Daily Static MCQs for UPSC & State PSC Exams - Economy (24 August 2023)

   

Daily Static MCQs Quiz for UPSC, IAS, UPPSC/UPPCS, MPPSC. BPSC, RPSC & All State PSC Exams

Subject : Economy

1. Consider the following statements:

1. Factor cost refers to the price arrived after deducting from the market price the government subsidy and adding the indirect taxes.
2. GDP at factor cost is useful to see how competitive market forces are and how distortionary indirect taxes are.

Which of the above statements is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: (B)

Explanation: Factor costs are the actual production costs at which goods and services are produced in an economy. Factor cost refers to the price arrived after deducting from the market price the indirect taxes and adding to the resulting number government subsidies if any. Hence, statement 1 is incorrect.

2. Which of the following are the factors considered behind the market determined exchange rates?

1. Net foreign currency inflows
2. Growth rate of the economy
3. Commodity dependence of the economy on global supplies
4. Forex reserves

How many of the above statements are correct?

(a) Only one
(b) Only two
(c) Only three
(d) All four

Answer: (D)

Explanation: Markets decide the exchange rate based on a variety of factors like:

  • Net foreign currency inflows
  • Commodity dependence of the country on global supplies
  • Forex reserves
  • Growth rate of the economy

If these factors are favourable, the currency strengthens.

3. Consider the following statements:

1. GDP deflator is a measure of the level of prices of all new, domestically produced, final goods and services in an economy in a year.
2. Like CPI, the GDP deflator is based on a fixed basket of goods and services.
3. When GDP deflator is negative, it necessarily means that there is inflation in the economy.

How many of the above statements are correct?

(a) Only one
(b) Only two
(c) All three
(d) None

Answer: (A)

Explanation:

  • In economics, the GDP deflator is a measure of the level of prices of all new, domestically produced, final goods and services in an economy in a year. Hence, statement 1 is correct.
  • Like the consumer price index (CPI), the GDP deflator is a measure of price inflation/deflation with respect to a specific base year. The GDP deflator is a more comprehensive inflation measure than the CPI index because it isn’t based on a fixed basket of goods. When GDP deflator is negative, nominal GDP is less than real DP. It means that there is deflation in the economy. Hence, statement 2 and 3 are incorrect.

4. Which of the following is disadvantageous to developing countries’ international trade?

(a) Protection to domestic industries from dumping
(b) Establishing regional trading blocs
(c) Export of primary articles and import of manufactured goods
(d) Free trade with other developing nations

Answer: (C)

Explanation: The present integration of global markets favours the more competitive product from a more competitive country. Developed countries have an edge over manufactured goods due to advance in physical as well as human capital. Developing countries are preferred for exporting primary articles because they have an abundance of it. This affects their competitiveness in the long-run as they miss out on the chance to build a manufacturing base, and remain a primary producer backward economy. Hence, option (c) is correct.

5. A closed economy is likely to have which of the following characteristics?

(a) The government does not have a right to print currency.
(b) The central bank does not control money supply.
(c) Fiscal deficit would be zero.
(d) Balance of Payments is zero.

Answer: (D)

Explanation: 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. A closed economy is the opposite of an open economy, in which a country will conduct trade with outside regions. So, if no capital or goods/services are imported, exported, the BoP will be zero. In this case, the fiscal deficit need not be zero since a developing country may adopt expansionary fiscal policy to tackle poverty and unemployment. Hence, option (d) is correct.