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 38 of 111
Question #741
Which of the following is a characteristic of the 'Global Savings Glut' hypothesis?
A. A surplus of global saving relative to investment contributed to low interest rates and capital flows into deficit countries
B. Only domestic factors determined interest rates
C. A global shortage of saving
D. Capital flows were irrelevant
Discuss
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Correct Answer: Option A

Explanation:
The global-savings-glut hypothesis, advanced by Ben Bernanke, attributes the low long-term interest rates and large current-account deficits of some countries in the 2000s partly to excess saving in emerging Asia and oil-exporting economies.
This question belongs to: Economy GK Economy Set 1
Question #742
In the context of monetary policy implementation, the 'Corridor System' refers to:
A. Only the range of fiscal targets
B. Only the range of inflation targets
C. The arrangement in which the policy rate is kept within a standing-facility corridor defined by the lending and deposit rates of the central bank
D. The absence of any standing facilities
Discuss
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Correct Answer: Option C

Explanation:
In a corridor system the central bank’s overnight lending rate and deposit rate form a corridor within which the interbank rate fluctuates; open-market operations keep the market rate near the centre of the corridor.
This question belongs to: Economy GK Economy Set 1
Question #743
Which of the following is a feature of the 'Fear of Floating' phenomenon identified by Calvo and Reinhart?
A. Floating is always preferred to pegging
B. Only advanced economies fear floating
C. Many emerging-market countries that claim to float actually intervene heavily to limit exchange-rate volatility
D. All countries freely float without intervention
Discuss
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Correct Answer: Option C

Explanation:
Fear of floating describes the empirical regularity that many countries officially classified as floaters in fact intervene frequently and allow only limited exchange-rate variability, often because of balance-sheet vulnerabilities.
This question belongs to: Economy GK Economy Set 1
Question #744
The concept of 'Original Sin' in the literature on emerging-market debt refers to:
A. The sin of high public spending
B. The historical difficulty of many countries in borrowing internationally in their own currency
C. The first occurrence of a debt default
D. Only domestic-currency debt problems
Discuss
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Correct Answer: Option B

Explanation:
Original sin denotes the inability of most emerging-market and developing countries to borrow abroad in their own currencies, forcing them to issue foreign-currency debt and creating currency mismatches.
This question belongs to: Economy GK Economy Set 1
Question #745
Which of the following is a characteristic of the 'Sudden Stop' literature?
A. Abrupt reversals of capital inflows can cause large real depreciations, output collapses and financial crises
B. Capital flows never reverse
C. Only trade shocks matter
D. Capital-flow reversals are always gradual and benign
Discuss
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Correct Answer: Option A

Explanation:
Sudden-stop models analyse the macroeconomic and financial consequences of large and abrupt reversals in capital inflows, which often trigger currency crises, credit contractions and sharp recessions.
This question belongs to: Economy GK Economy Set 1
Question #746
In the context of growth theory, 'Semi-Endogenous Growth' models feature:
A. Only exogenous technological progress
B. Long-run growth that is fully endogenous to policy
C. No role for research and development
D. Long-run growth that depends on population growth but not on policy parameters that affect the R&D share
Discuss
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Correct Answer: Option D

Explanation:
Semi-endogenous growth models retain diminishing returns to knowledge in the R&D sector, so that long-run growth is proportional to population growth and is not affected by the share of resources devoted to R&D.
This question belongs to: Economy GK Economy Set 1
Question #747
Which of the following is a feature of the 'Carry Trade' strategy in foreign-exchange markets?
A. Only hedging all exchange-rate risk
B. Borrowing in a high-interest-rate currency and investing in a low-interest-rate currency
C. Borrowing in a low-interest-rate currency and investing in a high-interest-rate currency
D. Only trading on the basis of purchasing-power parity
Discuss
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Correct Answer: Option C

Explanation:
A carry trade involves borrowing funds in a currency with a low interest rate and investing them in a currency with a higher interest rate, thereby earning the interest differential while remaining exposed to exchange-rate risk.
This question belongs to: Economy GK Economy Set 1
Question #748
The concept of 'Macroprudential Policy' aims at:
A. Only fiscal sustainability
B. Only price stability
C. Limiting systemic risk and ensuring the stability of the financial system as a whole
D. Only the soundness of individual institutions
Discuss
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Correct Answer: Option C

Explanation:
Macroprudential policy uses regulatory and supervisory tools to mitigate systemic risk and to increase the resilience of the financial system as a whole, complementing microprudential supervision of individual institutions.
This question belongs to: Economy GK Economy Set 1
Question #749
Which of the following is a characteristic of the 'Global Financial Cycle' hypothesis?
A. National financial conditions are completely independent of global factors
B. Capital flows are always driven by local pull factors
C. Co-movements in capital flows, asset prices and credit growth across countries are driven in large part by global factors, especially US monetary policy
D. Only domestic monetary policy matters
Discuss
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Correct Answer: Option C

Explanation:
The global-financial-cycle hypothesis emphasises that fluctuations in global risk appetite, often linked to US monetary policy and the strength of the dollar, generate correlated movements in capital flows, credit and asset prices across many countries.
This question belongs to: Economy GK Economy Set 1
Question #750
In the context of public debt management, 'Debt Sustainability Analysis' typically examines:
A. Whether the projected path of the debt-to-GDP ratio remains stable or declines under plausible assumptions about growth, interest rates and primary balances
B. Only the absolute level of debt
C. Only the currency composition
D. Only the maturity structure
Discuss
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Correct Answer: Option A

Explanation:
Debt sustainability analysis assesses whether a country’s debt trajectory is consistent with intertemporal solvency, usually by examining the evolution of the debt-to-GDP ratio under baseline and stress scenarios.
This question belongs to: Economy GK Economy Set 1
Question #751
Which of the following is a feature of the 'Modern Portfolio Theory' developed by Markowitz?
A. Risk is independent of portfolio composition
B. Only the return of individual assets matters
C. Diversification never reduces risk
D. Investors can reduce risk by diversifying across assets whose returns are not perfectly correlated
Discuss
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Correct Answer: Option D

Explanation:
Markowitz’s modern portfolio theory shows that the risk of a portfolio depends on the covariances among asset returns; diversification can therefore lower portfolio variance for a given expected return.
This question belongs to: Economy GK Economy Set 1
Question #752
The concept of 'Shadow Banking' refers to:
A. Only informal moneylenders in rural areas
B. Only central-bank operations
C. Only the activities of commercial banks
D. Credit intermediation involving entities and activities outside the regular banking system
Discuss
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Correct Answer: Option D

Explanation:
Shadow banking comprises non-bank financial intermediaries and activities that perform bank-like functions—maturity, credit and liquidity transformation—but operate with less regulation and without direct access to central-bank liquidity.
This question belongs to: Economy GK Economy Set 1
Question #753
Which of the following is a characteristic of the 'Risk-Sharing' benefits of international financial integration?
A. Integration always increases consumption volatility
B. Countries can smooth consumption in the face of idiosyncratic shocks by trading claims on future output
C. Only closed economies can smooth consumption
D. Risk-sharing is irrelevant for welfare
Discuss
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Correct Answer: Option B

Explanation:
International risk-sharing allows countries to diversify away country-specific income shocks by holding foreign assets, thereby reducing the volatility of national consumption relative to national output.
This question belongs to: Economy GK Economy Set 1
Question #754
In the context of monetary policy, the 'Divine Coincidence' in basic New Keynesian models refers to:
A. Only the stabilisation of the exchange rate
B. The conflict between inflation and output stabilisation
C. The fact that stabilising inflation also stabilises the output gap under certain assumptions
D. The impossibility of stabilising either inflation or output
Discuss
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Correct Answer: Option C

Explanation:
In the simplest New Keynesian model with only sticky prices and no other distortions, the optimal policy that fully stabilises inflation also closes the output gap—the so-called divine coincidence.
This question belongs to: Economy GK Economy Set 1
Question #755
Which of the following is a feature of the 'Financial Development' and growth literature?
A. Only the size of the banking system matters and quality is irrelevant
B. Better-functioning financial systems can promote growth by improving the allocation of capital and reducing financing constraints
C. Financial development always retards growth
D. Finance is completely neutral for real activity
Discuss
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Correct Answer: Option B

Explanation:
A large body of research finds that financial development—deeper, more efficient and more inclusive financial systems—tends to raise long-run growth by relaxing credit constraints and improving resource allocation.
This question belongs to: Economy GK Economy Set 1
Question #756
The concept of 'Capital Account Liberalisation' involves:
A. The imposition of new capital controls
B. Only the liberalisation of trade in goods
C. Only the liberalisation of the current account
D. The removal or relaxation of restrictions on cross-border capital flows
Discuss
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Correct Answer: Option D

Explanation:
Capital-account liberalisation refers to the reduction or elimination of legal barriers to the free movement of capital across national borders.
This question belongs to: Economy GK Economy Set 1
Question #757
Which of the following is a characteristic of the 'Global Value Chains' phenomenon?
A. Production processes are fragmented across countries, with intermediate goods crossing borders multiple times
B. Trade is limited to primary commodities
C. Only final goods are traded
D. All production occurs within a single country
Discuss
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Correct Answer: Option A

Explanation:
Global value chains describe the international fragmentation of production in which different stages of the production process are located in different countries and intermediate inputs are traded intensively.
This question belongs to: Economy GK Economy Set 1
Question #758
In the context of fiscal policy, 'Automatic Stabilisers' operate through:
A. Only exchange-rate adjustments
B. Only discretionary changes in spending
C. Only changes in the monetary base
D. Built-in features of the tax and transfer system that dampen fluctuations without discretionary action
Discuss
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Correct Answer: Option D

Explanation:
Automatic stabilisers are elements of the fiscal system—progressive taxes and unemployment benefits—that automatically reduce the amplitude of business-cycle fluctuations without the need for new legislation.
This question belongs to: Economy GK Economy Set 1
Question #759
Which of the following is a feature of the 'Modern Supply-Side Economics' emphasis?
A. Complete neglect of incentives
B. Tax incentives and structural reforms to raise potential output and improve incentives to work, save and invest
C. Only monetary expansion
D. Only demand management through fiscal expansion
Discuss
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Correct Answer: Option B

Explanation:
Supply-side approaches stress policies that expand the productive capacity of the economy by improving incentives, reducing distortions and raising the efficiency of resource allocation.
This question belongs to: Economy GK Economy Set 1
Question #760
The concept of 'Inclusive Growth' emphasises:
A. Only growth in the formal sector
B. Growth that is broad-based, creates productive employment and reduces poverty and inequality
C. Only growth in urban areas
D. Only the maximisation of GDP growth regardless of distribution
Discuss
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Correct Answer: Option B

Explanation:
Inclusive growth is economic growth that generates productive employment opportunities for a large part of the labour force and ensures that the benefits of growth are widely shared.
This question belongs to: Economy GK Economy Set 1
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