- Money is neutral in the long run according to –
(A) Classical theory
(B) Keynesian theory
(C) Monetarism
(D) New Keynesian
Answer: (A)
Explanation: Classical theory posits that money is neutral in the long run, affecting only prices, not real output or employment. In India, long-term growth depends on labor and capital, not money supply, unlike Keynesian short-run views. - Factor income from abroad is added to –
(A) GDP to get GNP
(B) NNP to get GDP
(C) GNP to get NNP
(D) Disposable income to get national income
Answer: (A)
Explanation: Factor income from abroad, like Indian IT workers’ overseas earnings, is added to GDP to calculate GNP, reflecting total national income, unlike NNP or disposable income adjustments. - Involuntary unemployment arises when –
(A) Workers refuse jobs
(B) Willing workers can’t find jobs at prevailing wage
(C) Workers are overqualified
(D) Seasonal jobs increase
Answer: (B)
Explanation: Involuntary unemployment occurs when workers willing to work at current wages can’t find jobs, often due to low demand. In India, factory slowdowns leave skilled workers jobless, unlike voluntary or seasonal cases. - Net exports equal –
(A) Imports – exports
(B) Exports – imports
(C) GDP – GNP
(D) GNP – depreciation
Answer: (B)
Explanation: Net exports are exports minus imports, contributing to GDP. In India, software exports exceeding oil imports create a positive net export balance, unlike GDP-GNP or depreciation calculations. - Okun’s Law shows relationship between –
(A) Inflation and unemployment
(B) Interest rate and savings
(C) GDP and unemployment
(D) Tax and fiscal deficit
Answer: (C)
Explanation: Okun’s Law links GDP growth to unemployment changes, suggesting a 2% GDP drop raises unemployment by about 1%. In India, economic slumps increase joblessness, guiding policy responses. - Dutch disease occurs when –
(A) Currency weakens with trade surplus
(B) A resource boom leads to decline in manufacturing
(C) Budget deficit causes inflation
(D) Productivity falls due to migration
Answer: (B)
Explanation: Dutch disease describes a resource boom (e.g., oil) strengthening currency, hurting manufacturing. If India discovered vast oil reserves, a stronger rupee could undermine textile exports, unlike deficit or migration effects. - A flat supply curve suggests –
(A) High elasticity
(B) Low elasticity
(C) No elasticity
(D) Inelastic demand
Answer: (A)
Explanation: A flat (horizontal) supply curve indicates high (perfectly elastic) supply, where quantity supplied changes infinitely at a fixed price. In India, generic medicines at regulated prices exemplify this, unlike low elasticity or demand. - Capital gains tax is imposed on –
(A) Salary income
(B) Profits from asset sales
(C) Rental income
(D) Dividends
Answer: (B)
Explanation: Capital gains tax is levied on profits from selling assets like stocks or property. In India, selling shares after a year incurs long-term capital gains tax, unlike taxes on salaries or dividends. - Depreciation in national income accounting refers to –
(A) Decline in currency value
(B) Loss of capital value over time
(C) Fall in exports
(D) Tax loss
Answer: (B)
Explanation: Depreciation is the loss of capital value due to wear and tear, deducted from GDP to get NDP. In India, aging machinery in factories reduces capital stock, unlike currency or export declines. - The poverty gap indicates –
(A) Number of poor
(B) Depth of poverty below the poverty line
(C) Per capita income
(D) Employment rate
Answer: (B)
Explanation: The poverty gap measures how far incomes fall below the poverty line, reflecting poverty’s depth. In India, it shows the income needed to lift rural poor to the poverty threshold, unlike headcount or employment metrics. - A quasi-fiscal deficit arises due to –
(A) State government spending
(B) Central PSU losses
(C) Off-budget subsidies by central banks or public entities
(D) Trade imbalance
Answer: (C)
Explanation: Quasi-fiscal deficits stem from off-budget subsidies or losses by public entities, like RBI or PSUs funding government schemes. In India, fuel subsidies via oil companies create such deficits, unlike state spending or trade imbalances. - NAFTA is a –
(A) Political alliance
(B) Currency union
(C) Trade agreement
(D) Fiscal monitoring group
Answer: (C)
Explanation: NAFTA (now USMCA) is a trade agreement reducing tariffs among the US, Canada, and Mexico. Unlike India’s ASEAN FTA, it fosters regional trade, distinct from political or currency unions. - Price floor causes –
(A) Shortages
(B) Black markets
(C) Surpluses
(D) Equilibrium
Answer: (C)
Explanation: A price floor, like India’s minimum support price (MSP) for wheat, sets prices above equilibrium, causing surpluses as supply exceeds demand, often leading to government procurement, unlike shortages or black markets. - Stagflation features –
(A) High inflation and high growth
(B) Low inflation and growth
(C) High inflation and unemployment
(D) High exports
Answer: (C)
Explanation: Stagflation combines high inflation and high unemployment with low growth. In India, oil price shocks in the 1970s caused stagflation, challenging RBI’s inflation control, unlike high-growth or export scenarios. - Hotelling rule is applied in –
(A) Renewable resources
(B) Public finance
(C) Non-renewable resource pricing
(D) Welfare economics
Answer: (C)
Explanation: Hotelling’s rule governs non-renewable resource pricing, suggesting prices rise at the interest rate to optimize extraction. In India, coal pricing reflects this, balancing current and future use, unlike renewable or welfare applications. - Marginal rate of substitution (MRS) declines due to –
(A) Constant opportunity cost
(B) Law of diminishing marginal utility
(C) Tax reform
(D) Price effect
Answer: (B)
Explanation: MRS declines as consumers trade less of one good for another, per the law of diminishing marginal utility. In India, swapping rice for wheat yields less satisfaction per unit, shaping convex indifference curves. - Bounded rationality suggests –
(A) Perfect decisions always
(B) Limited information leads to satisficing
(C) Full foresight
(D) Instant optimization
Answer: (B)
Explanation: Bounded rationality, per Simon, implies decisions are limited by information and cognitive constraints, leading to satisficing. In India, consumers choose satisfactory products due to market complexity, unlike perfect foresight. - Securities Transaction Tax (STT) is levied on –
(A) Bank deposits
(B) Online shopping
(C) Sale/purchase of securities
(D) Real estate
Answer: (C)
Explanation: STT is imposed on stock or derivative transactions in India, like buying shares on BSE, to generate revenue and curb speculation, unlike taxes on deposits or real estate. - Phillips Curve represents trade-off between –
(A) GDP and growth
(B) Unemployment and inflation
(C) Interest and investment
(D) Exports and imports
Answer: (B)
Explanation: The Phillips Curve shows a short-run trade-off between unemployment and inflation. In India, low unemployment may raise wages, fueling inflation, though long-run expectations weaken this link. - A currency depreciation leads to –
(A) Cheaper imports
(B) Costlier exports
(C) Improved trade balance
(D) Decrease in domestic production
Answer: (C)
Explanation: Currency depreciation, like a weaker rupee, makes exports cheaper and imports costlier, often improving India’s trade balance by boosting software exports, unlike cheaper imports or reduced production. - Capital account in BoP includes –
(A) Merchandise trade
(B) Services
(C) FDI, FII, loans
(D) Remittances
Answer: (C)
Explanation: The capital account includes FDI, FII, and loans, like foreign investments in India’s retail or external borrowings, balancing financial flows, unlike trade or remittances in the current account. - Demographic dividend is –
(A) High child population
(B) Declining population
(C) Rising working-age population
(D) High dependency ratio
Answer: (C)
Explanation: Demographic dividend occurs when a rising working-age population boosts growth. India’s young workforce drives economic expansion, unlike high child populations or dependency ratios. - Normal goods have –
(A) Negative income elasticity
(B) Zero price elasticity
(C) Positive income elasticity
(D) Constant demand
Answer: (C)
Explanation: Normal goods have positive income elasticity, with demand rising as income grows. In India, demand for cars increases with higher incomes, unlike inferior goods or constant demand scenarios. - Income method of GDP adds –
(A) Expenditure
(B) Output
(C) Factor incomes like wages, rent, interest, profit
(D) Subsidies
Answer: (C)
Explanation: The income method sums factor incomes—wages, rent, interest, and profit—to calculate GDP. In India, it captures earnings from labor and capital, unlike expenditure or subsidy-based approaches. - Giffen goods violate –
(A) Law of demand
(B) Law of supply
(C) Law of marginal utility
(D) Engel’s law
Answer: (A)
Explanation: Giffen goods, rare cases where higher prices increase demand, violate the law of demand. In India, staple foods for the poor may act as Giffen goods, unlike supply or utility laws. - Value added in GDP is –
(A) Output – intermediate consumption
(B) Revenue – tax
(C) Profit – depreciation
(D) Sales + investment
Answer: (A)
Explanation: Value added is output minus intermediate consumption, avoiding double-counting. In India, a bakery’s value added is bread sales minus flour costs, contributing to GDP, unlike profit or investment metrics. - Vicious cycle of poverty refers to –
(A) High savings → high investment → poverty
(B) Low income → low saving → low investment → low income
(C) High income inequality
(D) Government failure
Answer: (B)
Explanation: The vicious cycle of poverty traps regions with low income, limiting savings and investment, perpetuating poverty. In rural India, low farm incomes restrict capital, unlike inequality or government failure alone. - Effective exchange rate is –
(A) Spot rate
(B) Arbitrary conversion
(C) Weighted average of bilateral exchange rates
(D) Real GDP
Answer: (C)
Explanation: Effective exchange rate is a weighted average of bilateral rates, reflecting trade importance. India’s nominal effective exchange rate tracks the rupee’s value against key trading partners’ currencies, unlike spot or GDP measures. - Equality vs. equity in economics implies –
(A) Same treatment vs. fair outcomes
(B) Equal income always
(C) Minimum wage vs. living wage
(D) Flat tax vs. progressive tax
Answer: (A)
Explanation: Equality means uniform treatment, while equity aims for fair outcomes based on need. In India, equal subsidies for all versus targeted aid for the poor illustrate equality versus equity, unlike wage or tax distinctions. - Creative destruction is associated with –
(A) Karl Marx
(B) John Keynes
(C) Joseph Schumpeter
(D) Amartya Sen
Answer: (C)
Explanation: Schumpeter’s creative destruction describes innovation replacing old industries. In India, e-commerce growth displaces traditional retail, driving progress, unlike Marx’s or Sen’s frameworks. - Import substitution policy aims at –
(A) Promoting foreign trade
(B) Reducing dependence on imports
(C) Boosting exports
(D) Increasing FDI
Answer: (B)
Explanation: Import substitution promotes domestic production to reduce import reliance. India’s pre-1991 policies fostered local manufacturing, like cars, to replace imports, unlike export or FDI-focused strategies. - Overvaluation of currency leads to –
(A) Export competitiveness
(B) Import increase, export fall
(C) Improved balance of payments
(D) Currency appreciation
Answer: (B)
Explanation: An overvalued currency makes imports cheaper and exports costlier, worsening trade balances. In India, an overvalued rupee could hurt IT exports while boosting imported electronics, unlike competitiveness or appreciation effects. - Tariff escalation occurs when –
(A) Export taxes exceed import duties
(B) Duties increase with processing level
(C) Quotas are applied
(D) Import costs fall
Answer: (B)
Explanation: Tariff escalation raises duties on processed goods versus raw materials. In India, higher tariffs on finished leather versus raw hides protect domestic processing, unlike quotas or export tax scenarios. - Welfare economics studies –
(A) Economic growth
(B) Government spending
(C) Efficiency and distribution of resources
(D) National income only
Answer: (C)
Explanation: Welfare economics examines resource allocation efficiency and distribution fairness. In India, policies like food subsidies aim to enhance welfare by addressing inequality, unlike growth or income-focused studies. - Progressive tax system leads to –
(A) Regressive redistribution
(B) Equal tax across all incomes
(C) Greater burden on higher incomes
(D) Tax neutrality
Answer: (C)
Explanation: A progressive tax system, like India’s income tax with higher rates (up to 30%) for top earners, places a greater burden on higher incomes, promoting equity, unlike equal or regressive systems. - Factor payments are paid for –
(A) Transfer income
(B) Contribution of land, labor, capital, entrepreneurship
(C) Social schemes
(D) Fiscal correction
Answer: (B)
Explanation: Factor payments compensate land (rent), labor (wages), capital (interest), and entrepreneurship (profit). In India, farmers earn rent, workers wages, shaping GDP via the income method, unlike transfers or fiscal measures. - Current account of BoP includes –
(A) Direct investment
(B) Loans
(C) Trade in goods and services, remittances
(D) FII
Answer: (C)
Explanation: The current account covers trade in goods (e.g., India’s oil imports), services (IT exports), and remittances (from overseas workers), unlike capital account items like FDI or FII. - Base rate is set by –
(A) RBI
(B) Commercial banks
(C) Ministry of Finance
(D) SEBI
Answer: (B)
Explanation: Commercial banks set the base rate, the minimum lending rate, influenced by RBI’s policies. In India, banks like SBI adjust base rates based on cost of funds, unlike direct RBI or SEBI control. - Digital divide is an issue of –
(A) Technological infrastructure inequality
(B) Taxation
(C) Foreign trade
(D) Consumer behavior
Answer: (A)
Explanation: The digital divide reflects unequal access to technology, like internet disparities between urban and rural India, limiting opportunities, unlike tax, trade, or behavioral issues. - A pure public good is –
(A) Rival and excludable
(B) Non-rival and non-excludable
(C) Private
(D) Congestible
Answer: (B)
Explanation: Pure public goods, like India’s national defense, are non-rival (one’s use doesn’t reduce others’) and non-excludable (all benefit), unlike private or congestible goods. - Transfer payments include –
(A) Salaries
(B) Interest
(C) Pensions and scholarships
(D) Exports
Answer: (C)
Explanation: Transfer payments, like pensions and scholarships in India, are non-productive payments redistributing income, unlike salaries (factor payments) or exports (trade flows). - Subsidies are treated in national income accounting as –
(A) Income
(B) Negative taxes
(C) Depreciation
(D) Investment
Answer: (B)
Explanation: Subsidies are treated as negative indirect taxes, reducing market prices to factor costs in GDP calculations. In India, fertilizer subsidies lower effective tax burdens, unlike income or investment. - IMF’s primary role is –
(A) Facilitate trade
(B) Lend to countries facing BoP problems
(C) Regulate interest
(D) Manage inflation
Answer: (B)
Explanation: The IMF lends to countries with balance of payments crises, like India’s 1991 loan to stabilize forex reserves, unlike trade (WTO’s role) or inflation management (central banks). - Disguised unemployment refers to –
(A) More workers than required with zero marginal productivity
(B) Open unemployment
(C) Frictional unemployment
(D) Educated unemployment
Answer: (A)
Explanation: Disguised unemployment involves excess workers with zero marginal productivity, common in Indian agriculture, where removing laborers doesn’t reduce output, unlike open or frictional unemployment. - Phillips curve flattens due to –
(A) High inflation
(B) Anchored expectations
(C) High GDP
(D) Tight fiscal policy
Answer: (B)
Explanation: A flat Phillips Curve results from anchored inflation expectations, reducing the unemployment-inflation trade-off. In India, RBI’s credible 4% inflation target stabilizes expectations, flattening the curve. - Economic infrastructure includes –
(A) Health, education
(B) Transport, energy, communication
(C) Politics
(D) Media
Answer: (B)
Explanation: Economic infrastructure, like India’s highways, power grids, and telecom networks, supports production, unlike social infrastructure (health, education) or non-economic sectors like media. - Laffer curve shows relationship between –
(A) Interest rate and inflation
(B) Tax rate and tax revenue
(C) Price and quantity
(D) Saving and consumption
Answer: (B)
Explanation: The Laffer Curve illustrates that beyond a point, higher tax rates reduce revenue due to disincentives. In India, high income tax rates could shrink collections if evasion rises, guiding tax policy. - Frictional unemployment is –
(A) Short-term during job search
(B) Long-term structural
(C) Due to low wages
(D) Caused by inflation
Answer: (A)
Explanation: Frictional unemployment arises during short-term job searches, like Indian graduates transitioning to new roles, reflecting labor market dynamics, unlike structural or wage-driven unemployment. - Marginal cost is –
(A) Cost of producing one additional unit
(B) Total cost
(C) Fixed cost
(D) Average cost
Answer: (A)
Explanation: Marginal cost is the extra cost of producing one more unit. In India, a factory’s cost of making one additional car informs pricing and output decisions, unlike total or fixed costs. - Monetary policy transmission mechanism works through –
(A) Taxation
(B) Interest rates, liquidity, credit
(C) Direct subsidies
(D) Government expenditure
Answer: (B)
Explanation: Monetary policy transmits via interest rates, liquidity, and credit, like RBI’s rate hikes reducing borrowing in India, curbing inflation, unlike fiscal tools like taxes or subsidies.