customs union refers to –
(A) Increase in domestic taxes
(B) Replacement of low-cost imports with higher-cost ones
(C) Shift from domestic to more efficient partner imports
(D) Trade diversion
Answer: (C)
Explanation: Trade creation occurs when a customs union shifts production to more efficient partner countries. In a hypothetical India-ASEAN union, India might import cheaper electronics from Malaysia, boosting efficiency, unlike tax hikes or trade diversion. - A good with perfectly inelastic demand will have a demand curve that is –
(A) Horizontal
(B) Vertical
(C) Downward sloping
(D) Upward sloping
Answer: (B)
Explanation: Perfectly inelastic demand, shown by a vertical demand curve, means quantity demanded doesn’t change with price. In India, life-saving drugs like insulin often exhibit this, as patients buy regardless of cost. - Supply curve of monopolist is –
(A) Horizontal
(B) Vertical
(C) Does not exist independently
(D) U-shaped
Answer: (C)
Explanation: A monopolist’s supply curve doesn’t exist independently, as output depends on marginal cost and demand, not a fixed supply schedule. In India, a sole cement producer sets output based on market conditions, unlike competitive markets. - The real burden of public debt increases when –
(A) Inflation is high
(B) Interest rate is low
(C) Inflation is low
(D) Output rises
Answer: (C)
Explanation: Low inflation increases the real burden of public debt, as the debt’s real value remains high. In India, low inflation means fixed debt repayments consume more real resources, unlike high inflation or rising output scenarios. - A flexible exchange rate system is also known as –
(A) Gold standard
(B) Fixed system
(C) Floating exchange rate
(D) Dollar peg
Answer: (C)
Explanation: A flexible or floating exchange rate adjusts based on market forces. India’s rupee, managed with RBI intervention, is largely floating, responding to trade and capital flows, unlike fixed or pegged systems. - The opportunity cost of holding money is –
(A) Income earned
(B) Inflation
(C) Interest foregone
(D) Loan cost
Answer: (C)
Explanation: Holding money incurs an opportunity cost of interest foregone from investments like bonds. In India, keeping cash instead of a 6% fixed deposit sacrifices potential returns, unlike income or inflation costs. - Profit maximization under perfect competition occurs when –
(A) MR = AR
(B) MR = MC
(C) AR = AC
(D) MC = AC
Answer: (B)
Explanation: In perfect competition, firms maximize profit where marginal revenue (MR) equals marginal cost (MC). In India’s vegetable market, farmers produce until the cost of one more unit equals its sale price, ensuring efficiency. - In the long-run equilibrium of monopolistic competition, firms earn –
(A) Supernormal profits
(B) Losses
(C) Normal profits
(D) Zero revenue
Answer: (C)
Explanation: In monopolistic competition’s long run, firms earn normal profits as entry eliminates excess profits. In India, restaurants compete with differentiated menus, stabilizing at break-even, unlike monopolies or loss-making scenarios. - The supply of money in the economy is controlled by –
(A) Ministry of Finance
(B) RBI
(C) SEBI
(D) State governments
Answer: (B)
Explanation: The Reserve Bank of India (RBI) controls money supply through tools like repo rates and open market operations. In India, RBI’s policies regulate liquidity, unlike SEBI’s market oversight or fiscal roles. - Aggregate supply curve in Keynesian short-run model is –
(A) Vertical
(B) Upward sloping
(C) Horizontal at low levels of output
(D) U-shaped
Answer: (C)
Explanation: In the Keynesian short-run model, the aggregate supply curve is horizontal at low output, as firms can increase production without price rises. In India, underutilized factories can expand output at stable costs during slumps. - Current account deficit may be financed by –
(A) Budget surplus
(B) Capital account surplus
(C) Government loans
(D) Tax hikes
Answer: (B)
Explanation: A current account deficit, like India’s due to oil imports, is financed by capital account surpluses (e.g., FDI, portfolio inflows), balancing external payments, unlike fiscal surpluses or tax hikes. - The average fixed cost curve is –
(A) U-shaped
(B) Horizontal
(C) Downward sloping
(D) Vertical
Answer: (C)
Explanation: The average fixed cost (AFC) curve slopes downward, as fixed costs (e.g., rent) spread over more output. In India, a factory’s rent per unit falls as production rises, unlike variable or total cost curves. - The backward bending supply curve applies to –
(A) Commodity supply
(B) Labor supply
(C) Public goods
(D) Normal goods
Answer: (B)
Explanation: The backward bending labor supply curve shows that at high wages, workers may supply less labor, preferring leisure. In India, high-paid IT professionals might work fewer hours if salaries rise significantly. - Nominal GDP increases when –
(A) Real output increases
(B) Prices rise
(C) Both price and output rise
(D) Any of the above
Answer: (D)
Explanation: Nominal GDP rises with increased real output, higher prices, or both. In India, growth in IT services or rising food prices both boost nominal GDP, reflecting total economic value. - Dumping is prohibited under –
(A) Bretton Woods agreement
(B) WTO rules
(C) IMF Act
(D) SAARC charter
Answer: (B)
Explanation: The World Trade Organization (WTO) prohibits dumping, selling below cost abroad. India imposes anti-dumping duties on Chinese steel to protect local industries, enforced under WTO rules, unlike IMF or SAARC agreements. - Terms of trade is calculated as –
(A) Imports / exports
(B) Export price index / import price index × 100
(C) GDP / trade deficit
(D) Tax rate × GDP
Answer: (B)
Explanation: Terms of trade are the ratio of export price index to import price index, multiplied by 100. In India, rising software export prices versus stable oil import prices improve terms of trade, unlike GDP or tax metrics. - Saving function is derived from –
(A) Consumption function
(B) IS curve
(C) LM curve
(D) Investment function
Answer: (A)
Explanation: The saving function, where saving equals income minus consumption, derives from the consumption function. In India, if consumption is 80% of income, saving is 20%, directly tied to consumption behavior. - Balanced budget multiplier is –
(A) Greater than 1
(B) Equal to 1
(C) Less than 1
(D) Zero
Answer: (B)
Explanation: The balanced budget multiplier equals 1, as increased government spending matched by taxes boosts output by the same amount. In India, ₹100 crore in spending funded by taxes raises GDP by ₹100 crore. - A horizontal supply curve implies –
(A) Perfectly elastic supply
(B) No supply
(C) Perfectly inelastic supply
(D) Unitary elasticity
Answer: (A)
Explanation: A horizontal supply curve indicates perfectly elastic supply, where quantity supplied changes infinitely at a fixed price. In India, generic drugs may have such supply at regulated prices, unlike inelastic scenarios. - Market equilibrium occurs when –
(A) Demand exceeds supply
(B) Supply exceeds demand
(C) Demand equals supply
(D) Price is regulated
Answer: (C)
Explanation: Market equilibrium is where demand equals supply, setting stable prices. In India’s wheat market, equilibrium occurs when farmers’ supply matches consumer demand, avoiding shortages or surpluses. - Disguised unemployment is mainly found in –
(A) Manufacturing sector
(B) Service sector
(C) Agriculture
(D) Corporate sector
Answer: (C)
Explanation: Disguised unemployment, where workers add little to output, is common in Indian agriculture. Many farm laborers could leave without reducing production, unlike in organized manufacturing or services. - Effective capital means –
(A) Total planned investment
(B) Capital actually available for use
(C) Capital reserves
(D) Depreciated capital
Answer: (B)
Explanation: Effective capital is the capital stock available for production. In India, operational machinery in factories represents effective capital, unlike planned investments or depreciated assets. - The law of diminishing returns applies in –
(A) Long-run
(B) Both short and long-run
(C) Only agricultural production
(D) Short-run with at least one fixed input
Answer: (D)
Explanation: The law of diminishing returns applies in the short run when one input (e.g., labor) is fixed. In India, adding more workers to a fixed farm plot reduces per-worker output, unlike long-run scenarios. - Multiplier effect is stronger when –
(A) MPC is low
(B) MPC is high
(C) Investment falls
(D) Tax increases
Answer: (B)
Explanation: A high marginal propensity to consume (MPC) strengthens the multiplier, as more income is spent. In India, an MPC of 0.8 amplifies government spending’s impact on GDP, unlike low MPC or tax hikes. - Open economy includes –
(A) No trade with others
(B) Full government control
(C) Trade in goods and capital across borders
(D) Only financial flows
Answer: (C)
Explanation: An open economy engages in trade of goods (e.g., India’s textile exports) and capital (e.g., FDI). India’s integration with global markets exemplifies this, unlike closed or purely financial economies. - The budget constraint in consumer theory represents –
(A) Marginal cost of spending
(B) Trade-off between goods within income
(C) Fixed utility
(D) Supply limitations
Answer: (B)
Explanation: The budget constraint shows trade-offs between goods within a consumer’s income. In India, a household with ₹10,000 chooses between food and clothing, balancing spending, unlike utility or supply limits. - Price rigidity is common in –
(A) Perfect competition
(B) Monopoly
(C) Oligopoly
(D) Public goods
Answer: (C)
Explanation: Price rigidity occurs in oligopolies due to interdependence, like India’s telecom sector, where firms avoid price wars to maintain stability, unlike competitive markets or monopolies. - Cost-benefit analysis is used in –
(A) Trade balancing
(B) Investment appraisal and public project evaluation
(C) Budgeting only
(D) Tax reform
Answer: (B)
Explanation: Cost-benefit analysis evaluates projects by comparing costs and benefits. In India, assessing highways or dams ensures efficient resource use, unlike trade or budgeting applications. - Incremental revenue is –
(A) Total revenue
(B) Increase in revenue from selling one more unit
(C) Net profit
(D) Operating surplus
Answer: (B)
Explanation: Incremental revenue is the additional revenue from selling one more unit. In India, a retailer’s extra ₹100 from selling another shirt reflects this, guiding pricing, unlike total revenue or profit. - A conglomerate merger is between –
(A) Firms producing similar goods
(B) Firms in the same supply chain
(C) Firms in unrelated businesses
(D) Firms with same brand
Answer: (C)
Explanation: A conglomerate merger involves unrelated businesses, like an Indian textile firm merging with a tech company, diversifying operations, unlike horizontal or vertical mergers. - GDP at constant prices shows –
(A) Nominal growth
(B) Real growth adjusted for inflation
(C) Net factor income
(D) Tax-adjusted GDP
Answer: (B)
Explanation: GDP at constant prices measures real growth, adjusted for inflation, reflecting actual output changes. In India, it tracks economic progress without price distortions, unlike nominal or income metrics. - The production possibility frontier is concave due to –
(A) Increasing returns
(B) Constant opportunity cost
(C) Increasing opportunity cost
(D) Decreasing returns
Answer: (C)
Explanation: The production possibility frontier (PPF) is concave due to increasing opportunity costs, as shifting resources (e.g., labor) between goods like cars and wheat in India sacrifices more of one for the other. - Securitization refers to –
(A) Selling company assets
(B) Bundling financial assets into marketable securities
(C) Foreign borrowing
(D) Tax structuring
Answer: (B)
Explanation: Securitization bundles assets like loans into securities for sale. In India, banks securitize home loans to raise funds, improving liquidity, unlike asset sales or borrowing. - The present value of a future income is –
(A) Discounted future income
(B) Actual future value
(C) Sum of current earnings
(D) Capital gain
Answer: (A)
Explanation: Present value discounts future income to today’s worth, using interest rates. In India, ₹100 received in a year at 5% discount is worth ₹95.24 today, unlike future value or current earnings. - Transaction cost is –
(A) Cost of input
(B) Cost of tax
(C) Cost of exchange or negotiating an economic deal
(D) Cost of capital
Answer: (C)
Explanation: Transaction costs arise from negotiating or executing deals, like legal fees in India’s property sales. They affect market efficiency, unlike input, tax, or capital costs. - Autonomous investment is –
(A) Income-dependent
(B) Government-linked
(C) Independent of income
(D) Trade-based
Answer: (C)
Explanation: Autonomous investment is independent of income, driven by factors like technology. In India, a firm’s R&D spending persists regardless of GDP, unlike income-driven or trade-based investments. - Pareto improvement occurs when –
(A) Everyone gains
(B) Some gain, no one loses
(C) Rich lose
(D) Government benefits
Answer: (B)
Explanation: Pareto improvement means some gain without others losing. In India, free vaccinations benefit recipients without harming others, enhancing welfare, unlike scenarios involving losses. - The life-cycle hypothesis explains –
(A) Consumption smoothing over life
(B) Investment growth
(C) Wage flexibility
(D) Tax avoidance
Answer: (A)
Explanation: The life-cycle hypothesis, by Modigliani, suggests people smooth consumption over their lifetime, saving during working years for retirement. In India, pension schemes align with this behavior, unlike investment or tax strategies. - Value-added tax (VAT) is imposed on –
(A) Final retail sale only
(B) Imports
(C) Each stage of production value addition
(D) Profits
Answer: (C)
Explanation: VAT is levied on value added at each production stage. In India, GST (a VAT variant) taxes each step from raw materials to final goods, ensuring comprehensive coverage, unlike retail-only or profit taxes. - Tax evasion differs from tax avoidance in that it –
(A) Is legal
(B) Is illegal
(C) Reduces liability lawfully
(D) Increases revenue
Answer: (B)
Explanation: Tax evasion is illegal, involving unreported income, unlike legal tax avoidance (e.g., using deductions). In India, hiding cash transactions is evasion, harming fiscal health, while claiming exemptions is avoidance. - A progressive tax system means –
(A) Same rate for all
(B) Higher rates for higher incomes
(C) Less tax for the rich
(D) Flat rate
Answer: (B)
Explanation: A progressive tax system imposes higher rates on higher incomes. India’s income tax, with slabs up to 30% for high earners, promotes equity, unlike flat or regressive systems. - Transaction demand for money increases with –
(A) Lower interest rates
(B) Higher income
(C) High inflation
(D) Currency depreciation
Answer: (B)
Explanation: Transaction demand for money rises with income, as more cash is needed for spending. In India, rising incomes increase cash holdings for daily purchases, unlike interest rate or inflation effects. - Black economy affects –
(A) Employment positively
(B) GDP growth directly
(C) Fiscal health and equity
(D) Nothing
Answer: (C)
Explanation: The black economy, involving unreported transactions, undermines fiscal health by reducing tax revenue and promotes inequity. In India, cash-based informal markets exacerbate this, unlike employment or GDP growth benefits. - Ricardian theory of comparative advantage is based on –
(A) Absolute cost advantage
(B) Opportunity cost differences
(C) Technological growth
(D) Capital accumulation
Answer: (B)
Explanation: Ricardo’s comparative advantage theory relies on opportunity cost differences. India specializes in IT services, with lower opportunity costs than manufacturing, trading efficiently with capital-intensive economies. - FDI is a component of –
(A) Current account
(B) Capital account
(C) Revenue account
(D) Fiscal account
Answer: (B)
Explanation: Foreign Direct Investment (FDI), like multinational investments in India’s retail, is part of the capital account, reflecting long-term financial flows, unlike current or fiscal accounts. - The Keynesian multiplier fails if –
(A) Marginal propensity to consume = 0
(B) MPC = 1
(C) Inflation rises
(D) Government spends
Answer: (A)
Explanation: The Keynesian multiplier fails if MPC equals 0, as no additional spending occurs. In India, if households save all extra income, government spending has no ripple effect, unlike high MPC or inflation scenarios. - The value of marginal product (VMP) is calculated as –
(A) MP × total cost
(B) MP × price
(C) Price / MP
(D) Total cost / output
Answer: (B)
Explanation: VMP is the marginal product (MP) of a resource times the price of output. In India, a worker adding 10 shirts daily, sold at ₹100 each, has a VMP of ₹1,000, guiding hiring decisions.