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 37 of 111
Question #721
Which of the following is a characteristic of the 'Endogenous Money' view?
A. The money supply is determined primarily by the demand for bank credit and accommodates itself to that demand
B. The money supply is strictly controlled by the central bank through the monetary base
C. Only the monetary base matters
D. Banks play no role in money creation
Discuss
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Correct Answer: Option A

Explanation:
The endogenous-money approach argues that the quantity of money is determined by the demand for loans and the willingness of banks to extend credit, with the central bank mainly setting the price of reserves rather than the quantity of base money.
This question belongs to: Economy GK Economy Set 1
Question #722
In the context of growth empirics, 'Conditional Convergence' means that:
A. All countries converge to the same income level regardless of fundamentals
B. Only absolute convergence is observed
C. There is no convergence of any kind
D. Countries converge to their own steady-state levels of income, which may differ because of differences in saving rates, population growth and technology
Discuss
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Correct Answer: Option D

Explanation:
Conditional convergence is the prediction that countries converge to their own steady states determined by their particular saving rates, population growth rates and levels of technology; poorer countries grow faster only after controlling for these differences.
This question belongs to: Economy GK Economy Set 1
Question #723
Which of the following is a feature of the 'Portfolio Balance' approach to exchange-rate determination?
A. Interest rates are irrelevant
B. Only purchasing-power parity matters
C. Only goods-market equilibrium determines the exchange rate
D. Exchange rates are determined by the relative supplies of and demands for domestic and foreign assets
Discuss
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Correct Answer: Option D

Explanation:
The portfolio-balance approach treats the exchange rate as the relative price of domestic and foreign assets and emphasises imperfect substitutability among assets denominated in different currencies.
This question belongs to: Economy GK Economy Set 1
Question #724
The concept of 'Fiscal Dominance' refers to:
A. A situation in which fiscal policy constraints force the monetary authority to monetise deficits
B. Complete independence of the central bank
C. Only the dominance of monetary policy
D. The absence of any deficit
Discuss
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Correct Answer: Option A

Explanation:
Fiscal dominance occurs when the fiscal authority’s need to finance deficits constrains or dictates the behaviour of the monetary authority, often leading to inflationary monetisation.
This question belongs to: Economy GK Economy Set 1
Question #725
Which of the following is a characteristic of the 'Quality Ladder' models of endogenous growth?
A. There is no role for research and development
B. Innovation takes the form of improvements in the quality of existing products
C. Growth is purely exogenous
D. Innovation only expands the variety of products
Discuss
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Correct Answer: Option B

Explanation:
Quality-ladder (or vertical-innovation) models of endogenous growth, associated with Aghion-Howitt and Grossman-Helpman, treat innovation as successive improvements in the quality of intermediate or final goods.
This question belongs to: Economy GK Economy Set 1
Question #726
In the context of international finance, the 'Trilemma' or 'Impossible Trinity' implies that a country must choose:
A. All three simultaneously
B. None of the three
C. Two out of the three: fixed exchange rate, free capital mobility and monetary-policy independence
D. Only one of the three
Discuss
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Correct Answer: Option C

Explanation:
The trilemma states that only two of the three policy goals—exchange-rate stability, capital-market openness and monetary independence—can be achieved at the same time.
This question belongs to: Economy GK Economy Set 1
Question #727
Which of the following is a feature of the 'Buffer-Stock' theory of money demand?
A. Only the transactions motive matters and uncertainty is irrelevant
B. Money is held only for speculative purposes
C. Individuals hold money as a buffer against unforeseen fluctuations in income and expenditure
D. Money demand is independent of uncertainty
Discuss
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Correct Answer: Option C

Explanation:
Buffer-stock models emphasise that money balances serve as a short-run shock absorber, allowing agents to smooth consumption in the face of transitory income or expenditure shocks.
This question belongs to: Economy GK Economy Set 1
Question #728
The concept of 'Creative Accounting' in public finance refers to:
A. Only the calculation of primary deficit
B. Transparent and accurate fiscal reporting
C. Only the use of accrual accounting
D. Accounting practices that improve the reported fiscal position without improving the underlying fiscal reality
Discuss
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Correct Answer: Option D

Explanation:
Creative accounting (or fiscal gimmickry) involves the use of accounting devices that temporarily improve reported deficit or debt figures without a corresponding improvement in the true intertemporal fiscal position.
This question belongs to: Economy GK Economy Set 1
Question #729
Which of the following is a characteristic of the 'Learning-by-Doing' models of growth?
A. Experience has no effect on productivity
B. Only formal R&D matters
C. Productivity is completely exogenous
D. Productivity rises as a by-product of cumulative production experience
Discuss
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Correct Answer: Option D

Explanation:
Learning-by-doing models, originating with Arrow, treat increases in productivity as an automatic by-product of the accumulation of production experience (cumulative output).
This question belongs to: Economy GK Economy Set 1
Question #730
In the context of exchange-rate regimes, a 'Currency Board' arrangement is characterised by:
A. A freely floating exchange rate
B. Complete monetary discretion without any reserve backing
C. Only a crawling peg
D. A fixed exchange rate backed by a full foreign-exchange reserve cover of the monetary base and limited monetary discretion
Discuss
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Correct Answer: Option D

Explanation:
A currency board maintains a fixed exchange rate to an anchor currency, backs the entire monetary base with foreign reserves, and severely restricts the scope for discretionary monetary policy.
This question belongs to: Economy GK Economy Set 1
Question #731
Which of the following is a feature of the 'Debt-Deflation' theory associated with Irving Fisher?
A. Deflation always reduces the real burden of debt
B. Only inflation causes debt problems
C. Debt is irrelevant for the business cycle
D. Falling prices raise the real value of debt, leading to further declines in spending and prices
Discuss
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Correct Answer: Option D

Explanation:
Fisher’s debt-deflation theory argues that an initial decline in prices increases the real burden of nominal debt, forcing distressed selling and further price declines in a downward spiral.
This question belongs to: Economy GK Economy Set 1
Question #732
The concept of 'Horizontal Equity' in taxation requires that:
A. Taxes should be independent of ability to pay
B. Individuals with higher ability to pay should pay proportionally more
C. Only vertical equity matters
D. Individuals with the same ability to pay should pay the same tax
Discuss
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Correct Answer: Option D

Explanation:
Horizontal equity is the principle that taxpayers with equal capacity to pay (usually measured by income or wealth) should bear equal tax burdens.
This question belongs to: Economy GK Economy Set 1
Question #733
Which of the following is a characteristic of the 'Vertical Equity' principle in taxation?
A. Taxes should be independent of income
B. Only equal absolute burdens are fair
C. All taxpayers should pay the same absolute amount
D. Taxpayers with greater ability to pay should bear a larger tax burden
Discuss
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Correct Answer: Option D

Explanation:
Vertical equity requires that taxpayers with greater ability to pay contribute more in taxes, which is the ethical foundation for progressive taxation.
This question belongs to: Economy GK Economy Set 1
Question #734
In the context of monetary economics, the 'Liquidity Effect' of an increase in the money supply refers to:
A. The short-run decline in nominal interest rates caused by an increase in liquidity
B. The long-run rise in interest rates
C. Only the rise in prices
D. Only the rise in output
Discuss
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Correct Answer: Option A

Explanation:
The liquidity effect is the tendency for an exogenous increase in the money supply to lower nominal interest rates in the short run as the supply of loanable funds increases.
This question belongs to: Economy GK Economy Set 1
Question #735
Which of the following is a feature of the 'Fisher Effect'?
A. The real interest rate equals the nominal rate plus inflation
B. The nominal interest rate equals the real interest rate plus expected inflation
C. Nominal and real rates are always equal
D. Inflation has no effect on nominal rates
Discuss
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Correct Answer: Option B

Explanation:
The Fisher equation states that the nominal interest rate is approximately equal to the real interest rate plus the expected rate of inflation.
This question belongs to: Economy GK Economy Set 1
Question #736
The concept of 'Pass-Through' of exchange-rate changes refers to:
A. The complete absence of price adjustment
B. The extent to which changes in the nominal exchange rate are reflected in domestic prices of traded goods
C. Only the effect on interest rates
D. Only the effect on output
Discuss
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Correct Answer: Option B

Explanation:
Exchange-rate pass-through measures the degree to which a change in the nominal exchange rate is transmitted to import prices and ultimately to consumer prices in the domestic economy.
This question belongs to: Economy GK Economy Set 1
Question #737
Which of the following is a characteristic of the 'New Institutional Economics' approach?
A. It ignores institutions completely
B. It focuses only on technological change
C. It assumes zero transaction costs always
D. It emphasises the role of institutions, property rights and transaction costs in economic performance
Discuss
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Correct Answer: Option D

Explanation:
New Institutional Economics, associated with Coase, North and Williamson, analyses how institutions, property-rights structures and transaction costs shape economic behaviour and long-run performance.
This question belongs to: Economy GK Economy Set 1
Question #738
In the context of development, the 'Poverty Trap' refers to:
A. A situation that always disappears automatically
B. Only the absence of foreign aid
C. A self-reinforcing mechanism that causes poverty to persist
D. A temporary decline in income
Discuss
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Correct Answer: Option C

Explanation:
A poverty trap is a self-perpetuating condition in which an economy or household remains poor because the existing level of poverty itself prevents the accumulation of capital or adoption of better technologies.
This question belongs to: Economy GK Economy Set 1
Question #739
Which of the following is a feature of the 'Modern Monetary Theory' (MMT) perspective?
A. Monetary financing is always inflationary regardless of capacity utilisation
B. Only balanced budgets are sustainable
C. Governments are always financially constrained like households
D. A sovereign currency issuer faces no purely financial constraint on its spending and the main limit is inflation
Discuss
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Correct Answer: Option D

Explanation:
Modern Monetary Theory argues that a government that issues its own fiat currency cannot be forced into involuntary default and that the relevant constraint on spending is the availability of real resources and the risk of inflation.
This question belongs to: Economy GK Economy Set 1
Question #740
The concept of 'Financial Repression' refers to:
A. Complete liberalisation of interest rates
B. Policies that keep interest rates artificially low and channel credit to preferred borrowers, often the government
C. Only high real interest rates
D. Only the absence of any credit controls
Discuss
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Correct Answer: Option B

Explanation:
Financial repression encompasses a set of policies—interest-rate ceilings, high reserve requirements, directed credit and capital controls—that hold real interest rates low and facilitate cheap financing of the government.
This question belongs to: Economy GK Economy Set 1
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