Indian Economy- Part 4

Indian Economy

1. Which of the following best describes the concept of 'Moral Hazard' in economics?

a) The risk that arises from a borrower defaulting on a loan b) The risk that one party has an incentive to take undue risks because they do not bear the full consequences of those risks c) The risk that arises from holding high-yield bonds d) The risk of inflation due to high government spending

b) 'Moral Hazard' occurs when one party in a transaction takes more risks because they do not have to bear the full cost of those risks, often due to the protection provided by another party. This is common in insurance and financial markets.

2. What is the primary goal of India's 'Make in India' initiative?

a) To increase foreign direct investment in the agriculture sector b) To boost manufacturing in India and transform it into a global manufacturing hub c) To promote IT and software services export d) To focus on the development of the service sector

b) The 'Make in India' initiative aims to boost India's manufacturing sector by encouraging both multinational and domestic companies to produce their goods in India. It focuses on improving infrastructure, ease of doing business, and attracting FDI.

3. Which of the following factors is most likely to cause 'Demand-Pull Inflation'?

a) A significant decrease in consumer demand b) An increase in the supply of goods and services c) An increase in consumer income or government spending d) A decrease in the cost of production

c) Demand-pull inflation occurs when the aggregate demand in an economy surpasses aggregate supply. It is often caused by increased consumer spending, higher government expenditure, or both, leading to higher prices.

4. Which economic theory argues that market forces, in the absence of government intervention, can best allocate resources?

a) Keynesian economics b) Supply-side economics c) Monetarism d) Classical economics

d) Classical economics suggests that free markets, through the 'invisible hand,' are best at allocating resources efficiently without government intervention. It assumes that markets naturally tend toward equilibrium.

5. In the context of foreign exchange, what is a 'Forward Contract'?

a) A contract to buy or sell a currency at the current exchange rate b) A binding agreement to exchange currencies at a predetermined rate at a future date c) A loan taken in foreign currency d) A market where foreign exchange is traded for immediate delivery

b) A binding agreement to exchange currencies at a predetermined rate at a future date Explanation: A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date. It is used in foreign exchange markets to hedge against currency risk.

6. What does the term 'Dutch Disease' refer to in economics?

a) A phenomenon where high inflation is caused by excess money supply b) A situation where rapid economic growth leads to increased imports and trade deficits c) An economic condition where the discovery of natural resources leads to a decline in the manufacturing sector d) A scenario where a country's currency is pegged to another more stable currency

c) 'Dutch Disease' refers to the negative impact on an economy that occurs when a country discovers large reserves of natural resources. The resource boom can lead to an appreciation of the currency, making other sectors like manufacturing less competitive internationally.

7. Which of the following statements is true regarding the 'Gini Coefficient'?

a) It measures the absolute level of poverty in a country b) It quantifies the inequality of income distribution within a population c) It represents the total amount of wealth in a country d) It measures the trade balance of a country

b) The Gini Coefficient is a measure of statistical dispersion intended to represent income inequality or wealth inequality within a nation or a group of people. A Gini coefficient of 0 expresses perfect equality, while a Gini coefficient of 1 implies maximum inequality.

8. What is 'Fiscal Drag'?

a) A situation where tax revenues fall due to reduced economic activity b) The slowdown in economic growth due to increased government borrowing c) The effect of inflation pushing taxpayers into higher income tax brackets, increasing the overall tax burden without any change in real income d) The negative impact of increased interest rates on private investment

c) Fiscal drag occurs when inflation and wage growth move taxpayers into higher income tax brackets, increasing their tax burden without an increase in real purchasing power. This can reduce disposable income and slow economic growth.

9. In the context of financial markets, what does 'Arbitrage' refer to?

a) A strategy of buying high and selling low b) The simultaneous purchase and sale of an asset to profit from a difference in price c) A long-term investment strategy d) Speculative trading in foreign exchange markets

b) Arbitrage is the practice of taking advantage of a price difference between two or more markets. It involves buying an asset in one market and simultaneously selling it in another market at a higher price, profiting from the temporary difference.

10. Which of the following best explains the 'Fisher Effect'?

a) The relationship between unemployment and inflation b) The effect of a change in the money supply on nominal interest rates c) The theory that the real interest rate is independent of monetary measures d) The impact of government spending on aggregate demand

c) The Fisher Effect describes the relationship between nominal interest rates and inflation. According to the Fisher Effect, the real interest rate equals the nominal interest rate minus the expected inflation rate, suggesting that the real interest rate is unaffected by changes in the inflation rate.

If any answer found wrong, Please comment.

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