Ramesh Singh Test: Inflation & Business Cycle- 2


10 Questions MCQ Test Indian Economy for UPSC CSE | Ramesh Singh Test: Inflation & Business Cycle- 2


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QUESTION: 1

Consider the following statements.

1. Real interest rate is always lower than the normal interest rate.

2. To neutralize the effects of inflation premium, the lender takes the recourse to decrease the nominal rate of interest.

Which of these statements is/are correct?

Solution:
  • The bonus brought by inflation to the borrowers is known as the inflation premium. The interest banks charge on their lending is known as the nominal interest rate, which might not be the real cost of borrowing paid by the borrower to the banks.

  • To calculate the real cost a borrower is paying on its loan, the nominal rate of interest is adjusted with the effect of inflation and thus the interest rate we get is known as the real interest rate.

  • The real interest is always lower than the nominal interest rate if the inflation is taking place the difference is the inflation premium. Rising inflation premium shows depleting profits of the lending institutions. A

QUESTION: 2

Consider the following statements about Phillips Curve

1. It is a graphic curve which advocates a relationship between inflation and unemployment in an economy.

2. The curve suggests that higher the inflation, lower the unemployment and lower the inflation, lower the unemployment.

Which of these statements is/are correct?

Solution:
  • It is a graphic curve which advocates a relationship between inflation and unemployment in an economy.

  • As per the curve, there is a 'trade-off between inflation and unemployment, i.e., an inverse relationship between them.

  • The curve suggests that lower the inflation, higher the unemployment and higher the inflation, lower the unemployment.

QUESTION: 3

Consider the following statements about the non-accelerating Inflation rate of unemployment.

1. The NAIRU is that rate of unemployment which is consistent with a constant rate of inflation.

2. The upward and downward forces on price and wage neutralise each other and there is no tendency of change in the rate of inflation.

Which of these statements is/are correct?

Solution:
  • The NAIRU is that rate of unemployment which is consistent with a constant rate of inflation. It means at NAIRU, the upward and downward forces on price (inflation) and wage (unemployment) neutralise each other and there is no tendency of change in the rate of inflation.

  • We may say that the NAIRU is the lowest unemployment rate that an economy can sustain without any upward pressure on the inflation rate.

QUESTION: 4

What the government can do to bring about the situation of Reflation?

1. Printing of extra money

2. Interest rate cuts

3. Higher public expenditure

Which of these statements is/are correct?

Solution:
  • Reflation is a situation often deliberately brought by the government to reduce unemployment and increase demand by going for higher levels of economic growth.

  • Governments go for higher public expenditures, tax cuts, interest rate cuts, etc Fiscal deficit rises, extra money is generally printed at a higher level of growth, wages increase and there is almost no improvement in unemployment.

QUESTION: 5

What is the effect of inflation on the expenditure?

1. Increased prices make our consumption levels fall as goods and services we buy get costlier.

2. Inflation makes investment expenditure decrease as a result of the increased cost of money.

Which of these statements is/are correct?

Solution:
  • Inflation affects both the forms of expenditures -consumption as well as investment. Increased prices make our consumption levels fall as goods and services we buy get costlier.

  • We see a tendency among the people to cut their consumption levels aimed at neutralising the impact of price rise- making consumption expenditure fall.

  • The exact opposite happens once prices head downward. On the other hand, inflation invest' expenditure increases as a result of the decreased cost of money/finance (inflation brings benefit to the borrower-known as 'inflation premium'). In times of price fall, just the opposite happens.

 

 

 

 

 

QUESTION: 6

What is the effect of inflation on the tax structure of the economy?

1. Taxpayers suffer while paying there direct and indirect taxes

2. On the other hand, the government gets the benefit of inflation on the tax collection

Which of these statements is/are correct?

Solution:
  • The extent to which tax collections of the government are concerned, inflation increases the nominal value of the gross tax revenue, while the real value of the tax collection does not compare with the current pace of inflation as there is a lag (delay) in the tax collection in all economies.

  • But governments get an advantage on their interest burden, on their borrowings as inflation benefits borrowers. This benefit, however, depends upon the contemporary levels of fiscal deficit and the total national debt.

QUESTION: 7

Consider the following statements

1. Inflation has no impact on the self-employed people in the short-run

2. In the long-run they also get affected as the economy as a whole gets affected

Which of these statements is/are correct?

Solution: Inflation has a neutralising impact on the self-employed people in the short-run. But in the long-run they also get affected as the economy as a whole gets affected.

QUESTION: 8

Consider the following statements.

1. India's official Housing Price Index (HPI) was launched in July 2007 in Mumbai.

2. It was developed by the Indian home loans regulator, the National Housing Bank (NHB) the index is named NHB Residex.

Which of these statements is/are incorrect?

Solution:
  • India's official Housing Price Index (HPI) was launched in July 2007 in Mumbai.

  • Developed by the Indian home loans regulator, the National Housing Bank (NHB) the index is named NHB Residex.

  • Presently, the index has been introduced as a pilot project for five cities Bangalore, Bhopal, Delhi, Kolkata and Mumbai, -till now it has been updated up to the quarter ended March 2016.

QUESTION: 9

Which of the following are the economy traits of the cycle of recovery?

1. An upturn in aggregate demand which has to be accompanied by an increase in the level of production.

2. Production process expands and new investments become attractive.

3. Inflation also moves downward making borrowing cheaper for investors.

Which of these statements is/are correct?

Solution:

The business cycle of recovery may show the following economy traits:

  • (i) an upturn in aggregate (total) demand which has to be accompanied by an increase in the level of production;

  • (ii) production process expands and new investments become attractive;

  • (iii) as demand goes upward, inflation also moves upward making borrowing cheaper for investors;

  • (iv) with an upturn in production, new employment avenues are created and the unemployment rate starts declining, etc.

QUESTION: 10

Which of the following are the traits of depression?

1. An extremely low aggregate demand in the economy causes activities to decelerate.

2. Inflation is comparatively higher.

3. The employment avenues start shrinking forcing unemployment rate to grow fast.

Which of these statements is/are correct?

Solution:

The major traits of depression could be as given below.

  • (i) an extremely low aggregate demand in the economy causes activities to decelerate;

  • (ii) the inflation being comparatively lower;

  • (iii) the employment avenues start shrinking forcing unemployment rate to grow fast;

  • (iv) to keep the business going, production houses go for forced labour-cuts or retrenchment (to cut down production cost and be competitive in the market,) etc.