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UPSC Economics questions | General Economics questions and answers
| Q. 1 | If there is a lack of money supply in comparison to the supply of goods and services, then the possible consequence would be ___. |
| a. Hyperinflation b. Inflation c. Deflation d. Devaluation | |
| Ans | c |
| Solution | – Deflation is the decline in the prices for goods and services that occur when the rate of inflation falls below 0%. – It will take place naturally, if and when the money supply of an economy is limited. – It indicates deteriorating conditions. – It is normally linked with significant unemployment and low productivity levels of goods and services. |
| Q. 2 | Which of the following economic activities employs the maximum number of people in India? |
| a. Tourism b. Agriculture c. Mining d. Manufacturing | |
| Ans | b |
| Solution | – The agriculture sector employs the maximum no. of people in India, whereas it has the least contribution to GDP. – The opposite scenario is due to lack of technological up-gradation in agriculture, disguised employment, land fragmentation, and low agriculture input.’ |
| Q. 3 | A sustained rise in the general price level in an economy is called ___. |
| a. Disinflation b. Deflation c. Inflation d. Stagflation | |
| Ans | c |
| Solution | – Inflation is a general increase in all prices across an economy – Deflation is a general decrease in all prices across an economy. – Stagflation is rising prices and falling output. – Disinflation is a temporary slowing of the pace of price inflation. |
| Q. 4 | The Banking Regulation Act was passed in India in ___. |
| a. 1965 b. 1974 c. 1949 d. 1951 | |
| Ans | c |
| Solution | – The Banking Regulation Act was passed in India in 1949. – The Act has 5 parts and 5 Schedules regarding the regulation of banks in the country. – The main objective of the banking the regulation act is to ensure sound banking through regulations covering the opening of branches and the maintenance of liquid assets. – It assigns power to RBI to appoint, reappoint and remove the chairman, director, and officers of the banks. |
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| Q. 5 | A ___ occurs when a government’s total expenditures exceed the revenue that it generates, excluding money from borrowings. |
| a. Current Account Deficit b. Fiscal Deficit c. Budgetary Deficit d. Revenue Deficit | |
| Ans | b |
| Solution | – Fiscal Deficit is the difference between the total income of the government (total taxes and non-debt capital receipts) and its total expenditure. Or a government’s total expenditures exceed the revenue that it generates, excluding money from borrowings. – Fiscal Responsibility and Budget Management (FRBM) Act was passed in 2003 to monitor and optimally manage the fiscal deficit of the country. – NK Singh Committee on Review of FRBM act suggests the formation of a Fiscal Council. |
| Q. 6 | In its Global Economic Outlook report, Fitch Ratings cut India’s economic growth forecast for the next financial year 2019-20 starting from April 1 to ___% from its previous estimate of 7%. |
| a. 5.4 b. 6.2 c. 6.8 d. 6.1 | |
| Ans | c |
| Solution | – The Global Economic Outlook report, cut India’s economic growth forecast for the next financial year 2019-20 starting from April 1 to 6.8% from its previous estimate of 7%. – The Global Economic Outlook report is released by the International Monetary fund. |
| Q. 7 | The base financial year for the calculation of all India Index of Industrial Production (IIP) is : |
| | a. 2010-2011 b. 2004-2005 c. 2011-2012 d. 2005-2006 |
| Ans | c |
| Solution | – The base financial year for the calculation of all India Index of Industrial Production (IIP) is 2011-12. – Index of Industrial Production (IIP) is an index that shows the performance of different industrial sectors of the Indian economy. – IIP is published by Central Statistical Organization. |
| Q. 8 | What does the Lorenz Curve indicate? |
| | a. Relationship between the price of a certain commodity and its demand b. Income distribution c. Rate of employment d. Taxable income elasticity |
| Ans | b |
| Solution | – The Lorenz curve is a graphical representation of the distribution of income or of wealth. – It was developed by Max O. Lorenz in 1905. |
| Q. 9 | A situation where the expenditure of the government exceeds its revenue is called ___. |
| | a. Default Financing b. Deficit Revenue c. Budget Deficit d. Fiscal Deficit |
| Ans | c |
| Solution | – The values that the revenue plan you define at the product level is the default revenue. – Budget Deficit is the condition where the expenditure of the government exceeds its revenue. – Default Financing is a failure to meet legal obligations. – Deficit Revenue occurs when net income is less than the projected net income. |
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| Q. 10 | An economic condition when there is one buyer and many sellers is called ___. |
| | a. Monopoly b. Oligopoly c. Monopsony d. Perfect Competition |
| Ans | c |
| Solution | – An economic condition when there is one buyer and many sellers are called Monopsony. – Monopoly– It is a market situation where one producer controls the supply of goods or services and where the entry of new producers is prevented or highly restricted. – Oligopoly: It is a state of limited competition, in which a market is shared by a small number of producers or sellers. – Perfect Competition is the situation prevailing in a market in which buyers and sellers are so numerous and well informed that all elements of monopoly are absent and the market price of a commodity is beyond the control of individual buyers and sellers. |
| Q. 11 | What is the name given to the graph that shows all the combinations of two commodities that a consumer can afford at given market prices and within the particular income level in economic terms? |
| | a. Demand Curve b. Isocost Line c. Budget Line d. Supply Curve |
| Ans | c |
| Solution | – Budget line is the graph that shows all the combinations of two commodities that a consumer can afford at given market prices and within the particular income level in economic terms. – It is also called a Budget constraint. |
| Q. 12 | In economic terms what do we mean by ‘Intermediate Goods’? |
| | a. Fixed assets used by manufacturers b. Price of goods without GST c. Goods sold between industries for the resale or production of other goods d. Goods in transit before reaching the consumers |
| Ans | c |
| Solution | – In economic terms, intermediate goods are sold between industries for the resale or production of other goods. – An intermediate good is a product used to produce a final good or finished product. – These goods can be used in production but they can also be consumer goods. – For example: If a consumer buys a packet of sugar to use at home, it is a consumer good but if a manufacturer purchases sugar to use during the production of another product, it becomes an intermediate good. Same as Sugar, Steel, Glass, Wood, etc. |
| Q. 13 | The demand for a commodity or service which is a consequence of the demand for something else is called ___. |
| | a. Direct Demand b. Income Demand c. Derived Demand d. Composite Demand |
| Ans | c |
| Solution | – Direct demand- Commodities or services which satisfy our wants directly are said to have direct demand. – Income demand refers to the different quantities of a commodity or service that consumers will buy at different levels of income, assuming other things remain constant. – Commodities or services demanded producing goods which satisfy our wants directly are said to have derived demand. – A commodity is said to have a composite demand when its use is made for more than one purpose. |
| Q. 14 | Which economist gave the theory of Opportunity Cost? |
| | a. Gottfried Haberler b. John Keynes c. Milton Friedman d. Adam Smith |
| Ans | a |
| Solution | – Theory of opportunity cost is given by Gottfried Haberler. – This theory is related to making a particular choice out of many alternatives. – Opportunity cost is a key concept in economics, which expresses “the basic relationship between scarcity and choice”. |
| Q. 15 | When the output is equal to zero, the variable cost is ___. |
| | a. constant b. zero c. maximum d. minimum |
| Ans | b |
| Solution | – A variable cost is a corporate expense that changes in proportion to production output. – Variable costs are dependent on production output. The variable cost of production is a constant amount per unit produced. As the volume of production and output increases or decreases, variable costs will also increase or decrease. – Hence once the output is zero the variable cost is also zero. |
| Q. 16 | The interest rate charged by banks on short-term loans to their largest, most secure, and most creditworthy customers is called ___. |
| | a. Variable Rate b. Prime Lending Rate c. Discount Rate d. Amortised Rate |
| Ans | b |
| Solution | – Interest rate charged by banks on short-term loans to their largest, most secure, and most creditworthy customers is called the prime lending rate. – PLR rate is calculated based on the average cost of funds. – Non-Banking Finance Companies generally price their loan at discount on their existing PLR |
| Q. 17 | What effect will a decrease in demand and an increase in supply have on equilibrium price? |
| | a. Equilibrium price will rise b. Equilibrium price will fall c. Equilibrium price will be constant d. Sometimes the price will rise and sometimes it will fall |
| Ans | b |
| Solution | – A demand curve shows the relationship between quantity demanded and price in a given market on a graph. – The equilibrium price and equilibrium quantity occur where the supply and demand curves cross. – When there is a decrease in demand and an increase in supply then the equilibrium price falls. |
| Q. 18 | A substantial increase in capital expenditure or revenue deficit leads to ___. |
| | a. Fiscal Deficit b. Primary Deficit c. Budgetary Deficit d. Revenue Deficit |
| Ans | a |
| Solution | – Budget deficit = total expenditure – total receipts. – Revenue deficit = revenue expenditure – revenue receipts. – Fiscal Deficit = total expenditure – total receipts except borrowings. – Primary Deficit = Fiscal deficit – interest payments. Hence Fiscal Deficit is the right answer. |
| Q. 19 | What is the value of the tangible resources such as raw materials and labor that are used in the production process called? |
| | a. Variable Cost b. Opportunity Cost c. Real Cost d. Fixed Cost |
| Ans | c |
| Solution | – Opportunity costs represent the sacrifice that is made when the means of production are used for one task rather than another. – Fixed cost– business costs, such as rent, that are constant whatever the amount of goods produced. – Variable cost– A variable cost is a corporate expense that changes in proportion to production output. – Real cost– The overall actual expense involved in creating a good or service for sale to consumers. |
| Q. 20 | When the fiscal deficit is high, what happens to prices? |
| | a. Prices increase b. There is no direct impact on prices c. Prices remain stable d. Prices decrease |
| Ans | b |
| Solution | – Fiscal deficit has no direct impact on prices in the economy but it has indirect impacts. – Fiscal deficits arise whenever a government spends more money than it brings in during the fiscal year. – Fiscal deficits crowd out private borrowing, manipulate capital structures and interest rates, decrease net exports, and lead to either higher taxes, higher inflation, or both. In this way it indirectly impacts Prices. |
| Q. 21 | A marketplace in which a final good or service is bought and sold is called ___. |
| | a. Factory Market b. Equity Market c. Commodity Market d. Product Market |
| Ans | d |
| Solution | – Product Market is a marketplace where final goods and services are bought and sold. – It does not include raw material trading and intermediate materials. – UK, Australia, USA, and Canada are countries where the least regulated product markets are found. |
| Q. 22 | What is the economic impact of the increase in productivity of firms? |
| | a. No change in Gross Domestic Product b. Increase in Gross Domestic Product c. Decrease in Gross Domestic Product d. The impact may vary among nations and their economic conditions |
| Ans | b |
| Solution | – The increase of productivity of a firm led to increasing in the gross domestic product of the firm or country. – Reason is that Increases in productivity allow firms to produce greater output for the same level of input, earn higher revenues, and ultimately generate higher Gross Domestic Product. – Review report of the International Labour Organization, 2013 finds that an increase in labor productivity within economic sectors is the main driver of economic growth. |
| Q. 23 | What would happen to the demand curve when there is an increase in the price of substitute products? |
| | a. Outward Shift b. Initially inward and then after a period outward shift c. Inward shift d. Remains constant |
| Ans | a |
| Solution | – When there is an increase in the price of substitute products the demand curve shifts outward. – A Demand curve is a graph depicting the relationship between the price of a certain commodity and the quantity of that commodity. – When income increases, the demand curve for normal goods shifts outward as more will be demanded at all prices, while the demand curve for inferior goods shifts inward due to the increased attainability of superior substitutes. |
| Q. 24 | Which theory in economics proposes that countries export what they can most efficiently and plentifully produce? |
| | a. Input-Output Model b. Cournot Competition c. Heckscher-Ohlin Model d. Solow-Swan Model |
| Ans | c |
| Solution | – The Heckscher-Ohlin model is an economic theory that proposes that countries export what they can most efficiently and plentifully produce. – The model emphasizes the export of goods requiring factors of production that a country has in abundance. – It also emphasizes the import of goods that a nation cannot produce as efficiently. – In economics, an input-output model is a quantitative economic model that represents the interdependencies between different sectors of a national economy or different regional economies. |
| Q. 25 | Which theory is used to make long-run predictions about exchange rates in a flexible exchange rate system? |
| | a. Balance of Payment Theory b. Interest Rate Approach c. Portfolio Balance Approach d. Purchasing Power Parity Theory |
| Ans | d |
| Solution | – Purchasing Power Parity (PPP) theory is used to make long-run predictions about exchange rates in a flexible exchange rate system. – It is based on the Law of One Price, which says that, if there are no transaction costs nor trade barriers for a particular good, then the price for that good should be the same at every location. |