Basic Economy Concepts MCQs with Answers

Question #621

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Which of the following is used to measure the degree of concentration in an industry?

A. Lorenz curve only

B. Human Development Index

C. Gini coefficient only

D. Herfindahl-Hirschman Index

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Correct Answer: Option D

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

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In the context of international economics, the 'Balassa-Samuelson Effect' explains:

A. Why tariffs are always beneficial

B. Why real exchange rates tend to be higher in richer countries

C. Why poorer countries always have trade surpluses

D. Why capital flows only from rich to poor countries

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Correct Answer: Option B

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

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Which of the following is a feature of the 'Real Business Cycle' theory?

A. Business cycles are primarily caused by monetary shocks

B. Sticky prices are the main source of fluctuations

C. Fiscal policy is the primary driver of cycles

D. Business cycles are primarily driven by real shocks, especially technology shocks

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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

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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. Depositors monitor banks more intensively

D. Insurance always reduces risk-taking

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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

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Which of the following is a characteristic of the 'New Keynesian' Phillips Curve?

A. It denies any role for demand factors

B. It assumes continuous market clearing

C. It is based on adaptive expectations only

D. It incorporates forward-looking expectations and sticky prices

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Correct Answer: Option D

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

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In the context of development economics, the 'Lewis Model' focuses on:

A. Only the role of foreign aid

B. The role of surplus labour in agriculture and its transfer to industry

C. Only technological progress in agriculture

D. The importance of balanced growth across all sectors equally

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Correct Answer: Option B

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

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Which of the following is a feature of the 'Impossible Trinity' in open economy macroeconomics?

A. A country can achieve only two of the three: fixed exchange rate, free capital flows and monetary independence

B. Only fiscal policy is constrained

C. A country can simultaneously maintain a fixed exchange rate, free capital mobility and independent monetary policy

D. All three objectives are always compatible

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Correct Answer: Option A

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

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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

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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

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Which of the following is a characteristic of the 'Endogenous Growth Theory'?

A. Diminishing returns to capital always limit growth

B. Technological progress is exogenous

C. Only population growth determines per capita income growth

D. Long-run growth is determined by factors within the model such as human capital and R&D

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Correct Answer: Option D

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

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In the context of financial markets, 'Adverse Selection' before a loan is made refers to:

A. Only the problem of monitoring after the loan

B. Lenders always having perfect information

C. Borrowers with higher risk being more likely to seek loans

D. Borrowers becoming riskier after receiving loans

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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

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Which of the following is a feature of the 'Taylor Rule' for monetary policy?

A. Interest rate responds only to money supply growth

B. Nominal interest rate responds to inflation gap and output gap

C. Fiscal deficit is the primary target

D. Exchange rate is the only target

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Correct Answer: Option B

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

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The concept of 'Creative Destruction' is associated with the work of:

A. Adam Smith

B. Joseph Schumpeter

C. John Maynard Keynes

D. David Ricardo

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Correct Answer: Option B

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

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Which of the following is a characteristic of the 'Liquidity Coverage Ratio' under Basel III?

A. It requires banks to hold sufficient high-quality liquid assets to cover net cash outflows over 30 days

B. It measures only long-term funding stability

C. It applies only to non-bank financial institutions

D. It is related only to capital adequacy

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Correct Answer: Option A

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

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In the context of public economics, the 'Samuelson Condition' for optimal provision of pure public goods states that:

A. The sum of marginal rates of substitution equals the marginal rate of transformation

B. Only the median voter determines the quantity

C. Private provision is always optimal

D. Each individual's marginal rate of substitution equals the marginal cost

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Correct Answer: Option A

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

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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. Only fundamental analysis is irrelevant

C. Stock prices are predictable based on past patterns

D. Technical analysis can systematically generate excess returns

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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

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The concept of 'Fiscal Space' refers to:

A. The room available for a government to increase spending or reduce taxes without endangering debt sustainability

B. Only the revenue deficit

C. Only the primary surplus

D. The physical space occupied by government offices

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Correct Answer: Option A

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

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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

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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

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In the context of international trade, the 'Stolper-Samuelson Theorem' predicts that:

A. Only labour always gains from trade

B. An increase in the relative price of a good raises the real return to the factor used intensively in its production

C. Factor prices are independent of goods prices

D. Trade benefits all factors of production equally

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Correct Answer: Option B

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

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Which of the following is a feature of the 'Efficient Market Hypothesis' in its semi-strong form?

A. Prices do not reflect any information

B. Prices reflect all publicly available information

C. Prices reflect all information including private information

D. Prices reflect only past price information

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Correct Answer: Option B

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

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The concept of 'Debt Overhang' refers to:

A. A situation where existing debt is so large that it discourages new investment

B. Only short-term liquidity problems

C. Only household debt

D. A situation of low public debt

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Correct Answer: Option A

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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