Economy Quiz

Q.1) Which of the following initiative has not been covered under the Bharatmala Project?
a) Construction of roads along India’s borders and coastal areas
b) Improving connectivity of non-major ports, religious and tourist places
c) Development of newly declared national highways in district headquarters
d) Improving connectivity by inland waterways

Ans- d

Explanation-  Bhartmala is an ambitious roads and highways project of  the NDA government. It involves construction of roads and highways to India’s borders, coastal areas, ports, religious and tourist places as well as over 100 district headquarters. It will involve construction of around 25000 km of road network. Following states will have road construction under this- Gujarat, Rajasthan, JnK, HP, Uk, borders of UP and Bihar near Terai region, Sikkim, Assam, Arunanchal Pradesh and upto Indo-Myanamar border in Manipur and Mizoram. Linking with this, road network from Maharashtra to Bengal along the coastal areas will be built.

Funding of this will be done majorily by govt itself and rest through PPP model. Benefits are huge- it will be a strong strategic component with respect to national security, act as a multiplier effect in our economy, provide backward and forward linkages to the markets, connect remote mountainous areas, trade and tourism will boost and generation of huge employement. Major challenge is just of environment clearences and land acquisition.

Inland waterways construction is under Inland waterways authority of India. It is not covered under Bhartmala. Recently a bill has been passed in Rajya Sabha that will seek to make waterways in 110 rivers.

Q.2) The economic survey talks about “Chakravyuha” by which it means1. Difficult entry of firm in market
2. Difficult exit of firm from market

Select the incorrect answer using the codes given below:
a) 1 only
b) 2 only
c) Both 1 and 2
d) None of the above

Ans- a*

Explanation-  It is the difficulty of exit of firm from the market.

Chakarvyuh is the name of a military strategy described in Hindu Epic Mahabharatha. During the great Mahabharatha war Kauravas’ army general created a chakarvyuh to trap elder Pandava Yuddhisthira. This if successful would have resulted into the defeat of Pnadavas. Only Arjun knew how to break this by entering into it and exiting out of it. Unfortunately when the war was going on and Kaurav’s army proceeded to trap Yuddhisthira, they were stopped and challenged by Arjun’s son Abhimanyu.  Abhimanyu knew only how to enter into it but not how to exit. As a result he went inside this but could not come out and died fighting valiantly. This phenomenon is now commonly in India reffered to as getting trapped in chakarvyuh when you can’t escape out from any situation.

Indian firms due to the existing laws , rules and regulations face the big problem when businesses go bust. The current laws make it almost impossible for firms to close business. This is often  a disincentive for strating a business based on innovative and risky idea.

Economic survey address the situation by 5 ways- first,  by promoting competition via private sector entry rather than change of ownership from public to private. Secondly, direct policy action through better laws like the Insolvency and Bankruptcy Code 2015 will expedite exit. Thirdly, use of technology to layers of intermediaries. The fourth is increasing transparency and highlighting social costs. Finally, showcasing exit as an opportunity.

Q.3) What would be the impact on price of a commodity with rise in indirect taxes?1. Increase in its Factory price
2. Increase in its Ex-factory price
3. Increase in its Market price

Select the correct answer using the codes given below:
a) 1 and 3 only
b) 1 and 2 only
c) 2 and 3 only
d) All of the above

Ans – d

Explanation– Indirect taxes are taxes which are collected from manufacturer or retailer. Customs duty, central excise duty, service tax, sales tax, octroi entertainment tax etc are a few types of indirect taxes.

Factory price is the total cost of making a product at the production location, and comprising of raw material, labor, and overhead costs.

Ex factory price is the factor price of the final good made + Indirect taxes of the central government only.Look at Q2,Link.

Now increase in any of the mentioned indirect tax is going to affect factory price first via Raw materials. Ex factory price will also increase if rise is in GoI indirect taxes.

After factory when product will move to market it will be levied with other taxes like sales tax, octroi and other state indirect taxeswhich will further increase the market price.

Q.4) The Economic Survey has prescribed a 4-D model for the banking sector to face competition in the changed environment. These 4-D stands fora) Deregulation, Development, Diversification and Disinvestment
b) Deregulation, Double financial repression, Diversification and Disinvestment
c) Deregulation, Disinterring, Diversification and Disinvestment
d) Deregulation, Disinterring, Diversification and Differentiation

Ans-d

Explanation-The four Ds include:

De-regulation (addressing the statutory liquidity ratio (SLR) and priority sector lending (PSL))

Differentiation (within the public sector banks in relation to recapitalisation, shrinking balance sheets, and ownership)

Diversification (of source of funding within and outside banking)

Disinterring (by improving exit mechanisms).

Q.5) Human Development Index measured on the basis of three broad parameters. These are
a) Per capita income, school enrollment and child mortality
b) Purchasing power parity, educated adults and infant mortality
c) Real per capita income, Level of education and Life expectancy at birth
d) Gross national income, literacy rate and life expectancy at birth

Ans- c

Explanation

A HDI is an index that ranks the countries into four tiers of human development.  This index was developed by Amartya Sen and Mahbub ul haq. It is composite index which is made from 3 indexes, these are:

1. Life expectancy at birth
2. Education index=Mean years of scholing+expected years of schooling
3. GNI per capita

In the question it is asking about broad parameters.

Real per capital income is = Nominal income-inflation

This nominal income is GNI

Q.6) Due to recession, there has been a drastic rise in job cuts. This is a case of
1. Structural unemployment
2. Cyclical unemployment

Select the correct answer using the codes given below:
a) 1 only
b) 2 only
c) Both 1 and 2
d) None of the above

Ans- b

Explanation- Economists mainly classify unemployment on 5 heads. They are cyclical, structural, frictional, classical and Marxian.

Cyclical unemployment is an unemployment that relates to the cyclical trends in growth and production in a business cycle. When business cycles are at their peak, cyclicalunemployment will be low because total economic output is being maximized. When economic output falls cyclical unemployment will rise.

Recession is slowdown of economic activities. It is the result of businesses not having enough demand. The lack of demand comes from a lack of spending and consumption in an economy. This causes in turn job cuts or unemployment.

Structural unemployment is unemployment caused by a mismatch between the present skills of worker and the skills demanded by employers. It is also known as the skills gap. Structural unemployment is often brought about by technological changes.

Q.7) Which of the following is/are tools of Monetary policy?1. Repo rate
2. Tax rate

Select the correct answer using the codes given below:
a) 1 only
b) 2 only
c) Both 1 and 2
d) None of the above

Ans- a

Explanation- Monetary policy is the policy made by central bank of a country to control the flow of money in the economy. This is done by keeping control over interest rates in order to maintain price stability. Various modes of operations and instruments used are-

Open market operations involves buying and selling of government securities from or to the public or bank.

Cash Reserve Ratio – It is a certain percentage of bank deposits which banks are required to keep with RBI in the form of reserves or balances.

Statutory Liquidity ratio – Every financial institution has to maintain a certain quantity of liquid assets with themselves at any point of time of their total time and demand liabilities. These assets have to be kept in non cash form such as G-secs precious metals, approved securities like bonds etc. Currently it is 21.5%

The bank rate– It is the rate of interest charged by the RBI for providing funds or loans to the banking system. Currently it is 7.75%

Moral Suasion – Request by the RBI to the commercial banks to take action and measures wrt any trend of the economy. RBI may request commercial banks not to give loans for unproductive purpose which does not add to economic growth but increases inflation.

Repo rate-It is the rate at which RBI lends to commercial banks generally against government securities. Reduction in Repo rate helps the commercial banks to get money at a cheaper rate and increase in Repo rate discourages the commercial banks to get money as the rate increases and becomes expensive. Currently it is 6.75%

Reverse Repo rate is the rate at which RBI borrows money from the commercial banks. The increase in the Repo rate will increase the cost of borrowing and lending of the banks which will discourage the public to borrow money and will encourage them to deposit. Currently it is 5.75%

Tax rate is the rate imposed by government to individuals and companies at the rate of which they have to pay taxes to them.

Q.8) ‘Liquidity Trap’ is a situation in which:a) People want to hold only cash because prices are falling everyday
b) People want to hold only cash because there is too much of liquidity in the economy
c) The rate of interest is so low that no one wants to hold interest bearing assets and people wants to hold cash
d) There is an excess of foreign exchange reserves in the economy leading to excess money supply

Ans- c

Explanation-The liquidity trap is the situation in which prevailing interest rates are low and savings rates are high.Public choose to avoid bonds , making monetary policy ineffective.All this happen under apprehension of belief that interest rates will increase. In liquidity trap public do not want to hold an asset with a price that is expected to decline.

Q.9) The most appropriate measure of a country’s economic growth is the:
a) Gross Domestic Product
b) Net Domestic Product
c) Net National Product
d) Per capita real income
Ans- c

Explanation-

GNP= GDP+net property income from abroad (rent, interest, profits and dividends)

NNP= GNP- Depreciation

NNP is the amount of goods that can be consumed within a nation each year without reducing the amount that can be consumed in following years.Thus, it gives the real trend of economic growth .
Q.10) The main argument advanced in favour of small scale and cottage industries in India is that:
a) Cost of Production is low
b) They require small capital investment
c) They advance the goal of equitable distribution of wealth
d) They generate a large volume of employment

Ans- d

Explanation- They are labour intensive industries and in a country where we have labour surplus, they act as an important area to absorb big portion of people looking for employment. The employment generating capacity of small scale cottage industries could be noted from the fact that in India, rupees one lakh of investment in plant and machinery in this sector provides employment to 21-25 persons, while in large scale units, the same amount of investment provides employment to only 4 persons. It provides both self employement and wage employment. It accounts for 80% of the total employment in industrial seector.

With little capital investment they can be set up anywhere in rural or semi urban places easily. They also provide part time employment to women and unskilled labourers.

Q11.) Consider the following statements

1. When economy grows, market forces increase inequality at first
2. When economy grows, market forces ultimately decrease inequality

Which of the below curves represent the above hypothesis?

a) Phillips Curve
b) Kuznets Curve
c) Bell Curve
d) Lorenz Inequality Curve

Ans- b

Explanation-Kuznets curve graphs the hypothesis that as an economydevelops, market forces first increase and then decrease economic inequality. It is represented by a curve like this :

Curve implies that as a nation undergoes industrialization –the center of the nation’s economy shift to the cities. Internal migration by farmers looking for better-paying jobs causes a significant rural-urban inequality gap as income rise will be slow initially. Inequality decreases when a certain level of average income is reached and the processes of industrialization – democratization and the rise of the welfare state – allow for the trickle-down of the benefits from rapid growthand increases per-capita income.

Phillips curve represents the relationship between the rate of inflation and the unemployment rate.

Lorenz inequality curve is a graphical representation ofthe distribution of income or of wealth

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Q.12) What is the meaning of ‘take off stage’ in an economy?
a) hyper growth rate in an economy
b) economic growth takes place automatically
c) economy is de-linked from primary sector and growth is occurring in secondary sector
d) none of the above

Ans- b

Explanation-

Walt Rostow, US economist and a political theorist suggested that economy passes through following five stages before it becomes a developed economy.

These are:

1. Traditional society– This is an agricultural economy of mainly subsistence farming,
2. Pre-conditions for take-off– Agriculture becomes more mechanised and more output is traded.
3. Take-off– Manufacturing assumes greater importance, although the number of industries remains small. Political and social institutions develop . Economy becomes self reliant and growth take place automatically.
4. Drive to maturity– Industry becomes more diverse. Growth spread to different parts of the country as technology improves.
5. Age of mass consumption– Output grows, enabling increased consumer expenditure. There is a shift towards tertiary sector activity.

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Q.13) The price of any currency in international market is decided by the
1. World Bank
2. Demand for goods/services provided by the country concerned
3. Stability of the government of the concerned country
4. Economic potential of the country in question

Select the correct answer using the codes given below.
a) 2 and 3 only
b) 3 and 4 only
c) 1 and 4 only
d) 1, 2, 3 and 4

Ans-a

Explanation– The World Bank is a vital source of financial and technical assistance to developing countries around the world. It has no relation with price of currency in international market. So we can eliminate  option c and option d.

Price of any currency is determind like price of any other commodity i.e, by forces of demand and supply. Demand for a currency is created by two factors, its exports that is other countrieswho want to buy, or the investments that people want to make in that currency. Therfore, Option 2 is correct.

Stability of the government is very important factor too as an unstable govt may not be able to take effective economic decisions which will in turn affect export and import.

Considering all these option a is correct

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Q.14) The function of the Reserve Bank of India are:
1. Issuing all notes and coins
2. Distributing all notes and coins
3. Formulating monetary policy
4. Acting as agent of Government in respect of India’s membership of the IMF

Select the correct answer using the codes given below.
a) 1, 3 and 4
b) 2 and 3
c) 2, 3 and 4
d) 1, 2, 3 and 4

Ans- c

Explanation-All coins and one rupee note is printed by GoI. In fact GoI has the sole right to mint coins. Therefore option 1 is wrong. We can eliminate option a and option d.

Formulating monetary policy is one of the prime function of the RBI or any central bank of country. Distribution of all currency is done by RBI.

RBI also acts as an agent of GoI in respect of membership of the IMF. You can read RBI functionshere.

Department of External Investments and Operations of RBI handles external transactions on behalf of GoI including transactions relating to International Monetary Fund (IMF). Thus option 4 is also correct.

Hence ans is option c

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Q.15) Regional rural banks:
1. Have limited area of operation
2. Have free access to liberal refinance facilities from NABARD
3. Are required to lend only to weaker sections

Select the correct answer using the codes given below.
a) 1 and 3 only
b) 2 and 3 only
c) 1 and 2 only
d) 1, 2 and 3

Ans-c

Explanation–

Sources of funds of RRBs comprise of owned fund, deposits, borrowings from NABARD, Sponsor Banks and other sources including SIDBI and National Housing Bank.

NABARD website says “Department of Refinance is vested with the core function of providing refinance in respect of term loan for both Farm Sector and Non – Farm Sector activities for a period upto 3-15 years and is released to only eligible institutions viz. SCARDBs, SCBs, Regional Rural Banks or Scheduled commercial banks or any other financial institution, approved by Reserve Bank of India (RBI) as defined under Section 25 of NABARD Act.”Therefore statement 2 is correct. We can eliminate option 1.

The area of operation of the RRBs is limited to notified few districts in a State. Therefore statement 1 is also correct.

The RRBs mobilise deposits primarily from rural/semi-urban areas and provide loans and advances mostly to small and marginal farmers, agricultural labourers , rural artisans and other segments of priority sector.Priority sector lending includes loans given to agriculture, micro, small and medium enterprises, education, housing, weaker sections, social infrastructure and renewable energy segments. Therefore, statement 3 is wrong as it says ‘only’ weaker sections which does not include PSL.

Thus, option c is correct.

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Q.16) The per capita income has been low in India because:
a) of population growth.
b) of inflation reducing the purchasing power of people.
c) of insufficient increase in total income.
d) of regional imbalances

Ans-a

Explanation-India is overpopulated country. Though India has made considerable progress in economy but due to high population per capita availability of resources and income are low

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Q.17) Consider the following statements
1. Inflation in every form is bad for the economic growth of a country.
2. Right monetary policy by the Central Bank control all inflation.

Select the Incorrect statements using the codes given below.

a) 1 only
b) 2 only
c) Both 1 & 2
d) Neither 1 nor 2

Ans- c

Explanation– Inflation in every form is not bad. Zero inflation is discouraging for the economy. Thus statement 1 is wrong.

Monetary policy alone no matter how much it is right with respect to economic environment may not control all kind of inflation. Fiscal policy support and intervention of the govt are also needed. Thus statement 2 is also wrong.

Hence ans is c.

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Q.18) Which of the following would be considered as tools of economic stimulus?
1. Increasing taxes so that government has more money to spend
2. Quantitative Easing
3. Decreasing Interest Rates

Select the correct statements using the codes given below:
a) 1 and 2 only
b) 1 and 3 only
c) 2 and 3 only
d) 1, 2 and 3

Ans-c

Explanation-An economic stimulus is the use of monetary or fiscal policy to stimulate lagging or struggling economy. Government can use tactics such as lowering interest rates, and quantitative easing mainly to achieve this.

Lowering taxes enables increase of consumer spending which helps economy to recover from the recession. Thus Option c.

Q.19) Fiscal Consolidation is one of the objectives of India’s economic policy. Which of the following would help in fiscal consolidation?

1.  Increasing taxes
2. Getting more loans
3. Reducing subsidies

Choose the correct answer using the codes given below:
a) 1 and 2 only
b) 1 and 3 only
c) 1 only
d) 1, 2 and 3

Ans- [B]

Explanation– According to OECD, Fiscal consolidation is a policy aimed at reducing government deficits and debt accumulation. It means taking steps to fix the fiscal deficit problem in its root and prevent heavy fiscal deficits situation from occurring in future. Some steps are:

1. Cutting down subsidies.
2. Stop leakages in subsidies.
3. Reform the tax structure (implement GST).
4. Improve the performance of PSUs.
5. Recover black money
6. Policy reforms and creating environment conducive for economy.
7. Controlling wasteful expenditures.

Q.20) The Fiscal Responsibility and Budget Management Act aimed for

1. Eliminating revenue deficit and fiscal deficit
2. Giving flexibility to RBI for inflation management

Which of the above statements is/are correct?
a) 1 only
b) 2 only
c) Both 1 and 2
c) Neither 1 nor 2

Ans-[B]

Explanation- In late 1980s and early 1990s, Indian economy faced  the problem of large fiscal deficit and its effects on to the external sector. Govt was not able to pay for large borrowings. This crisis ultimately scaled up to the economic crisis of 1991. Consequently, Economic reforms were introduced in 1991 and fiscal consolidation emerged as one of the key areas of reforms. Initially it gave good results but fiscal consolidation faltered after 1997-98. The fiscal deficit started rising after 1997-98.

The Government then introduced FRBM Act,2003 to check the fiscal situation. This act was brought in to institutionalise the financial discipline, introduce transparent fiscal management systems in the country, introduce a more equitable and manageable distribution of the country’s debts over the years, to aim for fiscal stability for India in the long run.

Main purpose of the act was elimination of the revenue deficit and building revenue surplus thereafter. It also aimed for reducing fiscal deficit to 3% of GDP till 2008. As statement 1 is saying elimination of revenue deficit and fiscal deficit, it is wrong. It only talked about elimination of revenue deficit. Zero fiscal deficit is bad for the country.

This law also gives flexibility to the Reserve Bank of India to undertake monetary policy to tackle inflation and take corrective measures in order to give an impetus to the economic environment. Statement 2 is correct.

Q.21) Consider the following statements regarding Index of Industrial Production (IIP):

1. It is released monthly by Central Statistical Organisation(CSO)
2. It shows the volume of Industrial activity

Which of the above statements is/are correct?
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2

Ans-[A]

Explanation– IIP measures the growth of various sectors in the economy by measuring the industrial activity of the country. It does not show volume of activity and only shows the magnitude which represents the status of production in the industrial sector for a given period of time as compared to a reference period of time. IIP is released every month by the CSO.

Q.22) Gross Capital Formation will increase if:

1. Gross domestic savings increase
2. Gross domestic consumption increases
3. GDP increases

Choose the correct answer using the codes given below:
a) 1 and 2 only
b) Either 1 or 2
c) 3 only
d) None of the above

Ans – [D]

Explanation- Gross capital formation increase means increase in the net investment. None of the statements can certainly say that their increase will result in the increase of the Gross Capital Formation.

So, answer would be (D).

Q.23) The WTO follows the method of “Self Selection”. This means

1. Member countries decide to which agreement they want to be a party
2. Member countries decide the rate of tariff and tariff reduction
3. Member countries decide whether they want to be in developed or developing category

Which of the above statements is/are correct?
a) 1 and 2 only
b) 1 and 3 only
c) 1 only
d) 3 only

Ans-[D]

Explanation– Developing countries enjoy special benefits in WTO. 2/3rd of the WTO Members are developing countries. There is no agreed definition of what is a “developed” or a “developing” Member in the WTO. It is up to each Member to decide if it is to be considered “developing Member” or not. This is known as self selection. However, other Members can challenge the decision of a Member to be considered as a developing Member.

Q.24) World Economic Outlook is a report published by
a) World Bank
b) IMF
c) OECD
d) None of the above

Ans-[B]

Explanation- WEO is a report conducted and published by the International Monetary Fund. It is published biannually. It depicts the world economy in the near and medium context.

OECD report is known as economic outlook and The world Bank publishes Global Economic prospects.

Q.25) How does National Rural Livelihood Mission seek to improve livelihood options of rural poor?

1. By setting up a large number of new manufacturing industries and agribusiness centres in rural areas
2. By strengthening ‘self-help’ groups and providing skill development
3. By supplying seeds, fertilizers, diesel pump sets and micro irrigation equipment free of cost to farmers

Select the correct answer by using the codes given below:
a) 1 and 2 only
b) 2 only
c) 1 and 3 only
d) 3 only

Ans-[B]

Explanation – NRLM or Aajeevika is a poverty alleviation project implemented by Ministry of Rural Development, Government of India. It focus on promoting self-employment of rural poor. The basic idea behind this programme is to organize the poor into SHG groups and make them capable for self-employment.

Q.26) Which of the following is/are treated as artificial currency?
a) ADR
b) GDR
c) SDR
d) Both ADR and SDR

Ans-[C]

Explanation- SDRs or special drawing rights are used by the members of the IMF to pay their dues and transfer funds between countries. It is an international type of monetary reserve currency, created by the International Monetary Fund (IMF) in 1969.

ADR is a negotiable security that represents securities of a non-US company that trades in the US financial markets and GDR are A global depositary receipt (GDR) is a bank certificate issued in more than one country for shares in a foreign company.

Q.27) Consider the following actions by the government:

1. Cutting the tax rates
2. Increasing government spending
3. Abolishing the subsidies

In the context of an economic recession, which of the above actions can be considered a part of the ‘fiscal stimulus’ package?
a) 1 and 2 only
b) 2 only
c) 2 and 3 only
d) 1, 2 and 3

Ans- [ A]

Explanation– Recession occurs when there is significant drop in level of economic activity due to lack of demand. To tackle it, government has to make policy in such a way that more consumer spending occurs. Cutting the tax rates and increasing the government spending will revitalize the stagnant economy. Abolishing the subsidies will increase the cost of subsidised products which will further slow down the economy.

Q.28) Consider the following:

1. Fringe Benefit Tax
2. Securities Transaction Tax
3. Interest Tax

Which of the above taxes is/are indirect taxes?
a) 1 only
b) 1 and 2 only
c) 1, 2 and 3
d) None of the above

Ans – [ D]

Explanation– List of Indirect taxes-

1. Service tax,
2. sales tax,
3. custom,
4. excise duties,
5. VAT,
6. MODVAT,
7. CENVAT and
8. proposed GST.

Direct taxes include-

1. Income tax
2. Corporate Tax (and MAT)
3. Interest tax (on banks)
4. Fringe benefits tax
5. Hotel receipt Tax
6. Wealth Tax
7. Securities transaction Tax (STT)
8. Banking cash transaction tax
9. Estate duty
10. Gift tax