Indian Economy MCQs
Indian Economy Multiple Choice Questions (MCQs) for SSC, State and all One Day Examinations of India. Objective Questions on Indian Economy for competitive examinations.
1. If demand and supply increase equally, what happens to market price?
[A] Remain stable
[B] Increase
[C] Decrease
[D] Cannot be determined without more information
Show Answer
Correct Answer: A [Remain stable]
Notes:
When demand and supply increase equally at every price, the demand and supply curves shift rightward by the same amount. The upward price pressure from demand is offset exactly by downward pressure from supply. The new equilibrium price remains the same, but the equilibrium quantity increases. This is a standard result in microeconomics related to simultaneous shifts in demand and supply curves.
2. Interest rate policy is a tool of which economic policy framework?
[A] Fiscal policy
[B] Industrial policy
[C] Trade policy
[D] Monetary policy
Show Answer
Correct Answer: D [Monetary policy]
Notes:
Monetary policy is conducted by central banks to control money supply and interest rates. In India, the Reserve Bank of India manages monetary policy under the Reserve Bank of India Act, 1934. Changing interest rates is a primary method to influence inflation and economic growth. The Monetary Policy Committee determines policy repo rates. Interest rate changes affect borrowing, spending, and inflation in the economy.
3. Pump priming mainly deals with which of the following?
[A] Increased government expenditure during recession
[B] Decreased government expenditure during recession
[C] Increased government income during recession
[D] Decreased government income during recession
Show Answer
Correct Answer: A [Increased government expenditure during recession]
Notes:
Pump priming is a fiscal policy tool used to revive economic activity during a slowdown or recession. It involves increasing public expenditure and often reducing taxes so that demand in the economy rises. Higher government spending creates jobs, boosts consumption, and encourages investment, which helps economic recovery. Therefore, pump priming mainly refers to increased government expenditure during recession.
4. What is the general effect of an inflationary trend on bank lending and deposit interest rates?
[A] They generally tend to increase
[B] They generally tend to decrease
[C] They always remain unchanged
[D] They have no relation with inflation
Show Answer
Correct Answer: A [They generally tend to increase]
Notes:
During an inflationary phase, central banks usually tighten monetary policy to control price rise. This often pushes up market interest rates, and banks may revise lending and deposit rates upward. Higher inflation expectations also affect the cost of funds and the return demanded by savers. Therefore, the general trend in bank lending and deposit interest rates during inflation is upward, though the exact movement can vary with policy and market conditions.
5. Consider the following tools used by central banks to influence monetary conditions:
- Reverse Repo Rate
- Cash Reserve Ratio
- Statutory Liquidity Ratio
- Bank Rate
An increase in which among the above could raise interest rates in the market?
[A] Only 1 and 2
[B] Only 1
[C] 1, 2, 3 and 4
[D] 1, 2 and 3
Show Answer
Correct Answer: C [1, 2, 3 and 4]
Notes:
An increase in any of the reverse repo rate, cash reserve ratio, statutory liquidity ratio, or bank rate reduces liquidity or increases borrowing costs for banks, leading to higher market interest rates. All four are contractionary monetary tools used by central banks to moderate inflation and control credit growth by tightening monetary conditions.
6. Which among the following correctly denotes the Primary Deficit?
[A] Revenue Expenditure – Revenue Receipts
[B] sum of the net increase in holdings of treasury bills of the RBI and its contributions to the market borrowing of the government.
[C] Budgetary Deficit + Govt. market borrowings and liabilities
[D] Fiscal Deficit – Interest Payments
Show Answer
Correct Answer: D [Fiscal Deficit – Interest Payments]
Notes:
The fiscal deficit may be decomposed into primary deficit and interest payment. The primary deficit is obtained by deducting interest payments from the fiscal deficit. Thus, primary deficit is equal to fiscal deficit less interest payments. It indicates the real position of the government finances as it excludes the interest burden of the loans taken in the past.
7. Which among the following was not stipulated in the Fiscal Responsibility and Budget Management (FRBM) Act, 2003?
[A] Elimination of revenue deficit
[B] Elimination of primary deficit
[C] Non-borrowing by the Central Government from RBI except in certain situations
[D] Fixing government guarantees in any financial year as a percentage of GDP
Show Answer
Correct Answer: B [Elimination of primary deficit]
Notes:
The FRBM Act, 2003 was designed to promote fiscal discipline by laying down targets such as eliminating revenue deficit, reducing fiscal deficit, and restricting direct borrowing from the RBI except in specified situations. It also provided for monitoring of contingent liabilities and related fiscal parameters. However, it did not prescribe elimination of the primary deficit as a statutory target. Therefore, option 2 is the correct answer.
8. With reference to various types of Banking, what is “Mixed Banking”?
[A] when banks undertake the activities of commercial and investment banking together
[B] when banks undertake the activities of wholesale and retail banking together
[C] when banks undertake the activities of offline and online banking together
[D] when banks undertake the activities of commercial and cooperative banking together
Show Answer
Correct Answer: A [when banks undertake the activities of commercial and investment banking together]
Notes:Mixed Banking is the system in which banks undertake activities of commercial and investment banking together.
- These banks give short-term and long-term loans to industrial concerns.
- The banks appoint experts which give valuable advice on various financial issues and also help gauge the financial health of companies.
- Industries don’t have to run to different places for differential financial needs.
- They thus promote rapid industrialization.
- They may however pose a grave threat to liquidity of a bank and lead to bad debts.
9. Which of the following says that the marginal product of a factor input initially rises with its employment level. But after reaching a certain level of employment, it starts falling?
[A] Law of diminishing marginal product
[B] Law of variable proportions
[C] The Short Run
[D] The Long Run
Show Answer
Correct Answer: B [Law of variable proportions]
Notes:
The law of variable proportions states that as the quantity of one factor is increased, keeping the other factors fixed, the marginal product of that factor will eventually decline.
10. What is investment by foreign investors in Indian company shares and bonds called?
[A] Foreign Direct Investment (FDI)
[B] Foreign Portfolio Investment (FPI)
[C] Domestic Institutional Investment (DII)
[D] Non-Resident Indian (NRI) Investment
Show Answer
Correct Answer: B [Foreign Portfolio Investment (FPI)]
Notes:
Foreign Portfolio Investment (FPI) refers to investment by foreign investors in financial assets such as shares, bonds and other securities in India. Such investment is generally made without seeking management control over the company. This is different from Foreign Direct Investment (FDI), which involves a lasting interest and often some degree of control in the enterprise. Hence, foreign investment in listed shares and bonds is classified as FPI.
