Question 1

Which one of the following indices is now used by the Reserve Bank of India as the key measure for tracking the rate of inflation in India?

Accepted Answer

Introduction / Context: Measuring inflation accurately is crucial for effective monetary policy. The Reserve Bank of India (RBI) needs a reliable price index to set interest rates, monitor price stability, and communicate its policy stance. Over time, the preferred index for inflation targeting has evolved. This question asks which index is currently used by the RBI as the primary measure when it tracks and targets inflation in India under its flexible inflation targeting framework. Given Data / Assumptions: Four indices are listed: NASDAQ Index, BSE Index, Consumer Price Index (CPI), and Wholesale Price Index (WPI). We are concerned with the index used by the RBI specifically for measuring inflation. We assume standard definitions of stock market indices and price indices. We also assume knowledge of India's formal inflation targeting framework, which uses a specific measure of CPI inflation. Concept / Approach: The NASDAQ Index and the BSE Index are stock market indices that track the performance of selected groups of shares; they are not price indices for goods and services and therefore are not used as inflation measures. The Wholesale Price Index historically played a role in analysing price trends in India, but in recent years the RBI has adopted the Consumer Price Index as the primary anchor for its inflation targeting. Specifically, the RBI and the Government of India agreed on a flexible inflation targeting framework that focuses on headline CPI inflation as the formal target. Therefore, the correct index for this question is the Consumer Price Index. Step-by-Step Solution: Step 1: Eliminate NASDAQ Index, which is a United States stock market index and has no direct role in Indian inflation measurement.Step 2: Eliminate BSE Index, which measures share prices of selected companies on the Bombay Stock Exchange and is not a consumer price index.Step 3: Consider Wholesale Price Index, which measures prices of goods at the wholesale level and was historically used for some inflation analysis.Step 4: Recognise that under the formal inflation targeting framework adopted in India, the RBI uses headline Consumer Price Index inflation as the main target variable.Step 5: Therefore, the index now used by the RBI to measure and target inflation is the Consumer Price Index. Verification / Alternative check: Policy documents, agreements between the Government of India and the Reserve Bank of India, and monetary policy reports explicitly refer to a target range for CPI inflation, typically set as a percentage band around a central value. The Monetary Policy Committee is tasked with keeping CPI inflation within this band. Stock market indices such as NASDAQ and BSE are discussed in the context of financial markets, while WPI continues to be used for some analytical purposes but is not the main target for monetary policy. These facts confirm that CPI is the correct answer. Why Other Options Are Wrong: NASDAQ Index is wrong because it is a foreign stock market index and has nothing to do with measuring India's domestic inflation. BSE Index is incorrect because it reflects changes in share prices, not prices of goods and services consumed by households. Wholesale Price Index, while useful, is not the main indicator used for inflation targeting under the current framework. Thus, only the Consumer Price Index matches the role required in the question. Common Pitfalls: Some candidates remember that WPI was widely cited in earlier years and may mistakenly believe it is still the main policy index, overlooking the shift towards CPI in formal inflation targeting. Another pitfall is to confuse stock market performance with inflation; although rising share prices can reflect expectations, they do not directly measure the cost of living. To avoid such errors, remember that inflation targeting in India is explicitly based on Consumer Price Index inflation as the benchmark measure. Final Answer: The index now used by the Reserve Bank of India to measure the rate of inflation is the Consumer Price Index.

Question 2

Which among the following is not a direct tax, given that direct taxes are levied directly on the income or wealth of individuals and corporations?

Accepted Answer

Introduction / Context: Taxes can broadly be classified into direct taxes and indirect taxes. Direct taxes are levied directly on the income, profits, or wealth of individuals and corporations, while indirect taxes are levied on goods and services and are collected from consumers by intermediaries such as retailers. Understanding whether a particular tax is direct or indirect is important for analysing tax incidence and equity. This question asks which of the listed taxes is not a direct tax, which effectively tests whether the candidate can correctly identify the nature of income tax, wealth tax, and corporate tax. Given Data / Assumptions: Income tax is levied on the income of individuals and certain entities. Wealth tax (when applicable) is levied on the net wealth of individuals or specified entities. Corporate tax is levied on the profits of companies. Option D, None of these, is available, indicating that all listed taxes may belong to the same category. We assume the standard definitions of direct and indirect taxes from public finance. Concept / Approach: Direct taxes are imposed directly on persons or organisations, based on measurable indicators such as income, profits, or wealth. The tax liability falls on the person or organisation and cannot be easily shifted to someone else. Income tax is the classic example, as individuals are assessed and pay according to their income slabs. Wealth tax, where it exists, is levied directly on the net wealth above a threshold. Corporate tax is imposed on the profits of companies. All of these are direct taxes. In contrast, indirect taxes such as Goods and Services Tax are levied on transactions and consumption. Since the question asks which is not a direct tax, and all three listed taxes are direct, the correct answer is that none of them is an indirect tax. Step-by-Step Solution: Step 1: Identify income tax as a tax charged directly on the income of individuals and certain entities. It clearly qualifies as a direct tax.Step 2: Recognise that wealth tax is charged on the net wealth held by a person, above a specified limit. This is also a direct tax because it is levied on the person's wealth, not on a transaction.Step 3: Understand that corporate tax is levied on the profits earned by companies. Again, this tax is assessed directly on the corporation and is therefore a direct tax.Step 4: Since all three named taxes are direct taxes, none of them is a non direct tax in this list.Step 5: Therefore, the only correct answer is that none of these is a non direct tax; all are direct. Verification / Alternative check: Public finance textbooks and official documents routinely classify income tax, corporate tax, and wealth tax as direct taxes. Indirect taxes are grouped separately and include taxes on goods and services, customs duties, excise duties, and similar levies. The presence of the "None of these" option in such questions typically signals that all named items share the same property. Cross checking with these standard classifications supports the conclusion that all three given taxes are direct, and hence the correct choice is to state that none of them is outside the direct tax category. Why Other Options Are Wrong: Option A (Income tax) cannot be chosen as not a direct tax, because income tax is the most typical direct tax. Option B (Wealth tax) is clearly a direct tax, as it is computed on net wealth. Option C (Corporate tax) is a direct tax on company profits. Selecting any of these would contradict standard tax theory. Only Option D, None of these, is consistent with the fact that all three taxes listed are direct taxes. Common Pitfalls: Students sometimes get confused because companies may shift some of the economic burden of corporate tax to consumers through higher prices, but this does not change the legal classification: corporate tax remains a direct tax. Another pitfall is to focus on whether a tax still exists or has been abolished; even if wealth tax has been changed or removed in practice, its conceptual classification as a direct tax remains. It is also important not to mix up the categories with newer value added taxes such as Goods and Services Tax, which are indirect taxes. Final Answer: All the taxes listed are direct taxes, so the correct choice is None of these.

Question 3

Which of the following is not considered an instrument of fiscal policy, given that fiscal policy relates to government taxation, public expenditure, and borrowing?

Accepted Answer

Introduction / Context: Fiscal policy and monetary policy are the two major tools used by governments and central banks to manage the macroeconomy. Fiscal policy is concerned with government revenue and spending decisions, while monetary policy deals with money supply, interest rates, and credit conditions. This question asks which of the given items is not an instrument of fiscal policy and therefore belongs instead to the toolkit of monetary policy or qualitative credit control. Understanding this distinction helps in correctly classifying policy tools and analysing their effects. Given Data / Assumptions: Taxation, public expenditure, and public debt are listed, all commonly discussed under fiscal policy. Credit rationing is one of the options and must be classified. We assume standard definitions of fiscal and monetary policy as taught in macroeconomics. Fiscal policy is carried out by the government, while monetary policy is carried out by the central bank. Concept / Approach: Fiscal policy instruments include taxation (types and rates of taxes), public expenditure (government spending on goods, services, and transfers), and public debt (borrowing by the government through issuing bonds and other instruments). These tools influence aggregate demand, distribution, and development priorities. Credit rationing, in contrast, is a qualitative tool of monetary policy, where the central bank restricts or guides the amount of credit that commercial banks can extend to certain sectors or borrowers. It is used to regulate credit flow for macroeconomic and prudential reasons, not as part of the government's budget decisions. Therefore, credit rationing does not belong to fiscal policy. Step-by-Step Solution: Step 1: Recognise that taxation is a classic fiscal policy instrument, as it determines how the government collects revenue.Step 2: Understand that public expenditure refers to government spending, which is another core element of fiscal policy, used to influence growth and welfare.Step 3: Note that public debt represents government borrowing, which is coordinated through fiscal policy to finance deficits or development projects.Step 4: Examine credit rationing, which involves the central bank limiting or directing bank credit to certain uses or sectors.Step 5: Credit rationing is part of qualitative credit control under monetary policy, not a component of the government budget.Step 6: Therefore, among the options given, credit rationing is not an instrument of fiscal policy. Verification / Alternative check: Standard macroeconomics textbooks list taxes, government spending, and government borrowing as the core instruments of fiscal policy. In contrast, credit control methods including credit rationing, moral suasion, and margin requirements are repeatedly grouped under monetary policy tools used by the central bank. This clear separation confirms that while taxation, public expenditure, and public debt are fiscal, credit rationing belongs to monetary policy and should not be considered a fiscal instrument. Why Other Options Are Wrong: Taxation (option A) is unquestionably a fiscal tool because it defines how the government raises revenue. Public expenditure (option B) is a core part of fiscal policy, as it specifies how the government spends money. Public debt (option C) arises from the government's borrowing decisions to finance deficits and is also handled under fiscal policy. Only credit rationing (option D) is not a fiscal tool; it is a monetary policy instrument used by the central bank to influence lending and credit allocation. Common Pitfalls: Students often mix up fiscal and monetary instruments because both ultimately affect aggregate demand and growth. The key is to remember that fiscal policy instruments appear in the government budget, while monetary policy instruments are operational tools of the central bank. Another pitfall is to associate any instrument related to credit or debt with fiscal policy simply because it involves financial flows, but credit rationing is specifically about bank credit, not government borrowing. Clear separation of institutional responsibilities helps avoid these confusions. Final Answer: The item that is not an instrument of fiscal policy is Credit rationing.

Question 4

In economics, the Lorenz curve is a graphical representation of which of the following economic concepts?

Accepted Answer

Introduction / Context: The Lorenz curve is a well known graphical tool in economics and statistics used to study inequality. It helps visualise how a variable such as income or wealth is distributed across a population. Understanding what the Lorenz curve represents is important in discussions of poverty, social justice, and economic development. This question asks candidates to recall the primary economic concept that the Lorenz curve is designed to depict. Given Data / Assumptions: The options include employment, inflation, deflation, and income distribution. The Lorenz curve is drawn on a graph with cumulative population share on one axis and cumulative income or wealth share on the other. We assume the standard use of the Lorenz curve in inequality and distribution analysis. Concept / Approach: The Lorenz curve plots the cumulative percentage of total income received against the cumulative percentage of the corresponding population, starting from the poorest to the richest. If everyone had exactly the same income, the Lorenz curve would coincide with the line of perfect equality. The more the Lorenz curve bows away from this line, the greater the inequality in income distribution. This curve is closely related to the Gini coefficient, which quantifies the degree of inequality. It does not directly describe employment, inflation, or deflation, which are different macroeconomic variables. Step-by-Step Solution: Step 1: Recall the basic definition: the Lorenz curve is a plot relating cumulative population share to cumulative income or wealth share.Step 2: Understand that this curve is used to see how total income is distributed across different segments of the population.Step 3: Employment levels concern how many people have jobs, which is not the direct focus of the Lorenz curve.Step 4: Inflation and deflation refer to changes in the general price level over time, which also are not depicted by the Lorenz curve.Step 5: Income distribution, in contrast, exactly matches what the Lorenz curve is intended to show: who gets how much of the total income.Step 6: Therefore, the correct answer is income distribution. Verification / Alternative check: In textbooks on welfare economics and development economics, the Lorenz curve is always introduced in chapters dealing with inequality and distribution. It is often accompanied by diagrams showing the line of perfect equality and the Lorenz curve lying below it. Measures such as the Gini coefficient are calculated from the area between the Lorenz curve and the line of equality. There is no use of the Lorenz curve in standard discussions of employment rates, inflation, or deflation. This confirms that its purpose is to represent income or wealth distribution. Why Other Options Are Wrong: Employment (option A) is measured by indicators such as the unemployment rate, labour force participation rate, and employment to population ratio, not by the Lorenz curve. Inflation (option B) and deflation (option C) are tracked by price indices such as the Consumer Price Index or Wholesale Price Index. None of these use the Lorenz curve as a standard tool. Only option D, income distribution, accurately reflects the function of the Lorenz curve. Common Pitfalls: Some learners may confuse the Lorenz curve with other economic curves, such as the Phillips curve (which relates inflation and unemployment) or production possibility frontiers. The names and shapes of these curves can be similar, so it is important to remember what variables are plotted on each axis. For the Lorenz curve, always think in terms of cumulative population and cumulative income or wealth, which clearly indicates that it is about distribution and inequality, not about prices or employment directly. Final Answer: The Lorenz curve is used to represent Income distribution in an economy.

Question 5

In microeconomics, what do we call goods that are typically consumed together, such that an increase in the consumption of one leads to a rise in the demand for the other?

Accepted Answer

Introduction / Context: Understanding the relationship between goods is an essential part of microeconomics and consumer theory. Some goods are related in such a way that they are used together, while others can replace each other. These relationships affect how demand changes when prices or incomes change. The question focuses on the category of goods that are consumed together, like tea and sugar or car and fuel, and asks for the correct term used in economics to describe them. Given Data / Assumptions: We are looking at goods that are consumed together, not separately. Examples include items like shoes and shoelaces, printer and ink, or car and petrol. The options include inferior goods, normal goods, complementary goods, and substitute goods. We assume standard microeconomic definitions of these terms. Concept / Approach: Complementary goods are goods that are used together in consumption. When the use of one increases, the demand for the other tends to rise because they jointly provide utility. Substitute goods, in contrast, can replace one another; an increase in the price of one makes the other more attractive. Normal goods are goods for which demand rises when consumer income increases, and inferior goods are goods for which demand falls when income rises. The phrase “consumed together” directly matches the definition of complementary goods, and this relationship is often represented by a negative cross price elasticity of demand. Step-by-Step Solution: Step 1: Identify the key phrase in the question: goods that are consumed together.Step 2: Recall that complementary goods are defined as goods that are jointly consumed, such that consumption of one increases the usefulness of the other.Step 3: Recognise that when the consumption of one complementary good rises, demand for the other good also tends to increase because both are used together.Step 4: Note that inferior and normal goods describe how demand changes with income, not how two goods are related to one another in joint consumption.Step 5: Substitute goods are alternatives, not goods consumed together; they are used instead of each other.Step 6: Therefore, the correct term for goods consumed together is complementary goods. Verification / Alternative check: Consider some simple examples. If a consumer buys a car, the demand for petrol rises because the car and petrol are used together. If the price of petrol becomes very high, people may reduce their car usage, affecting demand for both goods. Similarly, buying a printer increases demand for ink cartridges. These examples clearly illustrate goods that are consumed together and are discussed in textbooks under the heading of complementary goods. This confirms that complementary goods is the correct label for the concept in the question. Why Other Options Are Wrong: Inferior goods (option A) are goods for which demand falls when income rises; this is unrelated to whether the goods are consumed together with another good. Normal goods (option B) simply have demand that increases with income; again, this does not specify a relationship between two different goods. Substitute goods (option D) are alternatives that consumers switch between, not goods used jointly. Only complementary goods (option C) correctly describe goods that are usually consumed together. Common Pitfalls: A frequent error is to confuse complementary and substitute goods because both involve relationships between products. The key is to remember that complementary goods go together, while substitutes replace each other. Another pitfall is ignoring the direction of the demand response: for complements, a fall in the price of one tends to increase demand for the other, while for substitutes, a rise in the price of one increases demand for the other. Keeping these distinctions clear helps answer such definitional questions accurately. Final Answer: Goods that are consumed together are called Complementary goods.

Question 6

For a normal good in consumer theory, how does the demand for that good typically change when the consumer's income increases?

Accepted Answer

Introduction / Context: In microeconomics, goods are often classified as normal or inferior based on how their demand responds to changes in consumer income. This is a fundamental concept when analysing income effects and drawing Engel curves. A normal good is one that consumers buy more of as their income rises. This question asks for the correct description of how demand for a normal good changes with an increase in the consumer's income. Given Data / Assumptions: The good in question is explicitly stated to be a normal good. The consumer's income is assumed to increase. Other factors such as prices of goods and tastes are assumed to remain constant (ceteris paribus). We are asked about the direction of change in demand, not the exact magnitude. Concept / Approach: For a normal good, the income effect is positive. This means that when income rises, the quantity demanded of the good also rises, holding other things equal. This relationship arises because consumers now have more purchasing power and can afford a higher quantity or better quality of the good. In contrast, an inferior good has a negative income effect: when income increases, demand for that good decreases, as consumers switch to higher quality alternatives. The key idea here is the sign of the relationship between income and demand. With a normal good, that sign is positive. Step-by-Step Solution: Step 1: Identify that the good mentioned in the question is normal, which implies a positive income effect.Step 2: Consider an increase in the consumer's income, while keeping prices and preferences constant.Step 3: For a normal good, higher income allows the consumer to purchase more of the good, reflecting higher demand.Step 4: This means that the demand curve for the normal good shifts to the right as income rises.Step 5: Therefore, the change in demand associated with an income increase is an increase in quantity demanded at each price level.Step 6: Among the options, "Increase" correctly describes this outcome. Verification / Alternative check: Think of common examples of normal goods, such as better quality food, clothing, or electronic devices. When people's incomes rise, they generally buy more of these goods or upgrade to more expensive brands. Demand does not stay constant, nor does it automatically double in a fixed proportion, but it clearly shows an upward tendency. This everyday observation, supported by empirical data and theoretical models, confirms that demand for normal goods rises with income, consistent with the definition. Why Other Options Are Wrong: "Decrease" is wrong because it reflects the behaviour of inferior goods, not normal goods. "Remain constant" is incorrect because normal goods are defined specifically by the fact that their demand changes with income, rather than staying unchanged. "Double" is also incorrect because while demand may increase, there is no requirement that it doubles; the relationship is positive but not necessarily a fixed multiple. Thus, only "Increase" is both precise and consistent with the definition of a normal good. Common Pitfalls: Students sometimes confuse normal and inferior goods due to the word "normal" sounding casual. It is important to remember that a normal good has a positive income elasticity of demand, while an inferior good has a negative income elasticity. Another pitfall is assuming that the increase has to be proportional or very large; in reality, any positive relation, even a small one, qualifies the good as normal. Focusing on the sign of the income effect rather than its size helps reduce confusion. Final Answer: For a normal good, the demand increases when the consumer's income increases.

Question 7

Match the characteristics with their market structure: (a) Price is greater than marginal cost (MC) in both the short run and the long run. (b) The firm faces a highly elastic demand curve. Which market structures correspond to (a) and (b)?

Accepted Answer

Introduction / Context: Different market structures have distinct relationships between price and marginal cost and face different shapes of demand curves. In perfect competition, each firm is a price taker and faces a perfectly elastic demand curve, so price equals marginal cost in equilibrium. In monopolistic competition and monopoly, firms have some degree of market power, so price is greater than marginal cost in both the short run and the long run. This question asks you to match two specific characteristics with the correct market structures, testing your understanding of how price, marginal cost, and demand elasticity vary across market types. Given Data / Assumptions: Characteristic (a): Price is greater than marginal cost in both the short run and the long run. Characteristic (b): The firm faces a highly elastic demand curve. Options involve combinations of pure competition, monopolistic competition, monopoly, and oligopoly. We assume standard textbook definitions of these market structures and their properties. Concept / Approach: In pure competition, each firm takes the market price as given and can sell as much as it wants at that price. The demand curve facing an individual competitive firm is perfectly elastic, and in equilibrium, price equals marginal cost (P = MC). In monopolistic competition, each firm faces a downward sloping demand curve and has some pricing power; therefore, price is greater than marginal cost (P > MC) in both the short run and the long run. The demand curve is elastic but not perfectly elastic. Monopoly also has P > MC, but its demand is usually less elastic than in monopolistic competition. The question states that price exceeds marginal cost in both periods for (a), which fits monopolistic competition or monopoly, and that the firm for (b) faces a highly elastic demand curve, which best fits pure competition. Therefore, the correct matching is (a) monopolistic competition, (b) pure competition. Step-by-Step Solution: Step 1: Focus on characteristic (a): Price greater than marginal cost in both short run and long run.Step 2: Recognise that in perfect competition, price equals marginal cost in equilibrium, so pure competition cannot satisfy characteristic (a).Step 3: Note that monopolistic competition and monopoly both have some market power, so price exceeds marginal cost in both short run and long run.Step 4: Now consider characteristic (b): the firm faces a highly elastic demand curve.Step 5: In pure competition, each firm faces a perfectly elastic (that is, infinitely elastic) demand curve at the market price.Step 6: In monopolistic competition, demand is downward sloping but relatively elastic, not perfectly elastic; in monopoly, demand is typically less elastic.Step 7: Therefore, the best fit is (a) monopolistic competition (P > MC both periods) and (b) pure competition (highly elastic demand), which corresponds to option A. Verification / Alternative check: We can cross check each alternative. Option B pairs (a) with pure monopoly, which does have P > MC, but it pairs (b) with monopolistic competition, where demand is not as highly elastic as under pure competition. Option C claims (a) pure competition, which is incorrect because in pure competition P = MC. Option D links (a) oligopoly, where behaviour depends on the model and is not uniquely described by the condition, and (b) pure competition, but it still leaves (a) poorly matched. Only option A gives a logically consistent pair. Monopolistic competition exhibits P > MC in the long run due to product differentiation and downward sloping demand, and pure competition exhibits the highest elasticity of demand at the firm level. Why Other Options Are Wrong: Option B is wrong because it assigns the highly elastic demand curve to monopolistic competition rather than pure competition, which is an overstatement of the elasticity. Option C is incorrect because pure competition does not have P > MC; it has P = MC in equilibrium. Option D is problematic because it assigns characteristic (a) to oligopoly without clear justification, and while pure competition does have highly elastic demand, the pair does not handle (a) correctly. Only option A aligns both characteristics with the correct market structures. Common Pitfalls: A common mistake is to assume that any imperfectly competitive market necessarily faces an elastic demand curve, but elasticity is relative. Pure competition has a perfectly elastic demand curve at the firm level, while monopolistic competition has a moderately elastic but downward sloping curve. Another pitfall is forgetting that in the long run, monopolistic competition still has P > MC because of product differentiation, even though firms earn only normal profit. Keeping track of both the P versus MC relationship and the shape of the demand curve helps avoid confusion. Final Answer: The correct matching is (a) Monopolistic competition, (b) Pure competition.

Question 8

A commodity market has which type of market structure if there is one seller of the commodity, the commodity has no close substitute, and entry into the industry by another firm is prevented?

Accepted Answer

Introduction / Context: Market structure analysis is central to understanding how firms set prices and output and how they interact with consumers. The extreme case of market power occurs when a single firm dominates an industry, faces no close substitutes, and is protected by barriers to entry. Such a structure has important implications for efficiency, consumer welfare, and regulation. This question asks you to identify the market structure described by these conditions, which is a classic textbook definition. Given Data / Assumptions: There is one seller of the commodity in the market. The commodity has no close substitute available to consumers. Entry into the industry by other firms is prevented, either by legal, natural, or strategic barriers. We assume standard definitions of perfect competition, monopoly, oligopoly, and monopolistic competition. Concept / Approach: A monopoly is defined as a market structure where there is a single seller of a product with no close substitutes, and strong barriers to entry prevent new firms from entering the industry. This gives the monopolist substantial control over price and output. Perfect competition, by contrast, has many sellers and free entry, with products that are homogeneous. Oligopoly has a few large firms, and monopolistic competition has many firms offering differentiated products and relatively free entry. The conditions given in the question match the definition of monopoly exactly. Step-by-Step Solution: Step 1: Note that the market has one seller, which rules out perfect competition, oligopoly, and monopolistic competition, all of which involve more than one firm.Step 2: Recognise that the commodity has no close substitute, meaning consumers cannot easily switch to alternative products if the seller raises the price.Step 3: Observe that entry into the industry is blocked, indicating strong barriers to entry, which is a key feature of monopoly.Step 4: Compare these features to the definition of monopoly, which is a single seller, no close substitutes, and restricted entry.Step 5: Confirm that the other market structures do not satisfy all three conditions simultaneously.Step 6: Conclude that the appropriate market structure is monopoly. Verification / Alternative check: Examples such as a local water utility or an electricity distribution company in a region often match this pattern in practice: a single provider, essential service with no close substitutes, and legal or infrastructural barriers to entry. Textbooks consistently use such examples when explaining monopoly. Perfect competition, monopolistic competition, and oligopoly always involve more than one firm, so the case of one seller with barriers to entry is uniquely associated with monopoly. This confirms the classification. Why Other Options Are Wrong: Perfect competition (option A) is wrong because it requires many sellers, identical products, and free entry and exit. Oligopoly (option C) is incorrect because it involves a few large firms, not a single seller. Monopolistic competition (option D) has many firms selling differentiated products and generally free entry; it is very different from the protected single seller scenario described. Only monopoly matches the conditions of one seller, no close substitutes, and blocked entry. Common Pitfalls: Some learners confuse monopoly with monopolistic competition due to similar naming. It is important to remember that the "mono" in monopoly means one seller, whereas monopolistic competition still has many sellers with differentiated products. Another pitfall is ignoring the requirement of no close substitutes; a firm that has a large market share but faces effective substitutes is not a true monopolist. Paying attention to all the listed characteristics helps avoid misclassification. Final Answer: The market structure described is a Monopoly.

Question 9

In demography, the birth rate of a country is typically defined as which of the following measures?

Accepted Answer

Introduction / Context: Demographic indicators such as birth rate, death rate, and fertility rate are used to study the population dynamics of a country. These measures help policymakers understand population growth, design health programmes, and plan for education and employment needs. The birth rate is a specific measure of how many births occur relative to the size of the population. This question tests whether the candidate knows the standard definition used in demography for birth rate. Given Data / Assumptions: The options describe births per 100 persons, per 1000 persons, and births per kilometre of area. We assume the conventional international and Indian statistical definition of crude birth rate. The reference period is one year. The base population is usually the mid year population. Concept / Approach: The crude birth rate is defined as the number of live births occurring during a year per 1000 population, usually calculated using the mid year population estimate. This standardises the measure so that countries with different population sizes can be compared. Measuring births per unit of area, such as per square kilometre, would mix population density with fertility, which is not how birth rate is defined. Similarly, a base of 100 persons would be unusual and is not the standard practice in demographic statistics. Step-by-Step Solution: Step 1: Recall the standard definition of crude birth rate: number of live births per 1000 population in one year.Step 2: Compare this with option B, which matches exactly: number of births per 1000 persons in one year.Step 3: Option A uses a base of 100 persons, which is not standard in demography; most demographic rates are expressed per 1000 population.Step 4: Options C and D define birth rate per kilometre or per 100 kilometres of area, which relate more to population density rather than fertility.Step 5: Therefore, the correct definition among the options is births per 1000 persons in one year. Verification / Alternative check: Demography textbooks and United Nations statistical manuals consistently define crude birth rate as the number of live births per 1000 population in a given year. National statistical agencies, including those in India, publish birth rate figures using the same base. The 1000 base makes interpretation easier and allows direct comparison across regions. This standard confirms that option B is the correct answer. Why Other Options Are Wrong: Option A (per 100 persons) is incorrect because the usual base is 1000, not 100, for birth rate. Options C and D (per kilometre of area or per 100 kilometres of area) mix geographic area with population dynamics and are not used in standard demographic practice to describe birth rate; they would reflect a combination of fertility and population density. Thus, only option B matches the accepted definition. Common Pitfalls: Students may confuse birth rate with population density, which is measured as people per square kilometre. They may also generalise from other types of percentages, assuming a base of 100, but demographic indicators traditionally use a base of 1000. Another pitfall is to confuse crude birth rate with total fertility rate, which measures the average number of children born to a woman over her lifetime. Keeping these concepts distinct avoids errors in such questions. Final Answer: The birth rate is defined as the Number of births per 1000 persons in one year.

Question 10

In the context of the Census of India, which of the following correctly describes the term sex ratio?

Accepted Answer

Introduction / Context: Sex ratio is an important demographic indicator used in population studies and social policy, particularly in a country like India where gender balance is a key concern. It reflects the relative number of females and males in a population and can highlight social issues such as gender preference, discrimination, or differences in mortality. This question asks for the precise definition of sex ratio as used in the Census of India, which follows a specific convention. Given Data / Assumptions: Options present different ways of expressing the ratio of males and females. We assume the official Indian practice for defining sex ratio. The usual base for sex ratio in India is 1000. We are asked to choose the correct numerical relationship between the number of females and the number of males. Concept / Approach: In the Indian census context, sex ratio is defined as the number of females per 1000 males. This means that if the sex ratio is 950, there are 950 females for every 1000 males in the population. Other possible ways of expressing gender balance, such as number of males per 1000 females, are used in some other countries, but the Indian convention is firmly based on females per 1000 males. It is important to recall this specific convention when answering such questions. Step-by-Step Solution: Step 1: Recall that the Census of India defines sex ratio as the number of females per 1000 males.Step 2: Match this definition with the given options.Step 3: Option B states "Number of females per 1000 males," which matches exactly.Step 4: Option A reverses the ratio and refers to the number of males per 1000 females, which is not the standard Indian practice.Step 5: Option C uses a base of 100 males, which is not the official convention in India.Step 6: Option D refers to the number of females in a sample of 1000 persons, which is a different measure and not the definition of sex ratio.Step 7: Therefore, the correct definition is given by option B. Verification / Alternative check: Official publications of the Census of India, as well as National Family Health Surveys and other demographic reports, express sex ratio as females per 1000 males. For example, if a report says the sex ratio is 940, it means there are 940 females for every 1000 males. This consistent usage confirms that option B is the correct answer. If the definition were males per 1000 females, the reported figures would have a completely different interpretation, which is not how Indian data is presented. Why Other Options Are Wrong: Option A is wrong because it reverses the roles of males and females and defines the ratio differently from the Indian convention. Option C is incorrect because it uses a base of 100 males instead of 1000, which is not standard practice in Indian census data. Option D is wrong because it describes a different kind of statistic, not a ratio between males and females via a fixed number of one group. Thus only option B aligns with the official Indian definition of sex ratio. Common Pitfalls: Students may be familiar with other countries or studies where sex ratio is expressed as males per 100 females and may accidentally apply that convention to India. Another pitfall is to think of sex ratio in terms of percentages or overall counts rather than a clear ratio with a fixed base. Remembering the phrase "females per 1000 males" as a fixed expression for Indian data helps avoid confusion. Final Answer: In the Census of India, sex ratio is defined as the Number of females per 1000 males.

Question 11

The second Green Revolution in India aims at increasing agricultural output primarily to promote which broader development objective?

Accepted Answer

Introduction / Context: The term "second Green Revolution" refers to efforts to significantly increase agricultural production again, but with a stronger focus on sustainability and equity compared to the first Green Revolution. In India, this idea is linked not only to raising yields but also to ensuring that small and marginal farmers benefit and that rural poverty is reduced. This question asks you to identify the broader development objective that the second Green Revolution is intended to promote, beyond just raising output for its own sake. Given Data / Assumptions: The second Green Revolution focuses on increasing agricultural output. Options mention easy credit for big farmers, co operative farming, inclusive growth, and general rural development. We assume that policies associated with the second Green Revolution aim to correct some limitations of the first Green Revolution, such as regional imbalances and unequal benefits. We look for an option that reflects both growth and equity in the benefits. Concept / Approach: The first Green Revolution increased food grain production substantially but often benefited mainly larger farmers in certain regions. The concept of a second Green Revolution emphasises not only higher productivity but also wider participation and more equitable gains, especially for small and marginal farmers, women farmers, and disadvantaged regions. This idea fits within the broader development goal of inclusive growth, which aims to ensure that the benefits of economic expansion are shared across different segments of society. Although rural development and co operative farming can be part of the strategy, the overarching goal is inclusive growth. Step-by-Step Solution: Step 1: Recognise that the second Green Revolution aims to boost agricultural output in a way that corrects past imbalances and includes small and marginal farmers.Step 2: Evaluate option A, which focuses on easy credit to big farmers; this contradicts the inclusive objective, because it tilts benefits towards larger farmers.Step 3: Examine option B, co operative farming, which is a possible method or organisational form, but not the overarching development objective.Step 4: Consider option C, inclusive growth, which explicitly refers to growth that benefits a wide cross section of the population and reduces inequality.Step 5: Look at option D, development of the rural sector, which is important but still narrower than the idea of inclusive growth across different social and economic groups.Step 6: Since the second Green Revolution is framed as part of a larger agenda to make growth more inclusive, option C best captures its primary objective. Verification / Alternative check: Policy documents and speeches about the second Green Revolution often stress that new technologies, better irrigation, improved seeds, and extension services must reach small and marginal farmers, rainfed regions, and disadvantaged communities. The language used frequently mentions inclusive and sustainable growth, rather than focusing only on average yields or credit facilities for large farmers. While rural development is certainly an important outcome, the phrase "inclusive growth" better reflects the intention to combine higher productivity with broader sharing of benefits. This supports choosing option C. Why Other Options Are Wrong: Option A, availability of easy credit to big farmers, goes against the inclusive spirit of the second Green Revolution by favouring larger farmers only. Option B, co operative farming, is more of a possible organisational strategy and not the primary objective; it may be used as one of several means to reach goals. Option D, development of the rural sector, is important but still does not fully capture the specific idea that growth should include the poor and marginalised; rural development could, in principle, be uneven. Inclusive growth, option C, explicitly points to growth that benefits all, including the rural poor and small farmers. Common Pitfalls: Students may focus only on the word "Green Revolution" and think only about output and technology, forgetting the policy lessons about inequality and regional imbalances from the first Green Revolution. Another pitfall is to choose very general terms such as rural development, which are correct in spirit but less precise than inclusive growth as a policy goal. To avoid such mistakes, always recall that the second Green Revolution is designed to be not just a repeat of the first, but a more inclusive and sustainable phase of agricultural development. Final Answer: The second Green Revolution primarily aims to promote Inclusive growth by ensuring that higher agricultural output benefits a broad range of farmers and rural communities.

Question 12

In a perfectly competitive firm, the market price is Rs 60, output is 300 units, average variable cost is Rs 18, and average total cost is Rs 36. What is the total profit earned by the firm on this output level?

Accepted Answer

Introduction / Context: This question tests a very important application of cost and revenue concepts in microeconomics. In particular, it focuses on how to compute total profit for a perfectly competitive firm when you are given the market price, quantity produced, average variable cost, and average total cost. Understanding how average costs relate to total cost and profit is essential for solving numerical questions on firm behaviour and profit maximisation in competitive markets. Given Data / Assumptions: The firm operates in a perfectly competitive market, so it is a price taker. Market price (P) = Rs 60 per unit. Output level (Q) = 300 units. Average variable cost (AVC) = Rs 18 per unit. Average total cost (ATC) = Rs 36 per unit. We assume that ATC already includes both average fixed cost and average variable cost, and that all units are sold at the given price. Concept / Approach: Profit in economics is defined as total revenue minus total cost. For a given output level, total revenue is price multiplied by quantity, and total cost is average total cost multiplied by quantity. Although average variable cost is given, it is not needed directly for profit here because average total cost already captures the full cost per unit. The key idea is therefore to convert averages into totals and then subtract total cost from total revenue. Alternatively, you can use the shortcut formula profit = (price minus average total cost) multiplied by quantity. Step-by-Step Solution: Step 1: Compute total revenue (TR). TR = P * Q = 60 * 300 = Rs 18000.Step 2: Compute total cost (TC). TC = ATC * Q = 36 * 300 = Rs 10800.Step 3: Compute profit using the basic formula. Profit = TR - TC = 18000 - 10800 = Rs 7200.Step 4: Cross check using the shortcut. Profit per unit = P - ATC = 60 - 36 = Rs 24 per unit. Multiply by Q: 24 * 300 = 7200, which confirms the earlier result.Step 5: Match the computed profit with the options and select Rs 7200. Verification / Alternative check: You can also verify consistency using the relationship between average costs. Average fixed cost is ATC minus AVC, which here is 36 - 18 = Rs 18 per unit. This means total fixed cost is 18 * 300 = Rs 5400 and total variable cost is AVC * Q = 18 * 300 = Rs 5400, so total cost is 5400 + 5400 = Rs 10800. Substituting into the profit formula gives profit = 18000 - 10800 = Rs 7200 again. Both methods lead to the same result, so the calculation is internally consistent. Why Other Options Are Wrong: Rs. 5400: This equals either total fixed cost or total variable cost, not the profit. It comes from 18 * 300 but ignores revenue. Rs. 3600: This number does not correspond to any standard combination of cost and revenue in the given data and is therefore incorrect. Rs. 1800: This is far smaller than the profit per unit times quantity and has no clear economic basis here. Common Pitfalls: Many learners mistakenly use average variable cost instead of average total cost when computing profit, which leads to an overstatement of profit because fixed costs are ignored. Another frequent error is to forget that profit is total revenue minus total cost and instead subtract costs per unit without scaling by quantity. By remembering the simple formulas for TR, TC, and profit, and by carefully distinguishing between AVC and ATC, you can avoid these mistakes in exam questions and real world applications. Final Answer: The total profit earned by the firm at this output level is Rs 7200.

Question 13

In elementary microeconomics, if at a given price the market supply is greater than the market demand, we say that there is ________ in the market at that price.

Accepted Answer

Introduction / Context: This question examines your understanding of basic demand and supply terminology in microeconomics. In competitive markets, the relationship between quantity demanded and quantity supplied at a given price determines whether there is equilibrium, shortage, or surplus. Being able to label these situations correctly is fundamental for drawing and interpreting demand supply diagrams and for understanding how prices adjust in markets. Given Data / Assumptions: We are looking at a single market for a particular good. At the given price, the quantity that sellers wish to supply is greater than the quantity that buyers wish to demand. There is no government price control in this basic description. We apply standard competitive market theory, where buyers and sellers respond to price signals. Concept / Approach: In a demand supply framework, equilibrium occurs when quantity demanded equals quantity supplied. When supply exceeds demand at a given price, the result is a surplus of goods in the market, which is also called excess supply. Sellers are left with unsold stock and are likely to lower prices so that demand increases and supply contracts until equality is restored. Conversely, if demand were greater than supply at a given price, that situation would be labelled excess demand or shortage. Recognising the correct term is essential for understanding how market forces operate. Step-by-Step Solution: Step 1: Identify the relationship. The problem states that market supply is greater than market demand at the given price.Step 2: Recall definitions. When quantity supplied is larger than quantity demanded at a price, there is a surplus or excess supply in the market.Step 3: Check alternative possibilities. Excess demand would require demand to exceed supply, which is the opposite of what is described here.Step 4: Equilibrium requires that supply equals demand, which is also not the case.Step 5: Marginal revenue is a firm level concept describing the additional revenue from selling one more unit, and is not relevant to this market level mismatch.Step 6: Therefore, the correct description of the situation is excess supply. Verification / Alternative check: You can visualise a standard diagram with a downward sloping demand curve and an upward sloping supply curve. If the price is set above the intersection point, you can see that the horizontal line at that high price intersects the supply curve at a larger quantity than it intersects the demand curve. The horizontal distance between these two quantities at that price is the surplus or excess supply. This graphical reasoning confirms the verbal description that supply greater than demand at a given price implies excess supply. Why Other Options Are Wrong: Equilibrium: At equilibrium, quantity supplied equals quantity demanded. There is no excess of either side. Excess Demand: This occurs when quantity demanded is greater than quantity supplied, which is the opposite of the situation described. Marginal Revenue: This is a microeconomic concept relating to firm revenue changes and does not describe market wide imbalances of supply and demand. Common Pitfalls: Some learners confuse which side is in excess and quickly choose excess demand without carefully reading the condition. Others may think any imbalance means there is no special term, but economics uses specific labels for clarity. Always check whether supply or demand is larger at the given price and then choose the corresponding term: excess supply when supply is larger, and excess demand when demand is larger. Final Answer: When market supply is greater than market demand at a given price, there is excess supply in the market.

Question 14

In the context of Indian development finance, the State Financial Corporations have mainly provided assistance in order to promote which category of industries?

Accepted Answer

Introduction / Context: State Financial Corporations play a key role in the structure of development finance institutions in India. They were set up to address the credit needs of certain categories of enterprises that are often underserved by commercial banks, especially at the state level. This question checks whether you know which group of industries these corporations primarily support, which is an important part of Indian financial system general knowledge. Given Data / Assumptions: The institution mentioned is the State Financial Corporation, not a commercial bank or central bank. We are dealing with assistance for industrial development at the state level. The options cover agriculture farms, cottage industries, medium and small scale industries, and large scale industries. We assume the traditional mandate and legal framework under which State Financial Corporations were set up. Concept / Approach: State Financial Corporations were established under the State Financial Corporations Act with the primary objective of providing medium and long term finance to small and medium scale industrial units within the state. These units often face difficulties in accessing capital from large all India financial institutions or commercial banks. Large scale industries typically borrow from national level institutions, while cottage industries and agriculture farms are served by other specialised credit agencies. Therefore, the core focus area of State Financial Corporations is the promotion and development of small and medium scale industries. Step-by-Step Solution: Step 1: Recall the purpose of setting up State Financial Corporations: to provide term finance to industries at the state level.Step 2: Identify which size segment most struggles with access to finance from traditional banking channels. Typically, medium and small scale industrial units face this gap.Step 3: Recognise that agriculture farms are primarily supported by cooperative credit institutions, regional rural banks, and agricultural development banks rather than State Financial Corporations.Step 4: Cottage industries receive targeted support through institutions like State Khadi and Village Industries Boards and microfinance programmes.Step 5: Large scale industries usually obtain finance from all India development financial institutions and commercial banks.Step 6: Therefore, State Financial Corporations mainly assist medium and small scale industries. Verification / Alternative check: If you refer to standard Indian economy textbooks, the section on development financial institutions explains that State Financial Corporations finance industrial concerns whose capital is within a specified range, which typically covers small and medium units. Examples include financing for setting up manufacturing units, expansion, and modernisation at a scale that is larger than cottage industries but smaller than giant corporations. This description fits the medium and small scale category and confirms that this is the core focus group. Why Other Options Are Wrong: Agriculture farms: These are mainly served by institutions such as cooperative banks, regional rural banks, and agricultural development banks, not primarily by State Financial Corporations. Cottage industries: While important, they are usually supported by other dedicated institutions and schemes aimed at micro and village enterprises. Large scale industries: Big industrial houses rely more on commercial banks and national development finance institutions rather than on state level financial corporations. Common Pitfalls: Students sometimes mix up the roles of different financial institutions in India because many organisations appear to provide development finance. A helpful strategy is to remember that State Financial Corporations sit in the middle segment, bridging the gap for small and medium industries at the state level. Recognising this niche makes it easier to answer similar questions correctly in exams. Final Answer: State Financial Corporations mainly provide assistance to develop medium and small scale industries.

Question 15

In consumer theory, goods for which the quantity demanded moves in the opposite direction to the income of the consumer are known as which type of goods?

Accepted Answer

Introduction / Context: This question examines your understanding of how consumer income affects the demand for different types of goods. In microeconomics, goods are classified based on how demand responds to changes in income. Recognising the category for which demand decreases when income increases, and increases when income falls, is essential for correctly interpreting income demand relationships and drawing Engel curves. Given Data / Assumptions: We focus on the relationship between consumer income and quantity demanded, holding other factors constant. The question specifies that demand moves in the opposite direction to income. The options list inferior goods, normal goods, complementary goods, and substitute goods. We assume standard textbook definitions of these terms. Concept / Approach: Normal goods are those for which demand rises when income rises and falls when income falls. Inferior goods see the reverse pattern: as income increases, consumers reduce their purchases of these goods because they can now afford better quality or more preferred alternatives. Complementary goods and substitute goods describe relationships between two different goods, based on how demand for one responds to changes in the price of another, and are not defined by income effects. Therefore, the type of goods where demand moves in the opposite direction to income is called inferior goods. Step-by-Step Solution: Step 1: Identify the relationship described: when income increases, demand decreases, and when income decreases, demand increases.Step 2: Recall that normal goods show a positive income effect: demand and income move in the same direction, so this does not match.Step 3: Inferior goods show a negative income effect: as income rises, people shift away to higher quality goods, so demand for inferior goods falls.Step 4: Complementary goods are defined by joint consumption, such as tea and sugar, where demand links to the price of the related good, not income.Step 5: Substitute goods are goods that can replace each other in consumption, and their definition again relates to the price of another good rather than to income.Step 6: Therefore, the correct label for goods whose demand moves opposite to income is inferior goods. Verification / Alternative check: You can think of common examples to verify this concept. Items like low quality grains, coarse cloth, or basic bus travel sometimes behave as inferior goods. When a consumer income rises, they may switch to fine rice, branded clothing, or private transport, reducing demand for the lower quality options. When income falls, they return to the cheaper alternatives. These examples match what economists call inferior goods and show that the income and demand movements are in opposite directions, which confirms the definition. Why Other Options Are Wrong: Normal goods: Demand and income move together, so they do not fit the description of opposite movement. Complementary goods: These are defined by joint use with another good, for example toothbrush and toothpaste, and the relationship is based on price, not income. Substitute goods: These are defined by the possibility of replacement between goods when relative prices change, again not by income changes. Common Pitfalls: Some learners assume that inferior goods must be low priced or poor quality in all cases, but the formal definition is about the income demand relationship, not the absolute price. Others confusingly mix income effects with cross price effects. Keeping a clear distinction between how demand responds to income and how it responds to the price of the same or different goods helps you avoid such mistakes on exam questions. Final Answer: Goods whose demand moves in the opposite direction to consumer income are called inferior goods.

Question 16

In the Indian banking system, credit rationing, that is, the regulation and limitation of credit supplied by commercial banks, is mainly carried out by which of the following institutions?

Accepted Answer

Introduction / Context: Credit rationing is a part of monetary policy through which authorities influence the total volume and direction of credit in the economy. In India, different financial institutions have different roles, such as commercial banking, insurance, and policy making. This question checks whether you know which institution has the authority and responsibility to implement credit rationing as part of overall monetary and credit policy. Given Data / Assumptions: The practice in question is credit rationing, meaning control over how much credit banks can extend and to which sectors. The options are the Reserve Bank of India (RBI), State Bank of India (SBI), Life Insurance Corporation (LIC), and the Finance Ministry. We assume the usual allocation of functions in the Indian financial and policy system. Concept / Approach: In India, the central bank, the Reserve Bank of India, is responsible for formulating and implementing monetary policy. This includes various quantitative and qualitative instruments, such as cash reserve ratio, statutory liquidity ratio, open market operations, and selective credit controls. Credit rationing falls under selective credit controls where the RBI may direct banks to restrict lending to certain speculative sectors and encourage lending to priority sectors. SBI is a commercial bank, LIC is an insurance company, and the Finance Ministry sets fiscal policy and broad guidelines but does not directly ration credit at the operational level. Step-by-Step Solution: Step 1: Identify which institution in India is the central bank and monetary authority. This is the Reserve Bank of India.Step 2: Recall that monetary policy instruments include both general credit controls and selective credit controls, both of which are used by the RBI.Step 3: Understand that credit rationing is a form of control on the quantity and direction of bank lending, which is a central bank function.Step 4: Recognise that SBI, although large, is just one commercial bank and follows the directions issued by the RBI, not the other way around.Step 5: LIC deals with life insurance and invests funds but does not control bank credit policies.Step 6: The Finance Ministry designs fiscal policy and coordinates with the RBI but does not directly execute detailed credit rationing at the bank level.Step 7: Therefore, credit rationing in India is carried out by the RBI. Verification / Alternative check: Standard Indian economy textbooks describe the RBI as the controller of credit. Instruments such as directives on maximum credit to certain sectors, changes in margin requirements, and priority sector lending norms are associated with the central bank. Commercial banks are expected to comply with these guidelines. When you review past exam questions on monetary policy tools, the Reserve Bank of India is always identified as the authority that applies such controls, confirming it as the correct answer. Why Other Options Are Wrong: SBI: It is a major commercial bank but is itself subject to credit control measures imposed by the RBI and does not set system wide credit rationing rules. LIC: This is an insurance corporation that collects premiums and provides life insurance; it does not regulate bank credit. Finance Ministry: Although it influences policy at a broad level, day to day credit rationing measures are the responsibility of the central bank, not the ministry. Common Pitfalls: Some learners confuse the size and visibility of SBI with regulatory power and think that the largest bank must be responsible for credit rationing. Others mix up fiscal policy and monetary policy roles. To avoid these errors, remember the simple rule that the central bank handles the money supply and bank credit, while the government ministry manages taxes and spending. In India, this central banking role belongs to the RBI. Final Answer: Credit rationing in India is done by the Reserve Bank of India (RBI).

Question 17

In the theory of production, which law states that if we keep increasing the employment of one input while holding all other inputs fixed, a point will eventually be reached after which the marginal product of that input will start falling?

Accepted Answer

Introduction / Context: This question focuses on a fundamental concept in production theory that explains how output responds when a firm changes the quantity of one input while keeping other inputs constant. Understanding this law is essential for analysing short run production functions, cost curves, and optimal use of factors of production. The law is frequently examined in introductory microeconomics and is closely related to the idea of diminishing returns. Given Data / Assumptions: We are considering a production process with multiple inputs. Only one input is increased, while all other inputs remain fixed. The statement describes that eventually the marginal product of the variable input begins to decline. The options include two named laws and two general terms about time periods. Concept / Approach: The law described states that when additional units of a variable input are employed, with other inputs held constant, the additional output produced by each extra unit of that input will at some stage begin to decline. This is the law of diminishing marginal product, also known in some texts as diminishing marginal returns. The law of variable proportions is a broader concept that describes three phases of output behaviour as the variable input increases, including an initial phase of increasing returns and a later phase of diminishing returns. The Short Run and The Long Run refer to time periods in which some or all inputs can vary and are not themselves economic laws. Step-by-Step Solution: Step 1: Focus on the key phrase: marginal product of the input will start falling.Step 2: Recall that marginal product means the extra output from employing one more unit of the input.Step 3: The law that directly states this effect is the law of diminishing marginal product.Step 4: The law of variable proportions includes this idea but also covers earlier stages where marginal product may be rising, so it is more general.Step 5: The Short Run and The Long Run describe whether at least one input is fixed or all inputs are variable; they do not specify a law about declining marginal product.Step 6: Therefore, the most precise answer that matches the description in the stem is the law of diminishing marginal product. Verification / Alternative check: Standard microeconomics texts define the law of diminishing marginal product as stating that beyond some level of utilisation of a variable factor, with other factors fixed, the marginal product of that variable factor will diminish. They often illustrate this with an example of adding more workers to a fixed amount of land or machinery. Initially, output increases rapidly, but after a point, each additional worker adds less extra output than the previous one. This exactly matches the statement given in the question and confirms that the correct law is the law of diminishing marginal product. Why Other Options Are Wrong: Law of variable proportions: While related, this law is a broader framework and does not directly name the specific effect described as its main focus. The Short Run: This refers to a time period in which at least one input is fixed, but it is not a law and does not guarantee diminishing marginal product. The Long Run: This is a period during which all inputs can vary, and again, it is a time horizon concept, not the law described. Common Pitfalls: Many students confuse the law of diminishing marginal product with the general phrase law of variable proportions because both are taught together. A useful way to avoid confusion is to remember that the question here is focusing narrowly on the falling marginal product, which directly points to diminishing marginal product. The law of variable proportions encompasses the entire pattern of changes in total and marginal product as the variable input increases, so when a question is this specific, diminishing marginal product is the safer choice. Final Answer: The law described is the law of diminishing marginal product.

Question 18

In open economy macroeconomics, the real exchange rate is defined as the relative price of foreign goods in terms of domestic goods. Which type of exchange rate does this describe?

Accepted Answer

Introduction / Context: This question tests your understanding of a key concept in international economics: the distinction between nominal and real exchange rates. While the nominal exchange rate tells you how many units of domestic currency you need to buy one unit of foreign currency, the real exchange rate adjusts for price levels and shows the relative price of foreign goods measured in terms of domestic goods. Grasping this concept is essential for analysing competitiveness, trade flows, and purchasing power parity. Given Data / Assumptions: The definition given is the relative price of foreign goods in terms of domestic goods. The options are artificial, nominal, fixed, and real exchange rate. We assume standard definitions from macroeconomics for these exchange rate terms. We are not asked to compute a numerical value, only to identify the correct label. Concept / Approach: The real exchange rate compares the price of a representative basket of foreign goods to the price of a similar basket of domestic goods, after converting foreign prices into domestic currency using the nominal exchange rate. It therefore answers the question: how many units of domestic goods are needed to buy one unit of foreign goods. In contrast, the nominal exchange rate expresses the price of one currency in terms of another currency without adjusting for price levels. Fixed versus flexible refers to how the nominal exchange rate is determined, not to this relative price concept. The term artificial is not a standard technical term in this context. Step-by-Step Solution: Step 1: Focus on the phrase relative price of foreign goods in terms of domestic goods.Step 2: Recall that the real exchange rate measures foreign prices relative to domestic prices, adjusted by the nominal exchange rate.Step 3: Nominal exchange rate only tells you the price of one currency in terms of another and does not directly relate goods prices.Step 4: Fixed exchange rate describes a regime where the nominal rate is pegged by the government or central bank, not a separate type of rate that measures relative goods prices.Step 5: Artificial exchange rate is not a standard textbook category.Step 6: Therefore, the definition clearly matches the real exchange rate. Verification / Alternative check: A common formula for the real exchange rate is: real exchange rate = nominal exchange rate * (foreign price level / domestic price level). When this value is high, foreign goods are relatively expensive in terms of domestic goods, and when it is low, foreign goods are relatively cheap. This is exactly what the phrase relative price of foreign goods in terms of domestic goods means in macroeconomic analysis. The nominal exchange rate alone cannot capture this real purchasing power comparison, confirming that the correct answer is real exchange rate. Why Other Options Are Wrong: Artificial: This is not a technical term used to classify exchange rates in standard macroeconomic theory. Nominal: The nominal rate is defined as the price of one currency in terms of another currency and does not adjust for differences in price levels. Fixed: This describes a policy regime where the nominal rate is pegged, and it can apply to both nominal and real concepts, but it is not the definition given in the question. Common Pitfalls: Students often confuse nominal and real concepts in macroeconomics because both involve the term exchange rate. A useful memory aid is to remember that whenever you see a reference to the relative price of goods baskets or purchasing power across countries, the word real is usually involved. Nominal variables are in money terms, while real variables are adjusted for prices and reflect true purchasing power or relative values of goods. Final Answer: The relative price of foreign goods in terms of domestic goods is called the real exchange rate.

Question 19

In a market based economic system, the central problems of what to produce and how much to produce are largely solved through the coordination of economic activities brought about by which type of signals?

Accepted Answer

Introduction / Context: This question explores a fundamental idea in microeconomics and economic systems: how decentralised market economies solve the basic economic problems of what to produce, how much to produce, and for whom to produce. Instead of a central planner, markets coordinate the actions of millions of buyers and sellers through certain signals. Understanding which signals carry this information is crucial for appreciating how a market system functions. Given Data / Assumptions: The context is a market system, not a centrally planned economy. The basic problems considered are what goods and services to produce and how much of each to produce. The options identify supply signals, demand signals, price signals, and stock market signals. We assume a competitive environment where buyers and sellers respond to observable variables. Concept / Approach: In a competitive market economy, the interaction of supply and demand determines the prices of goods and services. These market prices then act as signals and incentives to producers and consumers. When a price rises, it signals that a good is relatively more scarce or more valued, encouraging producers to increase supply and consumers to economise on its use. When a price falls, it signals that a good is more abundant, discouraging further production and encouraging consumption. Although supply and demand schedules underlie this process, it is prices that act as the main observable coordinating signals throughout the economy. Step-by-Step Solution: Step 1: Recognise that both supply and demand contribute to determining the equilibrium outcome in a market.Step 2: Ask which variable market participants actually observe and react to when making day to day decisions. This is the price.Step 3: Producers see product prices, input prices, and wage rates and decide which goods and how much of them to produce.Step 4: Consumers observe prices and decide how to allocate their budgets across different goods and services.Step 5: Stock market signals affect asset prices and investment but are not the primary mechanism for solving the general problem of what and how much to produce for all goods.Step 6: Therefore, the most accurate answer is that price signals coordinate economic activity in a market system. Verification / Alternative check: Many introductory economics texts describe the price system as an invisible hand that guides self interested behaviour towards social outcomes. Diagrams show that when there is excess demand, prices rise, causing quantity demanded to fall and quantity supplied to increase until equilibrium is reached. When there is excess supply, prices fall and adjust behaviour in the opposite direction. These examples emphasise that given the underlying supply and demand, the adjustment mechanism depends on price signals, confirming that the answer is price, not supply, demand, or stock market alone. Why Other Options Are Wrong: Supply: Supply reflects producer behaviour but is part of the underlying relationship, not the observable signal that directly coordinates all agents. Demand: Demand reflects consumer preferences and purchasing power, but again, it is not the primary signal used for coordination in daily transactions. Stock Market: Stock market prices affect financial investment decisions but are not the main coordinating signal for production and consumption of all goods and services in the broader economy. Common Pitfalls: Some learners think in terms of supply side or demand side dominance without realising that both come together to form prices. Others confuse the importance of stock indices for investors with their relevance to general resource allocation. To avoid such confusion, it is useful to remember that prices are the key signals that transmit information about scarcity and preferences across the economy in a market system. Final Answer: In a market system, the central problems are solved largely through price signals.

Question 20

The study of individual markets of demand and supply, where the decision makers are individual consumers, workers, or firms that try to maximise their satisfaction or profits, is known by which branch of economics?

Accepted Answer

Introduction / Context: Economics is broadly divided into two main branches: microeconomics and macroeconomics. Each branch looks at different levels of analysis and uses different tools to answer economic questions. This question asks you to identify which branch focuses on individual markets and decision makers such as households and firms that aim to maximise satisfaction or profits. Knowing this distinction is fundamental for organising further economic knowledge. Given Data / Assumptions: The description emphasises individual markets, not the economy as a whole. The decision makers are described as individual consumers, workers, and firms. These decision makers are presented as trying to maximise personal welfare or profits. The options include macroeconomics, econometrics, microeconomics, and heterodox economics. Concept / Approach: Microeconomics is the branch of economics that studies the behaviour of individual economic units such as consumers, workers, firms, and specific industries. It examines how they make decisions about what to buy, what to produce, and how much to work, under the constraint of limited resources. It also studies how these decisions interact in specific markets of demand and supply, leading to prices and quantities. Macroeconomics, in contrast, studies aggregates such as national income, unemployment, inflation, and overall growth. Econometrics provides statistical tools for economic analysis, and heterodox economics is a broad term for approaches that depart from mainstream theory. Step-by-Step Solution: Step 1: Identify the level of analysis described in the question. It clearly refers to individual markets and individual decision makers.Step 2: Recall that microeconomics deals with such individual units and market level phenomena.Step 3: Macroeconomics instead looks at aggregate variables for entire economies, which is not what the question describes.Step 4: Econometrics involves the use of mathematical and statistical techniques to test economic theories, but it is a method, not a branch focused solely on market structure.Step 5: Heterodox economics is a collection of alternative schools of thought, not a standard label for the basic study of demand and supply in individual markets.Step 6: Therefore the correct term for the study described is microeconomics. Verification / Alternative check: Introductory economics courses and textbooks are often titled Principles of Microeconomics when they discuss demand and supply, consumer choice, production costs, market structures like perfect competition and monopoly, and firm behaviour. On the other hand, books titled Principles of Macroeconomics discuss inflation, unemployment, budget deficits, and monetary policy. By checking how these topics are grouped, you can verify that analysis of individual markets and decision makers belongs under microeconomics. Why Other Options Are Wrong: Macroeconomics: Focuses on overall economic aggregates and policies rather than specific markets and individuals. Econometrics: Provides quantitative methods used in both micro and macro studies and is not itself the branch defined in the question. Heterodox Economics: Refers to non mainstream schools of thought and does not denote the standard study of individual markets. Common Pitfalls: Learners sometimes confuse the terms micro and macro because both words refer to economic analysis and both are often discussed in the same course. A simple way to remember the difference is to associate microeconomics with microscopes and small units, while macroeconomics is like a wide angle lens looking at the whole economy. When a question stresses individual behaviour and specific markets, it usually points to microeconomics. Final Answer: The study of individual markets and decision makers is called microeconomics.

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