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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Question #801
Which of the following is a characteristic of the 'Easterlin Paradox'?
A. Only relative income matters and absolute income is irrelevant even within countries
B. Income has no relation to happiness at any level
C. Happiness always rises proportionally with income both within and across countries
D. Within countries, higher income is associated with higher happiness, but over time average happiness does not rise with average income
Discuss
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Correct Answer: Option D

Explanation:
The Easterlin Paradox observes that, while richer individuals within a country tend to report higher happiness, average national happiness does not increase systematically as national income grows over the long run.
This question belongs to: Economy GK Economy Set 1
Question #802
In the context of behavioural economics, 'Present Bias' or 'Hyperbolic Discounting' refers to:
A. The tendency to give stronger weight to payoffs that are closer to the present when considering trade-offs between two future moments
B. Consistent exponential discounting of all future payoffs
C. Only the preference for delayed gratification
D. The complete absence of time preference
Discuss
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Correct Answer: Option A

Explanation:
Present bias describes the common tendency for people to place disproportionately greater weight on immediate rewards relative to delayed rewards, leading to time-inconsistent preferences and self-control problems.
This question belongs to: Economy GK Economy Set 1
Question #803
Which of the following is a feature of 'Nudge' theory in behavioural public policy?
A. The complete rejection of any behavioural interventions
B. The use of choice architecture to steer people toward better decisions without restricting their freedom of choice
C. Only financial incentives
D. The use of mandates and bans only
Discuss
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Correct Answer: Option B

Explanation:
A nudge is any aspect of choice architecture that alters people’s behaviour in a predictable way without forbidding any options or significantly changing economic incentives, as popularised by Thaler and Sunstein.
This question belongs to: Economy GK Economy Set 1
Question #804
The concept of 'Mental Accounting' in behavioural economics refers to:
A. The perfect fungibility of all money
B. The tendency of individuals to categorise and treat money differently depending on its source or intended use
C. Only the national accounts
D. Only the formal accounting systems of firms
Discuss
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Correct Answer: Option B

Explanation:
Mental accounting describes the cognitive processes whereby individuals separate their wealth into non-fungible mental accounts, leading to behaviour that violates the principle of fungibility assumed in standard theory.
This question belongs to: Economy GK Economy Set 1
Question #805
Which of the following is a characteristic of 'Prospect Theory' developed by Kahneman and Tversky?
A. People evaluate outcomes relative to a reference point and are loss-averse
B. People always maximise expected utility with stable preferences
C. Losses and gains are treated symmetrically
D. Only final wealth levels matter
Discuss
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Correct Answer: Option A

Explanation:
Prospect theory posits that individuals evaluate outcomes as gains or losses relative to a reference point, overweight small probabilities, and exhibit loss aversion (losses loom larger than gains).
This question belongs to: Economy GK Economy Set 1
Question #806
In the context of behavioural economics, 'Default Effects' demonstrate that:
A. The option that is pre-selected for individuals has a disproportionately large influence on choices
B. Defaults have no effect on behaviour
C. Only active choices matter
D. People always opt out of defaults
Discuss
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Correct Answer: Option A

Explanation:
Default effects show that the pre-set option exerts a strong influence on behaviour; many people stick with the default even when opting out is easy, making defaults a powerful policy tool.
This question belongs to: Economy GK Economy Set 1
Question #807
Which of the following is a feature of the 'Save More Tomorrow' programme designed by Thaler and Benartzi?
A. A mandatory increase in taxes
B. A programme that ignores behavioural biases
C. A commitment device that allows employees to pre-commit to allocating a portion of future salary increases to retirement savings
D. An immediate large increase in current contributions
Discuss
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Correct Answer: Option C

Explanation:
Save More Tomorrow is a behavioural intervention that invites employees to commit in advance to increasing their retirement contribution rates whenever they receive pay raises, thereby overcoming present bias and inertia.
This question belongs to: Economy GK Economy Set 1
Question #808
The concept of 'Bounded Rationality' associated with Herbert Simon implies that:
A. Individuals are limited in their cognitive capacity and information and therefore satisfice rather than optimise
B. Rationality is unbounded
C. Only perfect information is assumed
D. Individuals always optimise with unlimited computational power
Discuss
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Correct Answer: Option A

Explanation:
Bounded rationality recognises that human decision-makers face cognitive limitations and incomplete information, so they typically seek satisfactory rather than optimal solutions.
This question belongs to: Economy GK Economy Set 1
Question #809
Which of the following is a characteristic of 'Libertarian Paternalism'?
A. The design of policies that steer people toward better choices while preserving freedom of choice
B. The complete rejection of any paternalistic intervention
C. The use of mandates that eliminate choice
D. Only laissez-faire without any guidance
Discuss
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Correct Answer: Option A

Explanation:
Libertarian paternalism, the philosophical foundation of nudge theory, advocates interventions that improve welfare by guiding choices without restricting the set of available options.
This question belongs to: Economy GK Economy Set 1
Question #810
In the context of behavioural public finance, 'Tax Salience' refers to:
A. Only the progressivity of the tax
B. Only the statutory tax rate
C. Only the administrative cost of the tax
D. The degree to which a tax is noticed and taken into account by decision-makers
Discuss
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Correct Answer: Option D

Explanation:
Tax salience measures how visible or noticeable a tax is to the agents who pay it; less salient taxes tend to produce smaller behavioural responses than more salient ones of equal magnitude.
This question belongs to: Economy GK Economy Set 1
Question #811
Which of the following is a feature of the 'Dual-Self' or 'Planner-Doer' models of self-control?
A. Individuals are modelled as consisting of a far-sighted planner and a myopic doer who are in conflict
B. Individuals have a single consistent set of preferences
C. There is no internal conflict
D. Only the doer determines all behaviour
Discuss
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Correct Answer: Option A

Explanation:
Planner-doer models represent the individual as containing both a long-run planner who values future consequences and a short-run doer who is tempted by immediate rewards, generating self-control problems.
This question belongs to: Economy GK Economy Set 1
Question #812
The concept of 'Social Preferences' in behavioural economics includes:
A. Only preferences over private consumption
B. Preferences that take into account the payoffs or intentions of others, such as altruism, fairness and reciprocity
C. Only self-regarding preferences
D. Only preferences over absolute income
Discuss
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Correct Answer: Option B

Explanation:
Social preferences encompass motives such as altruism, inequity aversion, reciprocity and spite that make an individual’s utility depend on the payoffs or actions of other people.
This question belongs to: Economy GK Economy Set 1
Question #813
Which of the following is a characteristic of 'Reference-Dependent Preferences'?
A. Reference points are irrelevant
B. Only absolute levels of wealth matter
C. Outcomes are evaluated relative to a reference point, generating gains and losses
D. Only final wealth enters utility
Discuss
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Correct Answer: Option C

Explanation:
Reference-dependent preferences, central to prospect theory, evaluate outcomes as gains or losses relative to a reference point rather than in terms of final absolute wealth levels.
This question belongs to: Economy GK Economy Set 1
Question #814
In the context of behavioural economics, 'Anchoring' refers to:
A. The complete independence of judgments from any initial values
B. Only the use of rational Bayesian updating
C. Only the effect of final outcomes
D. The tendency for quantitative judgments to be influenced by an initially presented value
Discuss
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Correct Answer: Option D

Explanation:
Anchoring is a cognitive bias in which individuals rely too heavily on an initial piece of information (the anchor) when making subsequent judgments.
This question belongs to: Economy GK Economy Set 1
Question #815
Which of the following is a feature of the 'Availability Heuristic'?
A. Only statistical frequencies matter
B. Memory has no effect on probability judgments
C. People assess the probability of an event by the ease with which instances come to mind
D. People always use base rates correctly
Discuss
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Correct Answer: Option C

Explanation:
The availability heuristic leads people to judge the likelihood of events by how readily examples can be recalled, which can produce systematic biases when memory is distorted by vividness or recency.
This question belongs to: Economy GK Economy Set 1
Question #816
The concept of 'Framing Effects' demonstrates that:
A. Preferences are completely invariant to description
B. Framing never affects choices
C. The way in which a choice is presented can systematically affect decisions even when the underlying outcomes are identical
D. Only the objective outcomes matter
Discuss
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Correct Answer: Option C

Explanation:
Framing effects occur when logically equivalent descriptions of the same decision problem lead to different choices, violating the invariance assumption of standard rational-choice theory.
This question belongs to: Economy GK Economy Set 1
Question #817
Which of the following is a characteristic of 'Overconfidence' as a behavioural bias?
A. Only the absence of any self-assessment
B. The tendency of individuals to overestimate their own knowledge, abilities or the precision of their information
C. Perfectly calibrated confidence intervals
D. The tendency to underestimate one’s own abilities
Discuss
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Correct Answer: Option B

Explanation:
Overconfidence manifests as excessive confidence in one’s own judgments, over-precision in probability estimates, or the better-than-average effect, and can lead to excessive trading and other suboptimal decisions.
This question belongs to: Economy GK Economy Set 1
Question #818
In the context of behavioural finance, the 'Disposition Effect' refers to:
A. The tendency to sell losers and hold winners
B. Only the effect of taxes on trading
C. Perfectly rational realisation of gains and losses
D. The tendency of investors to sell winning investments too early and hold losing investments too long
Discuss
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Correct Answer: Option D

Explanation:
The disposition effect is the empirical regularity that investors are more likely to realise gains than losses, consistent with prospect-theory value functions and the reluctance to admit mistakes.
This question belongs to: Economy GK Economy Set 1
Question #819
Which of the following is a feature of 'Herd Behaviour' in financial markets?
A. Only fundamental information drives prices
B. Imitation never occurs
C. Individuals imitate the actions of others, potentially leading to cascades and excess volatility
D. Individuals always act independently on the basis of their own information
Discuss
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Correct Answer: Option C

Explanation:
Herd behaviour occurs when agents follow the actions of others rather than their own private information, which can generate informational cascades, bubbles and crashes.
This question belongs to: Economy GK Economy Set 1
Question #820
The concept of 'Narrative Economics' associated with Robert Shiller emphasises:
A. Only the role of fundamental factors
B. The complete irrelevance of stories
C. The role of popular stories and narratives in driving economic fluctuations
D. Only the role of monetary policy
Discuss
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Correct Answer: Option C

Explanation:
Narrative economics studies how contagious popular stories and narratives spread and influence economic behaviour, contributing to booms, recessions and other major economic events.
This question belongs to: Economy GK Economy Set 1
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