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Part 030 – Macro Economics Previous Year Questions

Q1. One of the features of a free market economy is
(a) active state intervention
(b) public ownership of factors of production
(c) rationing and price control
(d) consumer’s sovereignty
Ans: (d) Consumer Sovereignty is one of the features of a free market economy. It refers to the assertion consumer preferences determine the production of goods and services. In a free market system, market performance is in fact responsive to the specific wants of the consumers within the system.

Q2. Which of the following costs is related to marginal cost?

(a) Variable Cost (b) Implicit Cost
(c) Prime Cost (d) Fixed Cost
Ans: (a) In economics, marginal cost is the change in the total cost that arises when the quantity produced is incremented by one unit. That is, it is the cost of producing one more unit of a good. Marginal cost is independent of the fixed cost and depends on the changes in the variable factors. Since fixed costs do not change with output, there are no marginal fixed costs when output is increased in the short run. It is only the variable costs that vary with output in the short run. Therefore, the marginal costs are in fact due to the changes in variable costs, and whatever the amount of fixed cost, the marginal cost in unaffected by it.

Q3. Surplus budget is recommended during :

(a) Boom (b) Depression
(c) Famines (d) War
Ans: (b) Surplus budget is a budget in which government receipts are greater than government expenditures. Such a budget is desired when the economy is battling inflation due to excess aggregate demand (AD). Surplus budget plugs the inflationary gap by lowering the level of aggregate demand. AD is lowered on account of (i) rise in revenue collection by the government, and (ii) fall in government expenditure.

Q4. Economic profit or normal profit is the same as :

(a) optimum profit
(b) accounting profile
(c) maximum profit
(d) net profit
Ans: (d) Normal profit or economic profit is an economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero. Simply put, normal profit is the minimum level of profit needed for a company to remain competitive in the market. In a sense, normal profit is the same as net profit which is calculated by subtracting a company’s total expenses from total revenue, thus showing what the company has earned (or lost) in a given period of time. Accounting profit occurs when revenues are greater than costs, and not equal, as in the case of normal profit.

Q5. When income increase, consumption also increases :

(a) in a lower proportion
(b) in a higher proportion
(c) in the same proportion
(d) None of the options
Ans: (a) According to the Keynesian Consumption theory, “men are disposed, as a rule and on average, to increase their consumption as their income increases, but not by as much as the increase in their income.” Another feature of consumer behavior is that when income increases, people do not spend their entire incremental income on consumption. They save a part of it for their financial security during the period of unemployment, illness, etc. In simple words, the marginal propensity to consume decreases, i.e., households spend a decreasing proportion of marginal income on consumption. That is why families on lower income scale save a lower percentage of their income and those on higher scale of income save a larger proportion of their income.

Q6. The total utility from 9 units of commodity x is 20 and from 10 units is 15. Calculate the marginal utility from 10th unit.

(a) 0.5 (b) –0.5
(c) 5 (d) –5
Ans: (d) Marginal Utility = Change in Total Utility / Change in number of Units consumed. The first component of the formula is to calculate the change in total utility. The second component of the marginal utility formula is the change in the number of units that have been consumed. This is done by subtracting the number that is currently being consumed from a previously consumed amount. So Marginal Utility (MU) from 10th Unit = TU10 – TU9= 15 – 20= –5

Q7. Barter transactions means

(a) Goods are exchanged with gold.
(b) Coins are exchanged for goods.
(c) Money acts as a medium of exchange.
(d) Goods are exchanged with goods.

Ans: (d) Barter is a system of exchange where goods or services are directly exchanged for other goods or services without using a medium of exchange, such as money. Barter, as a replacement for money as the method of exchange, is used in times of monetary crisis, such as when the currency may be either unstable or simply unavailable for conducting commerce.

Q8. The supply-side measure to control inflation is

(a) Reducing public expenditure
(b) Price control through Public Distribution System
(c) Higher taxation to mop up liquidity
(d) Credit control
Ans: (b) The issue of inflation is addressed from both demand and supply sides. demand management is achieved by measures such as postponing public expenditure, mopping up excess liquidity either through taxes or savings schemes, etc. On the supply side, the mechanism of Public Distribution System (PDS) ensures availability of essential commodities for the vulnerable sections of society. This helps to maintain price levels. Coupled with this is the open market sale of rice and wheat resorted to by FCI from its buffer stock in times of price rise.

Q9. The Ability Principle of Taxation is given by

(a) Adam Smith
(b) Edgeworth
(c) Joan Robinson
(d) J.S.Mill
Ans: (a) The ‘Ability-to-Pay’ principle of Taxation is one of the canons of taxation proposed by Adam Smith in his ‘Wealth of Nations.’It is a progressive taxation principle that maintains that taxes should be levied according a taxpayer’s ability to pay. It is concerned with the equitable distribution of taxes according to the stated taxable capacity or ability to pay of an individual or group. The emphasis in this approach is put on redistribution of income.

Q10. ‘Galloping Inflation’ is also known as

(a) Walking Inflation
(b) Running Inflation
(c) Hyper Inflation
(d) Creeping Inflation
Ans: (c) When prices rise between 20% to 100% per annum or even more, it is called galloping or hyperinflation. Such a situation brings a total collapse of the monetary system because of the continuous fall in the purchasing power of money. Galloping inflation has adverse effect on middle and low income groups in the society.

Q11. Average Fixed Cost Curve is

(a) Upward sloping
(b) ‘U’ shaped
(c) ‘V’ shaped
(d) Downward sloping
Ans: (d) The Average Fixed Cost Curvegraphically represents the relation between average fixed cost incurred by a firm in the short-run product of a good or service and the quantity produced. it is relatively high at small quantities of output, then declines as production increases. It is downward sloping because as output increases, the firm spreads its fixed costs over larger and larger amounts of output.

Q12. In which of the following market forms, a firm does not exercise control over price?

(a) Monopoly
(b) Perfect competition
(c) Oligopoly
(d) Monopolistic competition
Ans: (b) In perfect competition, the existence of a large number of firms producing and selling the product ensures that an individual firm exercises no influence over the price of the product. The output of an individual firm constitutes a very small fraction of the total output of the whole industry so that any increase or decrease in output by an individual firm has a negligible effect on the total supply of product of the industry. As a result, a single firm is not in a position to influence the price of the product by the increasing or reducing its output.

Q13. Situation Analysis is useful for:

(a) Analysis of Capital Market
(b) SWOT Analysis
(c) Capital Market
(d) Analysis of Capital Market and Capital Market
Ans: (b) Three of the four options in the question are identical. Situation analysis refers to a collection of methods that managers use to analyze an organization’s internal and external environment to understand the organization’s capabilities, customers, and business environment. It is useful for Strengths, Weaknesses, Opportunities, and Threats (SWOT) analysis in which internal strengths and weaknesses of an organization, and external opportunities and threats faced by it are closely examined to chart a strategy.

Q14. Which term is used in economics for the market value of all goods and services in one year by labour and properly supplied by the residents of the country?

(a) GDP (b) GPN
(c) OMP (d) GNP
Ans: (d) Gross National Product (GNP) is defined as “the market value of all goods and services produced in one year by labour and property supplied by the residents of a country.” It is contrasted to Gross domestic product (GDP), defined as “the value of all final goods and services produced in a country in 1 year.”

Q15. Market segmentation is:

(a) Group of Sales Persons
(b) Dividing target groups as per their needs
(c) Market Division
(d) Market Space
Ans: (b) Market segmentation is a marketing strategy which refers to the aggregating of prospective buyers into groups, or segments, having similar needs, wants, or demand characteristics. Its objective is to design a marketing mix that precisely matches the expectations of customers in the targeted segment.

Q16. What will be the effect on inferior commodities when income of the consumer rises?

(a) Negative effect
(b) Positive effect
(c) No effect
(d) First increase then decrease
Ans: (a) In economics, an inferior good is a good that decreases in demand when consumer income rises (or rises in demand when consumer income decreases), unlike normal goods, for which the opposite is observed. Normal goods are those for which consumers’ demand increases when their income increases. Cheaper cars are examples of the inferior goods.

Q17. Which of the following curve describes the variation of household expenditure on a particular good with respect to household income ?

(a) Demand curve
(b) Engel curve
(c) Great Gatsby curve
(d) Cost curve
Ans: (b) In microeconomics, an Engel curve describes how household expenditure on a particular good or service varies with household income. The curve is named after the German statistician Ernst Engel (1821–1896), who was the first to investigate this relationship between goods expenditure and income systematically in 1857.

Q18. Malthusian theory is associated with which of the following ?

(a) Poverty (b) Employment
(c) Diseases (d) Population
Ans: (d) The most well-known theory of population is the Malthusian theory.It explains the relationship between the growth in food supply and in population. It states that population increases faster than food supply and if unchecked leads to vice or misery. Thomas Robert Malthus enunciated his views about population in his famous book, Essay on the Principle of Population as it affects the Future Improvement of Society, published in 1798.

Q19. When average product of an input is at its maximum then :
(AP= Average product)
(MP= Marginal product)

(a) AP = 0 (b) AP = MP
(c) AP > MP (d) AP < MP
Ans: (b) There is a close relationship between marginal product and average product because both are derived from total product. When marginal product is equal to average product, the average product is at its maximum. In the short-run production function, since marginal product starts off as greater than average product and then falls below average product, we can assume that at the “cross-over point,” when MP = AP, AP is at its maximum.

Q20. If total product is at its maximum then:
(AP= Average product)
(MP= Marginal product)

(a) AP = 0 (b) AP < 0
(c) MP = 0 (d) AP = MP = 0
Ans: (c) Total product (TP) is the total output a production unit can produce, using different combination of factors of production. When marginal product =0 (at point D in the figure), the total product is at its maximum (as seen at point C in the figure given below). Then en as the marginal product becomes negative, the total product starts going down.

Q21. Equilibrium output is determined by:

(a) the equality between total Variable cost and Marginal revenue.
(b) the equality betweem Marginal cost and Marginal revenue.
(c) the equality between Average cost and Average revenue.
(d) the equality between total cost and total revenue.
Ans: (b) Equilibrium Output refers to the level of output where the Aggregate Demand is equal to the Aggregate Supply (AD = AS) in an economy. It signifies that whatever the producers intend to produce during the year is exactly equal to what the buyers intend to buy during the year. According to MR-MC approach, equilibrium refers to stage of that output level at which Marginal Cost (MC) = Marginal Revenue (MR). As long as MC is less than MR, it is profitable for the producer to go on producing more because it adds to its profits. He stops producing more only when MC becomes equal to MR.

Q22. An employer goes on employing more and more of a factor units until :

(a) the Average Revenue Productivity becomes equal to Marginal Revenue Productivity.
(b) the Marginal Revenue Productivity becomes zero.
(c) the Diminishing Marginal Returns sets into operation.
(d) the Marginal Revenue Productivity of a factor becomes equal to its reward.
Ans: (d) According to the Marginal Productivity Theory, the reward or the price of a factor unit depends upon its productivity or its contribution to the total product. While employing a factor, an employer compares the marginal revenue productivity (MRP) of the lost unit and the marginal cost of the factor. He will employ a factor up to the point where the reward (marginal cost of the factor) paid to the factor equals its MRP. If MRP is more than the marginal cost, the employer increases its profits by employing more units of the factor; on the other hand, if marginal cost of the factor is greater than MRP, it will reduce employment to reduce its loss.

Q23. Apart from the availability of raw material location of an industry is also dependent on the availability of:

(a) enviornmental protection and vegetation
(b) man power and energy source
(c) transport and bio energy
(d) water and inputs
Ans: (b) Some of the factors which affect the industrial location are as follows: availability of raw materials, availability of labour, availability of capital, availability of power, availability of market and infrastructure. good supply of labor is one of the traditional factors that is indispensable for industry. Besides, availability of power/ electricity is also a deciding factor.

Q24. What happens when there is a demand deficiency in an economy?

(a) Poverty (b) Stagnation
(c) Recession (d) Inflation
Ans: (b) Deficient demand refers to the situation when aggregate demand for goods and services falls short of aggregate supply of output which is produced by fully employing the given resources of the economy. This deficient demand leads to the decrease in output, employ-ment and prices in the econo-my. According to Malthus, deficiency of demand could lead to stagnation in which both capital and labor are redundant relative to the opportunities for employing them profitably.

Q25. Pump priming should be resorted to at a time of ?

(a) Inflation (b) Deflation
(c) Stagflation (d) Reflation
Ans: (b) Pump priming is the action taken to stimulate an economy, usually during a recessionary/deflationary period, through government spending, and interest rate and tax reductions.Growth is accomplished through the increase in purchasing power experienced by those affected by the injection of funds, with the goal of prompting higher demand for goods and services.

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