Indian Economy- Part 5

Indian Economy

1. What is the primary purpose of a 'Liquidity Trap' in Keynesian economics?

a) A situation where monetary policy becomes ineffective because people hoard cash b) A mechanism to ensure liquidity in the banking sector c) A policy tool to encourage investment during economic booms d) A regulation to prevent excessive borrowing by households

a)A liquidity trap occurs when interest rates are very low and savings rates are high, rendering monetary policy ineffective. In this situation, people prefer holding cash instead of investing or spending, making it difficult for central banks to stimulate economic growth through lower interest rates.

2. In the context of Indian fiscal policy, what is 'Revenue Deficit'?

a) The excess of total revenue over total expenditure b) The excess of total expenditure over total revenue c) The difference between revenue receipts and revenue expenditure d) The difference between capital receipts and capital expenditure

c) Revenue deficit is the gap between the government’s revenue receipts and its revenue expenditures. It indicates that the government’s day-to-day expenses exceed its income, implying a lack of funds to cover current operations without borrowing.

3. What does the term 'Invisible Hand' in economics refer to?

a) Government intervention in markets to correct failures b) The effect of monopolies on market efficiency c) A hidden factor that influences demand and supply d) The self-regulating nature of the marketplace

d) The self-regulating nature of the marketplace Explanation: The term 'Invisible Hand,' coined by Adam Smith, refers to the self-regulating nature of a free market where individual self-interest and competition lead to the efficient allocation of resources.

4. In economic terms, what does 'Deadweight Loss' represent?

a) The loss in consumer surplus due to monopoly pricing b) The decrease in government revenue due to tax evasion c) The loss of economic efficiency when equilibrium is not achieved d) The loss of profit for firms in a perfectly competitive market

c) Deadweight loss refers to the loss of economic efficiency that can occur when the equilibrium for a good or service is not achieved, typically due to market distortions like taxes, subsidies, price ceilings, or monopolies.

5. What is 'Hyperinflation'?

a) Inflation that is significantly below the target set by a country's central bank b) A sustained increase in the general price level at a very high rate c) Inflation that occurs in a rapidly growing economy d) The rate of inflation that is consistent with full employment

b) Hyperinflation is an extremely high and typically accelerating inflation, often exceeding 50% per month. It erodes the real value of the currency and savings, leading to a loss of confidence in the currency.

6. What is the 'Crowding Out' effect in economics?

a) The reduction in private investment due to higher government borrowing b) The expansion of the private sector due to lower government spending c) The increase in government borrowing to finance infrastructure projects d) The influence of foreign direct investment on domestic industries

a) The crowding-out effect occurs when increased government borrowing leads to higher interest rates, which in turn reduces private investment. It can limit the effectiveness of fiscal policy aimed at stimulating economic growth.

7. What does 'Sterilization' mean in the context of central banking?

a) The process of controlling inflation by limiting money supply growth b) The act of reducing the foreign exchange reserves of a country c) The process of offsetting foreign exchange interventions to stabilize the money supply d) The regulation of interest rates to control capital flows

c) Sterilization is the process by which a central bank offsets foreign exchange interventions by buying or selling domestic assets to neutralize the impact on the money supply, thus preventing inflation or deflation.

8. What does 'Terms of Trade' (TOT) refer to in international economics?

a) The ratio of a country's imports to its exports b) The ratio of export prices to import prices c) The total value of a country's trade balance d) The sum of a country's trade surplus and deficit

b) Terms of Trade (TOT) is an economic measure that compares the relative prices of a country's exports to its imports. It reflects how much imports an economy can get for a unit of exported goods.

9. What is the primary purpose of 'Repo Rate' in monetary policy?

a) To control inflation by regulating the supply of money in the economy b) To provide long-term funding to commercial banks c) To determine the amount of foreign exchange reserves a country holds d) To regulate the stock market by adjusting interest rates

a) The repo rate is the rate at which the central bank lends money to commercial banks. By adjusting the repo rate, the central bank can influence inflation and liquidity in the economy. Higher repo rates reduce inflation by decreasing the money supply.

10. Which of the following best explains the concept of 'Ricardian Equivalence' in economics?

a) The idea that an increase in government spending leads to an equal decrease in private consumption b) The theory that consumers adjust their spending and saving behavior based on their expectations of future taxes c) The notion that free trade benefits all countries involved, regardless of their level of development d) The belief that fiscal deficits have no impact on national savings and investment levels

b) Ricardian Equivalence is an economic theory suggesting that consumers anticipate future taxes when the government increases debt to finance spending. As a result, they save more in the present to pay for future tax increases, neutralizing the impact of fiscal policy on the economy.

If any answer found wrong, Please comment.

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