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# Test: Economy NCERT Based Test - 2 (Oct 2, 2021)

## 25 Questions MCQ Test UPSC CSE Prelims 2021 Mock Test Series | Test: Economy NCERT Based Test - 2 (Oct 2, 2021)

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QUESTION: 1

### Which one of the following is likely to be the most inflationary, in its effect?

Solution:

If the government finances its deficit spending by printing new money, then there is no crowding out of private spending. That this spending will increase without reducing consumption or investment. This kind of financing is a more expansionary way but more inflationary.

QUESTION: 2

### Real National Income denotes

Solution:

Constant Prices refers to the price ruling in the market in the base year. For Example If we calculate our country’s national income in India for (2015-2016) according to the ruling prices in the year (2011-2012), we are said to calculate our country’s national income for the year (2015-2016) at constant prices.

QUESTION: 3

### Consider the following statements regarding the Regular salaried employees: 1. They are paid wages on a regular basis. 2. They are found more in urban areas. 3. They are skilled and qualiﬁed. Which of the above statements is/are correct?

Solution:
QUESTION: 4

Consider the following statement:
1) Inflation benefits the debtors
2) Inflation benefits the bond-holders
Which of the statement given above is/are correct?

Solution:

Inflation redistributes wealth from creditors to debtors i.e lenders suffer and borrowers benefit out of inflation. Bond holders are person who had lend money (to debtors) and received bond in returns. So he is lender, he suffers.

QUESTION: 5

Read the following statements carefully :
1) GNP = GDP + Net Factor income from abroad
2) NNP = GNP – Depreciation
3) NNP at Factor Cost = NNP at Market Price – Indirect Taxes + Subsidies
Which of these statements is correct?

Solution:

Gross National Product is the total market value of all final goods and services produced in a year. GNP includes net factor income from abroad whereas GDP does not. Therefore, GNP= GDP + Net Factor Income from abroad. NNP is the market value of all final goods and services after providing for depreciation. Therefore, NNP = GNP – Depreciation. NNP at the factor cost or National Income is the sum of wages, rent, interest and profits paid to factors for their contribution to the production of goods and services in a year.

QUESTION: 6

Mahalanobis Model has been associated with which of the following Five Year Plan?

Solution:
QUESTION: 7

Consider the following factors:
1) Deficit Financing
2) Black Money in an economy
3) High rate of population growth
Which of the factor given below above are responsible for the Demand-pull inflation in an economy?

Solution:

This type of inflation is a result of strong consumer demand. When many individuals are trying to purchase the same good, the price will inevitably increase. When this happens across the entire economy for all goods, it is known as demand pull inflation.

QUESTION: 8

What do you understand by the disposable personal income?

Solution:

Disposable Income is total personal income minus personal current taxes. In national accounts definitions , personal income, minus personal current taxes equals disposable personal income.

QUESTION: 9

National Sample Survey Organisation (NSSO) is an organisation under:

Solution:
• Option (b) is correct: NSSO is an organisation either MoSPI.

Supplementary notes:

National Sample Survey Organisation

• The National Sample Survey Organisation (NSSO), now known as the National Sample Survey Ofﬁ ce, is an organization under the Ministry of Statistics, Planning and Programme Implementation of the Government of India.
• It was established in 1950.
• It is the largest organization in India conducting regular socio-economic surveys.
QUESTION: 10

Which one of the following laws stated that the size of the a firm and its growth rate are independent?

Solution:

Gibrat’s Rule of proportionate growth or the law of proportionate effect.

QUESTION: 11

The per capita income is obtained by:

Solution:

Per Capita Income is calculated by taking a measure of all source of income in the aggregate (such as GDP or Gross National Income) and dividing it by total population. Per Capita Income is often used to measure the Standard of Living in the Country.

QUESTION: 12

Match the following:

Select the correct answer using the code given below:

Solution:

Supplementary notes:

Methods of Calculating National Income

• The same amount of money, representing the aggregate value of goods and services, is moving in a circular way as shown in the above diagram. To estimate the aggregate value of goods and services produced during a year, the annual value of the ﬂows at any of the dotted lines can be measured indicated in the diagram.
• The uppermost ﬂow can be measured by measuring the aggregate value of spending that the ﬁrms receive for the ﬁnal goods and services which they produce. This method will be called the expenditure method.
• The ﬂow at Goods and Services can be measured by measuring the aggregate value of ﬁnal goods and services produced by all the ﬁrms, it will be called product method.
• At Factor Payments, measuring the sum total of all factor payments will be called income method. Observe that the aggregate spending of the economy must be equal to the aggregate income earned by the factors of production
QUESTION: 13

What will be the real expression for the measurement of National Income?

Solution:

National Income is calculated by subtracting net indirect taxes from NNP at market prices. The obtained value is known as NNP at factor cost or national income.

NNP at factor cost or National Income= NNP at market price – (Indirect Taxes- Subsidy) =NNP at Market Prices - Indirect Tax + Subsidy.

QUESTION: 14

Which of the following is correct about the Phillips Curve of an Economy ?

Solution:

It is a inverse relationship between rates of unemployment and corresponding rates of inflation that result in an economy. Stated Simply, decreased unemployment in an economy will correlate with a higher rates of inflation.

QUESTION: 15

During the planning period in India, the Public Sector was given a leading roll in industrial development. What was/were the objective(s) behind this?
1. Balanced regional growth.
2. To provide goods and services for the welfare of the society, without looking for proﬁ ts.
3. To create more employment opportunities.

Select the correct answer using the code given below:

Solution:
• All statements are correct

Supplementary notes:

Role of Public Sector in Industrialization

• Public sector enterprises are owned and managed by the government. At the time of independence, the  state of the Indian economy was backward and underdeveloped.
• During the planning period, the public sector was given a leading role in industrial development because of the following reasons:
• Lack of capital: Private entrepreneurs lacked capital for setting industries as a huge amount was required. The government took the responsibility of developing industries in the economy.
• Lack of incentive: The Indian market was comparatively small which discouraged Indian industrialists to invest in major projects (even though they had sufﬁc ient capital to invest). The government promoted the industrial sector.
• Development of India on socialist base: Indian planners wanted to develop the Indian economy on a socialist base, so they focused on government-funded major projects.
• Social welfare: In India, there were certain projects in which the proﬁt margin was negligible. Thus, the private sector was not interested in such projects, and it was only the public sector which could bring the balanced regional growth with the establishment of government units in the backward areas. This move could increase the employment and income of the people.
• Although, the inefﬁciency and low productivity in Public Sector Undertakings (PSUs) may lead to wastage of the scarce resources and result in huge losses forming a constraint on economic resources of the country, they do have some advantages:
(i) Basic Infrastructure: An important ideology that was inherited in the initial Five Year Plans was that the public sector should lay down the basic infrastructure required for Industrialization that would encourage and facilitate the private sector at the later stage of industrialization.
(ii) Reduce Exploitation: It is believed that in public sector units, the labour is not exploited as it is protected by the government. The consumers are also not exploited by charging high prices or serving low quality goods as PSUs do not operate with proﬁt motive.
(iii) Generate Employment: Private sector does not have the inducement to invest and create employment opportunities during periods of low demand i.e., during economic recession. During such phases, PSUs are needed to generate employment opportunities with the help of government investment. Apart from this, job security is also provided by the PSUs to their employees.
QUESTION: 16

Which of the following could be the possible ways to overcome the energy crisis in India?
1. Privatization of the power sector.
2. Solar energy should be promoted in tropical countries like India.
3. Reducing transmission and distribution losses.

Select the correct answer using the code given below:

Solution:
• All statements are correct

Supplementary notes:

Energy Crisis

• Over the last two centuries, energy needs have increased dramatically, especially because of the transportation and industry sectors. However, fossil fuels are polluting and their reserves are limited.
• These resources are close to exhaustion and our societies are facing a major challenge: the energy crisis.
• India’s installed capacity to generate electricity is not sufﬁcient to feed an annual economic growth of 7–8 percent. In order to meet the growing demand for electricity, India’s commercial energy supply needs to grow at about 7 percent.
• At present, India is able to add only 20,000 MW a year. Even the installed capacity is under-utilized because plants are not run properly.
• State Electricity Boards (SEBs), which distribute electricity, incur losses that exceed Rs 500 billion. This is due to transmission and distribution losses, wrong pricing of electricity and other inefﬁciencies.
• Private sector power generators are yet to play their role in a major way; the same is the case with foreign investors.
• There is general public unrest due to high power tariffs and prolonged power cuts in different parts of the country.
• Thermal power plants, which are the mainstay of India’s power sector, are facing a shortage of raw material and coal supplies.

Challenges in the Power Sector in India

• India’s installed capacity to generate electricity is not sufﬁcient to feed an annual economic growth of 7–8 percent. In order to meet the growing demand for electricity, India’s commercial energy supply needs to grow at about 7 percent. At present, India is able to add only 20,000 MW a year. Even the installed capacity is underutilized because plants are not running properly.
• State Electricity Boards (SEBs), which distribute electricity, incur losses that exceed Rs 500 billion. This is due to transmission and distribution losses, wrong pricing of electricity and other inefﬁciencies.
• Private sector power generators are yet to play their role in a major way; the same is the case with foreign investors.
There is general public unrest due to high power tariffs and prolonged power cuts in different parts of the country, and
• Thermal power plants, which are the mainstay of India’s power sector are facing a shortage of raw material and coal supplies.

Solutions to overcome the problem of an energy crisis

• The government should encourage the use of hydel and wind energy.
• More public investment, better research and development efforts, exploration, technological innovation and use of renewable energy sources can ensure an additional supply of electricity.
• Investment in the power sector by adding to the installed capacity should be promoted along with privatization of the power sector.
• The use of renewable sources is the best way to overcome the crisis in the energy sector. Biogas generation programs have been boosted up.
• For a tropical country like India, where sunlight is an abundant source, solar energy should be given the highest priority.
QUESTION: 17

With reference to the concept of ‘growth with equity’, consider the following statements:
1. It is assessed by the market value of goods and services produced within the territory.
2. It aims to promote both economic growth and social equality.

Which of the above statements is/are incorrect?

Solution:
• Statement 1 is incorrect: Growth (not growth with equity) is assessed by the market value of goods and services produced in the economy (GDP).

Supplementary notes:

What is growth?

• Growth refers to the increase in the country’s capacity to produce the output of goods and services within the country.
• It implies either the stock of productive capital, or a larger size of supporting services like transport and banking, or an increase in the efﬁciency of productive capital and services.
• It is assessed by the market value of goods and services produced in the economy and it does not guarantee an equitable distribution of the income from this production. What is equity?
• Equity reﬂects that the beneﬁts of economic prosperity reach the poor sections as well instead of being employed only by the rich.
• It aims to provide every person his or her basic needs such as food, a decent house, education, and health care and inequality in the distribution of wealth should be reduced so that the beneﬁts of higher economic growth can be passed on to all sections of the population to bring about social justice. Growth with Equity
• Both growth and equity are the two important goals of Indian planning. Growth is desirable but in itself, it does not guarantee the welfare of society.
• Hence, growth with equity is a rational and desirable objective of planning. This objective ensures that the beneﬁts of high growth are shared by all the people equally and hence inequality of income is reduced along with growth in income.
QUESTION: 18

Consider the following statements regarding the trade barriers:
1. Tariff barriers refer to the tax imposed on the import of goods by a country to protect domestic goods.
2. Tariff barriers are more explicit in nature than Non-tariff barriers.
3. Tariff barriers are imposed on the quantity and quality of goods, whereas Non-tariff barriers are imposed on the value of goods.

Which of the above statements is/are correct?

Solution:
• Statement 3 is incorrect: Tariff barriers are imposed on the value of goods, whereas Non-tariff barriers are imposed on the quantity and quality of goods.

Supplementary notes:

Tariff and Non-tariff Barriers

Tariff Barriers:

• It refers to the tax imposed on the imports by the country to protect its domestic industries.
• It includes custom duties, export-import duties etc.
• It is imposed on physical units (like per tonne) or on the value of the goods imported.
• They are imposed at reasonable prices by member countries of the World Trade Organization.
• Tariff barriers are more explicit in nature as compared to Non-tariff barriers.

Non-tariff Barriers:

• It refers to the restrictions other than taxes, imposed on imports by a country.
• It includes quotas and licenses.
• It imposed on the quantity and quality of the goods imported.
• They are completely abolished (import quotas and voluntary export restraints) by the World Trade Organization.
QUESTION: 19

Consider the following statements:
1. Bretton Woods System re-established a system of Fixed Exchange Rate.
2. Under the Fixed Exchange Rate system, when  a government increases the exchange rate making the domestic currency cheaper, it is called devaluation.

Which of the above statements is/are incorrect?

Solution:
• Both statements are correct

Supplementary notes:

Bretton Woods System

• The Bretton Woods Conference held in 1944 set up the International Monetary Fund (IMF) and the World Bank (WB) and reestablished a system of ﬁxed exchange rates.
• This was different from the international gold standard in the choice of the asset in which national currencies would be convertible. A two-tier system of convertibility was established at the center of which was the dollar.
• The US monetary authorities guaranteed the convertibility of the dollar into gold at the ﬁxed price of \$35 per ounce of gold. The second-tier of the system was the commitment of the monetary authority of each IMF member participating in the system to convert their currency into dollars at a ﬁxed price. The latter was called the ofﬁcial exchange rate.
• Under the Fixed Exchange Rate system, when  a government increases the exchange rate making the domestic currency cheaper, it is called devaluation.
QUESTION: 20

Which of the following was/were the reason for the introduction of structural reforms in China after 1949?
1. China was under the compulsion of the International Monetary Fund to introduce economic reforms.
2. The Maoist vision of economic development based on decentralization and self-sufﬁ ciency had failed.

Select the correct answer using the code given below:

Solution:
• Statement 1 is incorrect: China did not have any compulsion to introduce economic reforms introduced by the International Monetary Fund.

Supplementary notes:

Structural Reforms in China

• China did not have any compulsion to introduce reforms as dictated by the World Bank and International Monetary Fund to India and Pakistan.
• The new leadership at that time in China was not happy with the slow pace of growth and lack of modernization in the Chinese economy under the Maoist rule.
• They felt that Maoist vision of economic development based on decentralisation, self sufﬁciency and shunning of foreign technology, goods and capital had failed.
• Despite extensive land reforms, collectivisation, the Great Leap Forward and other initiatives, the per capita grain output in 1978 was the same as it was in the mid-1950s.
QUESTION: 21

Consider the following statements regarding the Worker-Population Ratio:
1. Its proportion is higher in urban areas.
2. Limited availability of resources are the reason for lower workforce participation rates in rural areas.

Which of the above statements is/are correct?

Solution:
• Statements 1 is incorrect: Its proportion is higher in rural areas.
• Statement 2 is incorrect: Workforce participation is higher in rural areas. People in rural areas have limited resources to earn a higher income and they tend to participate more in the employment market.

Supplementary notes:

Worker-Population ratio

• It is deﬁned as the percentage of the total population which is engaged in productive activity. It is that proportion of the population of any country which is actively contributing towards the production of goods and services. It indicates the employment situation of the country.
• It is also called the workforce participation rate.
• The high work population ratio means that major part of a population of the country is actively contributing towards the GDP of the country.
• It is calculated as below –
• Worker-Population Ratio = (Workforce / Total population) x 100

Rural-Urban divide

• The workforce participation rate is lower in urban areas. Urban people study in various educational institutions and they have a variety of employment opportunities. They look for the appropriate job to suit their qualiﬁcations and skills
• The workforce participation is higher in rural areas. People in rural areas have limited resources to earn a higher income and they tend to participate more in the employment market.
• The economic conditions in rural areas do not allow people to stay at home. Many do not go to schools, colleges, and other training institutions. Even if some go, they discontinue in the middle to join the workforce.
QUESTION: 22

Consider the following statements regarding power consumption in India:
1. In India, commercial sources of energy contribute the largest share to the total consumed energy.
2. During the post-independence period, the transportation sector was the largest consumer of commercial energy.

Which of the statements given above is/are incorrect?

Solution:
• Both statements are correct

Supplementary notes:

Consumption pattern of commercial energy

• In India, commercial energy contributes the largest share to the total energy consumed in India.
• India’s energy demand outpaced global demand growth in 2018 according to the International Energy Agency. The higher energy demand was driven by a global economy that expanded by 3.7 percent in 2018, a higher pace than the average annual growth of 3.5 percent seen since 2010. China, the US, and India together accounted for nearly 70 percent of the rise in energy demand.
• According to the IEA’s Global Energy & CO2 status report, India saw primary energy demand increase 4 percent or over 35 million tonnes of oil equivalent. This accounts for 11 percent of global demand growth.
• The critical feature of India’s energy sector and its linkages to the economy is the import dependence on crude and petroleum products, which is likely to grow rapidly in the near future.
• The transport sector was the largest consumer of commercial energy in 1953-54. However, there has been a continuous fall in the share of the transport sector while the shares of the household, agriculture and industrial sector have been increasing. The share of oil and gas is the highest among all commercial energy consumption. With the rapid rate of economic growth, there has been a corresponding increase in the use of energy.
QUESTION: 23

Consider the following statements regarding Bilateral Trade:
1. Under bilateral trade, equal trade opportunities are given to both countries involved in the agreement.
2. Under bilateral trade, individual negotiation is necessitated with each country.

Which of the above statements is/are correct?

Solution:

Both statements are correct

Supplementary notes:

• It refers to a trade agreement between the two countries.
• Equal trade opportunity is given to both countries.
• Individual negotiation is necessitated by each country.
• It promotes economic cooperation between the two countries.
QUESTION: 24

Consider the following pairs:
1. Capitalist Economy - Goods are distributed on the basis of the need of the people.
2. Socialist Economy - The government decides how goods are to be produced and how they should be distributed.
3. Mixed Economy - Goods are produced by both public and private entities.

Which of the above pairs is/are incorrectly matched?

Solution:
• Pair 1 is incorrectly matched: In a capitalist society, the goods produced are distributed among people not on the basis of the need of people but on the basis of purchasing power.

Supplementary notes:

Capitalist Economy

• In a capitalist society, the goods produced are distributed among people not on the basis of what people need but on the basis of Purchasing Power— the ability to buy goods and services. Hence, money is more important in this economy.
• Example: Low-cost housing for the poor is much needed but will not count as demand in the market sense because the poor do not have the purchasing power to back the demand.
• As a result, this commodity will not be produced and supplied as per market forces.
• This society did not appeal to Jawaharlal Nehru, our ﬁrst Prime Minister, for it meant that the great majority of people of the country would be left behind without the chance to improve their quality of life.

Socialist Economy

• In a socialist society, the government decides what goods are to be produced in accordance with the needs of society. It is assumed that the government knows what is good for the people of the country and so the desires of individual consumers are not given much importance.
• The government decides how goods are to be produced and how they should be distributed. In principle, distribution under socialism is supposed to be based on what people need and not on what they can afford to purchase.
• Unlike capitalism, for example, a socialist nation provides free health care to all its citizens. Strictly, a socialist society has no private property since everything is owned by the state. Mixed Economy
• In a mixed economy, the market will provide whatever goods and services it can produce well, and the government will provide essential goods and services which the market fails to do.
• There were many states of the world that opted for a mixed economy in the post-Second World War period after coming out of the colonial rule, such as India, Malaysia, Indonesia, etc., to name a few.
• After Independence, India opted for a mixed economy when the state-market dilemma was at its peak globally.
QUESTION: 25

Which of the following characterize/s the informal sector credit in India?
1. High-interest rate
2. Debt trap
3. Easy credit access

Select the correct answer using the code given below:

Solution:
• All statements are correct

Supplementary notes:

Loans

• Credit (or loans) refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment.

Types of Loans

• Loans can be categorized as formal sector loans and informal sector loans.
• Among the former are loans from banks and cooperatives. Informal lenders include moneylenders, traders, employers, relatives, friends, etc.
• Compared to the formal lenders, most of the informal lenders charge much higher interest on loans. Thus, the cost to the borrower of informal loans is much higher.
• The higher cost of borrowing means a larger part of the earnings of the borrowers is used to repay the loan. Hence, borrowers have less income left for themselves.
• In certain cases, the high-interest rate for borrowing can mean that the amount to be repaid is greater than the income of the borrower. This could lead to increasing and debt trap.
• Getting a loan from a bank is much more difﬁcult than taking a loan from informal sources as bank loans require proper documents and collateral.