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 34 of 111
Question #661
Which of the following is a characteristic of the 'Calibration' approach in quantitative macroeconomics?
A. Parameters are chosen so that the model matches selected long-run averages or moments of the data
B. Parameters are estimated only by maximum likelihood
C. Only theoretical consistency matters
D. No attention is paid to empirical moments
Discuss
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Correct Answer: Option A

Explanation:
In the calibration methodology associated with real-business-cycle and dynamic stochastic general-equilibrium models, key parameters are set so that the model reproduces selected long-run averages or other empirical moments.
This question belongs to: Economy GK Economy Set 1
Question #662
In the context of labour economics, the 'Matching Function' in search theory relates:
A. The number of job matches to the stocks of unemployed workers and vacancies
B. Only wages to productivity
C. Only labour demand to the real wage
D. Only labour supply to the real wage
Discuss
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Correct Answer: Option A

Explanation:
The matching function in search-and-matching models describes how the flow of new hires depends on the number of unemployed workers and the number of job vacancies.
This question belongs to: Economy GK Economy Set 1
Question #663
Which of the following is a feature of the 'Baumol-Tobin Model' of money demand?
A. Money demand is independent of the interest rate
B. Money demand is proportional only to wealth
C. Money demand arises from the transactions motive and depends on income and the interest rate
D. Only the speculative motive matters
Discuss
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Correct Answer: Option C

Explanation:
The Baumol-Tobin inventory-theoretic model derives transactions demand for money as a function of income (or expenditure), the interest rate and the fixed cost of transferring funds between money and interest-bearing assets.
This question belongs to: Economy GK Economy Set 1
Question #664
The concept of 'Sudden Stop' in international finance refers to:
A. Only a stop in domestic investment
B. Only a stop in trade flows
C. A gradual reduction in capital flows
D. An abrupt reversal of capital inflows into a country
Discuss
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Correct Answer: Option D

Explanation:
A sudden stop is a large and abrupt reversal of capital inflows, often associated with currency crises, output collapses and balance-sheet problems in emerging markets.
This question belongs to: Economy GK Economy Set 1
Question #665
Which of the following is a characteristic of the 'Overlapping Generations' model?
A. Agents live for only one period
B. Only static optimisation is considered
C. Agents live for multiple periods and different generations coexist
D. There is a single infinitely-lived representative agent
Discuss
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Correct Answer: Option C

Explanation:
In overlapping-generations models, individuals live for a finite number of periods and at any date several generations coexist, allowing analysis of intergenerational issues and dynamic inefficiency.
This question belongs to: Economy GK Economy Set 1
Question #666
In the context of monetary economics, the 'Friedman Rule' recommends that:
A. Money growth should equal the growth of real output plus inflation
B. The nominal interest rate should be set equal to the real interest rate plus inflation
C. Only fiscal policy should be used
D. The nominal interest rate should be set to zero
Discuss
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Correct Answer: Option D

Explanation:
The Friedman rule states that the optimal monetary policy sets the nominal interest rate to zero so that the opportunity cost of holding real money balances equals the social cost of producing them (approximately zero).
This question belongs to: Economy GK Economy Set 1
Question #667
Which of the following is a feature of the 'Dornbusch Overshooting' model?
A. Exchange rates always adjust gradually
B. Prices are fully flexible and exchange rates never overshoot
C. Only real shocks matter
D. Exchange rates may overshoot their long-run values in response to monetary shocks because of sticky prices
Discuss
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Correct Answer: Option D

Explanation:
In Dornbusch’s overshooting model, sticky goods prices cause the exchange rate to jump more than proportionally to a monetary shock in the short run so that uncovered interest parity can hold.
This question belongs to: Economy GK Economy Set 1
Question #668
The concept of 'Gresham's Law' states that:
A. Bad money drives out good money when both are legal tender at fixed rates
B. Paper money always drives out metallic money
C. Good money drives out bad money
D. Only metallic money circulates
Discuss
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Correct Answer: Option A

Explanation:
Gresham’s Law observes that when two forms of money have the same face value but different intrinsic values, the money with lower intrinsic value (bad money) tends to remain in circulation while the higher-value money (good money) is hoarded or exported.
This question belongs to: Economy GK Economy Set 1
Question #669
Which of the following is a characteristic of the 'Search Theory' of unemployment?
A. Unemployment arises from the time-consuming process of matching workers and jobs
B. Only aggregate demand determines unemployment
C. Markets always clear instantaneously
D. Unemployment is only classical and caused by high real wages
Discuss
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Correct Answer: Option A

Explanation:
Search-and-matching theory explains frictional and structural unemployment as the result of imperfect information and the costly process of matching heterogeneous workers with heterogeneous jobs.
This question belongs to: Economy GK Economy Set 1
Question #670
In the context of public finance, the 'Median Voter Theorem' predicts that:
A. Voting never produces consistent outcomes
B. The outcome always reflects the preference of the richest voter
C. Under certain conditions, the outcome of majority voting will reflect the preference of the median voter
D. Only unanimous decisions are possible
Discuss
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Correct Answer: Option C

Explanation:
The median voter theorem states that if preferences are single-peaked, majority rule yields the outcome most preferred by the median voter.
This question belongs to: Economy GK Economy Set 1
Question #671
Which of the following is a feature of the 'Modigliani-Miller Theorem'?
A. In perfect capital markets, the value of a firm is independent of its capital structure
B. Capital structure is the only determinant of firm value
C. Dividend policy always affects firm value
D. The value of a firm always rises with higher leverage
Discuss
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Correct Answer: Option A

Explanation:
The Modigliani-Miller theorem asserts that, under perfect capital markets (no taxes, no bankruptcy costs, no asymmetric information), the total value of a firm is independent of whether it is financed by debt or equity.
This question belongs to: Economy GK Economy Set 1
Question #672
The concept of 'Crowding Out' can occur through which of the following channels?
A. Only through increased private consumption
B. Only through lower interest rates
C. Only through increased net exports
D. Higher interest rates reducing private investment and appreciation of the currency reducing net exports
Discuss
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Correct Answer: Option D

Explanation:
Government borrowing can raise interest rates (financial crowding out) and, in an open economy, appreciate the currency, thereby reducing net exports (international crowding out).
This question belongs to: Economy GK Economy Set 1
Question #673
Which of the following is a characteristic of the 'Rational Expectations' hypothesis?
A. Agents form expectations using all available information and do not make systematic errors
B. Agents ignore all available information
C. Agents use only past information and make systematic errors
D. Expectations are always adaptive
Discuss
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Correct Answer: Option A

Explanation:
Rational expectations imply that agents optimally use all available information, so that forecast errors are uncorrelated with information known at the time the expectation is formed.
This question belongs to: Economy GK Economy Set 1
Question #674
In the context of development economics, the 'Big Push' theory emphasises:
A. Complete reliance on market forces without coordination
B. The need for a coordinated large-scale investment to overcome complementarities and indivisibilities
C. Gradual and small investments in all sectors
D. Only agricultural investment
Discuss
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Correct Answer: Option B

Explanation:
The Big Push argument, associated with Rosenstein-Rodan, stresses that simultaneous large investments in many sectors may be necessary to make industrialisation profitable when demand complementarities and infrastructure indivisibilities exist.
This question belongs to: Economy GK Economy Set 1
Question #675
Which of the following is a feature of the 'Interest Rate Parity' conditions?
A. They determine only domestic interest rates
B. They apply only to real interest rates
C. They are independent of exchange rates
D. They link interest rates and expected or forward exchange-rate changes across countries
Discuss
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Correct Answer: Option D

Explanation:
Both covered and uncovered interest parity conditions relate the interest differential between two countries to the forward premium or the expected change in the exchange rate.
This question belongs to: Economy GK Economy Set 1
Question #676
The concept of 'Dynamic Inconsistency' is most relevant for:
A. Only trade policy
B. Only labour market policy
C. The design of monetary policy rules versus discretion
D. Only fiscal policy
Discuss
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Correct Answer: Option C

Explanation:
Dynamic (or time) inconsistency problems are central to the debate on rules versus discretion in monetary policy, because policymakers may have an incentive to deviate from previously announced optimal policies.
This question belongs to: Economy GK Economy Set 1
Question #677
Which of the following is a characteristic of the 'Solow Residual'?
A. It measures the contribution of total factor productivity growth to output growth
B. It measures only the contribution of capital
C. It is always equal to zero
D. It measures only the contribution of labour
Discuss
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Correct Answer: Option A

Explanation:
The Solow residual is the part of output growth that remains after accounting for the contributions of capital and labour inputs; it is commonly interpreted as a measure of total factor productivity growth.
This question belongs to: Economy GK Economy Set 1
Question #678
In the context of financial crises, the 'Third-Generation' models emphasise:
A. Balance-sheet effects, currency mismatches and financial fragility
B. Only fiscal deficits
C. Only current-account deficits
D. Only speculative attacks on overvalued fixed exchange rates without financial factors
Discuss
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Correct Answer: Option A

Explanation:
Third-generation crisis models highlight the role of financial-sector fragility, foreign-currency debt, and balance-sheet effects in amplifying currency and banking crises.
This question belongs to: Economy GK Economy Set 1
Question #679
Which of the following is a feature of the 'IS-LM-BP' or Mundell-Fleming model?
A. It assumes continuous full employment
B. It assumes a closed economy
C. It ignores the external sector completely
D. It analyses the effectiveness of monetary and fiscal policy under different exchange-rate regimes and degrees of capital mobility
Discuss
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Correct Answer: Option D

Explanation:
The Mundell-Fleming model extends the IS-LM framework to an open economy and examines how the effectiveness of monetary and fiscal policy depends on the exchange-rate regime and the degree of capital mobility.
This question belongs to: Economy GK Economy Set 1
Question #680
The concept of 'Precautionary Saving' arises because:
A. Individuals save only for retirement
B. Individuals save more when future income is uncertain
C. Only permanent income matters
D. Saving is independent of uncertainty
Discuss
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Correct Answer: Option B

Explanation:
Precautionary saving is additional saving undertaken by risk-averse agents to buffer against future income or expenditure uncertainty.
This question belongs to: Economy GK Economy Set 1
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