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Part 041 – Macro Economics Previous Year Questions

Q1. Freeing the economy from all unnecessary controls and regulations is referred to as
(a) Freedom
(b) Privatisation
(c) Liberalisation
(d) Globalisation
Ans: (c) Economic liberalization is a very broad term that usually refers to fewer government regulations and restrictions in the economy in exchange for greater participation of private entities; the doctrine is associated with classical liberalism. The arguments for economic liberalization include greater efficiency and effectiveness that would translate to a “bigger pie” for everybody. Thus, liberalization in short refers to “the removal of controls”, to encourage economic development.

Q2. Floating Exchange Rate is also referred to as

(a) Flexible Exchange Rate
(b) Fixed Exchange Rate
(c) Real Exchange Rate
(d) Controlled Exchange Rate
Ans: (a) A floating exchange rate or fluctuating exchange rate is a type of exchange rate regime wherein a currency’s value is allowed to fluctuate according to the foreign exchange market. In this sense, it is quite flexible and not something fixed or constant. Such rates automatically adjust, enabling a country to dampen the impact of shocks and foreign business cycles, and to preempt the possibility of having a balance of payments crisis.

Q3. Countries that depend mainly on the export of primary products for their income, are prone to

(a) inflation
(b) economic instability
(c) increasing unemployment
(d) stable economic growth
Ans: (c) Most of the world’s poorest countries depend for increasing export earnings on agricultural products that are vulnerable to fluctuating or declining terms of trade. Disadvantageous terms of technology transfer, protectionism, and decline in financial flows compound the already existing poverty and lack of work. Being labour-intensive, such sectors are prone to various types of unemployment. Developing countries that rely on the export of primary products were hit particularly hard by falling commodity prices between 1980 and 1984.

Q4. A Trade Policy consists of

(a) Export-Import Policy
(b) Licencing Policy
(c) Foreign Exchange Policy
(d) Balance of Payment Policy
Ans: (a) Trade policy, also called Export-Import policy, is a collection of rules and regulations which pertain to trade. Every nation has some form of trade policy in place, with public officials formulating the policy which they think would be most appropriate for their country. Things like import and export taxes, tariffs, inspection regulations, and quotas can all be part of a nation’s trade policy.

Q5. Globalisation means

(a) Integration of economy
(b) Integration of financial market
(c) Integration of the domestic economy with the world economy
(d) Integration of the various sectors of economy
Ans: (c) Globalization is the process of international integration arising from the interchange of world views, products, ideas, and other aspects of culture. Put in simple terms, globalization refers to processes that promote world-wide exchanges of national and cultural resources.

Q6. Globalisation means

(a) Integration of economy
(b) Integration of financial market
(c) Integration of the domestic economy with the world economy
(d) Integration of the various sectors of economy
Ans: (c) Globalization is the increasing economic interdependence of national economies across the world through a rapid increase in cross-border movement of goods, service, technology, and capital. It has been largely accounted by developed economies integrating with less developed economies, by means of foreign direct investment, the reduction of trade barriers, and in many cases cross border immigration.

Q7. Externality theory is the basic theory of the following branch of Economics:

(a) Environomics
(b) Fiscal Economics
(c) International Economics
(d) Macro Economics
Ans: (a) In economics, an externality is a cost or benefit which results from an activity or transaction and which affects an otherwise uninvolved party who did not choose to incur that cost or benefit. Environmental pollution is a classic case of an externality. Externality theory forms the basic theory of environmental economics.

Q8. The balance of payments of a country is in equilibrium when the

(a) demand as well as supply of the domestic currency are the highest
(b) demand for the domestic currency is equal to its supply
(c) demand for the domestic currency is the highest
(d) demand for the domestic currency is the lowest
Ans: (b) When the balance of payments (BOP) of a country is in equilibrium, the surplus or deficit is eliminated from the BOP. When the BOP of a country is in equilibrium, the demand for domestic currency is equal to its supply. The demand and supply situation is thus neither favourable nor unfavourable.

Q9. “Closed Economy” means:

(a) no provision for public sector
(b) no provision for private sector
(c) economy policy not well defined
(d) a country having no imports and exports
Ans: (d) Closed economy is an economy in which no activity is conducted with outside economies. A closed economy is self-sufficient, meaning that no imports are brought in and no exports are sent out. The goal is to provide consumers with everything that they need from within the economy’s borders.

Q10. Dumping is a form of price discrimination at

(a) within industry
(b) national level
(c) international level
(d) local level
Ans: (c) Dumping is, in general, is a situation of international price discrimination, where the price of a product when sold in the importing country is less than the price of that product in the market of the exporting country. It is regarded as an “unfair” trade practice as it may cause or threaten to cause material injury to the importing markets.

Q11. In the balance of payments account, unrequited receipts and payments are also regarded as

(a) bilateral transfers
(b) unilateral transfers
(c) capital account transfers
(d) invisible transfers
Ans: (b) Unrequited receipts and payments are also regarded as unilateral transfers as the flow is only in one direction with no automatic reverse flow in the other direction. There is no repayment obligation attached to these transfers because they are neither borrowings nor lending, but gifts and grants exchanged between governments and people in the world.

Q12. “Wall Street” is the name of the :

(a) Stock Exchange of New York
(b) Indian Township in Washington
(c) Super market in Mumbai
(d) Stock Exchange of kolkata
Ans: (a) Wall Street, a 1.1 km street in the Financial District of lower Manhattan, New York City, is home to the world’s two largest stock exchanges by total market capitalization, the New York Stock Exchange and NASDAQ. Over time, the term has become a metonym for the financial markets of the United States as a whole, the American financial sector.

Q13. As a result of higher rate of inflation in India, the U.S. dollar will

(a) Depreciate (b) Constant
(c) Negligible (d) Appreciate
Ans: (d) A relatively higher rate of inflation causing rise in prices of the goods in India as compared to those in the USA will make US goods relatively cheaper and the Indian goods expensive. This will lead to rise in imports of US goods into India and the reduction in Indian exports to the USA that will, in turn, cause the foreign exchange rate of dollar in terms of rupees to rise and the price of Indian rupee in terms of dollar will fall. Thus, as a result of higher rate of inflation in India, the US dollar -will appreciate and the Indian rupee will depreciate.

Q14. Which type of foreign investment is considered as unsafe?

(a) Foreign Direct Investment
(b) Portfolio Investment
(c) NRI deposits
(d) External commercial borrowing
Ans: (b) Portfolio Investments are considered unsafe. These are investments in the form of a group (portfolio) of assets, including transactions in equity securities, such as common stock, and debt securities, such as banknotes, bonds, and debentures. Portfolio investments are passive investments, as they do not entail active management or control of the issuing company. Rather, the purpose of the investment is solely financial gain, in contrast to foreign direct investment (FDI), which allows an investor to exercise a certain degree of managerial control over a company.

Q15. The term ‘Dumping’ refers to

(a) The sale of a sub-standard commodity
(b) Sale in a foreign market of a commodity at a price below marginal cost
(c) Sale in a foreign market of a commodity just at marginal cost with too much of profit
(d) Smuggling of goods without paying any customs duty
Ans: (b) Dumping is an international price discrimination in which an exporter firm sells a portion of its output in a foreign market at a very low price and the remaining output at a high price in the home market. This is done to turn out foreign competitors from the domestic market. If the foreign market is perfectly competitive, the firm may lower the price in comparison with other competitors so that the demand for it may increase. In such a situation, the firm may sell the commodity even below marginal cost of production, incurring loss in the foreign market (International Economics by M. Maria John Kennedy, p.122).

Q16. “Globalisation of Indian Economy” denotes :

(a) Increase of external borrowings
(b) having minimum intervention in economic relations with other countries
(c) starting of new business units abroad
(d) relaxing the programmes of import substitution
Ans: (b) Globalization means integrating the economy of a country with the economies of other countries or world economy under conditions of free flow of trade, capital and movement of persons across borders. In the Indian content, this implies opening up the economy to foreign direct investment by providing facilities to foreign companies to invest in different fields of economic activity in India; removing constraints and obstacles to the entry of MNCs in India allowing Indian companies to enter into foreign collaborations in India and also encouraging them to set up joint ventures abroad; carrying out massive import liberalization programmes by switching over from quantitative restrictions to tariffs in the first place and then bringing down the level of import duties considerably; and instead of a plethora of export incentives opting for exchange rate adjustments for promoting exports.

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