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Part 036 – Macro Economics Previous Year Questions

Q1. Value-added means value of
(a) output at factor cost
(b) output at market prices
(c) goods and services less depreciation
(d) goods and services less cost of intermediate goods and services
Ans: (d) Value added is an economic term to express the difference between the value of goods and the cost of materials or supplies that are used in producing them. It is a measure of economic activity which eliminates the duplication inherent in the sales value figure which results from the use of products of some establishments as materials or services by others. So it is of goods and services less cost of intermediate goods and services.

Q2. Forced Savings refer to

(a) Reduction of consumption consequent to a rise in prices
(b) Taxes on individual income and wealth
(c) Compulsory deposits imposed on income tax payers
(d) Provident fund contribution of private sector employees
Ans: (a) Forced saving is an economic situation in which consumers spend less than their disposable income, not because they want to save but because the goods they seek are not available or because goods are too expensive. In a free economy, this situation would normally result in increase in prices and inflow of more goods.

Q3. Which of the following is an indirect tax ?

(a) Capital Gains Tax
(b) Excise Duty
(c) Wealth Tax
(d) Estate Duty
Ans: (b) Some examples of indirect taxes include value added tax, excise duty, sales tax, stamp duty and custom duty levied on imports. These are taxes levied by the state on expenditure and consumption, but not on property or income.

Q4. Taxes on professions can be levied by :

(a) State government only
(b) both by state and union government
(c) by panchayats only
(d) Union government only
Ans: (a) In India, the professional tax is imposed at the state level. However, not all the states impose this tax. Business owners, working individuals, merchants and people carrying out various occupations comes under the purview of this tax. Professional tax is levied by particular Municipal Corporations.

Q5. A part of National Debt known as External Debt is the amount

(a) borrowed by its citizens from abroad
(b) lent by its citizens to foreign governments
(c) borrowed by its government from abroad
(d) lent by its government to foreign government
Ans: (c) External debt (or foreign debt) is that part of the total debt in a country that is owed to creditors outside the country. The debtors can be the government, corporations or private households. The debt includes money owed to private commercial banks, other governments, or international financial institutions such as the International Monetary Fund (IMF) and World Bank.

Q6. The non-expenditure costs which arise when the producing firm itself owns and supplies certain factors of production are

(a) Explicit costs
(b) Original costs
(c) Implicit costs
(d) Replacement costs
Ans: (c) In economics, an implicit is the opportunity cost equal to what a firm must give up in order to use factors which it neither purchases nor hires. It is the opposite of an explicit cost, which is borne directly. In other words, an implicit cost is any cost that results from using an asset instead of renting, selling, or lending it. These are costs a business incurs without actually spending money.

Q7. Which of the following subjects does not figure in the Concurrent List of our Constitution ?

(a) Stock Exchanges and futures markets
(b) Protection of wild animals and birds
(c) Forests
(d) Trade unions
Ans: (a) The Concurrent List or List-III is a list of 47 items given in Part XI of the Constitution of India, concerned with relations between the Union and States. Stock exchanges and futures markets come under the Union List.

Q8. The theory of “Maximum Social Advantage” in Public Finance was given by

(a) Robbins (b) Musgrave
(c) Findley (d) Dalten
Ans: (d) The ‘Principle of Maximum Social Advantage’ was introduced by British economist Hugh Dalton. According to Dalton, “The best system of public finance is that which secures the maximum social advantage from the operations which it conducts.”

Q9. Taxes are as certain as the death, because

(a) They constitute the major source of government revenue.
(b) Government have no other source of revenue.
(c) Most PSUs are run inefficiently.
(d) Government has its own budget constraints.

Ans: (a) Benjamin Franklin’s utterance, “In this world nothing can be said to be certain, except death and taxes,” when applied in economics means that the largest amount of revenue raised by governments comes from taxation. The proverb draws on the actual inevitability of death to highlight the difficulty in avoiding the burden of taxes.

Q10. A tax is said to be regressive when its burden falls

(a) less heavily on the poor than on the rich
(b) more heavily on the poor than on the rich
(c) equally on the poor as on the rich
(d) None of these
Ans: (b) In terms of individual income and wealth, a regressive tax imposes a greater burden on the poor than on the rich. There is an inverse relationship between the tax rate and the taxpayer’s ability to pay, as measured by assets, consumption, or income. These taxes tend to reduce the tax burden of the well-to-do, as they shift the burden disproportionately to the needy.

Q11. Mixed Economy means :

(a) Promoting both agriculture and industries in the economy
(b) Co-existence of public and private sectors
(c) Co-existence of rich and poor
(d) Co-existence of small and large industries
Ans: (b) A mixed economy is variously defined as an economic system consisting of a mixture of either markets and economic planning, public ownership and private ownership, or free markets and economic interventionism. All modern economies are mixed where the means of production are shared between the private and public sectors.

Q12. By whom was the autonomous investment separated from induced investment ?

(a) Schumpeter (b) Malthus
(c) Joan Robinson (d) Adam Smith
Ans: (a) Under his concept of creative destruction, Schumpeter distinguished between two types of investment that he called induced and autonomous. Induced investment arose from the discrepancy between supply and demand and autonomous investment from resources and technology created by the entrepreneurs. He also introduced a concept of “saving up” which is different from saving in the neoclassical growth models. Saving up constituted the part of output that is withheld from investment and consumption.

Q13. When price of a substitute of commodity ‘x’ falls, the demand for ‘x’ :

(a) falls
(b) remains unchanged
(c) increases at increasing rate
(d) rises
Ans: (a) Cross Price Effect refers to effect on the demand for a given commodity due to a change in the price of a substitute commodity. A change (increase or decrease) in the price of substitutes directly affects the demand for a given commodity. When price of substitute goods (say, coffee) rises, demand for the given commodity (say, tea) also rises at its same price. It leads to a rightward shift in the demand curve of the given commodity. With decrease in price of substitute goods (coffee), demand for the given commodity (tea) also decreases. It shifts the demand curve of the given commodity towards left.

Q14. VAT is imposed:

(a) Directly on Consumer
(b) On first stage of production
(c) On final stage of production
(d) On all stages between production and sale
Ans: (d) Value Added Tax (VAT) is imposed on the value added to each commodity by a firm during all stages of production and distribution. In simple terms, it is a fee assessed against businesses at each step of the production and distribution process, usually whenever a product is resold or value is added to it. Valueadded taxation in India was introduced as an indirect value added tax (VAT) into the Indian taxation system from 1 April 2005.

Q15. The aim of Differentiated Interest Scheme was to provide concessional loans to _______.

(a) weaker section of the society
(b) Public Sector Industries
(c) Public Limited Companies
(d) big exports
Ans: (a) The Differential Rate of Interest Scheme, formulated in March 1972, offers financial assistance at concessional rate of interest = 4% to those who intend taking up any productive activity and has been tailored for persons whose income is very low. This scheme is meant for: • Persons belonging to SC/STs, Adivasis engaged in agricultural operations and/ or allied activities; • Persons engaged in collection of forest products, fodder and selling these in markets; • Persons engaged in Village and Cottage Industries on a very small scale; etc.

Q16. Which among the following is not the outcome of decrease in prime lending rate ?

(a) to raise the bank loan
(b) decline in saving rate
(c) decline in productivity
(d) increased demand of consumer products
Ans: (c) Prime rate or prime lending rate is a term applied in many countries to a reference interest rate used by banks. The term originally indicated the rate of interest at which banks lent to favored customers, i.e., those with high credibility. When these rates are high, demand decreases and output falls to meet the new lower demand. Less output requires fewer worker, driving unemployment higher.

Q17. The major aim of devaluation is to :

(a) encourage imports
(b) encourage exports
(c) encourage both exports and imports
(d) discourage both exports and imports
Ans: (b) Devaluation in modern monetary policy is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged. ‘Devaluation’ means official lowering of the value of a country’s currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency. There are two implications for a currency devaluation. First, devaluation makes a country’s exports relatively less expensive for foreigners and second, it makes foreign products relatively more expensive for domestic consumers, discouraging imports. As a result, this may help to reduce a country’s trade deficit.

Q18. What is USP in marketing field?

(a) Uninterrupted power supply
(b) Universal standards of production
(c) US Programme based
(d) Exclusive marketing features
Ans: (*) The Unique Selling Proposition (a.k.a. Unique Selling Point, or USP) is a marketing concept that was first proposed as a theory to understand a pattern among successful advertising campaigns of the early 1940s. It states that such campaigns made unique propositions to the customer and that this convinced them to switch brands. The term was invented by Rosser Reeves of Ted Bates & Company. Today the term is used in other fields or just casually to refer to any aspect of an object that differentiates it from similar objects. The term USP has been largely replaced by the concept of a Positioning Statement.

Q19. When too much money is chasing too few goods, the situation is

(a) deflation (b) inflation
(c) recession (d) stagflation
Ans: (b) Demand-pull inflation is asserted to arise when aggregate demand in an economy outpaces aggregate supply. It involves inflation rising as real gross domestic product rises and unemployment falls, as the economy moves along the Phillips curve. This is commonly described as “too much money chasing too few goods”. More accurately, it should be described as involving “too much money spent chasing too few goods”, since only money that is spent on goods and services can cause inflation.

Q20. Which of the following groups suffer the most from inflation?

(a) Debtros
(b) Creditors
(c) Business class
(d) Holders of real assets
Ans: (b) Inflation, or the general rise of price levels in an economy, has many deleterious effects. It leaves the economy as a whole poorer relative to pre-inflation levels of wealth (individual and societal). Inflation reduces the value of each unit of currency and thus leaves the holder of that currency with lower purchasing power. Generally speaking, those who benefit from higher inflation are debtors and those who suffer from it- creditors. If one has substantial debt, each dollar one has to repay would be worth less than when it was borrowed. In this way, one pays back less in real terms than one had borrowed. Those who may benefit from higher inflation are people with significant debt.

Q21. What is “narrow money” ?

(a) The sum of currency in circulation and the demand deposits in banks
(b) The sum of MI money and the time deposits
(c) The sum of currency in circulation with the public and the cash reserves held by banks
(d) The market value of the stocks held by all the holders excluding the promoters
Ans: (a) The four main monetary aggregates of measures of money supply which reflect the state of the monetary sector are:- (i) M1 (Narrow money)= Currency with the public + demand deposits of the public; (ii) M2 = M1 + Post Office Savings deposits; (iii) M3 (Broad money)= M1 + time deposits of the public with banks; and (iv) M4 = M3 + Total post office deposits. So ‘Narrow Money’ is simply a category of money supply that includes all physical money like coins and currency along with demand deposits and other liquid assets held by the central bank. This category of money is considered to be the most readily available for transactions and commerce.

Q22. The main source of long-term credit for a business unit is

(a) sale of stocks and bonds to the public
(b) borrowing from banks
(c) loans from the Government
(d) deposits from the public and financial institutions
Ans: (a) Companies issue securities called stocks and bonds to raise necessary capital which funds the company’s daily operations and growth. Stock represents fractional ownership in the company. Investors may purchase preferred or common stock. Bonds represent loans of the company to lenders called bondholders. A company decides to sell stock when it needs longterm access to capital. Unlike bond loans, issuing stock to owners called stockholders doesn’t require the company’s repayment of investor principal.

Q23. Devaluation of money means :

(a) decrease in the internal value of money
(b) decrease in the external value of money
(c) decrease in both internal and external value of money
(d) the government takes back currency notes of any denominations
Ans: (b) Devaluation refers to a decline in the value of a currency in relation to another, usually brought about by the actions of a central bank or monetary authority. Devaluation is sometimes used more generally to describe any significant drop in a currency’s international exchange rate, although usually a decline caused by market forces with no government intervention is termed a depreciation. Devaluations are most often associated with developing countries that don’t allow their currency prices to float freely on the open market.

Q24. Bank rate is that rate on which–

(a) Any bank lends money to an individual
(b) State Bank of India gives loan to the rural banks
(c) Central Bank of Country lends money to the commercial banks
(d) Rural bank gives loan to cooperative societies
Ans: (c) Bank rate, also referred to as the discount rate, is the rate of interest which a central bank charges on the loans and advances to a commercial bank. Repo (Repurchase) rate is the rate at which the central bank lends short-term money to the banks against securities. A reduction in the repo rate will help banks to get money at a cheaper rate. The reverse repo rate is the rate at which the banks park surplus funds with reserve bank, while the repo rate is the rate at which the banks borrow from the central bank.

Q25. Devaluation usually causes the internal prices to :

(a) fall
(b) rise
(c) remain unchanged
(d) None of the above
Ans: (c) Devaluation reduces the export price in term of foreign currencies in the world market. As a result the exports are increased so as to increase the revenue of the country. When the exports are increased all efforts are made to increase the production of the country. However, devaluation of currency is in relation to external currencies and external trade. It has effects on a country’s international trade by alluring traders. But, internal prices remain unaffected.

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