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.

2220
Total Questions

Practice Questions

Page 36 of 111
Question #701
Which of the following is a characteristic of the 'Mundell-Tobin Effect'?
A. Inflation has no effect on capital accumulation
B. Inflation always raises the real interest rate
C. Higher inflation can reduce the real interest rate and raise capital accumulation in some portfolio-balance models
D. Only monetary neutrality holds
Discuss
Get Complete Subject PDF for Economy GK

Correct Answer: Option C

Explanation:
The Mundell-Tobin effect suggests that an increase in expected inflation may lower the real return on money, inducing a portfolio shift toward real capital and thereby raising steady-state capital intensity.
This question belongs to: Economy GK Economy Set 1
Question #702
In the context of labour markets, the 'Efficiency Wage' theory suggests that:
A. Only competitive wages maximise effort
B. Unemployment is only voluntary
C. Wages are always equal to the marginal product of labour
D. Firms may pay wages above the market-clearing level to raise productivity or reduce turnover
Discuss
Get Complete Subject PDF for Economy GK

Correct Answer: Option D

Explanation:
Efficiency-wage theories argue that higher wages can increase worker effort, reduce shirking, lower turnover or improve the quality of applicants, so that firms may optimally set wages above the market-clearing level.
This question belongs to: Economy GK Economy Set 1
Question #703
Which of the following is a feature of the 'Relative Income Hypothesis' of consumption associated with Duesenberry?
A. Consumption is independent of social comparisons
B. Consumption depends on an individual’s income relative to the incomes of others and on past peak income
C. Consumption depends only on absolute current income
D. Only permanent income matters
Discuss
Get Complete Subject PDF for Economy GK

Correct Answer: Option B

Explanation:
Duesenberry’s relative-income hypothesis posits that consumption depends on the individual’s rank in the income distribution and on the highest income previously attained (ratchet effect).
This question belongs to: Economy GK Economy Set 1
Question #704
The concept of 'Currency Substitution' or 'Dollarisation' refers to:
A. The complete replacement of the domestic currency by a commodity standard
B. The use of a foreign currency in parallel with or instead of the domestic currency
C. Only official dollarisation by law
D. Only the use of gold coins
Discuss
Get Complete Subject PDF for Economy GK

Correct Answer: Option B

Explanation:
Currency substitution occurs when residents hold and use a foreign currency (often the US dollar) for transactions or as a store of value alongside or instead of the domestic currency.
This question belongs to: Economy GK Economy Set 1
Question #705
Which of the following is a characteristic of the 'First-Generation' models of currency crises?
A. Crises are purely self-fulfilling without any fundamental weakness
B. Crises never involve reserve losses
C. Only banking-sector problems matter
D. Crises result from inconsistent fundamentals, typically persistent fiscal deficits financed by money creation under a fixed exchange rate
Discuss
Get Complete Subject PDF for Economy GK

Correct Answer: Option D

Explanation:
First-generation models (Krugman, Flood-Garber) show that a steadily deteriorating fiscal position financed by credit expansion leads to a speculative attack that exhausts reserves and forces the abandonment of the fixed exchange rate.
This question belongs to: Economy GK Economy Set 1
Question #706
In the context of public goods, the 'Lindahl Equilibrium' is characterised by:
A. Private provision only
B. Zero provision of the public good
C. Personalised prices (Lindahl taxes) such that each individual demands the same quantity of the public good and the sum of prices equals marginal cost
D. A single uniform price for the public good
Discuss
Get Complete Subject PDF for Economy GK

Correct Answer: Option C

Explanation:
In a Lindahl equilibrium each individual faces a personalised price for the public good equal to his or her marginal benefit; the sum of these prices equals marginal cost and all individuals agree on the quantity.
This question belongs to: Economy GK Economy Set 1
Question #707
Which of the following is a feature of the 'Second-Generation' models of currency crises?
A. Crises can be self-fulfilling and depend on the government’s trade-off between the benefits of maintaining the peg and the costs of doing so
B. Only current-account deficits matter
C. Crises are caused only by inconsistent fiscal policy
D. Crises never involve multiple equilibria
Discuss
Get Complete Subject PDF for Economy GK

Correct Answer: Option A

Explanation:
Second-generation models emphasise that the decision to abandon a peg depends on policy trade-offs; expectations of devaluation can themselves raise the cost of defending the peg, generating self-fulfilling crises and multiple equilibria.
This question belongs to: Economy GK Economy Set 1
Question #708
The concept of 'Economic Value Added' (EVA) is defined as:
A. Only cash flow
B. Only revenue minus explicit costs
C. Only accounting profit
D. Net operating profit after tax minus the opportunity cost of capital employed
Discuss
Get Complete Subject PDF for Economy GK

Correct Answer: Option D

Explanation:
Economic Value Added is a measure of residual income calculated as net operating profit after tax minus a charge for the opportunity cost of the capital employed in the business.
This question belongs to: Economy GK Economy Set 1
Question #709
Which of the following is a characteristic of the 'Habit-Formation' models of consumption?
A. Current utility depends on current consumption relative to a habit stock formed by past consumption
B. Only permanent income matters
C. Habits are irrelevant for saving behaviour
D. Utility depends only on current consumption
Discuss
Get Complete Subject PDF for Economy GK

Correct Answer: Option A

Explanation:
Habit-formation models allow current utility to depend on the deviation of current consumption from a habit level determined by past consumption, generating persistence in consumption growth.
This question belongs to: Economy GK Economy Set 1
Question #710
In the context of monetary policy, 'Forward Guidance' refers to:
A. Only changes in the current policy rate
B. Only quantitative easing
C. Communication by the central bank about the likely future path of policy rates
D. Only reserve requirements
Discuss
Get Complete Subject PDF for Economy GK

Correct Answer: Option C

Explanation:
Forward guidance is a policy tool in which the central bank communicates its intentions regarding the future path of the policy rate or other policy instruments in order to influence longer-term rates and expectations.
This question belongs to: Economy GK Economy Set 1
Question #711
Which of the following is a feature of the 'Specific Factors Model' of international trade?
A. There are no specific factors
B. All factors are mobile between industries
C. Some factors are specific to particular industries while labour is mobile between industries
D. Only capital is mobile internationally
Discuss
Get Complete Subject PDF for Economy GK

Correct Answer: Option C

Explanation:
In the specific-factors (Ricardo-Viner) model, each industry has a factor that is specific to it (immobile) while at least one factor (usually labour) is mobile between industries, generating clear distributional predictions of trade.
This question belongs to: Economy GK Economy Set 1
Question #712
The concept of 'Fiscal Multiplier' measures:
A. Only the change in the exchange rate
B. Only the change in interest rates
C. The change in output resulting from a unit change in government spending or taxes
D. Only the change in the money supply
Discuss
Get Complete Subject PDF for Economy GK

Correct Answer: Option C

Explanation:
The fiscal multiplier is the ratio of the change in real GDP to an exogenous change in the fiscal instrument (government purchases or taxes).
This question belongs to: Economy GK Economy Set 1
Question #713
Which of the following is a characteristic of the 'Catch-up' or 'Convergence' hypothesis in growth theory?
A. Only absolute convergence always holds unconditionally
B. There is no tendency for convergence
C. Poorer economies tend to grow faster than richer ones, conditional on similar steady-state determinants
D. Richer economies always grow faster
Discuss
Get Complete Subject PDF for Economy GK

Correct Answer: Option C

Explanation:
Conditional convergence predicts that countries with lower initial income per worker grow faster once differences in saving rates, population growth and technology are controlled for.
This question belongs to: Economy GK Economy Set 1
Question #714
In the context of banking theory, the 'Diamond-Dybvig' model explains:
A. Only the role of banks in solving adverse selection
B. Why banks never face runs
C. Only the role of banks in monitoring firms
D. The existence of banks as providers of liquidity insurance and the possibility of bank runs
Discuss
Get Complete Subject PDF for Economy GK

Correct Answer: Option D

Explanation:
The Diamond-Dybvig model shows that banks transform illiquid assets into liquid liabilities, providing liquidity insurance to depositors, but that this arrangement is vulnerable to self-fulfilling runs.
This question belongs to: Economy GK Economy Set 1
Question #715
Which of the following is a feature of the 'Uncovered Interest Parity' puzzle or forward-premium puzzle?
A. Interest differentials are always zero
B. High-interest currencies always depreciate as predicted
C. Forward rates are perfect predictors of future spot rates
D. High-interest currencies tend to appreciate rather than depreciate as uncovered interest parity would predict
Discuss
Get Complete Subject PDF for Economy GK

Correct Answer: Option D

Explanation:
Empirical evidence often shows that currencies with high interest rates tend to appreciate, contrary to the prediction of uncovered interest parity that they should depreciate; this is known as the forward-premium puzzle.
This question belongs to: Economy GK Economy Set 1
Question #716
The concept of 'Network Externalities' implies that:
A. The value of a good or service increases with the number of other users
B. Externalities are always negative
C. The value of a good decreases with the number of users
D. Only production externalities matter
Discuss
Get Complete Subject PDF for Economy GK

Correct Answer: Option A

Explanation:
Network externalities exist when the utility that a user derives from a good or service depends positively on the number of other users of the same or compatible goods.
This question belongs to: Economy GK Economy Set 1
Question #717
Which of the following is a characteristic of the 'New Keynesian' models used for monetary policy analysis?
A. They combine intertemporal optimisation, rational expectations and nominal rigidities
B. They ignore expectations completely
C. They assume continuous market clearing and flexible prices
D. They rely only on adaptive expectations
Discuss
Get Complete Subject PDF for Economy GK

Correct Answer: Option A

Explanation:
Modern New Keynesian DSGE models used for policy analysis feature optimising households and firms, rational expectations, and some form of nominal rigidity (sticky prices or wages).
This question belongs to: Economy GK Economy Set 1
Question #718
In the context of international reserves, the 'Guidotti-Greenspan Rule' suggests that:
A. Countries should hold reserves at least equal to short-term external debt
B. Reserves should equal total external debt
C. Reserves are unnecessary under floating rates
D. Reserves should equal only three months of imports
Discuss
Get Complete Subject PDF for Economy GK

Correct Answer: Option A

Explanation:
The Guidotti-Greenspan rule is a rule of thumb recommending that emerging-market countries hold foreign-exchange reserves at least equal to their short-term external debt in order to reduce vulnerability to sudden stops.
This question belongs to: Economy GK Economy Set 1
Question #719
Which of the following is a feature of the 'Ratchet Effect' in consumption theory?
A. Consumption falls symmetrically with income
B. Consumption rises with income but is resistant to falling when income declines
C. Only permanent income matters
D. Consumption is independent of past income
Discuss
Get Complete Subject PDF for Economy GK

Correct Answer: Option B

Explanation:
The ratchet effect, associated with Duesenberry’s relative-income hypothesis, describes the asymmetry whereby consumption adjusts upward more readily than downward when income changes.
This question belongs to: Economy GK Economy Set 1
Question #720
The concept of 'Too Big to Fail' in banking refers to:
A. The absence of any systemic risk
B. Only the size of non-bank firms
C. The expectation that systemically important banks will receive government support in the event of distress
D. The legal requirement that all banks must be small
Discuss
Get Complete Subject PDF for Economy GK

Correct Answer: Option C

Explanation:
Too-big-to-fail refers to the market perception or policy practice that certain large and interconnected financial institutions will be rescued by the authorities because their failure would impose systemic costs.
This question belongs to: Economy GK Economy Set 1
Today's Top Topics
Economy Set 1 2220
Explore Subjects
Accountancy and Statistics 3179 English 15164 Computer 5279 Geography GK 6121 Reasoning 2064
Practice Mix
Which of the following is the primary reason for the high rainfall in the Eastern Ghats?
In Access, which of the following is a valid way to import data from an Excel spreadsheet?
Find the error: 'She has a beautiful hair.'
The shortcut to open the 'Find' dialog in MS Excel is:
The noun 'news' is singular, so we say: