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 35 of 111
Question #681
Which of the following is a characteristic of the 'New Economic Geography' associated with Paul Krugman?
A. It focuses only on comparative advantage
B. It ignores agglomeration forces
C. It assumes constant returns and no transport costs
D. It explains the spatial concentration of economic activity through increasing returns and transport costs
Discuss
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Correct Answer: Option D

Explanation:
New Economic Geography models show how increasing returns, transport costs and factor mobility can lead to the endogenous agglomeration of economic activity in particular locations.
This question belongs to: Economy GK Economy Set 1
Question #682
In the context of monetary policy transmission, the 'Credit Channel' emphasises:
A. Only wealth effects on consumption
B. The effects of monetary policy on the supply of bank loans and external finance premia
C. Only the interest-rate effects on investment
D. Only exchange-rate effects
Discuss
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Correct Answer: Option B

Explanation:
The credit channel (or financial-accelerator mechanism) stresses that monetary policy affects real activity not only through interest rates but also through changes in the availability and cost of external finance for borrowers.
This question belongs to: Economy GK Economy Set 1
Question #683
Which of the following is a feature of the 'Purchasing Power Parity' theory in its absolute form?
A. The exchange rate between two currencies equals the ratio of the countries’ price levels
B. Exchange rates are determined only by trade balances
C. Only relative changes in prices matter
D. The exchange rate equals the interest differential
Discuss
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Correct Answer: Option A

Explanation:
Absolute purchasing power parity states that the nominal exchange rate should equal the ratio of the domestic to the foreign price level so that a basket of goods costs the same in both countries.
This question belongs to: Economy GK Economy Set 1
Question #684
The concept of 'Financial Accelerator' refers to:
A. Only the exchange-rate channel
B. The automatic stabilisers in the fiscal system
C. Only the direct interest-rate channel
D. The amplification of shocks through endogenous changes in credit conditions and asset prices
Discuss
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Correct Answer: Option D

Explanation:
The financial accelerator describes how deteriorations in borrowers’ balance sheets raise external finance premia, further reducing spending and amplifying the effects of the original shock.
This question belongs to: Economy GK Economy Set 1
Question #685
Which of the following is a characteristic of the 'Classical Dichotomy'?
A. Money affects real output in the long run
B. Only fiscal policy is neutral
C. Real and nominal variables are always interdependent
D. Real and nominal variables are determined separately and money is neutral
Discuss
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Correct Answer: Option D

Explanation:
The classical dichotomy is the proposition that real variables (output, employment, relative prices) are determined independently of nominal variables and that money is neutral in the long run.
This question belongs to: Economy GK Economy Set 1
Question #686
In the context of trade policy, the 'Optimal Tariff' argument suggests that:
A. Tariffs are always welfare-reducing for the imposing country
B. A large country may improve its terms of trade by imposing a tariff, provided foreign retaliation is absent
C. Free trade is never optimal
D. Only small countries can benefit from tariffs
Discuss
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Correct Answer: Option B

Explanation:
A large country can improve its terms of trade by restricting imports, thereby extracting some monopoly or monopsony rent; the optimal tariff balances this gain against the efficiency loss.
This question belongs to: Economy GK Economy Set 1
Question #687
Which of the following is a feature of the 'Real Exchange Rate'?
A. It is independent of price levels
B. It is the nominal exchange rate adjusted for relative price levels between countries
C. It is simply the nominal exchange rate
D. It is determined only by interest rates
Discuss
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Correct Answer: Option B

Explanation:
The real exchange rate is defined as the nominal exchange rate multiplied by the ratio of foreign to domestic price levels (or the relative price of foreign to domestic goods).
This question belongs to: Economy GK Economy Set 1
Question #688
The concept of 'Adverse Selection' in insurance markets leads to:
A. Only moral hazard problems
B. Lower-risk individuals being more likely to purchase insurance
C. Higher-risk individuals being more likely to purchase insurance
D. No effect on the pool of insured
Discuss
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Correct Answer: Option C

Explanation:
Because high-risk individuals have a greater incentive to buy insurance at any given premium, the insured pool tends to be riskier than the population average, driving up premiums and potentially causing market unraveling.
This question belongs to: Economy GK Economy Set 1
Question #689
Which of the following is a characteristic of the 'New Classical' policy ineffectiveness proposition?
A. Monetary policy is always effective
B. Anticipated monetary policy systematically affects real output
C. Fiscal policy is always effective
D. Only unanticipated monetary policy can affect real output
Discuss
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Correct Answer: Option D

Explanation:
Under rational expectations and continuous market clearing, only unanticipated policy shocks can affect real variables; anticipated policy is neutral.
This question belongs to: Economy GK Economy Set 1
Question #690
In the context of growth theory, the 'AK Model' is an example of:
A. A model with exogenous technological progress only
B. A neoclassical model with diminishing returns
C. An endogenous growth model without diminishing returns to capital
D. A model without capital accumulation
Discuss
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Correct Answer: Option C

Explanation:
The AK model assumes a production function linear in capital (Y = AK), thereby eliminating diminishing returns and generating endogenous long-run growth driven by capital accumulation.
This question belongs to: Economy GK Economy Set 1
Question #691
Which of the following is a feature of the 'J-Curve' effect?
A. Appreciation always improves the trade balance
B. After a depreciation, the trade balance first deteriorates before improving
C. Depreciation has no effect on the trade balance
D. After a depreciation, the trade balance improves immediately
Discuss
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Correct Answer: Option B

Explanation:
The J-curve describes the short-run deterioration of the trade balance following a depreciation (because quantities adjust slowly while prices change immediately), followed by a longer-run improvement.
This question belongs to: Economy GK Economy Set 1
Question #692
The concept of 'Liquidity Trap' is most relevant when:
A. Nominal interest rates are close to zero and money demand is perfectly elastic
B. Interest rates are very high
C. The economy is at full employment with high inflation
D. Money demand is interest-inelastic
Discuss
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Correct Answer: Option A

Explanation:
In a liquidity trap, the nominal interest rate is at or near zero and further increases in the money supply are absorbed entirely as idle balances, rendering conventional monetary policy ineffective.
This question belongs to: Economy GK Economy Set 1
Question #693
Which of the following is a characteristic of the 'Balanced Growth' path in the Solow model?
A. There is no steady state
B. Only capital grows while output is constant
C. Per capita variables grow at different rates
D. Capital, output and effective labour all grow at the same rate
Discuss
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Correct Answer: Option D

Explanation:
On the balanced-growth path of the Solow model, aggregate capital, output and effective labour grow at the exogenous rate of technological progress plus population growth, so that capital and output per effective worker are constant.
This question belongs to: Economy GK Economy Set 1
Question #694
In the context of international macroeconomics, the 'Twin Deficits' hypothesis links:
A. Only the trade deficit and the capital-account surplus
B. Only the revenue deficit and the primary deficit
C. The fiscal deficit and the current-account deficit
D. Only domestic saving and investment
Discuss
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Correct Answer: Option C

Explanation:
The twin-deficits hypothesis posits a positive relationship between the government budget deficit and the current-account deficit, arising from the national accounting identity linking private saving, investment and the twin deficits.
This question belongs to: Economy GK Economy Set 1
Question #695
Which of the following is a feature of the 'Quantity Theory of Money' in its modern restatement by Friedman?
A. Interest rates do not affect money demand
B. Only the transactions motive matters
C. Velocity is highly unstable and unpredictable
D. Money demand is a stable function of a limited number of variables and the velocity is predictable
Discuss
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Correct Answer: Option D

Explanation:
Friedman’s restatement treats the demand for money as a stable function of permanent income, interest rates and other variables, implying that velocity, while not constant, is predictable.
This question belongs to: Economy GK Economy Set 1
Question #696
The concept of 'Human Capital' in growth theory refers to:
A. Only physical capital
B. The stock of skills, knowledge and health embodied in the labour force
C. Only financial assets
D. Only natural resources
Discuss
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Correct Answer: Option B

Explanation:
Human capital comprises the knowledge, skills, health and other attributes of individuals that affect their productivity and are accumulated through education, training and health expenditure.
This question belongs to: Economy GK Economy Set 1
Question #697
Which of the following is a characteristic of the 'Speculative Attack' models of currency crises?
A. Crises occur only gradually
B. Only current-account deficits cause crises
C. Reserves never matter
D. A fixed exchange rate may collapse suddenly when reserves reach a critical threshold
Discuss
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Correct Answer: Option D

Explanation:
First-generation speculative-attack models show that an inconsistent policy mix (e.g., persistent money-financed deficits under a fixed exchange rate) leads to a sudden attack that exhausts reserves and forces abandonment of the peg.
This question belongs to: Economy GK Economy Set 1
Question #698
In the context of public economics, 'Pigouvian Taxes' are designed to:
A. Raise revenue without affecting behaviour
B. Internalise negative externalities by setting the tax equal to marginal external cost
C. Only redistribute income
D. Subsidise positive externalities only
Discuss
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Correct Answer: Option B

Explanation:
A Pigouvian tax is levied on an activity that generates a negative externality and is set equal to the marginal external damage at the socially optimal quantity, thereby aligning private and social costs.
This question belongs to: Economy GK Economy Set 1
Question #699
Which of the following is a feature of the 'Life-Cycle' and 'Permanent-Income' hypotheses taken together?
A. Both ignore the role of wealth
B. Both claim that only current income matters
C. Both emphasise that consumption depends on long-run resource constraints rather than current income alone
D. Both assume infinite horizons only
Discuss
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Correct Answer: Option C

Explanation:
Both the life-cycle hypothesis and the permanent-income hypothesis assert that forward-looking consumers base consumption on expected lifetime or permanent resources rather than on current income alone.
This question belongs to: Economy GK Economy Set 1
Question #700
The concept of 'Natural Monopoly' arises when:
A. The market is perfectly competitive
B. A single firm can supply the entire market at lower cost than two or more firms because of large fixed costs and declining average costs
C. Many firms can produce at the same minimum cost
D. There are no economies of scale
Discuss
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Correct Answer: Option B

Explanation:
A natural monopoly exists when subadditive costs (typically due to large fixed costs and declining average costs) make it more efficient for a single firm to serve the entire market.
This question belongs to: Economy GK Economy Set 1
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