Test: Economics - 2


25 Questions MCQ Test Economy and Indian Economy (Prelims) by Shahid Ali | Test: Economics - 2


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QUESTION: 1

The WTO follows the principle of ‘self selection’. This means :

Solution:

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

QUESTION: 2

Which of the following also acts as a mechanism for government lending?

1. CRR

2. Repo rate

3. Reverse repo rate

4. SLR

Select the correct answer using the codes given below.

Solution:

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.

QUESTION: 3

With reference to foreign portfolio investments (FPI), consider the following statements:

1. FPIs are more volatile than loans from international financial institutions.

2. Foreign Direct Investments are part of FPIs.

Which of the statements given above is/are correct ?

Solution:

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.

QUESTION: 4

Which among the following can result in ‘demand pull inflation’ ?

1. Increase in subsidy on LPG

2. Increase in fuel prices

3. Decrease in income tax rates

Select the correct answer using the codes given below.

Solution:

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.

QUESTION: 5

The term ‘narrow banking’ is best described as:

Solution:

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.

QUESTION: 6

If indirect taxes in an economy are increased, then which of the following can occur?

1. GDP at factor cost increases

2. GDP at factor cost decreases

3. GDP at market price increases

4. GDP at market price decreases

Select the correct answer using the codes given below.

Solution:

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.

QUESTION: 7

Equity market instruments help in financing a firm. Which of these is/are equity market instruments?

1. Bonds

2. Shares

3. Debentures

Select the correct answer using the codes given below.

Solution:

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.

QUESTION: 8

An economy pursuing an expansionary fiscal policy can witness :

1. Increase in fiscal deficit

2. Increase in wages of labour

3. Increase in rate of income tax

Select the correct answer using the codes given below.

Solution:

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.

QUESTION: 9

Which of the following is/are used as an indicator in calculating Multidimensional Poverty Index (MPI)?

1. Maternal mortality

2. Nutrition

3. Access to electricity

4. Access to telephone

Select the correct answer using the codes given below.

Solution:

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. 

QUESTION: 10

Consider the following economy traits

1) Prolonged increase in demand

2) Heating up of economy

3) Demand-supply lag

They are the characteristic feature of which phase of business/economy cycle?

Solution:

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

QUESTION: 11

The term ‘micro-finance’ frequently appears in newspapers. Micro-finance includes

1. Small loans

2. Small deposits

3. Money transfer

4. Payment services

Select the correct answer using the codes given below.

Solution:

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.

QUESTION: 12

Inclusive growth is an important objective of the development process. In this context, which of the following would amount to inclusive growth?

1. Poverty reduction.

2. Disinvestment.

3. Good governance.

4. Skill building.

Select the correct answer using the codes given below.

Solution:

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.

QUESTION: 13

If the interest rate is decreased in an economy, it will 

Solution:

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

QUESTION: 14

A rise in general level of prices may be caused by 

  1. An increase in the money supply
  2. A decrease in the aggregate level of output
  3. An increase in the effective demand

Select the correct answer using the codes given below.

Solution:

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.

QUESTION: 15

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

Solution:

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.

QUESTION: 16

The balance of payments of a country is a systematic record of

Solution:
QUESTION: 17

Which of the following measures would result in an increase in the money supply in the economy? 

  1. Purchase of government securities from the public by the Central Bank
  2. Deposit of currency in commercial banks by the public
  3. Borrowing by the government from the Central Bank
  4. Sale of government securities to the public by the Central Bank

Select the correct answer using the codes given below:

Solution:

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.
 

QUESTION: 18

Which of the following would include Foreign Direct Investment in India? 

  1. Subsidiaries of companies in India
  2. Majority foreign equity holding in Indian companies
  3. Companies exclusively financed by foreign companies
  4. Portfolio investment

Select the correct answer using the codes given below:

Solution:

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

QUESTION: 19

Participatory Notes (PNs) are associated with which one of the following?  

Solution:
QUESTION: 20

The lowering of Bank Rate by the Reserve Bank of India leads to 

Solution:
QUESTION: 21

When the Reserve Bank of India announces an increase of the Cash Reserve Ratio, what does it mean? 

Solution:

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.

QUESTION: 22

Which of the following is / are treated as artificial currency?

Solution:

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.

QUESTION: 23

Which of the following is used for the measurement of distribution of income?

Solution:
QUESTION: 24

Which of the following activities is/are excluded from calculation Gross Domestic Product?

1. Sale of a new car

2. Purchase of tyre by a car manufacturer

3. Buying share of a car company

4. Profits earned by a foreign-owned car company

Which of the above statement(s) is/are correct?

Solution:

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

QUESTION: 25

Gross domestic product (GDP) can also measure the relative contribution of an industry sector. This is possible because GDP is

Solution:

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)

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