Economy Set 1 MCQs

Economy GK

Economy Set 1 MCQs

Practice Economy GK MCQs on basic economic concepts including economy, economics, microeconomics, macroeconomics, goods and services, demand and supply, factors of production, opportunity cost, economic activities, sectors of economy and other fundamental concepts frequently asked in SSC, Railway, Banking, UPSC, JKSSB, JKPSC, Police, Defence and other competitive examinations.

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Page 32 of 111
Question #621
Which of the following is used to measure the degree of concentration in an industry?
A. Herfindahl-Hirschman Index
B. Lorenz curve only
C. Gini coefficient only
D. Human Development Index
Discuss
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Correct Answer: Option A

Explanation:
The Herfindahl-Hirschman Index (HHI) is calculated as the sum of the squares of the market shares of all firms in an industry and is widely used to measure market concentration.
This question belongs to: Economy GK Economy Set 1
Question #622
In the context of international economics, the 'Balassa-Samuelson Effect' explains:
A. Why tariffs are always beneficial
B. Why poorer countries always have trade surpluses
C. Why capital flows only from rich to poor countries
D. Why real exchange rates tend to be higher in richer countries
Discuss
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Correct Answer: Option D

Explanation:
The Balassa-Samuelson effect argues that productivity growth in the tradable sector raises wages economy-wide, increasing the relative price of non-tradables and leading to real appreciation in richer countries.
This question belongs to: Economy GK Economy Set 1
Question #623
Which of the following is a feature of the 'Real Business Cycle' theory?
A. Business cycles are primarily caused by monetary shocks
B. Fiscal policy is the primary driver of cycles
C. Sticky prices are the main source of fluctuations
D. Business cycles are primarily driven by real shocks, especially technology shocks
Discuss
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Correct Answer: Option D

Explanation:
Real Business Cycle theory attributes macroeconomic fluctuations mainly to real shocks, particularly technological disturbances, under the assumption of continuous market clearing and rational expectations.
This question belongs to: Economy GK Economy Set 1
Question #624
The concept of 'Moral Hazard' in the context of deposit insurance arises because:
A. Banks may take excessive risks knowing that deposits are insured
B. Depositors become more careful about bank risk
C. Insurance always reduces risk-taking
D. Depositors monitor banks more intensively
Discuss
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Correct Answer: Option A

Explanation:
Deposit insurance can create moral hazard by reducing depositors’ incentive to monitor banks and by encouraging banks to take greater risks because the downside is partly borne by the insurer.
This question belongs to: Economy GK Economy Set 1
Question #625
Which of the following is a characteristic of the 'New Keynesian' Phillips Curve?
A. It is based on adaptive expectations only
B. It incorporates forward-looking expectations and sticky prices
C. It assumes continuous market clearing
D. It denies any role for demand factors
Discuss
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Correct Answer: Option B

Explanation:
The New Keynesian Phillips Curve is derived from models with staggered price setting and rational expectations, linking current inflation to expected future inflation and the output gap or marginal cost.
This question belongs to: Economy GK Economy Set 1
Question #626
In the context of development economics, the 'Lewis Model' focuses on:
A. The importance of balanced growth across all sectors equally
B. Only the role of foreign aid
C. Only technological progress in agriculture
D. The role of surplus labour in agriculture and its transfer to industry
Discuss
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Correct Answer: Option D

Explanation:
The Lewis dual-economy model emphasises the existence of surplus labour in the traditional agricultural sector that can be transferred to the modern industrial sector at a constant real wage.
This question belongs to: Economy GK Economy Set 1
Question #627
Which of the following is a feature of the 'Impossible Trinity' in open economy macroeconomics?
A. All three objectives are always compatible
B. Only fiscal policy is constrained
C. A country can simultaneously maintain a fixed exchange rate, free capital mobility and independent monetary policy
D. A country can achieve only two of the three: fixed exchange rate, free capital flows and monetary independence
Discuss
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Correct Answer: Option D

Explanation:
The impossible trinity (or trilemma) states that it is impossible for a country to maintain a fixed exchange rate, free capital mobility and an independent monetary policy at the same time.
This question belongs to: Economy GK Economy Set 1
Question #628
The concept of 'Tobin's q' is defined as:
A. The ratio of the market value of installed capital to its replacement cost
B. The ratio of investment to saving
C. The ratio of money supply to GDP
D. The ratio of consumption to income
Discuss
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Correct Answer: Option A

Explanation:
Tobin's q is the ratio of the market value of a firm's capital to the replacement cost of that capital. Investment is encouraged when q > 1 and discouraged when q < 1.
This question belongs to: Economy GK Economy Set 1
Question #629
Which of the following is a characteristic of the 'Endogenous Growth Theory'?
A. Diminishing returns to capital always limit growth
B. Long-run growth is determined by factors within the model such as human capital and R&D
C. Only population growth determines per capita income growth
D. Technological progress is exogenous
Discuss
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Correct Answer: Option B

Explanation:
Endogenous growth theory treats technological progress and human capital accumulation as outcomes of economic decisions within the model, allowing sustained long-run growth in per capita income.
This question belongs to: Economy GK Economy Set 1
Question #630
In the context of financial markets, 'Adverse Selection' before a loan is made refers to:
A. Borrowers becoming riskier after receiving loans
B. Only the problem of monitoring after the loan
C. Borrowers with higher risk being more likely to seek loans
D. Lenders always having perfect information
Discuss
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Correct Answer: Option C

Explanation:
Adverse selection in credit markets occurs when higher-risk borrowers are more eager to borrow at any given interest rate, so that the pool of applicants becomes riskier as the interest rate rises.
This question belongs to: Economy GK Economy Set 1
Question #631
Which of the following is a feature of the 'Taylor Rule' for monetary policy?
A. Exchange rate is the only target
B. Interest rate responds only to money supply growth
C. Nominal interest rate responds to inflation gap and output gap
D. Fiscal deficit is the primary target
Discuss
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Correct Answer: Option C

Explanation:
The Taylor Rule prescribes that the central bank should set the nominal interest rate in response to deviations of inflation from target and of output from potential.
This question belongs to: Economy GK Economy Set 1
Question #632
The concept of 'Creative Destruction' is associated with the work of:
A. David Ricardo
B. Adam Smith
C. John Maynard Keynes
D. Joseph Schumpeter
Discuss
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Correct Answer: Option D

Explanation:
Joseph Schumpeter described creative destruction as the process by which innovation continuously revolutionises the economic structure from within, destroying old industries and creating new ones.
This question belongs to: Economy GK Economy Set 1
Question #633
Which of the following is a characteristic of the 'Liquidity Coverage Ratio' under Basel III?
A. It measures only long-term funding stability
B. It is related only to capital adequacy
C. It applies only to non-bank financial institutions
D. It requires banks to hold sufficient high-quality liquid assets to cover net cash outflows over 30 days
Discuss
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Correct Answer: Option D

Explanation:
The Liquidity Coverage Ratio (LCR) requires banks to maintain an adequate stock of unencumbered high-quality liquid assets that can be converted into cash to meet liquidity needs for a 30-calendar-day stress scenario.
This question belongs to: Economy GK Economy Set 1
Question #634
In the context of public economics, the 'Samuelson Condition' for optimal provision of pure public goods states that:
A. Each individual's marginal rate of substitution equals the marginal cost
B. Only the median voter determines the quantity
C. Private provision is always optimal
D. The sum of marginal rates of substitution equals the marginal rate of transformation
Discuss
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Correct Answer: Option D

Explanation:
The Samuelson condition requires that the sum of the marginal rates of substitution between the public good and a private good across all individuals equals the marginal rate of transformation (marginal cost).
This question belongs to: Economy GK Economy Set 1
Question #635
Which of the following is a feature of the 'Random Walk Hypothesis' of stock prices?
A. Successive price changes are independent and stock prices fully reflect available information
B. Technical analysis can systematically generate excess returns
C. Only fundamental analysis is irrelevant
D. Stock prices are predictable based on past patterns
Discuss
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Correct Answer: Option A

Explanation:
The random walk hypothesis, closely related to the efficient market hypothesis, asserts that successive price changes are independent and that prices incorporate information so rapidly that future changes are unpredictable.
This question belongs to: Economy GK Economy Set 1
Question #636
The concept of 'Fiscal Space' refers to:
A. Only the primary surplus
B. Only the revenue deficit
C. The physical space occupied by government offices
D. The room available for a government to increase spending or reduce taxes without endangering debt sustainability
Discuss
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Correct Answer: Option D

Explanation:
Fiscal space is the budgetary room that allows a government to provide resources for desired purposes without compromising fiscal sustainability or crowding out private investment excessively.
This question belongs to: Economy GK Economy Set 1
Question #637
Which of the following is a characteristic of the 'Natural Rate Hypothesis'?
A. Monetary policy can permanently reduce unemployment below the natural rate
B. In the long run, unemployment returns to its natural rate regardless of the inflation rate
C. There is a permanent trade-off between inflation and unemployment
D. Only adaptive expectations are assumed
Discuss
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Correct Answer: Option B

Explanation:
The natural rate hypothesis, associated with Friedman and Phelps, states that in the long run the economy returns to the natural rate of unemployment and there is no permanent trade-off with inflation.
This question belongs to: Economy GK Economy Set 1
Question #638
In the context of international trade, the 'Stolper-Samuelson Theorem' predicts that:
A. An increase in the relative price of a good raises the real return to the factor used intensively in its production
B. Only labour always gains from trade
C. Trade benefits all factors of production equally
D. Factor prices are independent of goods prices
Discuss
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Correct Answer: Option A

Explanation:
The Stolper-Samuelson theorem states that a rise in the relative price of a good increases the real return to the factor used intensively in that good and reduces the real return to the other factor.
This question belongs to: Economy GK Economy Set 1
Question #639
Which of the following is a feature of the 'Efficient Market Hypothesis' in its semi-strong form?
A. Prices reflect all information including private information
B. Prices reflect only past price information
C. Prices reflect all publicly available information
D. Prices do not reflect any information
Discuss
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Correct Answer: Option C

Explanation:
The semi-strong form of the efficient market hypothesis asserts that stock prices adjust rapidly to all publicly available information, so that neither technical nor fundamental analysis can yield abnormal returns.
This question belongs to: Economy GK Economy Set 1
Question #640
The concept of 'Debt Overhang' refers to:
A. A situation of low public debt
B. Only short-term liquidity problems
C. Only household debt
D. A situation where existing debt is so large that it discourages new investment
Discuss
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Correct Answer: Option D

Explanation:
Debt overhang occurs when a high level of existing debt reduces the incentive for new investment because a large part of the returns would accrue to existing creditors rather than to the investor.
This question belongs to: Economy GK Economy Set 1
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