Question 1

The study of economics as a social science is primarily concerned with which of the following broad issues?

Accepted Answer

Introduction / Context: Economics is often defined in many ways, but a common modern definition is that it is the study of how society uses scarce resources to satisfy unlimited wants. Scarcity forces individuals, firms, and governments to make choices, because not all wants can be fulfilled at once. This question asks what the study of economics is primarily concerned with, and it tests understanding of this core idea. Given Data / Assumptions: Resources such as land, labour, capital, and time are limited in supply. Human wants for goods and services are many and tend to grow over time. Individuals, firms, and governments must decide how to allocate resources among competing uses. Economics examines both micro level behaviour and macro level outcomes. The definition should be neutral and descriptive, not ideological or biased toward one system. Concept / Approach: Modern definitions of economics, influenced by Lionel Robbins, emphasise scarcity and choice. Economics studies how people make decisions when faced with limited means and unlimited ends, and how these decisions affect the allocation of resources and distribution of goods and services. It does not primarily aim to promote or defend any particular economic system, but rather to understand and analyse how different systems operate. Therefore, the correct description focuses on choices made to use scarce resources efficiently. Step-by-Step Solution: Step 1: Recall that economics deals with the problem of scarcity of resources relative to unlimited wants.Step 2: Recognise that because resources are scarce, individuals and societies must make choices about what to produce, how to produce, and for whom to produce.Step 3: Understand that economics studies these choices and the mechanisms, such as markets and planning, through which resources are allocated.Step 4: Compare the options and identify which statement refers to choices and efficient use of scarce resources.Step 5: Note that options about keeping businesses from losing money or proving that one system is superior are not neutral descriptions of the subject.Step 6: Select the option that describes economics as the study of choices made to use scarce resources efficiently. Verification / Alternative check: Textbooks commonly define economics as a science that studies how individuals and societies choose to allocate scarce resources among alternative uses and how these choices affect the production and distribution of goods and services. Some versions emphasise wealth, welfare, or growth, but the core theme of scarcity and choice remains. This confirms that the primary concern of economics aligns with option a, not with ideological claims or narrow tasks like preventing business losses. Why Other Options Are Wrong: Option b limits economics to keeping private businesses from losing money, which is only one small practical concern in applied economics and not the main focus of the discipline. Option c is ideological, suggesting that economics exists to prove the superiority of a particular system, which is not correct. Option d claims that economics shows government intervention is never required, which ignores the extensive study of market failures and public goods in the subject. Option e restricts economics to national income accounting, which is only one tool in macroeconomic analysis and not the full scope of economics. Common Pitfalls: Some learners think of economics only in terms of money, markets, or business, overlooking the broader themes of scarcity and choice that apply to households, governments, and societies as a whole. Others may view economics as inherently supporting a particular ideology. To avoid these misunderstandings, it is useful to remember that economics is a neutral analytical framework used to understand how scarce resources are allocated across competing wants in different institutional settings. Final Answer: The study of economics is primarily concerned with the choices that are made in seeking to use scarce resources efficiently to satisfy competing wants.

Question 2

A pure market economy, in which all resources are privately owned and economic decisions are guided mainly by prices, is sometimes called pure what?

Accepted Answer

Introduction / Context: Economic systems can be classified according to who owns the resources and how decisions are made. In a pure market economy, resources are privately owned and prices determined by demand and supply guide production and consumption decisions. This type of system is often associated with the term capitalism. The question asks what a pure market economy is sometimes called. Given Data / Assumptions: In a pure market economy, there is private ownership of land, labour, and capital. Firms and households act in their own self interest, responding to price signals. The government role is minimal or limited mainly to protecting property rights and enforcing contracts. Socialism typically involves significant state ownership and planning. We are focusing on ideal types described in basic economic theory, not on actual mixed economies. Concept / Approach: Capitalism is a term used to describe an economic system where capital and other resources are predominantly owned by private individuals and firms. Production and distribution decisions are largely determined by market forces and competition. When economists speak of a pure market economy, they mean a theoretical situation in which these features are fully realised and the state plays a very limited role. Therefore, a pure market economy is often referred to as pure capitalism in textbooks and exam materials. Step-by-Step Solution: Step 1: Recall that in a pure market economy, the key characteristics are private ownership, profit motive, and price guided decisions.Step 2: Recognise that capitalism is defined by these same features: private ownership of the means of production and reliance on markets.Step 3: Understand that in contrast, socialism involves state ownership and central planning for resource allocation.Step 4: Review the options and identify which one describes the name given to such a system.Step 5: Option a names capitalism and explains that capital and resources are privately owned, matching the description of a pure market economy.Step 6: Conclude that the correct term is pure capitalism. Verification / Alternative check: Introductory economics and political science texts frequently use the phrase capitalist market economy to refer to systems like those in some advanced industrial countries. They contrast this with socialist planned economies and mixed economies. When they describe theoretical extremes, they refer to a pure capitalist market economy, where all decisions are left to markets, and a pure command socialist economy, where central planning dominates. This confirms that pure market economy is associated with pure capitalism. Why Other Options Are Wrong: Stocking, in option b, is not a recognised name for any economic system and simply refers to the act of holding inventory. Sharing, in option c, might suggest communal distribution, which is closer to some interpretations of socialism, not to a market system based on private profit. Socialism, in option d, is a different system where the state plays a major role in ownership and planning, so it is not a pure market economy. Mercantilism, in option e, refers to a historical system of trade policy focused on accumulation of bullion and trade surpluses, not to the modern concept of a pure market economy. Common Pitfalls: Students sometimes mix up descriptive labels and may think that any modern economy that has markets is pure capitalism, even though most are mixed economies with significant government involvement. Others may confuse historical terms like mercantilism with contemporary systems. To answer correctly, it helps to focus on the key features of private ownership and market determination of prices and to recall that this combination is labelled capitalism in economic theory. Final Answer: A pure market economy is sometimes called pure capitalism, because capital and other resources are privately owned and decisions are guided mainly by market prices.

Question 3

In macroeconomic investment analysis, if depreciation of capital exceeds gross investment in a given year, what happens to the stock of capital in the economy?

Accepted Answer

Introduction / Context: In macroeconomics, it is important to distinguish between gross investment, depreciation, and net investment. Gross investment measures total spending on new capital goods, while depreciation represents the wearing out or obsolescence of existing capital. Net investment indicates whether the capital stock is expanding or contracting. This question asks what happens when depreciation exceeds gross investment. Given Data / Assumptions: Gross investment is the total expenditure on new capital goods in a given period. Depreciation is the estimated value of capital stock that has been used up or has worn out during the same period. Net investment is defined as gross investment minus depreciation. The capital stock is the total quantity of plant, machinery, and other productive equipment in the economy. We assume that the only factors affecting the capital stock are gross investment additions and depreciation losses. Concept / Approach: The relationship between gross investment, depreciation, and net investment is given by the formula net investment = gross investment minus depreciation. If gross investment equals depreciation, net investment is zero and the capital stock remains unchanged. If gross investment is greater than depreciation, net investment is positive and the capital stock grows. If depreciation is greater than gross investment, net investment becomes negative, which means that more capital is wearing out than is being added, so the total stock of capital shrinks. Step-by-Step Solution: Step 1: Write the basic formula: net investment = gross investment - depreciation.Step 2: Consider the case where depreciation exceeds gross investment, so depreciation is larger than gross investment.Step 3: Subtract a larger number (depreciation) from a smaller number (gross investment); the result is negative net investment.Step 4: Interpret negative net investment as a reduction in the capital stock, because the economy is not replacing all of the capital that is wearing out.Step 5: Conclude that when depreciation exceeds gross investment, the capital stock is shrinking. Verification / Alternative check: Take a numerical example. Suppose gross investment is 100 units and depreciation is 120 units in a year. Then net investment equals 100 minus 120, which is minus 20. This means the economy has 20 units less capital at the end of the year than at the beginning. In contrast, if gross investment had been 120 and depreciation 100, net investment would be plus 20 and the capital stock would grow. This numerical reasoning supports the conclusion that depreciation greater than gross investment implies a shrinking capital stock. Why Other Options Are Wrong: Option a claims that the capital stock is growing, which would require positive net investment, not negative. Option b says the capital stock may be either growing or shrinking, but when depreciation clearly exceeds gross investment, the outcome is unambiguously negative net investment, so the stock must be shrinking. Option c states that net investment is zero, which is true only when depreciation equals gross investment, not when it exceeds it. Option e makes an incorrect statement about capital doubling because depreciation allowances do not automatically expand the capital stock. Common Pitfalls: Some students confuse gross investment with net investment and think that any positive gross investment means the capital stock is growing. They forget to subtract depreciation, which can be large in an economy with a big existing capital base. Another error is to misread questions and treat depreciation equal to gross investment as the same as depreciation greater than gross investment. To avoid such mistakes, it is useful to always apply the formula net investment = gross investment minus depreciation carefully. Final Answer: If depreciation exceeds gross investment, net investment is negative and the stock of capital in the economy is shrinking.

Question 4

In the Indian banking system, which of the following became the first operational payments bank to start services in India?

Accepted Answer

Introduction / Context: Payments banks are a special category of banks introduced in India to further financial inclusion by providing small savings accounts, remittance services, and digital payment facilities. They have restrictions on lending but can accept deposits up to a specified limit and offer various payment services. The Reserve Bank of India granted licences to several entities, and one of them became the first operational payments bank in the country. This question asks which payments bank started services first. Given Data / Assumptions: The Reserve Bank of India granted in principle licences to multiple applicants to set up payments banks. These included telecom companies, technology firms, and financial institutions. The question is concerned with which payments bank actually launched operations first, not which licence was granted first. Early payments banks included Airtel Payments Bank, India Post Payments Bank, Fino Payments Bank, Paytm Payments Bank, and Aditya Birla Payments Bank. We rely on standard general knowledge and exam oriented information about the sequence of operational launches. Concept / Approach: According to general knowledge sources used in competitive examinations, Airtel Payments Bank, promoted by Bharti Airtel, was the first payments bank to begin operations in India. It initially launched a pilot in one state and then extended services to more regions, ahead of other licenced payments banks. As a result, it is widely recognised as the first operational payments bank in the country. Step-by-Step Solution: Step 1: Recall the list of entities that received licences for payments banks from the Reserve Bank of India.Step 2: Identify which of these banks actually began operations and launched their services to the public.Step 3: Examine the sequence of launches and note that Airtel Payments Bank started its pilot operations before other payments banks.Step 4: Recognise that exam preparation materials and banking awareness notes consistently mention Airtel Payments Bank as the first operational payments bank.Step 5: Compare this with the options provided and locate Airtel Payments Bank in option b.Step 6: Conclude that Airtel Payments Bank is the correct answer. Verification / Alternative check: Banking awareness textbooks and exam guides often include a question about the first payments bank in India and provide Airtel Payments Bank as the answer. They may mention the date of launch and the fact that it began as a pilot in one state before expanding to other regions. Other payments banks such as India Post, Fino, Paytm, and Aditya Birla started operations later. This consistent coverage supports the selection of Airtel Payments Bank as the first operational payments bank in India. Why Other Options Are Wrong: Fino Payments Bank commenced operations after Airtel Payments Bank, so option a is not correct. Aditya Birla Payments Bank also began operations later and eventually ceased functioning, so option c is incorrect. Paytm Payments Bank, option d, launched after Airtel Payments Bank and is not recognised as the first. India Post Payments Bank, option e, also started full operations after Airtel and is therefore not the correct answer to this specific question. Common Pitfalls: Because several payments banks launched around similar periods, candidates sometimes confuse which one was first. Another misunderstanding is to assume that the most widely known or largest brand, such as Paytm, must have been first. To avoid such errors, it is useful to memorise the standard banking awareness fact that Airtel Payments Bank was the first payments bank to commence operations in India. Final Answer: Airtel Payments Bank was the first operational payments bank to start services in India.

Question 5

In price policy discussions, the term administered prices generally refers to which of the following?

Accepted Answer

Introduction / Context: In many economies, particularly developing ones, governments intervene in markets to stabilise prices of essential goods and services. When the state sets or controls prices instead of leaving them entirely to market forces, these are often called administered prices. Understanding this term is important for questions on price policy, inflation control, and public distribution systems. Given Data / Assumptions: In a pure market system, prices are determined by demand and supply without direct government control. Governments sometimes fix prices for essential items like fertilizers, electricity, and food grains. Administered prices may be set by legislation, regulatory orders, or decisions of public bodies. The goal is often to protect consumers, support producers, or stabilise the economy. Administered prices are distinct from prices set by private monopolies or from negotiated wages in labour markets. Concept / Approach: Administered prices are those that are fixed or significantly influenced by government agencies or public authorities rather than being determined purely by free interaction of demand and supply. Examples include minimum support prices for agricultural products, regulated electricity tariffs, and some petroleum product prices in certain periods. In these cases, the authority considers social and political objectives as well as cost and profit when deciding the price. Therefore, the correct understanding is that administered prices involve government or public authority control. Step-by-Step Solution: Step 1: Recall that in a free market, prices adjust based on demand and supply, and no single authority fixes them.Step 2: Recognise that administered prices arise when a government or public body deliberately sets or constrains prices for specific goods or services.Step 3: Consider examples like minimum support prices for farmers, controlled gas cylinder prices, or regulated electricity tariffs.Step 4: Understand that these prices are designed to achieve policy goals such as protecting consumers, ensuring producer income, or controlling inflation.Step 5: Compare the options and identify the one that explicitly mentions prices fixed or influenced by the government rather than market forces.Step 6: Select option a as the accurate description of administered prices. Verification / Alternative check: Public finance and Indian economy textbooks refer to administered prices in the context of price controls, subsidies, and public distribution. They explain that such prices are set by authorities to pursue socio economic objectives rather than leaving the level of prices entirely to the market. Discussions of economic reforms often speak of deadministering prices when controls are reduced. These references support the interpretation in option a. Why Other Options Are Wrong: Option b describes prices that are purely market determined, which is the opposite of administered prices. Option c refers to wages negotiated between unions and management, which are labour market outcomes, not general administered prices. Option d highlights prices fixed by foreign governments, which may affect import costs but are not what is usually meant by administered prices in domestic policy discussions. Option e refers to private monopoly pricing without government oversight, which is again different from prices administered by public authorities. Common Pitfalls: Students sometimes confuse administered prices with monopoly prices or with any price influenced by large firms. Another misunderstanding is to assume that any government tax or subsidy automatically implies administered pricing, even when markets still adjust. To avoid confusion, it is helpful to remember that administered prices involve direct or strong government control over the price level of specific goods or services. Final Answer: Administered prices refer to prices of certain goods and services that are fixed or heavily influenced by the government or a public authority rather than by free market forces.

Question 6

Which of the following statements about India Goods and Services Tax (GST) is not correct?

Accepted Answer

Introduction / Context: The Goods and Services Tax, commonly called GST, is a major tax reform in India that replaced many earlier indirect taxes levied by the central and state governments. Examinations often test basic facts about GST, including whether it is a direct or indirect tax and what it replaced. This question asks which statement about GST is not correct. Given Data / Assumptions: GST is levied on the supply of goods and services in India. It replaced several indirect taxes such as excise duty, service tax, and value added tax. Direct taxes, such as income tax, are levied directly on income or profits of individuals and companies. Indirect taxes are levied on transactions in goods and services and are generally collected from consumers through intermediaries. GST was designed to simplify the indirect tax structure and create a unified national market. Concept / Approach: GST is clearly defined as an indirect tax. It is imposed on the supply of goods and services, collected by businesses from consumers, and then remitted to the government. It subsumes many earlier indirect taxes at both central and state levels, including luxury tax in many cases. It does not replace or function as a direct tax on income such as personal income tax or corporate tax. Therefore, any statement that refers to GST as a direct tax is incorrect. Step-by-Step Solution: Step 1: Identify the nature of GST. It is levied on transactions in goods and services and is collected at each stage of the supply chain.Step 2: Recognise that this structure is characteristic of an indirect tax, not a direct tax on income or profits.Step 3: Examine option a, which states that GST will replace luxury tax. This is broadly consistent with GST aim of subsuming earlier indirect taxes.Step 4: Examine option c, which states that GST will replace multiple taxes with a single comprehensive tax, which is correct.Step 5: Examine option d, which correctly states that GST is an indirect tax.Step 6: Observe that option b calls GST a direct tax on income of individuals and firms, which contradicts the basic definition of GST and is therefore not correct. Verification / Alternative check: Official descriptions of GST specify that it is an indirect tax on the supply of goods and services. It is collected at multiple stages with provision for input tax credit and is designed to avoid cascading. Direct taxes such as personal income tax and corporate tax continue to be levied separately and were not replaced by GST. Exam oriented reference books clearly list GST under indirect taxes and distinguish it from direct taxes in India tax structure. Why Other Options Are Wrong: Here, wrong means not the answer to the question which asks for the statement that is not true. Options a, c, d, and e are broadly correct statements about GST. Option a is correct because GST subsumed several earlier indirect taxes, including luxury tax. Option c is correct because GST replaced multiple overlapping indirect taxes with a single system. Option d correctly identifies GST as an indirect tax. Option e correctly notes that GST aims to create a unified national market by subsuming different state level taxes. Only option b incorrectly labels GST as a direct tax on income. Common Pitfalls: Some students confuse direct and indirect taxes because both are ways for the government to raise revenue. They may also assume that any major tax reform changes the entire tax structure, including direct taxes. To avoid this confusion, it is important to remember that GST belongs to the category of indirect taxes and coexists with direct taxes such as income tax and corporate tax, which were not replaced by GST. Final Answer: The statement that is not true is that GST is a direct tax that is levied directly on the income of individuals and firms.

Question 7

In the basic consumption function used in macroeconomics, how are income and consumption generally related?

Accepted Answer

Introduction / Context: The relationship between income and consumption is central to macroeconomic analysis. The consumption function describes how much households plan to consume at different levels of income. In simple models, consumption is assumed to increase as income increases, although not necessarily one for one. This question asks what kind of relationship exists between income and consumption. Given Data / Assumptions: Consumption refers to household spending on goods and services for current use. Income refers to disposable income available to households after taxes and transfers. In basic models, other influences on consumption such as wealth, expectations, and interest rates are held constant. The consumption function is usually written as C = a + bY, where a is autonomous consumption and b is the marginal propensity to consume. The marginal propensity to consume is positive but less than one. Concept / Approach: In the standard consumption function, consumption is positively related to income. As income rises, households are able to increase their spending on goods and services. The relationship is direct but not proportional, because households also save part of the additional income. Graphically, the consumption function slopes upward from left to right, showing that higher levels of income are associated with higher levels of consumption. Therefore, income and consumption are generally directly related in the basic macroeconomic framework. Step-by-Step Solution: Step 1: Recall the basic linear consumption function C = a + bY, where Y is income.Step 2: Note that b, the marginal propensity to consume, is positive, which means that when income increases, consumption also increases.Step 3: On a graph with income on the horizontal axis and consumption on the vertical axis, the consumption curve slopes upward.Step 4: Recognise that this upward slope indicates a direct relationship between income and consumption.Step 5: Compare this with an inverse relationship, which would require consumption to fall when income rises, something not assumed in basic models.Step 6: Conclude that the correct description is that income and consumption are directly related. Verification / Alternative check: Empirical studies and household surveys often show that as people incomes rise, their spending on goods and services also rises, although the fraction of income spent on necessities may fall. This supports the view that consumption increases with income even if the composition changes. Macroeconomic textbooks use this observed pattern to justify the assumption of a positively sloped consumption function and to derive the multiplier process in income determination. Why Other Options Are Wrong: Option b claims that income and consumption are only partially related and otherwise independent, which is vague and does not capture the clear positive relationship assumed in basic theory. Option c states that they are inversely related, which would imply that higher income reduces consumption, an assumption not used in simple consumption models. Option d claims that they are completely unrelated, which clearly contradicts both theory and empirical evidence. Option e restricts the relationship to firms, but the consumption function is specifically about households, not firms. Common Pitfalls: Students sometimes confuse total consumption with consumption on specific items and may think that consumption of some goods falls as income rises, such as inferior goods. While this can be true for particular goods, the overall level of consumption spending generally rises with income. To answer questions like this, it is important to focus on total consumption expenditure in basic macroeconomic models rather than on demand for individual products. Final Answer: Income and consumption are generally directly related, so higher income usually leads to higher consumption.

Question 8

In India, in which year was the Consumer Protection Act (commonly known as COPRA) first passed by the Parliament?

Accepted Answer

Introduction / Context: The Consumer Protection Act, popularly known by the short form COPRA, is a landmark piece of legislation in India that aims to protect consumers from unfair trade practices, defective goods, and deficient services. It provides for consumer councils and consumer courts at different levels. General knowledge and civics questions often ask the year in which this important act was first enacted. Given Data / Assumptions: The question refers to the original Consumer Protection Act, not to later amendments or replacement acts. The Act was passed by the Parliament of India and then notified for implementation. It is commonly referred to as COPRA in school level civics and economics textbooks. The options offer different years in the 1980s and 1990s. We assume standard exam oriented information about the year of enactment. Concept / Approach: The Consumer Protection Act was enacted in 1986 to provide better protection of the interests of consumers and to establish authorities for settlement of consumer disputes. The act has been amended several times and later replaced by an updated Consumer Protection Act in a more recent year, but the original law that students commonly study under the name COPRA dates from 1986. Therefore, the correct year to remember for basic general knowledge questions is 1986. Step-by-Step Solution: Step 1: Recall that the Consumer Protection Act was introduced in the mid 1980s as part of efforts to strengthen consumer rights in India.Step 2: Note that school textbooks and exam guides specifically mention the year 1986 in connection with COPRA.Step 3: Look at the options given: 1984, 1980, 1986, 1995, and 1991.Step 4: Compare the remembered year with these options and recognise that 1986 appears as option c.Step 5: Confirm that later dates such as 1991 and 1995 are associated with other reforms, not with the original COPRA.Step 6: Select 1986 as the correct answer. Verification / Alternative check: Official legal references and standard civics textbooks clearly state that the Consumer Protection Act was enacted in 1986. They often note that the act marks the beginning of a stronger, formal consumer movement in India. Many objective questions in competitive examinations also use the wording, in which year was the Consumer Protection Act (COPRA) passed, and provide 1986 as the correct option. This consistent information confirms the answer. Why Other Options Are Wrong: Option a, 1984, is earlier than the actual year of the act and is therefore incorrect. Option b, 1980, also precedes the enactment of COPRA. Option d, 1995, may refer to later developments but does not match the year the original act was passed. Option e, 1991, is known more for economic reforms and liberalisation measures, not for the initial consumer protection law. None of these years correspond to the original enactment of COPRA. Common Pitfalls: Students sometimes confuse the year of the original act with years of amendments or later replacement laws. Another common mistake is to mix up COPRA with other important dates in Indian economic reforms, such as 1991. To avoid errors, it is useful to memorise the simple association: COPRA and consumer protection act of India originally passed in 1986. Final Answer: The Consumer Protection Act (COPRA) was first passed in India in the year 1986.

Question 9

If the value of the rupee depreciates against foreign currencies, how are Indian exporters typically affected, assuming other factors remain constant?

Accepted Answer

Introduction / Context: Exchange rate movements affect exporters and importers differently. When a country currency depreciates, meaning it falls in value relative to foreign currencies, this changes the domestic currency value of export revenues and import payments. Understanding who gains and who loses from depreciation is a common topic in international economics and general knowledge questions. This question focuses on how exporters are affected when the rupee depreciates. Given Data / Assumptions: Rupee depreciation means that one unit of foreign currency now buys more rupees than before. Export contracts are often invoiced in foreign currency such as US dollars or euros. We assume that the foreign currency price of exports does not change immediately and that demand for exports remains reasonably stable in the short run. Exporters convert their foreign currency earnings back into rupees to pay domestic costs and earn profit. Other factors such as input costs and trade policies are assumed constant for the purpose of this question. Concept / Approach: When the rupee depreciates, each unit of foreign currency received by exporters converts into more rupees. For example, if the exchange rate moves from 70 rupees per dollar to 80 rupees per dollar, an exporter who earns 1,000 dollars from a shipment will now receive 80,000 rupees instead of 70,000 rupees. This increase in rupee revenue, assuming domestic costs have not risen by the same proportion, improves exporters profitability. At the same time, the rupee cost of imports rises, which tends to hurt importers. Therefore, depreciation of the rupee is generally beneficial for exporters, at least in the short run. Step-by-Step Solution: Step 1: Define rupee depreciation as a fall in the value of the rupee relative to foreign currencies, so that more rupees are needed to buy one unit of foreign currency.Step 2: Recognise that exporters receive payments in foreign currency for goods sold abroad.Step 3: When they convert these foreign currency earnings into rupees, a weaker rupee means that the same amount of foreign currency yields more rupees.Step 4: Assuming that export volumes and foreign currency prices remain unchanged, this increases rupee revenue for exporters.Step 5: Higher rupee receipts for the same level of foreign sales tend to increase profit margins if domestic costs do not rise proportionately.Step 6: Conclude that exporters are generally in profit when the rupee depreciates. Verification / Alternative check: International economics courses often present depreciation as making a country exports cheaper in foreign currency terms and imports more expensive in domestic currency terms. Over time, this can increase export volumes and reduce import demand. In addition, when export receipts in foreign currency are converted into a weaker domestic currency, the domestic currency value of those receipts rises. Business news during periods of rupee depreciation frequently reports that exporting firms see gains from currency movements, supporting the analysis above. Why Other Options Are Wrong: Option a is incorrect because exporters are affected by exchange rates; export receipts are not fixed only in rupees. Option b states that exporters are in loss, but depreciation tends to make exports more competitive and increases rupee receipts, which is favourable rather than harmful. Option d talks about a credit crunch, which is not an automatic result of currency depreciation and depends on broader financial conditions. Option e exaggerates the situation by suggesting that trade becomes impossible, which is clearly not true. Common Pitfalls: Some learners confuse the effects of appreciation and depreciation. Appreciation of the rupee makes exports more expensive in foreign currency and can hurt exporters, whereas depreciation has the opposite effect. Others think that any macroeconomic change is automatically bad for all businesses, overlooking the fact that some sectors gain while others lose. To answer correctly, it is important to link currency depreciation specifically to exporters foreign currency earnings and their conversion into domestic currency. Final Answer: If the rupee depreciates, exporters are generally in profit because they receive more rupees for the same amount of foreign currency earned from their exports.

Question 10

The rate of inflation in an economy tends to increase when the purchasing power of money does what over time?

Accepted Answer

Introduction / Context: Inflation is commonly defined as a sustained rise in the general price level of goods and services in an economy over time. Another way to view inflation is as a decline in the purchasing power of money, meaning that each unit of currency buys fewer goods and services than before. This question asks how changes in the purchasing power of money relate to the rate of inflation. Given Data / Assumptions: Purchasing power of money refers to the quantity of goods and services that can be bought with a given amount of money. Inflation refers to the rate at which the general price level is rising. There is an inverse relationship between the price level and the purchasing power of money. Other factors such as economic growth and changes in output are not directly considered in this simple conceptual question. We focus on the broad trend rather than on short term fluctuations. Concept / Approach: If prices of goods and services rise, a fixed amount of money will buy fewer items than before. This means that the purchasing power of money has decreased. Inflation, by definition, is the process of rising prices, so higher inflation corresponds to a faster decline in the purchasing power of money. Conversely, if prices are falling, the purchasing power of money increases and the rate of inflation becomes negative, a situation called deflation. Therefore, an increase in the rate of inflation is associated with a decrease in the purchasing power of money. Step-by-Step Solution: Step 1: Recall that the purchasing power of money is inversely related to the general price level.Step 2: When prices double, the same amount of money can only buy half as many goods and services as before, which means purchasing power has fallen.Step 3: The rate of inflation measures how quickly the general price level is rising over time.Step 4: If the inflation rate increases, prices rise more rapidly, and the purchasing power of money diminishes more quickly.Step 5: Therefore, an increase in the rate of inflation corresponds to a decrease in purchasing power.Step 6: Among the options, the statement that purchasing power decreases matches this inverse relationship. Verification / Alternative check: Economics textbooks often illustrate the relationship by noting that if inflation is 10 percent per year, then after one year, the same amount of money will buy roughly 10 percent fewer goods, assuming wages and other incomes do not rise at the same rate. They sometimes express purchasing power as 1 divided by the price level, which directly shows that as the price level increases, purchasing power declines. This confirms that rising inflation and falling purchasing power go together. Why Other Options Are Wrong: Option b states that inflation increases when purchasing power increases, which would require prices to fall, contradicting the definition of inflation. Option c suggests that purchasing power remains stable, which would imply zero inflation over time, not an increasing inflation rate. Option d gives a specific partial change without describing price behaviour and does not generally characterise the relationship between inflation and purchasing power. Option e is unrealistic and does not correspond to any standard economic scenario. Common Pitfalls: Some learners focus only on nominal amounts of money and forget that what matters is what money can buy. They may think that a higher money income automatically means higher real purchasing power, even if prices are rising faster. To understand inflation properly, it is important to think in real terms: higher inflation erodes the real value of money balances and fixed incomes by reducing what they can purchase. Final Answer: The rate of inflation increases when the purchasing power of money decreases, so that each unit of money buys fewer goods and services.

Question 11

In financial terminology, the organised market established specifically for the buying and selling of precious metals such as gold and silver is known by which market name?

Accepted Answer

Introduction / Context: The question checks basic financial market terminology, specifically the special type of market created to handle trading in precious metals such as gold and silver. Competitive exams often test this concept because gold and silver are important stores of value and their trade is organised differently from normal shares or everyday commodities. Given Data / Assumptions: We are dealing with precious metals, especially gold and silver. The market mentioned is an organised market for buying and selling these metals. We assume a standard textbook classification of financial and commodity markets. Concept / Approach: Financial markets are usually divided into capital markets, money markets, bullion markets, and a few other specialised segments. A bullion market is the recognised market where precious metals are traded in the form of bars, ingots, or coins, usually based on purity and weight. To answer, we recall which term is specifically reserved for gold and silver trading, rather than bonds, shares, or short term funds. Step-by-Step Solution: Step 1: Identify that the question is about a specialised market for precious metals such as gold and silver.Step 2: Recall that capital markets mainly deal with long term securities like shares and debentures.Step 3: Recall that money markets handle short term funds and instruments such as treasury bills and commercial paper.Step 4: Recognise that the term bullion refers to gold and silver in bulk form, traded by weight and purity.Step 5: Conclude that the organised market for gold and silver is called the bullion market. Verification / Alternative Check: In many financial news reports and economic textbooks, gold prices are quoted as bullion rates. Traders talk about bullion exchanges and bullion dealers whenever they discuss physical gold and silver. There is no similar consistent pairing of these metals with capital market or money market terminology, which confirms that bullion market is the correct technical expression. Why Other Options Are Wrong: Capital market is wrong because it mainly deals with long term financial securities, not directly with physical precious metals. Money market is incorrect because it focuses on short term borrowing and lending of funds. Wholesale cash market is a generic phrase and not the standard term used in economics for gold and silver trading. Therefore, none of these alternatives capture the precise meaning that bullion market does. Common Pitfalls: Students sometimes confuse any large scale trade with the term wholesale market and may feel that wholesale cash market fits. Others may wrongly assume that any valuable asset is part of the capital market. Another mistake is to think that money market covers all financial dealings, including gold, but in theory it is restricted to short term credit instruments. Remember that bullion is the key word linked to physical gold and silver bars. Final Answer: The organised market for buying and selling precious metals like gold and silver is called the bullion market.

Question 12

In international economics, what term is used for the difference in value between a country imports and its exports over a specific period of time?

Accepted Answer

Introduction / Context: This question tests a fundamental concept in international economics and trade. When a country trades goods and sometimes services with the rest of the world, analysts track the difference between the value of what it sells abroad and what it buys from abroad. Knowing the precise term for this difference is essential for understanding trade surpluses and trade deficits. Given Data / Assumptions: We are considering the value of imports and exports of a country. The time frame is a specific period such as a year. The focus is only on the difference between imports and exports, not all financial flows. Concept / Approach: The key idea is that Balance of Trade measures the difference between the value of exports and the value of imports of goods, and in many simple exam questions it is used as imports versus exports. In contrast, Balance of Payments is a wider concept that includes all economic transactions with the rest of the world such as investments and transfers. The term asked for here is the narrower trade concept. Step-by-Step Solution: Step 1: Note that the question talks only about imports and exports.Step 2: Recall that Balance of Trade is defined as value of exports minus value of imports of goods.Step 3: Balance of Payments covers a wider range including capital flows and remittances.Step 4: Balance of power is a political science term about relations between countries.Step 5: Therefore, the correct economic term for the difference between imports and exports is Balance of Trade. Verification / Alternative Check: Whenever we hear that a country has a trade deficit or trade surplus, the calculation is based on its Balance of Trade. If imports exceed exports, the country has a trade deficit; if exports exceed imports, it records a trade surplus. These statements do not use Balance of Payments or other terms, confirming that Balance of Trade is the correct label for the difference in question. Why Other Options Are Wrong: Balance of Payment is wrong because it covers all external economic transactions including trade, services, income, and capital flows. Balance of power belongs to international relations, not economics of trade flows. Credit Balance is a generic accounting phrase and does not specifically describe the relation between imports and exports at the national level. None of these alternatives match the narrow trade definition in the question. Common Pitfalls: Students often confuse Balance of Trade and Balance of Payments because both involve external transactions. Remember that Balance of Trade is a part of Balance of Payments, focusing mainly on trade in goods and sometimes services, while Balance of Payments is the full statement. Another pitfall is treating political phrases like balance of power as economic ones; always connect economic terms with their precise definitions. Final Answer: The difference in value between a country imports and exports over a period is called its Balance of Trade.

Question 13

In public finance and government budgeting, the term zero based budgeting refers to which type of budgeting approach used to plan expenditure?

Accepted Answer

Introduction / Context: Zero based budgeting is a modern budgeting technique frequently mentioned in economic reforms and administrative efficiency drives. Unlike traditional methods that build on past figures, zero based budgeting forces planners to justify each unit of spending afresh. This question checks whether you understand what the term really means in a government or organisational budgeting context. Given Data / Assumptions: The question is about the definition of zero based budgeting. The setting is public finance and government expenditure planning. We must distinguish this approach from other budgetary terms such as simple authorisations or inter agency payments. Concept / Approach: In zero based budgeting, every new budget cycle starts from a base of zero. No previous expenditure is automatically approved. Each department must clearly justify why it needs funds and demonstrate that proposed spending is linked to priorities and measurable results. This is different from traditional incremental budgeting where last year figures are adjusted up or down without full fresh review. The focus is on result orientation and efficient use of resources. Step-by-Step Solution: Step 1: Recall that zero based budgeting means starting the budget from a zero base.Step 2: Understand that every line of expenditure must be justified in terms of costs and benefits.Step 3: This ensures each rupee spent is linked to outcomes, not simply carried forward from previous years.Step 4: Compare with the options and identify which one emphasises justification and result orientation.Step 5: Option B clearly states that every rupee spent is result oriented, which matches the definition. Verification / Alternative Check: Administrative reform documents often describe zero based budgeting as a technique that obliges managers to review programmes from the ground up, eliminating wasteful or low priority activities. Training material also highlights that the key benefit is making expenditure more accountable and performance based. This confirms that the essence of the term is not about time periods or inter agency transfers but about justification from zero. Why Other Options Are Wrong: Option A merely describes an appropriation made by the legislature, which is true of all budgets and not specific to zero based budgeting. Option C talks about mandated reimbursement procedures, which are accounting items not linked to zero base logic. Option D describes internal charges between state agencies, again unrelated to the idea of starting from zero. None of these capture the core requirement of fresh justification of every expenditure item. Common Pitfalls: Candidates sometimes think zero based budgeting simply means cutting costs or reducing the overall size of the budget. In reality, it is about re examining priorities and ensuring that spending decisions are consciously chosen, even if some areas receive more funding. Another pitfall is mixing it up with performance budgeting or outcome budgeting; while related, zero based budgeting has the unique feature that no past expenditure is automatically assumed to continue. Final Answer: Zero based budgeting refers to a budgeting approach in which every rupee of expenditure must be freshly justified from a zero base, so that all spending is clearly result oriented.

Question 14

Among the following Indian festivals, which common feature correctly explains the similarity between Makar Sankranti, Pongal, Lohri and Baisakhi?

Accepted Answer

Introduction / Context: This question relates to Indian culture and festivals. Many important Indian festivals are linked to the agricultural cycle and harvest seasons. Makar Sankranti, Pongal, Lohri and Baisakhi are famous regional celebrations. The question asks you to identify the core similarity that connects all of them, which is a common theme often tested in cultural general knowledge. Given Data / Assumptions: Makar Sankranti is celebrated in many parts of India, especially in states like Gujarat and Maharashtra. Pongal is a major festival in Tamil Nadu. Lohri is mainly celebrated in Punjab and nearby regions. Baisakhi is also a major festival in Punjab and adjoining areas. Concept / Approach: All these festivals have their roots in agrarian life. They mark important points in the harvest cycle, often celebrating the gathering of crops, thanking nature and deities, and beginning a new agricultural year. Although the names, rituals, and regional flavours differ, the unifying theme is their role as harvest festivals rather than their geography or exact dates in the Gregorian calendar. Step-by-Step Solution: Step 1: Recall that Makar Sankranti is associated with the harvest of the rabi crop and also marks a change in the sun position.Step 2: Remember that Pongal is a harvest festival in Tamil Nadu, where newly harvested rice is cooked and offered.Step 3: Know that Lohri in Punjab is celebrated around the time of harvesting sugarcane and other winter crops.Step 4: Recognise that Baisakhi marks the harvest of the rabi crop and also has religious significance for the Sikh community.Step 5: Conclude that the main similarity is that all four are harvest festivals. Verification / Alternative Check: Standard cultural and exam preparation books describe Makar Sankranti, Pongal, Lohri and Baisakhi as harvest related celebrations. While some of them fall in January, Baisakhi is usually in April, which disproves the idea that their common feature is the month of celebration. Regional classification is also not correct, because Pongal is from South India whereas Lohri and Baisakhi are from North India, further confirming that the harvest theme is the correct unifying factor. Why Other Options Are Wrong: Option A is incorrect because not all four festivals belong to North India; Pongal is principally a South Indian festival. Option C is wrong because Baisakhi is celebrated in April, not January. Option D claims there is no similarity, which contradicts the clear agricultural and harvest context for all four. Therefore, only the harvest festival option captures the correct cultural link. Common Pitfalls: Students sometimes quickly associate all these festivals with a particular month, especially January, due to Makar Sankranti, Pongal and Lohri being close together in the calendar, and they forget that Baisakhi is later in the year. Another common confusion is to think about regional grouping instead of thematic grouping. For such questions, it is safer to ask what function the festival serves in rural and agrarian life, which often reveals the correct connection. Final Answer: The correct similarity is that Makar Sankranti, Pongal, Lohri and Baisakhi are all harvest festivals celebrated in different regions of India.

Question 15

In December 2017, which pair of Gulf countries announced the formation of a new economic and partnership group named the Joint Cooperation Committee?

Accepted Answer

Introduction / Context: This question deals with contemporary international relations and economic cooperation among Gulf countries. In recent years, some Gulf states have formed new groups and committees to deepen cooperation in defence, economy, and politics. One such initiative is the Joint Cooperation Committee announced in December 2017. The question asks you to recall which pair of countries launched this body. Given Data / Assumptions: The announcement took place in December 2017. The name of the new grouping is Joint Cooperation Committee. It is an economic and partnership group formed by Gulf countries. The options list four possible country pairs from the Gulf region. Concept / Approach: To answer, we rely on knowledge of recent Gulf diplomatic and economic developments. Around that period, Saudi Arabia and the United Arab Emirates were especially close partners, launching several joint initiatives, including military and economic coordination beyond the wider Gulf Cooperation Council framework. Many current affairs compilations highlighted this new committee as a sign of deepening Saudi and Emirati ties. Step-by-Step Solution: Step 1: Recall that the Joint Cooperation Committee was announced as a new economic and partnership group.Step 2: Think of which Gulf states were prominently cooperating and making joint announcements in 2017.Step 3: Note that Saudi Arabia and the United Arab Emirates repeatedly appeared together in news about strategic partnerships.Step 4: Cross check mentally that Qatar, Bahrain, Kuwait and Oman were not reported as forming a separate Joint Cooperation Committee under that exact name in that period.Step 5: Conclude that the correct pair is the United Arab Emirates and Saudi Arabia. Verification / Alternative Check: Reviewing standard current affairs notes for competitive exams for the 2017 to 2018 period shows references to a high level Joint Cooperation Committee set up by the United Arab Emirates and Saudi Arabia to coordinate in fields like politics, defence and economy. No similar mention appears for the other pairs listed in the options in that specific month. This confirms that the answer involving Saudi Arabia and the United Arab Emirates is accurate. Why Other Options Are Wrong: The pairs Qatar and United Arab Emirates, Bahrain and Kuwait, and Oman and Saudi Arabia were not reported as launching a group with this exact name in December 2017. While these countries are part of the Gulf region and participate in other regional platforms, the specific phrase Joint Cooperation Committee and the timing match only the Saudi and Emirati initiative. Hence, the other options are distractors. Common Pitfalls: Because many Gulf states are members of the same regional forums, candidates may assume any pair could be correct and rely on guesswork. Another pitfall is confusing the Joint Cooperation Committee with broader organisations like the Gulf Cooperation Council. To avoid these mistakes, pay attention to specific names, dates, and the exact wording used in news reports, which can clearly distinguish one initiative from another. Final Answer: The Joint Cooperation Committee announced in December 2017 was formed by the United Arab Emirates and Saudi Arabia.

Question 16

Which e commerce major signed an agreement with the National Institute for Entrepreneurship and Small Business Development (NIESBUD) to encourage small and medium enterprises to grow profitably online?

Accepted Answer

Introduction / Context: This question combines knowledge of Indian entrepreneurship support institutions and major e commerce platforms. NIESBUD is a government organisation that promotes entrepreneurship and training for small and medium enterprises. To help such businesses sell online, it entered into a collaboration with a large e commerce company. The question asks you to identify which platform signed that agreement. Given Data / Assumptions: NIESBUD focuses on entrepreneurship and small business development. The agreement aimed at encouraging small and medium enterprises to grow profitably online. The options list popular e commerce companies operating in India. We assume the question reflects a widely reported agreement highlighted in competitive exam material. Concept / Approach: At various times, Indian institutions have partnered with online marketplaces to train and onboard small sellers. Around the period when this question was framed, Snapdeal was actively promoting such tie ups with government linked training bodies to reach small entrepreneurs, especially in smaller towns. The approach is to recall which company was prominently associated with NIESBUD in news relating to online small business training. Step-by-Step Solution: Step 1: Identify that the question is about a specific partnership between NIESBUD and an e commerce company.Step 2: Recall that Snapdeal has often appeared in news about enabling small businesses in India to sell online.Step 3: Compare this with Amazon and Flipkart, which also support small sellers but were not typically highlighted in connection with a NIESBUD agreement in standard exam notes.Step 4: Recognise that eBay India was an important player but less associated with this particular government entrepreneurship institute at that time.Step 5: Conclude that Snapdeal is the correct choice for the NIESBUD partnership. Verification / Alternative Check: Current affairs booklets and compilations from the period mention a collaboration between NIESBUD and Snapdeal to train and support small and medium enterprises in selling products profitably through the Snapdeal marketplace. They stress training modules, digital cataloguing, and online marketing support. Similar details are not linked in those sources to Amazon, Flipkart, or eBay in the NIESBUD context, which supports choosing Snapdeal. Why Other Options Are Wrong: Amazon and Flipkart are large and active e commerce platforms in India, but standard exam oriented news about NIESBUD training programmes typically names Snapdeal as the partner. eBay had operations in India but was less central in such government linked initiatives. Therefore, while these companies do support small sellers, they do not match the specific NIESBUD agreement that the question refers to. Common Pitfalls: Because Amazon and Flipkart are more famous today than Snapdeal, many candidates are tempted to select one of them purely based on brand recognition. Another pitfall is to assume that any e commerce company could fit the description without checking specific partnerships mentioned in current affairs notes. For such questions, it is important to recall the exact names linked together in the news rather than relying on general impressions of company size. Final Answer: The e commerce major that signed an agreement with NIESBUD to help small and medium enterprises grow profitably online was Snapdeal.

Question 17

In microeconomics, in which of the following cases does the law of demand fail to hold in its usual form, so that quantity demanded may rise when price rises?

Accepted Answer

Introduction / Context: The law of demand states that, other things being equal, when the price of a good rises, the quantity demanded usually falls, and when the price falls, quantity demanded usually rises. However, there are rare exceptions where this relationship can be reversed. One of the most famous exceptions in microeconomics is the case of Giffen goods, which this question focuses on. Given Data / Assumptions: The law of demand refers to an inverse relation between price and quantity demanded. We are asked when this law fails in its normal form. Options include Giffen goods, normal goods, inferior goods in general, and a combination. Ceteris paribus assumptions such as constant income and tastes are in the background. Concept / Approach: Giffen goods are a special category of inferior goods where the negative income effect of a price rise is so strong that it outweighs the usual substitution effect. As a result, when the price of such a staple good rises, very poor consumers may actually buy more of it because they can no longer afford better alternatives. This creates a positively sloped demand curve, contradicting the usual law of demand. Not all inferior goods behave this way, only specific ones with very particular conditions. Step-by-Step Solution: Step 1: Recall that normal goods always follow the law of demand, with higher price leading to lower quantity demanded.Step 2: Recognise that inferior goods usually still obey the law of demand even though demand falls when income rises.Step 3: Giffen goods are a rare type of inferior good where a price rise may cause quantity demanded to increase.Step 4: This behaviour means the law of demand fails in its typical form for Giffen goods.Step 5: Therefore, the correct choice is Giffen goods, not all inferior goods. Verification / Alternative Check: Textbooks frequently present Giffen goods as the classic exception to the law of demand. Diagrams show an upward sloping demand curve for such goods, with the positive relationship between price and quantity demanded. They also emphasise that Giffen goods are theoretically possible and were named after the economist Robert Giffen. Normal and most inferior goods retain a downward sloping demand curve, confirming that only Giffen goods break the usual law. Why Other Options Are Wrong: Normal goods by definition show higher demand when income rises and follow the typical inverse relation between price and quantity, so the law of demand holds. Inferior goods in general are not exceptions to the law of demand; they differ only in how demand responds to income changes. Option D, which groups Giffen goods with all inferior goods, is wrong because only some very special inferior goods are Giffen goods. Hence, only option A is correct. Common Pitfalls: Students often confuse inferior goods and Giffen goods, assuming all inferior goods violate the law of demand. The important distinction is that inferior goods are defined by income response, not by price behaviour, and most still have downward sloping demand curves. Another pitfall is to think that luxury goods or normal goods could show a positive price demand relation due to prestige effects, but such goods are usually discussed separately as Veblen goods, not as standard exceptions in exam level microeconomics. Final Answer: The law of demand fails in its usual inverse form primarily in the case of Giffen goods.

Question 18

In financial markets, the money market is best described as a market for which type of funds or instruments?

Accepted Answer

Introduction / Context: The question tests your understanding of how financial markets are classified. The money market is one of the central market segments in finance. Knowing what is traded in the money market is important for understanding banking operations, liquidity management, and short term borrowing and lending in the economy. Given Data / Assumptions: The term used is money market. We must choose among short term funds, long term funds, negotiable instruments only, and sale of shares. Standard textbook definitions of financial markets are assumed. Concept / Approach: The money market is the segment of the financial market where short term funds and short maturity financial instruments are traded, typically with maturities of up to one year. Instruments include treasury bills, commercial paper, certificates of deposit, call money and similar items. In contrast, capital markets handle long term securities like bonds and shares. The key word for this question is short term. Step-by-Step Solution: Step 1: Recall that money market deals with highly liquid and short maturity instruments.Step 2: These instruments are used by banks, companies and governments for short term borrowing and lending.Step 3: Capital markets handle long term securities such as shares and debentures.Step 4: Consider the options and match the idea of short term funds to money market.Step 5: Conclude that the most accurate description is that the money market is a market for short term funds. Verification / Alternative Check: Standard definitions in banking and finance state that the money market is the market for short term funds and financial assets that can be quickly converted into cash. The purpose of this market is to help institutions manage liquidity and meet short term funding needs. While negotiable instruments often feature in this market, the core element is the short term nature of funds, confirming that this is the correct description. Why Other Options Are Wrong: Long term funds relate to capital markets, not the money market, so option B is incorrect. Negotiable instruments are indeed present in financial markets but they can also be long term; simply calling it a market for negotiable instruments does not capture the essential short term feature, so option C is incomplete and misleading. Sale of shares primarily belongs to the equity segment of the capital market, not to the money market, making option D wrong as well. Common Pitfalls: Some learners assume that because the term money is used, the market covers all types of financial instruments, both long and short term. Others confuse money market with capital market or think that any instrument traded by banks belongs automatically to the money market. To avoid this, always remember that the dividing line is maturity; one year or less is the typical zone for money market instruments. Final Answer: The money market is a market for short term funds and short maturity financial instruments.

Question 19

In macroeconomic policy, pump priming is a measure that should typically be used during which phase of the economy to stimulate demand?

Accepted Answer

Introduction / Context: Pump priming is a concept from macroeconomics and public finance associated with the use of government spending to revive a sluggish economy. The expression is borrowed from the idea of pouring a little water into a pump to start the flow. In economic terms, it refers to injecting extra expenditure when economic activity is low. The question asks during which phase such a measure is most appropriate. Given Data / Assumptions: The tool mentioned is pump priming, meaning increased government expenditure to stimulate demand. Options include inflation, deflation, stagflation and reflation. We assume standard textbook meanings of these phases. Concept / Approach: Deflation refers to a period of falling general price levels, usually accompanied by reduced demand, low investment and high unemployment. In such times, private sector spending is weak, so governments may increase their spending deliberately to boost aggregate demand. This policy action is called pump priming. Under inflation, where prices are already rising too fast, such additional spending would worsen the problem, so pump priming is not suitable. Step-by-Step Solution: Step 1: Define pump priming as deliberate government spending to stimulate aggregate demand.Step 2: Identify deflation as a situation of falling prices and weak demand.Step 3: Recognise that in deflation the main policy aim is to increase spending and investment.Step 4: Note that pump priming fits this aim by putting money into the economy through public works and similar projects.Step 5: Conclude that pump priming should be resorted to during deflation. Verification / Alternative Check: Classical descriptions of Keynesian fiscal policy describe pump priming as increased public expenditure during downturns or depressions. Deflationary periods are characterised by low output and unemployment, which match those downturn conditions. Standard exam guides also directly associate pump priming with overcoming deflation or depression, never with a boom or high inflation phase, which confirms this choice. Why Other Options Are Wrong: During inflation, the challenge is too much demand chasing limited supply, so an expansionary measure like pump priming would be counterproductive. Stagflation combines stagnation with inflation and requires more careful and mixed policy tools rather than simple expansion. Reflation is a policy objective of bringing an economy back from recession using various tools, and pump priming can be part of that, but the phase that clearly needs such stimulus due to low prices and weak demand is deflation, making option B the most accurate choice. Common Pitfalls: Students may confuse deflation with disinflation or think that any slowdown is stagflation. Another common error is to pick reflation mainly because it sounds similar to reflection or recovery without recalling its precise meaning. For questions about pump priming, always connect the idea of starting or restarting economic activity with a depressed or deflationary environment where government must step in to boost demand. Final Answer: Pump priming is most appropriately used during a deflationary phase to stimulate demand and revive economic activity.

Question 20

In the context of India exchange rate management, under a fixed foreign exchange rate system, which authority can officially change the fixed rate of the rupee against foreign currencies?

Accepted Answer

Introduction / Context: This question concerns the management of the exchange rate in India under a fixed or managed regime. Although the exchange rate is more market linked today, exam questions often refer to the authority responsible for making official changes in a fixed rate system. In India, the central bank plays a central role in exchange rate policy and intervention. Given Data / Assumptions: The subject is a fixed foreign exchange rate system. We are looking for the authority that can officially change the fixed rate. The options include the Reserve Bank of India, a securities regulator, the Ministry of Finance, and an investment promotion board. Concept / Approach: In most countries, the central bank is the principal authority dealing with currency management and foreign exchange operations, even if strategic decisions are taken in consultation with the government. In India, the Reserve Bank of India manages the foreign exchange reserves, intervenes in the market and administers relevant regulations. Traditionally, changes in the external value of the currency under a fixed system are implemented through central bank actions. Step-by-Step Solution: Step 1: Recognise that exchange rate management is a monetary rather than securities regulation function.Step 2: Recall that the Reserve Bank of India is the central bank responsible for currency and foreign exchange management.Step 3: Note that the Securities and Exchange Board of India regulates capital markets, not exchange rates.Step 4: Understand that while the Ministry of Finance sets overall economic policy, the operational role in changing rates lies with the central bank.Step 5: Conclude that the Reserve Bank of India is the authority associated with changing the fixed foreign exchange rate. Verification / Alternative Check: Most textbooks on Indian financial systems clearly state that the Reserve Bank of India manages the foreign exchange market and implements government policies regarding the exchange rate. Acronyms such as FEMA are also administered by the central bank. While the Ministry of Finance may decide on major devaluations or reforms, the day to day and technical aspect of changing or maintaining a fixed rate is executed by the central bank, which supports choosing the Reserve Bank. Why Other Options Are Wrong: The Securities and Exchange Board of India oversees stock exchanges, mutual funds, and other capital market intermediaries, not the foreign exchange rate of the rupee. The Ministry of Finance is a policy making body but the question asks about the authority under a fixed rate system, which is operationally the central bank. The Foreign Investment Promotion Board dealt with foreign investment clearances and not direct exchange rate settings. Therefore, all these options are less accurate than the Reserve Bank of India. Common Pitfalls: Some candidates choose the Ministry of Finance simply because it is a high level government body, overlooking the technical role of the central bank. Others may be misled by titles that contain the word foreign such as the Foreign Investment Promotion Board. To avoid such errors, remember that currency and exchange rate questions usually point towards the central bank unless clearly stated otherwise. Final Answer: Under a fixed foreign exchange rate system in India, the authority associated with changing the official rate is the Reserve Bank of India.

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