Economics - 2 - Free MCQ Practice Test with solutions, UPSC Indian Economy

Answer & Explanation: (c)

Countries themselves decide whether they want to be in developed or developing categories. There are no WTO definitions of “developed” or “developing” countries. Developing countries in the WTO are designated on the basis of self-selection although this is not necessarily automatically accepted in all WTO bodies

Answer & Explanation: (d) 4 only.

SLR, statutory liquidity ratio is the amount of money that is invested in certain specified securities predominantly central government and state government securities. Investing in government securities by bank is one way of fulfilling the requirement of SLR. In this way, SLR acts as a lending mechanism to government. Repo rate is a rate at which banks borrow from RBI for short periods up to 7 or 14 days but predominantly overnight.

Answer & Explanation: (a) 1 only.

FPI is also called Foreign institutional Investments ( FIIs). Because of their volatility they are also called hot money. Loans from international financial institutions are given for a fixed tenure and hence are stable. FDI is not part of FPI, but are accounted separately.

Answer & Explanation : (b) 1 and 3 only.

Increase in subsidy of LPG will reduce the pocket expenditure of people on LPG, making more money available with them, thereby increasing demand and pulling inflation. Similar will be the effect of decrease of income tax rates – more money availability. Increase in fuel prices will lead to cost-push inflation.

Answer & Explanation : (d)

Banks lending only to risk free sectors. A ‘Narrow Bank’ can be defined as the system of banking under which a bank places its funds in risk-free assets with maturity period matching its liability maturity profile, so that there is no problem relating to asset liability mismatch and the quality of assets remains intact without leading to emergence of sub-standard assets.

Answer & Explanation : (c) 3 only.

GDP (market price) = GDP ( factor cost) + indirect taxes – subisdies. This equation makes it clear that any increase in indirect taxes will increase the GDP at market prices.

Answer & Explanation : (b) 2 only.

Shares are equity instruments, while bonds and debentures are debt instruments. Debt instruments are assets that require a fixed payment to the holder, usually with interest. Examples of debt instruments include bonds (government or corporate), debentures and mortgages. Equity financing allows a company to acquire funds (often for investment) without incurring debt, eg shares.

Answer & Explanation : (a) 1 only.

Expansionary fiscal policy is a macroeconomic policy that seeks to expand the money supply to encourage economic growth or combat inflation (price increases). One form of expansionary policy is fiscal policy, which comes in the form of tax cuts, rebates and increased government spending. Expansionary policies can also come from central banks, which focus on increasing the money supply in the economy. Such a fiscal policy will increase the expenditure, thereby increasing fiscal deficit. Increase in wages of labour is unrelated. There can be a decrease (not increase ) in income tax rates, so statement 3 is false.

Answer & Explanation : (c) 2 and 3 only.

  Nutrition and access to electricity are included, while maternal mortality is not. Access to telephone comes under assets and is thus included. 

Answer & Explanation : (d) Boom.

All these are features of a boom phase of business cycle. During boom phase, the demand goes on increasing and the economy heats up. The supply is limited and hence there develops a demand-supply lag

Answer & Explanation : (d) 1, 2, 3 and 4.

Microfinance refers to a variety of financial services that target low-income clients. Since the clients of microfinance institutions (MFIs) have lower incomes and often have limited access to other financial services, microfinance products tend to be for smaller monetary amounts than traditional financial services. These services include loans, savings, insurance, and remittances (payments). So, microfinance is not limited to loans and deposits only, it includes other financial services also.

Answer & Explanation : (b) 1, 3 and 4 only.

Inclusive growth is a concept that advances equitable opportunities for economic participants during economic growth with benefits incurred by every section of society. Disinvestment is reducing the government ownership in public sector enterprises. It is not in any way related to inclusive growth. The rest three helps in inclusive growth.

The correct option is C.
Interest rate cut makes investment (borrowing) cheaper which makes 'investment expenditure' in the economy go upward.

In general the level of prices may be caused by  an increase in the money supply, an increase in the effective demand , a decrease in the aggregate level.
because all the three statements lead to increase in demand of goods and services or decrease in the supply. It leads to an increase in the general level of prices.

The correct answer is D as Deficit financing always brings inflationary pressure whatever be the means but 'creation' (printing) of new money has the highest inflationary impact.

Money supply increases when money flows out of the RBI. Purchase of Govt securities from the public by the Central bank leads to transfer of money to the public thereby leading to increase in money supply in the economy. Similarly, borrowing by the government from Central bank leads to increased money supply.
However, deposit of currency in commercial banks by public doesn't lead to increase in money supply as the money just gets transferred from public to commercial banks.
 

The correct answer is D as all the statements given would include Foreign Direct Investment in India 

A is the correct option.CRR refers to the percentage of deposits banks have to keep as reserve (in cash). This reserve sum is not available for banks for lending and thus if the CRR increases, banks will have less money to lend.

The correct option is C.
Special Drawing Right(SDR) belongs to the IMF. Member countries maintain their reserve tranches with it in SDR and get fiscal support from it in SDR.

Sale of a new car is calculated in GDP because it is a final good. Purchase of tyre by a car manufacturer is an intermediate good for a car and hence not included in GDP. Buying share of a car company is a transaction in financial products without any real capital or product formation. Hence, it is also excluded from GDP calculation. A profit earned by a foreign-owned car company is included in GDP as it is within the domestic territory of an economy. Hence, only 2 and 3 are excluded from GDP calculations

Answer: (A)

Explanation: GDP estimates are commonly used to measure the economic performance of a whole country or region, but can also measure the relative contribution of an industry sector. This is possible because GDP is a measure of ‘value added’ rather than sales; it adds each firm’s value added (the value of its output minus the value of goods that are used up in producing it)