Economics Mock Test - 3

The correct answer is the production possibility curve.

• In macroeconomics, the transformation curve is defined as the maximum amount of one commodity X obtainable for any given amount of another commodity Y, and vice versa.
• This concept is basically the same as the production-possibility frontier studied in microeconomics. In this case, however, the transformation curve shows the trade-off (or opportunity cost) for a country when deciding to produce one commodity or good instead of some other.
• The production possibility frontier (PPF) is a curve that illustrates the variations in the amounts that can be produced of two products if both depend upon the same finite resource for their manufacture.
• PPF also plays a crucial role in economics. It can be used to demonstrate the point that any nation's economy reaches its greatest level of efficiency when it produces only what it is best qualified to produce and trades with other nations for the rest of what it needs.
• So the transformation curve can also be referred to as the production possibility frontier PPF or the production possibility curve.

• Gottfried Haberler gave the theory of Opportunity Cost.
• Opportunity cost is the value of the most valuable choice from those which were not taken.
• It expresses the basic relation between choice and scarcity.
• Gottfried Haberler abandoned the labor theory of value for this concept.

The correct answer is an option (1) i.e Inferior goods

• Inferior goods are those goods for which demand falls with an increase in income.
• This situation is prevalent when a good has more expensive substitutes that see an increase in demand as incomes and the economy improve.
• Inferior goods have a negative income elasticity. Some of the reasons behind this shift may include quality or a change to a consumer's socio-economic status.
• When incomes are low or the economy contracts, inferior goods become a more affordable substitute for a more expensive good.
• Giffen goods are a kind of inferior good that have no ready substitute or alternative. Examples of Giffen goods include bread, rice, and potatoes.

1. A normal good is a good that experiences an increase in its demand due to a rise in consumers' income. Normal goods has a positive correlation between income and demand. Examples of normal goods include food staples, clothing, and household appliances.
2. In economics, a luxury goods (or upmarket good) is a good for which demand increases more than proportionally as income rises, so that expenditures on the good become a greater proportion of overall spending. 
3. A Complementary good is a product or service that adds value to another. In other words, they are two goods that the consumer uses together. For example, cereal and milk, or a DVD and a DVD player.

The correct answer is the Co-existence of the public and private sectors.

Key Points

• A mixed economy is an economy organized with some free-market elements and some socialistic elements, which lies on a continuum somewhere between pure capitalism and pure socialism.
  • It refers to a type of economy where the public and private sectors coexist.
  • Mixed economies typically maintain private ownership and control of most of the means of production, but often under government regulation.
  • Mixed economies socialize select industries that are deemed essential or that produce public goods.
  • The public sector works alongside the private sector but may compete for the same limited resources.
  • Mixed economic systems do not block the private sector from profit-seeking, but do regulate business and may nationalize industries that provide a public good.

 

• India is a mixed economy.
• In fact, all known historical and modern economies fall somewhere on the continuum of mixed economies.

• The Marginal Rate of Substitution is the amount of a good that a consumer is willing to give up for another good, with the same level of utility.
• It is used to measure the indifference curve because MRS is the slope of an indifference curve.
• It is used to analyze consumer behavior.

The correct answer is option 1.

Key Points

• Demand Curve and the Law of Demand
  • ​If the prices of other goods, the consumer’s income and her tastes and preferences remain unchanged, the amount of a good that the consumer optimally chooses, becomes entirely dependent on its price.
  • The relation between the consumer’s optimal choice of the quantity of a good and its price is very important and this relation is called the demand function.
  • Factors that affect the demand curve:
    • ​Income
    • Changing Tastes or Preferences
    • Changes in the Composition of the Population
  • Demand Curve 
    • The demand curve is a relation between the quantity of the good chosen by a consumer and the price of the good.
    • The independent variable (price) is measured along the vertical axis and the dependent variable (quantity) is measured along the horizontal axis.
    • The demand curve gives the quantity demanded by the consumer at each price.
• Thus,  there will not be a shift in the demand curve when the price of a commodity falls.

The correct answer is Upward rising.

Key Points

• A Giffen good has an upward-rising demand curve.
• A Giffen good is a good whose demand increases with the increase in price.
• Examples of Giffen goods are rice, wheat, bread, etc.
• They are some special variety of inferior goods, whose demand does not change with the change in price.
• They are also essential goods with very few substitution present.

The correct answer is option 3 i.e., There is a direct relationship

• There is a direct relationship between income and demand in the case of normal goods.
• They are directly related to each other.
• If the income increases, the demand will also rise, and if the income decreases, demand will also fall.
• A normal good is that which experiences an increase in its demand because of the rise in the income of consumers.
• There is an exception in Giffen / Griffin Goods.

The Great Depression

• The Great Depression began around 1929 and lasted till the mid1930s.
• During this period most parts of the world experienced catastrophic declines in production, employment, incomes and trade.
• The exact timing and impact of the depression varied across countries. But in general, agricultural regions and communities were the worst affected. This was because the fall in agricultural prices was greater and more prolonged than that in the prices of industrial goods.
• The depression was caused by a combination of several factors. We have already seen how fragile the post-war world economy was.
• First: agricultural overproduction remained a problem. This was made worse by falling agricultural prices. As prices slumped and agricultural incomes declined, farmers tried to expand production and bring a larger volume of produce to the market to maintain their overall income.
• This worsened the glut in the market, pushing down prices even further. Farm produce rotted for a lack of buyers. Second: in the mid-1920s, many countries financed their investments through loans from the US. While it was often extremely easy to raise loans in the US when the going was good, US overseas lenders panicked at the first sign of trouble. In the first half of 1928, US overseas loans amounted to over $ 1 billion. A year later it was one quarter of that amount. Countries that depended crucially on US loans now faced an acute crisis

• Factors of production are the resources used by people to produce goods and services.
• The four factors of production are land, labor, capital, and entrepreneurship. They are said to be the building blocks of the economy.
• Expenditure does not come under the four main factors of production. The third factor of production is capital.
• Capital can be the machinery, tools, and buildings used by humans to produce goods and services. 

• Gross Domestic Product (GDP) can be defined as Gross Value Added (GVA) at basic prices + Product taxes - Product subsidies.
• Gross Domestic Product is defined as the value of goods and services produced within the boundaries of a country.
• Gross Value Added (GVA) is defined as the value of goods and services produced in the country at a base price minus Intermediate consumption.

The correct answer is All of the above.

Key Points

• Economic depreciation is the decline in the economic value of an asset over time.
• It refers to the consumption of fixed capital for the purpose of estimating national accounts. 
• Features of Depreciation:
  • It is a decrease in the value of fixed assets.
  • It involves the loss of value of assets due to the passage of time and obsoleteness.
  • It is an ongoing process until the end of the life of assets.
• Causes of Economic Depreciation:
  • Wear and tear as the decline in the physical value of an asset is responsible for depreciating the financial value of the asset.
  • Constant technology up-gradation leads to depreciation in the value of an outdated technological asset.
  • Perishability of assets like raw materials over time causing depreciation in their value.
  • Expiration of rights of intangible assets like licenses, patents, trademarks, etc. is valid through a period of time for which the contract has been signed.
    • So, these assets need to be depreciated before the rights expire. 

The incorrect option is ​It is measured on the basis of current prices.

Key Points

Real GDP: 

• When the GDP is calculated on the basis of a fixed price in a base year.
• It is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year.
• It is often referred to as constant-price GDP, inflation-corrected GDP, or constant dollar GDP.
• Real GDP makes comparing GDP from year to year and from different years more meaningful because it shows comparisons for both the quantity and value of goods and services.
• Real GDP is calculated by dividing nominal GDP by GDP deflator and then multiplying by 100.

Additional Information

• Nominal GDP:
  • The GDP measured on the basis of the current price index.
  • It is also known as the Current price GDP or Money GDP.
• GDP deflator: 
  • An index of price change of goods and services included in GDP.
  • It is used to construct price index number and
  • To measure the rate of inflation or deflation.
• Gross Domestic Product 
  • It is the sum of the money of all the final goods and services produced solely within the boundaries of a country, at a specific time.
  • GDP includes the income of foreigners staying in the country.
  • It excludes the income of nationals of the country staying abroad and also excludes the remittances sent from abroad.
• Gross National Product:
  • ​It is the sum of the money of all the final goods and services produced both within and outside of a country by nationals during a specific period of time.
  • GNP includes remittances (money sent from abroad)
  • It excludes income generated locally by non-nationals.

The correct answer is the consumption per unit of income.

Key Points

​The average propensity to consume measures the percentage of income that is spent rather than saved.

• It may be calculated who wants to know where the money is going or by an economist who wants to track the spending and saving habits of an entire nation.

Additional Information 

• The propensity to consume can be determined by dividing average household consumption, or spending, by average household income or earnings.
• The percentage of income spent is the propensity to consume.
• The percentage of (after-tax) income saved is the propensity to save.
• The sum of the average propensity to consume and the average propensity to save is always equivalent to one.
• An individual determining personal propensities to consume and save should probably use the disposable income figure as well for a more realistic measure.

Key Points

• "Law of demand" implies that when there is excess demand for a commodity, then the price of the commodity rises.
• Law of Demand is that when the price of the product decreases with an increase in the consumption of the product and the vice-versa.

Additional Information

When price rises	If the price of a commodity rises and the demand falls then the market will have an excess supply of that commodity. For the excess supply, the price of the commodity will go down until it reaches its equilibrium point.
When demand rises	If the demand rises then the market will demand more commodity and there will be a short of supply or excess demand. Taking advantage of excess demand the producers will raise the price of the product until it reaches its equilibrium price.

 

The correct answer is Purchase of share.

• A real investment is the purchase of shares.
• Real Investment results in an increment of capital equipment.
• Real investment refers to the allocation of a proportion of money in stock of capital like tangible assets etc. in expectation of receiving some benefits in the future in terms of money or kind with the principle investment.

Key Points

• The 3 Types Of Investments are:
  • Ownership Investments: Ownership is what comes to mind for most people when the word investment is batted around. These are the most volatile and profitable classes of investment.
  • Lending Investments:  Lending money is a category of investing. The risks generally are lower than for many investments and, consequently, the rewards are relatively modest.
  • Cash Equivalents: These are investments are "as good as cash," which means that they can be converted back to cash easily and quickly.

Additional Information

• By real investment, we don’t mean to purchase the existing paper securities, bonds, debentures, or equities, but the purchase of new factories, machines, railroads, etc.
• Investment expenditure is a related concept, which refers to the expenditures which are done for producer’s durable equipment, new construction, and the change in inventories. 

The correct answer is Non-Performing Assets.

Key Points

• Non-performing asset (NPA) -
  • It is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
  • NPA as defined by the RBI, “if for a period of more than 90 days, the interest or installment amount is overdue then that loan account can be termed as a Non-Performing Asset.
  • There are different types of non-performing assets depending on how long they remain in the NPA category.
    • Sub-Standard Assets.
    • Doubtful Assets.
    • Loss Assets.

Additional Information

•  Reasons behind the rise of Non Performing Assets in India:
  • In the period from 2004 to 2009, there was a huge growth in the economy, which led to firms taking bank loans very aggressively.
  • Most of the investment was in infrastructure sectors like roads, power, aviation, steel.
  • Laxity in lending norms by the banks, without analyzing the financial health of the companies and their credit ratings.
  • The banning of mining projects, delay in the environmental permits, led to a rise in prices of raw materials and a big gap in demand and supply thereby affecting the power, steel, and iron industries.
  • This affected the capacity of the companies to repay the loans to banks which resulted in Non-Performing Assets (NPA).
• As per the Reserve Bank of India (RBI), an asset becomes non-performing when it stops generating income for the bank.
  • The Non Performing Assets in Public Banks are valued at approximately $ 62 Billion, which represents 90% of the total NPA in India.
• Impacts of Non-Performing Assets (NPA):
  • ​Banks won’t have sufficient funds for other development projects which will impact the economy.
  • To maintain a profit margin, banks will be forced to increase interest rates.
  • Due to the curb in further investments, it may lead to the rise of unemployment.

The correct answer is High powered money.

Key Points

• High Powered Money:
  • The total liability of the monetary authority of the country, RBI, is called the monetary base or high-powered money.
  • It consists of currency (notes and coins in circulation with the public and vault cash of commercial banks) and deposits held by the Government of India and commercial banks with RBI.
• If a member of the public produces a currency note to RBI the latter must pay her value equal to the figure printed on the note. Similarly, the deposits are also refundable by RBI on-demand from deposit-holders.
• These items are claims which the general public, government, or banks have on RBI and hence are considered to be the liability of RBI. RBI acquires assets against these liabilities.
• This can be understood by an example. Suppose RBI purchases gold or dollars worth Rs 5. It pays for the gold or foreign exchange by issuing currency to the seller. The currency in circulation in the economy thus goes up by Rs 5, an item that shows up on the liability side of the balance sheet. The value of the acquired assets, also equal to Rs 5, is entered under the appropriate head on the Assets side.
• Similarly, RBI acquires debt bonds or securities issued by the government and pays the government by issuing currency in return. It issues loans to commercial banks in a similar fashion.
• However, the most important role of RBI is as the controller of money supply and credit creation in the economy.
• RBI is the independent authority for conducting monetary policy in the best interests of the economy – it increases or decreases the supply of high-powered money in the economy and creates incentives or disincentives for the commercial banks to give loans or credits to investors.

The correct answer The short-term rate at which the Reserve Bank of India lends to the bank. Key Points

1. Repo rate is the rate at which the central bank of a country (Reserve Bank of I India) lends money to commercial banks in the event of any shortfall of funds.
2.  Repo rate is used by monetary authorities to control inflation.
3. The RBI has kept the repo rate, the rate at which the RBI lends funds to banks that is unchanged at four percent, and the reverse repo rate - the rate at which RBI borrows from banks – at 3.35 percent.
4. Repo rate is the rate at which the central bank gives loans to commercial banks against government securities. 

Important Points

1. Reverse repo rate is the interest that RBI pays to banks for the funds that the bank's deposits with it
2. Statutory liquidity ratio (SLR) refers to the minimum reserve requirement that needs to be maintained by commercial banks in the nation. 
3. CRR or cash reserve ratio is the minimum proportion/percentage of a bank's deposits to be held in the form of cash

Additional Information

• Reserve Bank of India (RBI):
  • RBI was set up on the basis of the Hilton Young Commission recommendation in April 1935, with the enactment of the >RBI Act, 1934.
  • It was nationalized on the basis of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948.
  • The Custodian of India’s foreign exchange reserves is the Reserve Bank of India.
  • Its first Governor was C.D. Deshmukh.
  • The headquarters of RBI is in Mumbai.
  • Current governor of RBI is Shaktikanta Das.

Key Points

• Bank Rate:
  • It is also called the rediscount rate. It is the rate, at which the RBI gives finance to commercial banks.
• Cash Reserve Ratio (CRR):
  • The RBI (Amendment) Bill, 2006, empowers RBI to prescribe CRR–Cash that banks deposit with the RBI without any floor rate or ceiling rate.
• Statutory Liquidity Ratio (SLR):
  • It is the ratio of a liquid asset, which all commercial banks have to keep in the form of cash, gold, and unencumbered approved securities equal to not more than 40% of their total demand and time deposit liabilities (ranges is 25‑40%).
• Repo Rate:
  • It is the rate, at which RBI lends short-term money to the bank against securities.
• Reverse Repo Rate:
  • It is the rate, at which banks park short-term excess liquidity with the RBI.
• Open Market Operations (OMOs):
  • Under OMOs, the RBI sells G-securities in the market.
• Quantitative credit controls are used to control the volume of credit and indirectly to control the inflationary and deflationary pressures caused by the expansion and contraction of credit.

The correct answer is Used for regulating consumption.

Key Points

• Money is often defined in terms of the three functions or services that it provides
• Money serves as a medium of exchange, as a store of value, and as a unit of account.
• The medium of exchange:  Money's most important function is as a medium of exchange to facilitate transactions.
  • Without money, all transactions would have to be conducted by barter, which involves direct exchange of one good or service for another.
• Store of value:  In order to be a medium of exchange, money must hold its value over time that is, it must be a store of value. If money could not be stored for some period of time and still remain valuable in exchange.
  •  it would not solve the double coincidence of wants problem and therefore would not be adopted as a medium of exchange.
• Unit of account:  Money also functions as a unit of account, providing a common measure of the value of goods and services being exchanged.
  • Knowing the value or price of a good, in terms of money, enables both the supplier and the purchaser of the good to make decisions about how much of the good to supply and how much of the good to purchase.
• The demand for money is affected by several factors, including the level of income, interest rates, and inflation as well as uncertainty about the future.

Additional Information

• The way in which these factors affect money demand is usually explained in terms of the three motives for demanding money the transactions, the precautionary, and the speculative motives.
• Transactions motive:
  • ​ The transaction's motive for demanding money arises from the fact that most transactions involve an exchange of money. Because it is necessary to have money available for transactions, the money will be demanded.
  • The total number of transactions made in an economy tends to increase over time as income rises.
• Precautionary motive:
  • ​ People often demand money as a precaution against an uncertain future. Unexpected expenses, such as medical or car repair bills, often require immediate payment.
  • The need to have money available in such situations is referred to as the precautionary motive for demanding money.
• Speculative motive:
  • Money, like other stores of value, is an asset. The demand for an asset depends on both its rate of return and its opportunity cost.
  • Typically, money holdings provide no rate of return and often depreciate in value due to inflation.
  • The opportunity cost of holding money is the interest rate that can be earned by lending or investing one's money holdings.

Money is defined differently in each country, although most contain at least one measure for narrow money and another for wide money. Money is a means of exchange, and any medium that may be used to exchange commodities and services is referred to as a medium of exchange. Important Points

• Broad money is defined as M3 and M4. M4 is the least liquid of the three.
• M3 is the most often used money supply metric. Aggregate monetary resources is another name for it.
• M4 money supply, for example, is defined as a combination of notes and coins in circulation (M0) plus bank accounts. It encompasses bank accounts as well as notes and coins in circulation, it is a larger definition.  

Additional Information

• Narrow money is defined as M1 and M2.
• M1 is the most liquid and transaction-friendly currency. M2 is a money supply estimate that incorporates all of the variables of M1 as well as "near money."
• Cash and checking deposits are classified as M1, whereas savings accounts, money market securities, mutual funds, and other time deposits are classified as near money.

Hence, M3 and M4 combinations of the money supply are characterized as broad money.

• A public good is a commodity or a service provided to the Citizen without any intention of making a profit out of it.
• Electricity is not provided free. People pay for the service or the unit of electricity they consume.
• National Defence, Light House, and Public Parks are an example of Public goods as people are not charged for it by the government.

The correct answer is Neutral fiscal policy.

• Neutral fiscal policy is generally undertaken when an economy is in neither a state of recession nor an expansion.

Key Points

• This implies a balanced budget where the Government spending is equal to the Tax revenue.
• It generally means that the government spending is entirely funded by tax revenue and the overall budget outcome has a neutral effect on the level of economic activity.
• In simpler terms, this type of policy is usually undertaken when an economy is in equilibrium.

The correct answer is option 3 i.e Progressive taxation.

Progressive taxation:

• It is a tax rate that increases as the taxable amount increases.
• In this progressive tax, the taxpayer should pay higher taxes if he earns more income and lower taxes if he earns less income.
• It is 'pro-poor' (in the interest of the poor), according to their vulnerability of taxpayers.

​Proportional taxation:

• It is a tax rate that is fixed as it levies the same percentage of tax to everyone regardless of their income.
• It is sometimes referred to as a flat tax.

Direct tax:

• It is a tax paid directly by an individual or organization to the government.
• The burden of payment is not passed from one individual to another.
• Example: Corporate tax, Income tax, wealth tax, etc.

Indirect tax:

• It is a tax that is not directly levied on the taxpayers but it is often levied on goods and services which results in their higher price.
• Indirect taxes are indirectly levied on the expense incurred by the individual.
• It is passed on to the end consumer i.e it can be passed from one individual to another.
• Example: GST, Customs duty, etc.

The correct answer is Tax rate increases as income increases.

Key Points

• Progressive Tax
  • In progressive taxation, the tax liability increases with individual or entity income.
  • This is based on the principle of ability to pay.
  • Under this system, the lowest income people are generally exempted while the highest income people pay the highest taxes.
  • Income Tax is thus an example of a progressive tax.
  • Progressive taxation results in the redistribution of income from rich to poor.
  • A progressive tax charges a higher tax rate for people who earn a higher income. Hence, Option 2 is correct.
  • The rationale is that people with a lower income will usually spend a greater percentage of their income to maintain their standard of living.
• 

Additional Information

• Proportional Tax
  • In this system, a flat tax is levied regardless of the income of wealth.
  • One example of corporation tax in India whereby government charges a flat rate of 30% on the income earned by the companies in India.
• Regressive Tax
  • A regressive tax is the one in which the tax rate decreases as the amount subject to taxation increases; and the tax rate progresses from high to low.
  • The lowest amount is subject to higher taxation and this leads to individuals with low-income bear the highest burden of regressive taxes.
  • Such tax does not take into account the ability to pay.
  • Indirect taxes, such as sales/service tax, are an example of regressive tax as the poor and rich pay the same tax in purchasing everyday products and services.
  • Apart from indirect taxes, some other regressive tax examples are sin tax (tax on intoxicants such as tobacco and alcohol, which are more consumed by lower classes); toll tax (every passing vehicle of the same type has to pay irrespective of the income of the person traveling in that vehicle), etc.

The correct answer is 4 i.e. Crude oil reserve.

Foreign exchange reserves of India:

• India has high foreign-exchange reserves; including cash, bank deposits, bonds, and other financial assets like our Indian rupee. 
• It is managed by the Reserve Bank of India and foreign currency assets are very important in it.
• India's total foreign exchange reserves stand at around US$474.660 billion on 3rd April 2020.
• This reserve contains around 6% in gold.
• India is at 7th position in a list of countries by foreign-exchange reserves (December 2019).
• The main foreign exchange reserve in India are mentioned below:
  • Gold stock of RBI
  • Special Drawing Rights
  • Foreign currency assets
  • Reserve Tranche Position in IMF.

The correct answer is Option 2.

Key Points

• In a managed floating exchange rate, the exchange rate is neither floating nor fixed. Hence, option 1 is incorrect.
• Here, the central bank of a country occasionally intervenes to alter the pace of change of a country's currency value. Hence, option 3 is incorrect.
• The central bank acts as a buffer against an external economic shock before its effects become disruptive to the domestic economy. 
  • It improves the balance of trade by making exports more price competitive.
  • It rebalances the economy by moving towards higher exports and capital investment and moving away from consumption. Hence, option 4 is incorrect.
• This exchange rate has to be managed by an autonomous or semi-autonomous central bank with a high level of Forex reserves and strong credibility. Hence, option 2 is correct.

Additional Information

• The exchange rate is the rate at which the domestic currency is exchanged for a foreign currency.
• There are three types of exchange rate systems: Floating exchange rate system, Fixed exchange rate system, and managed floating exchange rate system.

• Any current account deficit is of necessity financed by a net capital inflow.
• A budget surplus is a period or situation where receipts or income exceed expenditures or outlays.
• Currency depreciation means a fall in the value of a currency in a floating exchange rate system.  This fall is in reference to foreign currencies. 

The correct answer is  World Bank and International Monetary Fund.

Key Points

• The Bretton Woods Institutions are the World Bank, and the International Monetary Fund (IMF).
• They were set up at a meeting of 43 countries in Bretton Woods, New Hampshire, the USA in July 1944.
• Their aims were to help rebuild the shattered postwar economy and to promote international economic cooperation.

Additional Information

World Bank:

• David Malpass is the President of the World Bank Group.
• David was elected as the 13th President of the World Bank Group.
• He was made the President on 5th April 2019.
• Previous President - Jim Yong Kim.

International Monetary Fund:

• IMF Headquarters- Washington, D.C.
• IMF Member Countries - 189
• Christine Lagarde was the Managing Director of the International Monetary Fund (IMF), till September 2019.
• Lagarde is currently the President of the European Central Bank.

 

Special Drawing Right (SDR):

• The SDR was created as a supplementary international reserve asset in the context of the Bretton Woods fixed exchange rate system.
• The collapse of the Bretton Woods system in 1973 and the shift of major currencies to floating exchange rate regimes lessened the reliance on the SDR as a global reserve asset.
• Nonetheless, SDR allocations can play a role in providing liquidity and supplementing member countries’ official reserves, as was the case amid the global financial crisis.
• The SDR serves as the unit of account of the IMF and some other international organizations.

Link: https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14/51/Special-Drawing-Right-SDR

The correct answer is Neither exports nor imports are done.

Key Points

• A closed economy is one that has no trading activity with outside economies.
• The closed economy is entirely self-sufficient.
• It means no imports come into the country and no exports leave the country. 
• In other words, A closed economy is one that does not swap their trading with outside.

Additional Information

• Open Economy:
  • An economy in which participants are permitted to buy and sell goods and services with other countries.
  • The GDP of open economies includes exports and imports.
  • Some very open economies try to have few or no trade restrictions. 

The correct answer is a Stagnant Economy.

Key Points

• Feature of Indian economy on the eve of independence:
  • India's economy on the eve of independence was a Stagnant economy. Hence, Option 2 is correct.
  • There was very slow or no economic growth in the country.
  • As a result of stagnation, there was unemployment, death, and suffering due to lack of food.
  • The Indian economy was backward and per capita income was very low and in India, it was just Rs. 230 from 1947-1948.
  • With 70% of people engaged in agriculture, its contribution to GDP was only 50%. Productivity and production too were extremely low.
  • The industrial sector was not developed, there was a lack of basic and heavy industries in the country.
  • The people in the country could not even meet their basic needs i.e food, shelter, and clothing. Unemployment and Illiteracy were other issues faced by the country.
  • Infrastructure like communication, transport, power, or energy was underdeveloped.
  • As a result of industrial backwardness in the country, several consumer goods like medicines were imported from abroad.
  • The majority of the population lived in villages meaning that they lacked opportunities outside agriculture.
  • As India was a British colony, Britishers exploited the Indian economy for their own benefits.

The correct answer is All of the above.

Key Points

• Land Reforms in India
  • Land reform refers to efforts to reform the ownership and regulation of land in India.
  • Those lands redistributed by the government from landholders to landless people for agriculture or special purpose are known as Land Reform.
  • Land-reform policy in India had two specific objectives:
    1. To remove such impediments to increase agricultural production arises from the agrarian structure inherited from the past.
    2. The second objective, which is closely related to the first, is to eliminate all elements of exploitation and social injustice within the agrarian system, provide security for the soil tiller, and assure equality of status and opportunity to all sections of the soil the rural population.
• Categories of Reforms
  • There are six main categories of reforms:
    1. Abolition of Intermediaries.
    2. Tenancy regulation.
    3. A ceiling on landholdings.
    4. Attempts to consolidate disparate landholdings.
    5. encouragement of cooperative joint farming. 
    6. Settlement and regulation of tenancy.

Important Points

• First Amendment Act, 1951 of Indian Constitution also related to land reforms and deals with the issues involved in the cases included in freedom of speech, acquisition of the Zamindari land, State Monopoly of trade, etc.
• It added the Ninth Schedule to protect the land reforms and other laws included in it from the Judicial review.
• Articles 31, 31A, and 31B were added to the Indian Constitution.

The correct answer is Kerala.

Key Points

• At the time of independence, the land tenure system was characterized by intermediaries who merely collected rent from the actual tillers of the soil without contributing towards improvements on the farm.
• Equity in agriculture called for land reforms which primarily refer to change in the ownership of landholdings.
• The land ceiling legislation also faced hurdles.
• The big landlords challenged the legislation in the courts, delaying its implementation.
• They used this delay to register their lands in the name of close relatives, thereby escaping from the legislation.
• The legislation also had a lot of loopholes that were exploited by the big landholders to retain their land.
• Land reforms were successful in Kerala and West Bengal because these states had governments committed to the policy of land to the tiller. Hence, Option 3 is correct.
• Unfortunately, other states did not have the same level of commitment, and vast inequality in landholding continues to this day. 

Economic policy refers to the actions that governments take in the economic field. It covers the systems for setting levels of taxation, government budgets, the money supply and interest rates as well as the labor market, national ownership, and many other areas of government interventions into the economy.

1991 economic crisis:

• By 1985, India had started having balance of payments problems. This is due to more expenditure by the government whereas the income generated was less. In addition there was huge disparities between income and expenditure. 
• By the end of 1990, it was in a serious economic crisis. The government was close to default, its central bank had refused new credit
• In 1991, India met with an economic crisis - relating to external debt. The government was not able to make repayments on its borrowings from abroad.
• The foreign exchange reserves, which we maintain to import petroleum and other important items, dropped to levels that were not sufficient to last even a fortnight. The crisis was further compounded by rising prices of essential goods.

​

Liberalisation:
Liberalisation was done in various sectors in the following ways:

1. Deregulation of industrial sectors 
2. Financial sector reforms
3. Tax reforms
4. Foreign exchange reforms
5. Trade and investment policy reforms

Privatisation:

• Privatisation means the transfer of assets from public sector to private sector.
• Privatisation helps in improving financial discipline and to facilitate modernisation. It helps in strong inflow of FDIs.

Globalisation:

• Globalisation is the process of international integration arising from the interchange of world views, products, ideas and mutual sharing, and other aspects of culture.

• The National Food Security Act (NFSA) was passed in the year 2013.

 Key PointsSalient Features-

• It is also called Right to Food Act.
• It aims at providing food grains at subsidised rates.
• Up to 75% of the rural population and 50% of the urban population will be covered under TPDS (Targeted Public Distribution System).
• It changed the ongoing food security schemes into a legal entitlement and a Right.
• It includes the Midday Meal Scheme, Integrated Child Development Services scheme and the Public Distribution System. 
• The beneficiaries of the Public Distribution System (or, PDS) are entitled to 5 kilograms per person per month (excluding beneficiaries of Antodaya Anna Yojana) of cereals at the following prices:-
• Rice at ₹3 per kg, Wheat at ₹2 per kg, coarse grains (millet) at ₹1 per kg.
• Antodaya Anna Yojana (AAY) includes poorest of the poor and provide 35 Kg of food grains per household.
• Pregnant women and lactating mothers and children in the age group of 6 months to 14 years are entitled to meals as per prescribed nutritional norms under Integrated Child Development Services (ICDS) and Mid-Day Meal (MDM) schemes.

The correct answer is Absolute poverty.

Key Points

• An absolute type of poverty refers to a lack of basic resources needed to maintain health and bodily functioning.
  • Poverty is an economic state where people are experiencing scarcity or the lack of certain commodities that are required for the lives of human beings like money and material things. 
    • It is complex to define poverty because it depends on multifaceted and multidimensional elements like the region, era, geographical condition, circumstances, and many more.
  • The absolute concept measures poverty only in relation to the amount of money necessary to meet basic needs such as food, clothing, shelter, safe drinking water, education, healthcare, etc.
    • In this type of poverty people who are living below the aforementioned poverty threshold are not affected even if the country they live in is economically thriving.
    • It was first introduced in 1990, the “dollar a day” poverty line measured absolute poverty by the standards of the world's poorest countries.
• Hence, option 1 is correct. 

Additional Information

• Relative Poverty:
  • It is defined from the social perspective that is living standard compared to the economic standards of the population living in surroundings.
  • Hence it is a measure of income inequality.
  • For example, a family can be considered poor if it cannot afford vacations, or cannot buy presents for children at Christmas, or cannot send its young to the university. 
• Situational Poverty:
  • It is a temporary type of poverty based on the occurrence of an adverse event like an environmental disaster, job loss, and severe health problems.
  • People can help themselves even with small assistance, as poverty comes because of unfortunate events.
• Generational Poverty:
  • It is handed over to individuals and families from one generation to one.
  • This is more complicated as there is no escape because the people are trapped in its cause and unable to access the tools required to get out of it.

The MSP on agricultural crops in India is determined by the Cabinet Committee on Economic Affairs on the recommendation of the CACP.

The correct answer is casual employment.

• Wage labour is usually referred to as paid work paid employment or paid labour.
• Refers to the socioeconomic relationship between a worker and an employer in which the worker sells their labour power under a formal or informal employment contract.

Important Points

1. A casual worker is a worker on a temporary employment contract with generally limited entitlements to benefits and little or no security of employment.
2. Daily wage work is based on a daily and hourly basis. It is casual employment.

Additional Information

1. Regular employment means work regularly performed for remuneration in a trade, business, profession, or other occupation in this state.
2. A permanent job is expected to last as long as the employee wants it, given that business conditions permit. There is no pre-determined termination date.
3. Contractual employment is a form of employment that requires an employee to sign and agree to the terms' act before one starts working. 

Hence, Daily wage work is a kind of casual employment.

The correct answer is an enclave within a country where industries get some tax advantages.

• Special Economic Zones (SEZs):
  • An SEZ is an enclave within a country that is typically duty-free and has different business and commercial laws chiefly to encourage investment and create employment.
  • In this zone, industries get some tax advantages.
  • The Parliament passed the Special Economic Zones Act in 2005 after many consultations and deliberations and it came into force in 2006.
  • SEZs were operational in India from 2000 to 2006 (under the EXIM/Foreign Trade Policy).
• Special Economic Zones Act, 2005
  • It is defined as an Act to provide for the establishment, development, and management of the Special Economic Zones for the promotion of exports and for matters connected therewith or incidental thereto.
• Objectives of the SEZs Act are:
  • To create further economic activity.
  • To encourage the export of goods and services.
  • To provide employment.
  • To boost domestic and foreign investments.
  • To develop infrastructure facilities.

Great Leap Forward campaign was initiated by China in the year 1958

• It was aimed at industrialising the country on a massive scale.
• People were encouraged to set up industries in their backyards.
• Great Leap Forward campaign met with many problems. Such as - the lack of central planning by the Chinese government and a severe drought killed 30 million people in China

The correct answer is China.

Key Points

• The one-child policy, the official program was initiated by the central government of China in 1980.
• It was a population planning initiative in China implemented between 1980 and 2015.
• The purpose of the policy was to limit the great majority of family units in the country to one child each.
• The policy was enacted to address the growth rate of China's population.
• A few consequences of the policy are given below:
  • The birth rate decreased after 1980.
  • The fertility rate decreased after 1980.
  • The overall rate of natural increase (difference between birth and death rate) declined.
  • The gender ratio of China was skewed as people preferred to abort or abandon their female babies.

 Thus, we can say that in 1980, China had adopted the 'One-child policy' to regulate its population.

The correct answer is Sri Lanka.

• The port of Hambantota is located at the strategic location of Sri Lanka.

Key Points

• As the port incurred heavy losses, making debt repayment difficult, in 2016 it was proposed to lease 80% of the port in a debt-for-equity swap to the China Merchants Ports holding company (CMPort).
• Sri Lanka is now fallen into the Chinese debt trap.
• India’s main concern has been the long term impact of Chinese state-owned companies in the Sri Lankan economy.

Additional Information

India

• Capital - New Delhi
• President - Ram Nath Kovind
• Prime Minister - Narendra Modi
• Currency - Indian rupee (INR)

Srilanka

• Capital - Sri Jayawardenepura Kotte
• President - Ranil Wickremesinghe
• Prime Minister - Ranil Wickremesinghe
• Currency - Sri Lankan rupee (Rs) (LKR)

Pakistan

• Capital - Islamabad
• President - Arif Alvi
• Prime Minister - Shehbaz Sharif
• Currency - Pakistani rupee (₨) (PKR)

Myanmar

• Capital - Naypyidaw
• President - Myint Swe (acting)
• State Counsellor - Min Aung Hlaing
• Currency - Kyat (K)

The correct answer is Option 3.

Key Points

• Third Five Year Plan was a failure due to India-China war followed by Indo-Pakistan.
• Third Five Year Plan (1961-66) aimed to make India’s economy ‘self-reliant’ and ‘self-generating’.
• It has faced a lot of political and economic crisis.
• The Indo-China war (1962) and Indo-Pak war (1965) had exposed the weakness of country’s defence sector, so, the good amount of money from the budget was invested in this sector.
• It could not even achieve its growth target of 5.6%

• Pakistan has leased Gwadar port to state-run firm of China for 40 years.
• This was done on April 20, 2017.
• Under this contract, China will retain over 90% of revenue from Gwadar’s marine operations, and 85% from the management of an adjacent free zone.
• The port holds strategical importance for China.

The correct answer is Option 2.

Key Points

• Aggregate demand measures the total amount of demand for all finished goods and services produced in an economy.
• Aggregate demand is expressed as the total amount of money spent on those goods and services at a specific price level and point in time.
• Aggregate demand consists of all consumer goods, capital goods (factories and equipment), exports, imports, and government spending.

• The equation for aggregate demand adds the amount of consumer spending, private investment, government spending, and the net of exports and imports. The formula is shown as follows:
  
  Aggregate Demand=C+I+G+Nx
  where:
  C=Consumer spending on goods and services
  I=Private investment and corporate spending on
  non-final capital goods (factories, equipment, etc.)
  G=Government spending on public goods and social
  services (infrastructure, Medicare, etc.)
  Nx=Net exports (exports minus imports)
  ​

The correct answer is Positive, Negative

• Substitute goods are products that all satisfy a common want. 
• Example: Coke and Pepsi, iPhone and Galaxy S series, Nike and Adidas are a few examples of substitute goods. If price of Coke increases, demand for Pepsi should increase because many Coke consumers will switch over to Pepsi.
• Complementary goods are products that are consumed together. 
• Example: iPhones and iPhones cover, car and petrol, etc. are examples of complementary goods i.e. goods that are used/consumed together. If iPhone becomes expensive and its quantity demanded decreases, you would expend the demand for iPhone covers to drop too and vice versa.
• Demand for a product’s substitutes increases when price increases.
• Demand for its complements decreases if the product’s price increases.
• The cross elasticity of demand measures the percentage change in quantity demanded of the product that occurs in response to a percentage change in the price of a substitute good.

Important Point

• The cross elasticity of demand measures the percentage change in quantity demanded of the product that occurs in response a percentage change in price of a substitute good.
• If the cross elasticity of demand is positive, the products are substitute goods.
• On the other hand, if cross elasticity is negative, the products are complements.

Therefore, the correct answer is Option 2.

Industrial Policy Resolution - 1956:

• It was shaped by the Mahalanobis Model of growth.
• It suggested that emphasis on heavy industries would lead the economy towards a long-term higher growth path. 
• This was aimed towards laying the foundation of regional equality.
• This policy was used for promoting industry in backward regions.
• It was easier to obtain a license if the industrial unit was established in an economically backward area.
• This resolution formed the basis of the Second Five Year Plan, the plan which tried to build the basis for a socialist pattern of society.

Industries were divided into four broad categories

Strategic or Public Sector:

• It included in its ambit the manufacture of arms and ammunition, production and control of atomic energy and the ownership and management of railway transport.
• These industries became the exclusive monopoly of the Central government of India. 

Key Industries:

• This included coal, iron and steel, aircraft manufacture, shipbuilding, manufacture of telephone, telegraphs and wireless apparatus and mineral oils.
• New undertakings in this category could be started only by the state government.

Important Industries (Controlled by Private sectors):

• This included industries of basic importance like machine tools, chemicals, fertilizers, non-ferrous metals, rubber manufactures, cement, paper, newsprint, automobiles, electric engineering etc.
• For this, the Central Government would feel necessary to plan and regulate.

Other Industries (Private and Cooperative): 

• It included those industries which were left open to the private sector, individuals well as cooperatives.

Thus, the purpose of the Industrial Policy Resolution of 1956 is Regional equality.

The correct answer is option 2, i.e. Low marginal propensity to consume.

Marginal propensity to consume (MPC) is defined as the proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services, as opposed to saving it.

• Keynesian theory states that increasing investment or government spending increases consumers’ income, and they will, in turn, spend more.
• This additional spending will generate additional production, creating a continuous cycle via a process known as the Keynesian multiplier.
• The higher the MPC, the higher the multiplier—the more the increase in consumption from the increase in investment; similarly, the lower the MPC, the lower the multiplier.

The correct answer is Mixed Economy.

• "Profit Motive and Social Welfare" both are the characteristics of a Mixed Economy. 
• Mixed Economy: 
  • The mixed economy where both the private market and the factors of production under government control, take place.
  • It is the most common system of an economy that exists in several countries worldwide.
  • Our country(India) is a pure example of a Mixed economy.

The following tables show the types of economic systems with the respective countries. 

TYPES OF ECONOMIC SYSTEM
CAPITALIST ECONOMY	Capitalism is an economic system in which any kind of a private entity or any personal business owns capital goods. This economy basically focused on Privatization.	Focused Country-United States of America (USA)
SOCIALIST ECONOMY	Socialist economy means the economic system under which it is controlled & regulated by the government. so as to provide some public welfare and equal opportunity to the people in a society.	Focused Country-RUSSIA
MIXED ECONOMY	A mixed economic system is a system that combines both aspects of capitalism and socialism.	Focused Country-INDIA

If interest payments are included in the primary deficit, it is equal to the fiscal deficit. Fiscal deficit = revenue receipts + debt related receipts + other receipts - total expenditure