Question 1

When a good or productive factor is completely fixed in quantity regardless of the market price, what is the shape of its supply curve?

Accepted Answer

Introduction / Context: Supply analysis in microeconomics often assumes that the quantity supplied of a good varies with its price. However, there are special cases where the quantity of a good or factor is completely fixed, at least in the short run. This question asks you to recall the shape of the supply curve when the quantity of a good cannot change regardless of price, which is a classic textbook example for perfectly inelastic supply. Given Data / Assumptions: The total quantity of the good or productive factor is fixed. Producers cannot increase or decrease the available quantity in response to price changes. We are considering the relationship between price on the vertical axis and quantity supplied on the horizontal axis. The focus is on the shape of the supply curve under these conditions. Concept / Approach: When the quantity supplied of a good is completely unresponsive to price, the supply is said to be perfectly inelastic. Graphically, a perfectly inelastic supply curve is drawn as a vertical line at the given fixed quantity. No matter what the price is, the quantity supplied remains the same. Examples include the supply of land in a given region or the supply of a unique painting by a famous artist. In contrast, a horizontal supply curve would represent perfectly elastic supply, where suppliers are willing to supply any quantity at a given price but none at any other price. Step-by-Step Solution: Step 1: Identify that the key condition is “completely fixed in amount, regardless of price”. Step 2: Recall that when quantity cannot change as price changes, supply is perfectly inelastic. Step 3: Remember that a perfectly inelastic supply curve is drawn as a vertical line at the fixed quantity on the horizontal axis. Step 4: Match this description to the option that says the supply curve is vertical. Verification / Alternative check: A quick mental diagram can confirm this. Place quantity on the horizontal axis and price on the vertical axis. If quantity is fixed at Q0, draw a line at Q0 that does not move left or right as price changes. This line is vertical. Any upward sloping or downward sloping curve would imply that quantity changes with price, which contradicts the given condition. Why Other Options Are Wrong: Downward sloping to the right: This would indicate an inverse relationship between price and quantity supplied, which is not typical for supply and is also inconsistent with fixed quantity. Horizontal: A horizontal supply curve implies that quantity supplied can change freely at a fixed price, which is the opposite of a completely fixed quantity. Upward sloping to the right: This is the usual case for supply when quantity responds positively to price, but here quantity is not allowed to change at all, so this is wrong. Common Pitfalls: Students sometimes mix up the shapes for perfectly elastic and perfectly inelastic curves, confusing vertical with horizontal. A useful memory aid is that “inelastic” suggests “no movement” in quantity, which is represented by a vertical line at a fixed quantity. Also, some learners assume supply must always slope upward, forgetting that special cases like fixed factor supply are important exceptions in theory and in some real markets. Final Answer: When the quantity of a good or factor is completely fixed regardless of price, the supply curve is vertical.

Question 2

A market structure in which many firms sell products that are similar but not identical is known as what type of competition?

Accepted Answer

Introduction / Context: Market structures in microeconomics describe how many firms there are in a market, how similar their products are, and how much control each firm has over price. One important form is where many sellers offer differentiated versions of a product that are close but not perfect substitutes. This question tests whether you can correctly name the market structure in which many firms sell similar but not identical products. Given Data / Assumptions: There are many firms in the market. Products are similar but differentiated in some way (brand, quality, features). Each firm has some degree of market power due to product differentiation. Entry and exit are relatively easy in the long run. Concept / Approach: In perfect competition, many firms sell an identical product and no single firm has market power. In monopolistic competition, many firms sell differentiated products that are close substitutes but not identical. Because of differentiation, each firm faces a downward sloping demand curve and has some control over its own price. Oligopoly involves only a few large firms, and monopoly involves a single firm. The phrase “similar but not identical products” is a classic indicator of monopolistic competition in exam questions. Step-by-Step Solution: Step 1: Focus on the phrase “similar but not identical products”, which signals product differentiation. Step 2: Recall that perfect competition assumes identical or homogeneous products, so it cannot be the correct structure here. Step 3: Remember that monopolistic competition has many firms, free entry and exit, and differentiated products. Step 4: Match this description to the option “Monopolistic competition”. Verification / Alternative check: Think about real world examples such as branded toothpaste, fast food chains, or clothing brands. Many firms sell broadly similar items, but each brand has its own features, advertising, and loyal customers. These markets are commonly modeled as monopolistic competition. This mental check supports the choice of monopolistic competition for the given description. Why Other Options Are Wrong: Perfect competition: Assumes identical products and zero market power for individual firms. This contradicts the idea of similar but not identical products. Imperfect competition in general: This is a broad term that covers several non perfect structures, but the question wants a specific type, and the textbook label is monopolistic competition. Oligopoly: Involves only a few firms dominating the market, whereas the question implies many firms selling differentiated products. Common Pitfalls: A common mistake is to confuse monopolistic competition with general imperfections and to think of any differentiated product market as simply imperfect competition. Another pitfall is mixing up monopolistic competition with monopoly because of the word “monopolistic”. Remember that in monopolistic competition there are many firms, each with a mini monopoly over its own brand due to differentiation, but overall the market remains competitive. Final Answer: A market where many firms sell similar but not identical products is called monopolistic competition.

Question 3

Which income and consumption theory states that an individual's consumption in any time period depends on resources available to the individual, the rate of return on his or her capital, and the age of the individual?

Accepted Answer

Introduction / Context: In macroeconomics and consumption theory, several hypotheses attempt to explain how individuals decide how much to consume and how much to save. These include the Absolute Income Hypothesis, Relative Income Hypothesis, Life Cycle Hypothesis, and Permanent Income Hypothesis. This question asks you to identify which specific hypothesis emphasizes that consumption depends on lifetime resources, rate of return on capital, and the age of the individual. Given Data / Assumptions: Consumption decisions are not based only on current income. The individual considers total resources or wealth available over the whole life. The rate of return on capital affects how savings grow and support future consumption. Age matters because individuals move through working years and retirement. Concept / Approach: The Life Cycle Hypothesis, associated with Modigliani and others, suggests that individuals plan their consumption and saving behaviour over their entire lifetime. People work and earn in some years and retire in others, and they aim to smooth consumption across life. Consumption in any period depends on lifetime resources, expected income, rate of return on savings and assets, and where the individual currently is in the life cycle. Other hypotheses focus on different aspects: the Absolute Income Hypothesis links consumption mainly to current income, Relative Income Hypothesis focuses on income relative to others, and Permanent Income Hypothesis, associated with Friedman, emphasizes permanent income rather than temporary fluctuations, but does not stress age in the same way as the Life Cycle approach. Step-by-Step Solution: Step 1: Identify key cues in the question: resources available, rate of return on capital, and age of the individual. Step 2: Recall that the Life Cycle Hypothesis explicitly models consumption decisions over the life span, from working years to retirement, which naturally involves age. Step 3: Recognize that rate of return on capital is important in life cycle models because it determines how savings grow to finance future consumption. Step 4: Match this description to the Life Cycle Hypothesis and select it as the correct option. Verification / Alternative check: A quick check is to recollect that the Life Cycle Hypothesis often uses diagrams showing income and consumption over time, with higher income during middle age and declining income in retirement, while consumption is smoother. Age is central in those diagrams. Other hypotheses do not place equal emphasis on age and life stages. This confirms that the Life Cycle Hypothesis is the best fit for the description given in the question. Why Other Options Are Wrong: Absolute Income Hypothesis: Proposes that consumption mainly depends on current absolute income, without detailed consideration of age or lifetime planning. Relative Income Hypothesis: Emphasizes that consumption depends on income relative to others in society and on past peak income, rather than directly on age and rate of return on capital. Permanent Income Hypothesis: Focuses on permanent income versus transitory income and how people smooth consumption, but age and life cycle structure are not as central in its basic form as they are in the Life Cycle Hypothesis. Common Pitfalls: Students often mix up the Life Cycle and Permanent Income Hypotheses because both involve smoothing consumption over time. The key difference for exam purposes is that the Life Cycle Hypothesis explicitly structures decisions over different life stages, making age a crucial variable, whereas the Permanent Income Hypothesis emphasizes expected long term average income. Keeping this distinction clear helps avoid confusion in theory based questions. Final Answer: The theory described is the Life Cycle Hypothesis of consumption.

Question 4

In India, which agency is responsible for compiling the official estimates of National Income?

Accepted Answer

Introduction / Context: National Income statistics are fundamental for understanding the overall performance of an economy, designing fiscal and monetary policy, and comparing development across countries. In India, there is a designated official agency responsible for compiling and publishing these estimates. This question tests your knowledge of the institutional arrangement for National Income accounting in the Indian context. Given Data / Assumptions: The focus is on India's official National Income estimates. Several economic and statistical bodies exist at the national level. We are asked which of the listed institutions compiles National Income. We refer to the traditional name used in many exam syllabi, Central Statistical Organization, which is now part of a larger statistical system. Concept / Approach: Historically, the Central Statistical Organization, often abbreviated as CSO, under the Ministry of Statistics and Programme Implementation, has been responsible for the preparation of National Accounts Statistics in India. These statistics include Gross Domestic Product at current and constant prices, sectoral contributions, and related macro aggregates. While administrative structures have evolved over time, competitive examinations typically refer to CSO as the body associated with National Income compilation. Other institutions listed in the options have different roles in fiscal federalism, research, or policy coordination. Step-by-Step Solution: Step 1: Recall that National Income accounting requires a central statistical authority. Step 2: Recognize that the Central Statistical Organization is the traditional name linked directly with the National Accounts Statistics of India. Step 3: Verify that the other listed bodies do not perform the technical task of compiling National Income. Step 4: Select “Central Statistical Organization” as the correct answer. Verification / Alternative check: A quick check is to remember that the Finance Commission deals primarily with the distribution of tax revenues between the Union and the States, not with statistical compilation. The Indian Statistical Institute is mainly a research and teaching institution. The National Development Council historically dealt with broad planning policies. None of these bodies are primarily responsible for official National Accounts, which confirms that the Central Statistical Organization is the correct choice for this question. Why Other Options Are Wrong: Finance Commission: It recommends how to share tax revenues and grants between Union and States; it does not compile National Income data. Indian Statistical Institute: It is an academic and research institution engaged in advanced statistical research and training, not the official compiler of National Income. National Development Council: This body was concerned with development policy and planning, not with detailed statistical compilation of National Accounts. Common Pitfalls: Students sometimes confuse the roles of different institutions because they all deal with economic issues. It is important to distinguish between bodies that make policy recommendations, those that conduct research, and those that compile official statistics. Remembering that the Central Statistical Organization is directly associated with National Accounts Statistics helps avoid this confusion in exam questions. Final Answer: In India, the official estimates of National Income are compiled by the Central Statistical Organization.

Question 5

A backward bending supply curve is most commonly associated with the supply behaviour of which factor market?

Accepted Answer

Introduction / Context: In microeconomics, the supply curves for most goods and factors are drawn as upward sloping, indicating that higher prices or wages induce more supply. However, there is a famous exception: the backward bending supply curve, where beyond a certain point an increase in wage leads to a decrease in the quantity of labour supplied. This question asks you to recall which factor market typically exhibits this backward bending supply curve in standard economic theory. Given Data / Assumptions: We are discussing the supply of a factor of production. The supply curve eventually bends backward at higher price levels. The behaviour is explained using income and substitution effects. We assume a typical individual decision maker facing a trade off between work and leisure. Concept / Approach: The backward bending supply curve is usually associated with the labour market. At lower wage levels, an increase in wage makes work more attractive relative to leisure, and the substitution effect dominates, leading people to work more hours. As wage becomes very high, the income effect can dominate: individuals feel that they can maintain their desired standard of living while working fewer hours, so they choose more leisure and less work. This leads to a decrease in labour supplied as wage rises further, creating a backward bend in the individual or aggregate labour supply curve at higher wage levels. Such behaviour is not typically described for capital, money, or inventory markets in standard textbooks. Step-by-Step Solution: Step 1: Recognize the phrase “backward bending supply curve” as a classic description related to labour supply. Step 2: Recall how the labour supply curve is derived from the trade off between income and leisure. Step 3: Understand that at high wage levels, additional wage increases may cause people to prefer more leisure and supply less labour. Step 4: Conclude that the factor market with a backward bending supply curve is the labour market. Verification / Alternative check: Think of typical diagrams in microeconomics textbooks where labour supply is shown as initially upward sloping and then bending backward at higher wages. This is presented as a special property of labour supply due to the unique work leisure trade off. There are no similar standard diagrams for capital or money supply that are backward bending. This confirms that the labour market is the correct answer. Why Other Options Are Wrong: Capital market: The supply of capital is usually discussed in terms of savings behaviour and interest rates but is not commonly depicted with a backward bending supply curve in basic texts. Money market: Money supply is typically determined by the central bank and banking system, not by a backward bending private supply curve. Inventories: Inventory decisions involve stock management, but the concept of a backward bending supply curve is not standard for inventory markets. Common Pitfalls: A common error is to assume that all factor supply curves are simply upward sloping. Another pitfall is to confuse labour demand and labour supply; it is the supply that may bend backward due to workers choices, not the demand curve of firms. Remember that the special work leisure decision and the interplay of income and substitution effects make labour supply unique among factor markets in this respect. Final Answer: The backward bending supply curve is typically associated with the labour market.

Question 6

If a state government budget is defeated in the legislature, what is the usual constitutional consequence?

Accepted Answer

Introduction / Context: In a parliamentary system, including the system followed in Indian states, the executive (Council of Ministers headed by the Chief Minister) is collectively responsible to the legislature. A budget or appropriation bill is a key measure of confidence. If the budget is defeated, it usually indicates that the government no longer enjoys the confidence of the majority in the legislature. This question examines your understanding of the constitutional convention that follows such a defeat at the state level. Given Data / Assumptions: We are dealing with a state government within the Indian Union. The budget or appropriation bill has been defeated in the state legislature. The system of government is parliamentary, not presidential. Collective responsibility to the legislature is a key principle. Concept / Approach: Under the principle of collective responsibility, the Council of Ministers is responsible as a body to the legislative assembly. Defeat of a money bill or budget is treated as a vote of no confidence. If the government cannot secure passage of its budget, it is considered to have lost the confidence of the house. The usual consequence is that the entire Council of Ministers, including the Chief Minister, must resign or seek dissolution of the assembly. It is not just the Finance Minister who is personally responsible; responsibility is collective. Step-by-Step Solution: Step 1: Recognize that the budget is a crucial measure of confidence in a parliamentary system. Step 2: Recall that defeat of the budget is equivalent to a loss of majority support in the legislature. Step 3: Apply the principle of collective responsibility, which requires the entire Council of Ministers to answer to the legislature. Step 4: Conclude that the appropriate consequence is that the Council of Ministers along with the Chief Minister has to resign. Verification / Alternative check: Compare this situation with a vote of no confidence. In both cases, the government is unable to demonstrate majority support. In practice, when a budget is defeated, the Chief Minister submits the resignation of the entire Council of Ministers to the Governor, or the government may advise dissolution and fresh elections, but resignation is the primary constitutional consequence. This confirms that the answer involves the whole Council, not just one minister. Why Other Options Are Wrong: The Finance Minister alone has to resign: This misunderstands collective responsibility. The entire government, not just one minister, is accountable. The Finance Minister is suspended: Suspension is not a standard constitutional response to budget defeat and does not address the underlying issue of majority support. Fresh elections are automatically ordered: Elections may follow if the assembly is dissolved, but they are not automatic. First, the government must resign or attempt to prove majority by other means; alternative government formation is also possible. Common Pitfalls: Students sometimes treat the budget as solely the Finance Minister's responsibility, forgetting that the whole Council collectively endorses it. Another pitfall is assuming that defeat of the budget automatically leads to elections, ignoring the possibility of a new government being formed within the same assembly. Understanding the logic of parliamentary accountability helps to avoid these errors. Final Answer: If a state budget is defeated in the legislature, the Council of Ministers along with the Chief Minister has to resign.

Question 7

In economic terms, if it is possible to make at least one person better off without making anyone else worse off, the current situation is described as what?

Accepted Answer

Introduction / Context: Welfare economics uses the concepts of Pareto efficiency and Pareto improvement to assess how resources are allocated in an economy. A situation is Pareto efficient if no one can be made better off without making someone else worse off. Conversely, if such an improvement is possible, the current allocation is not Pareto efficient. This question asks you to identify how we describe a situation where a Pareto improvement is still possible. Given Data / Assumptions: We are examining a particular allocation of resources or goods among individuals. It is possible to make someone better off without making anyone worse off. No redistribution that harms others is needed to achieve that improvement. We are using the standard Pareto framework in welfare economics. Concept / Approach: A Pareto efficient allocation is one in which all possible Pareto improvements have already been exhausted. If there exists at least one feasible change that makes at least one person better off while making no one worse off, the current allocation is Pareto inefficient. A move from the current allocation to the improved one is called a Pareto improvement, and the improved state can be described as Pareto superior relative to the original. However, the question is about the initial situation, not the improved one. Therefore, we label the initial situation as inefficient in the Pareto sense. Step-by-Step Solution: Step 1: Recognize that the ability to make someone better off without hurting others defines a Pareto improvement. Step 2: Recall that if a Pareto improvement is possible, the current allocation is not Pareto efficient. Step 3: Understand that the appropriate term for such an allocation is Pareto inefficient or simply inefficient in the Pareto sense. Step 4: Select the option that best captures this idea, which is “Inefficient”. Verification / Alternative check: You can picture a simple Edgeworth box diagram where points inside the contract curve represent allocations where mutual gains from trade are still possible. These interior points are Pareto inefficient because moving to the contract curve can make someone better off without making others worse off. Only points on the contract curve are Pareto efficient. Since the question describes a situation where an improvement is still possible, it corresponds to an interior point and thus an inefficient allocation. Why Other Options Are Wrong: Efficient: This would mean that no Pareto improvements are possible, which contradicts the condition given in the question. Optimal: In many contexts, optimal implies some form of efficiency, often Pareto efficiency or social welfare maximization, so it does not describe a situation where improvements are still possible. Pareto superior: This term describes the improved allocation relative to the original one, not the original situation itself. The question is about the nature of the current situation where improvement is possible, so Pareto superior is not the correct label. Common Pitfalls: Some learners confuse the label for the improved allocation (Pareto superior) with the label for the original allocation. It is important to distinguish between the state being evaluated and the direction of change. Another pitfall is thinking that any real world allocation is automatically efficient, which is not true. Many real allocations are Pareto inefficient because there are still mutually beneficial changes that could, at least in theory, make some people better off without harming others. Final Answer: If it is possible to make someone better off without making anyone worse off, the current situation is inefficient in the Pareto sense.

Question 8

Which of the following statements about a bank demand draft is not true?

Accepted Answer

Introduction / Context: A demand draft is a commonly used instrument in banking and commerce, especially for making secure payments. Understanding its legal and practical characteristics is important for exams on banking, finance, and general awareness. This question asks which statement about a demand draft is not true, so you must know how it differs from an ordinary cheque and under what conditions it can be dishonoured. Given Data / Assumptions: A demand draft is drawn by a bank on another branch of the same bank or on another bank. The purchaser pays the bank the amount of the draft plus charges in advance. The draft is used to transfer funds securely from one place to another. We must identify the statement that does not correctly describe these features. Concept / Approach: A demand draft is often called a banker's cheque because it is drawn by a bank on itself or another bank. The payer (customer) deposits the full amount with the issuing bank at the time the draft is made. Because the bank already holds the funds, the draft should not be dishonoured for lack of funds in the customer's account when it is presented for payment. This is different from an ordinary cheque, which can be dishonoured if the drawer's account does not have sufficient balance at the time of presentation. Demand drafts are negotiable instruments and are widely accepted due to their security and reliability. Step-by-Step Solution: Step 1: Recall that a demand draft is issued by a bank and functions as a banker's cheque. Step 2: Recognize that the customer pays the amount in advance, so the bank is responsible for honouring the draft. Step 3: Understand that dishonour for lack of funds in the customer's account is not applicable in the same way as for an ordinary cheque. Step 4: Identify the statement that claims the draft may be dishonoured for lack of funds as the one that is not true. Verification / Alternative check: You can check the logic by comparing a demand draft to a personal cheque. With a cheque, the payer writes it against their own account balance, so if the balance is insufficient at the time of presentation, the bank can dishonour it. With a demand draft, the payer has already handed over the money to the bank, and the bank issues the draft on its own responsibility. Therefore, the usual reason for dishonour due to lack of customer funds does not apply, confirming that the statement mentioning dishonour for lack of funds is incorrect in this context. Why Other Options Are Wrong: It is a negotiable instrument: This is true because the demand draft can be transferred and encashed by the payee or endorsee subject to banking rules. It is a banker's cheque: This is also true, as a demand draft is issued by a bank and represents a bank's payment commitment. It is issued by a bank: This is correct and follows from the definition of a demand draft as a bank issued instrument. Common Pitfalls: A common mistake is to treat a demand draft exactly like a personal cheque and assume it can be dishonoured for the same reasons. Students often overlook the fact that the bank has already received the funds before issuing the draft. While a demand draft could theoretically face issues due to technical defects or fraud, the specific reason of lack of funds in the customer's account at the time of presentation is not relevant, because the bank, not the customer, is the drawer. Final Answer: The statement that is not true is that a demand draft may be dishonoured for lack of funds in the customer's account.

Question 9

In the theory of profit, the innovation theory of profit, which links profit to entrepreneurial innovations, was proposed by which economist?

Accepted Answer

Introduction / Context: Several theories attempt to explain the origin and nature of profit in a capitalist economy. One influential view is the innovation theory of profit, which argues that profit arises because innovative entrepreneurs introduce new products, new processes, or new ways of organizing production and thus temporarily earn extra returns. This question tests your ability to associate this theory with the correct economist. Given Data / Assumptions: The focus is on a theory that emphasizes innovation by entrepreneurs. Profit is seen as a reward for introducing new combinations or new methods. The question lists several prominent economists as options. We must recall which economist is most closely linked to the innovation theory of profit. Concept / Approach: Joseph Schumpeter is best known for his theory of economic development based on innovation and the role of the entrepreneur as an innovator. He argued that entrepreneurs introduce new products, new production techniques, new markets, new sources of supply, and new forms of organization. These innovations create temporary monopoly positions and allow entrepreneurs to earn profits until competitors imitate them. This view is often summarized as the innovation theory of profit. Other economists listed in the options are associated with different contributions, such as Marshall with marginal analysis and partial equilibrium, Clark with marginal productivity theory of distribution, and Joan Robinson with imperfect competition and monopsony analysis. Step-by-Step Solution: Step 1: Identify that the theory in question links profit directly to entrepreneurial innovation. Step 2: Recall which economist emphasized innovation as the engine of economic development and profit. Step 3: Recognize that Joseph Schumpeter developed the idea of the entrepreneur as an innovator who earns profits from new combinations. Step 4: Choose “Schumpeter” from the list of options as the correct answer. Verification / Alternative check: You can double check by recalling Schumpeter's famous phrase about “creative destruction”, which refers to the process by which new innovations replace old industries and methods. Profit in this framework is closely tied to the temporary gains that innovators enjoy before competition erodes their advantage. This is exactly the logic of the innovation theory of profit. The other economists in the options are not primarily known for such a theory of entrepreneurial profit. Why Other Options Are Wrong: Marshall: Known for contributions to partial equilibrium, consumer surplus, and the analysis of supply and demand, not specifically for an innovation based theory of profit. Clark: Associated with marginal productivity theory of distribution, explaining wages, rent, and interest based on marginal productivity, rather than innovation based profit. Joan Robinson: Famous for the theory of imperfect competition and analysis of monopsony power in labour markets, not for the innovation theory of profit. Common Pitfalls: A frequent mistake is to associate profit theories generically with any famous economist without remembering their specific contributions. Another pitfall is mixing up Schumpeter with other theorists of entrepreneurship who may emphasize risk or uncertainty rather than innovation. To avoid confusion, remember that Schumpeter focuses on the entrepreneur as an innovator and on profit as a temporary reward for innovation, which helps you immediately recognize his name in such questions. Final Answer: The innovation theory of profit was proposed by Schumpeter.

Question 10

Which one of the following statements about Exchange Traded Funds (ETFs) as marketable investment products is NOT correct from a basic personal finance point of view?

Accepted Answer

Introduction / Context: Exchange Traded Funds, commonly called ETFs, are an important investment product that combine features of mutual funds and individual shares. Competitive exam questions often test whether a candidate can distinguish the correct basic properties of ETFs from statements that are slightly misleading. In this question you are asked to pick the statement that is not correct, so you must recall how ETFs are structured, how they trade during the day, and how their costs and liquidity compare with regular mutual fund schemes. Given Data / Assumptions: - The question is about general features of exchange traded funds as they are commonly offered to retail investors. - Four qualitative statements are given that talk about marketability, intraday price changes, liquidity and fees, and trading behaviour. - Exactly one of these statements is factually incorrect, while the remaining statements are broadly correct at an introductory level. Concept / Approach: An ETF is a pooled investment vehicle that holds a basket of assets, like a mutual fund, but it is listed and traded on a stock exchange like a share. Because of this structure there are some standard benchmark facts. Units of an ETF are marketable securities. They trade throughout exchange hours and therefore their market prices move up and down continuously. In addition, most popular ETFs, especially index based ones, are designed to offer relatively low management fees and reasonably good liquidity. Any option that contradicts these core features of ETFs should be treated as the incorrect statement. Step-by-Step Solution: Step 1: Look at option A. ETF units are listed on an exchange and can be freely bought and sold, so they are indeed marketable securities. Option A is therefore a correct description.Step 2: Look at option B. Because ETFs trade during the whole market session, their prices do not stay fixed. They change whenever investors place buy and sell orders. This is another standard feature, so option B is also correct.Step 3: Look at option D. This option emphasises that transactions in ETFs take place at market prices on the exchange rather than only at a single end of day price, which is how traditional mutual fund redemptions work. As a simple comparison between ETFs and open ended funds, this statement is acceptable and broadly correct.Step 4: Look at option C. It claims that ETFs usually have lower liquidity and higher fees than comparable mutual fund schemes. In practice, one of the selling points of ETFs is that many of them offer competitive liquidity and low expense ratios because they are often passively managed index funds. So option C clearly conflicts with the normal advantages of ETFs and is therefore the incorrect statement. Verification / Alternative check: A fast way to verify your reasoning is to recall why investors shift from mutual funds to ETFs. They usually mention intraday tradability, transparency and lower fund management charges as key attractions. Liquidity in actively traded ETFs is also supported by market makers and arbitrageurs. Since option C claims exactly the opposite situation, it stands out as the wrong statement. The other three options fit the standard textbook level description of ETFs, so the pattern of three correct features and one wrong feature is consistent. Why Other Options Are Wrong: Option A is not wrong because by definition ETF units are listed and therefore marketable. Option B is not wrong because intraday price movement is a central characteristic of exchange traded securities. Option D is not wrong because, although an official net asset value is still calculated once per day for reporting, investors actually transact in ETFs at market determined prices on the exchange rather than only at a single end of day price like in many open ended mutual funds. Common Pitfalls: Students sometimes assume that all funds behave like traditional mutual funds and forget the exchange traded nature of ETFs. Another common mistake is to confuse the official calculation of net asset value with the practical experience of price changes on the exchange. Some candidates also over generalise from a few small or illiquid ETFs and conclude that low liquidity and high charges are typical of the entire product category. Careful reading of the options and recalling the main advantages that are quoted in investor education material helps to avoid these errors. Final Answer: The incorrect statement about Exchange Traded Funds is It typically has lower daily liquidity and higher management fees than comparable mutual fund schemes..

Question 11

Consider the following statements about how the burden of an indirect tax is shifted between consumers and producers when demand and supply have different elasticities. Which of the statements given below is or are correct?

Accepted Answer

Introduction / Context: This question examines your understanding of tax incidence, that is, how the economic burden of a tax is shared between buyers and sellers. In particular it links the direction of shifting of an indirect tax to the relative price elasticities of demand and supply. Many candidates memorise that taxes can be shifted forward or backward, but they do not always connect this idea to elasticity. Here you are given two general statements and asked to judge whether each statement correctly describes the effect of relative elasticity on the shifting of the tax burden. Given Data / Assumptions: - Statement 1 says that a tax is shifted forward to consumers if demand is inelastic relative to supply. - Statement 2 says that a tax is shifted backward to producers if supply is relatively more inelastic than demand. - The question assumes standard competitive market conditions for an indirect tax on a good or service and uses basic microeconomic theory of elasticity and incidence. Concept / Approach: Tax incidence theory tells us that the side of the market which is relatively less price elastic bears a larger share of the burden of a tax, because that side adjusts quantity less when price changes. If demand is inelastic compared with supply, buyers cannot easily reduce their purchases when price rises, so the burden is pushed forward onto them. This is called forward shifting. If supply is inelastic relative to demand, producers cannot easily cut output when price falls, so they bear more of the tax burden through lower net receipts, which is called backward shifting. Therefore we should compare each statement with this general principle. Step-by-Step Solution: Step 1: Analyse statement 1. It says that a tax is shifted forward to consumers if demand is inelastic relative to supply. When demand is less elastic, buyers are less sensitive to price increases. As a result, producers can raise prices by almost the full amount of the tax without losing much quantity sold, so most of the tax gets passed on to consumers. This is exactly what standard incidence theory predicts.Step 2: Conclude about statement 1. Since this matches the general rule that the less elastic side bears more burden, statement 1 is correct.Step 3: Analyse statement 2. It says that a tax is shifted backward to producers if supply is relatively more inelastic than demand. When supply is less elastic, producers cannot easily reduce quantity supplied when the price they receive falls after the tax is imposed. They must continue selling roughly the same quantity, so they absorb a bigger part of the tax in the form of lower net revenue per unit.Step 4: Conclude about statement 2. This again lines up with the rule that the less elastic side bears more of the tax, so statement 2 is also correct. Verification / Alternative check: You can visualise standard demand and supply diagrams. With inelastic demand and elastic supply, the demand curve is steep and the supply curve is relatively flat. The price paid by consumers rises strongly while the price received by producers falls only slightly, so consumers bear more of the tax. With inelastic supply and elastic demand, the supply curve is steep and the demand curve is relatively flat. In that case the price received by producers falls sharply while the price paid by consumers rises less, so producers bear more of the burden. This graphical check confirms both statements. Why Other Options Are Wrong: Option A is wrong because it assumes only statement 1 is correct and ignores the fact that statement 2 also follows directly from elasticity principles. Option B is wrong because it treats statement 2 as the only correct one, which is incomplete. Option D is wrong because it claims that neither statement is correct, which contradicts standard microeconomics and basic tax incidence diagrams. Since both statements faithfully apply the rule that the less elastic side of the market bears more of the tax burden, the only valid choice is that both 1 and 2 are correct. Common Pitfalls: Many students confuse elasticity with slope and think only about which curve is steeper without relating that to responsiveness of quantity. Others believe that producers always bear the tax because they are the ones remitting it to the government, or that consumers always pay because the price they see increases. In reality, legal incidence and economic incidence are different ideas, and the true burden depends on relative elasticities. Remembering that the side that can escape more easily through quantity adjustment bears less of the tax helps to avoid these conceptual errors. Final Answer: Both statements correctly describe tax shifting, so the right answer is Both 1 and 2.

Question 12

According to the law of diminishing marginal utility in consumer behaviour, as the amount of a good consumed increases over time, the marginal utility or additional satisfaction derived from each extra unit of that good tends to ____.

Accepted Answer

Introduction / Context: The law of diminishing marginal utility is a fundamental concept in microeconomics and consumer behaviour. It is used to explain why demand curves slope downward and why consumers are willing to pay less for additional units of the same good. This question asks you to recall the basic statement of that law and to identify what happens to marginal utility as consumption of a good increases. Given Data / Assumptions: - A single consumer is consuming units of a particular good over a given period of time. - Total consumption of the good is increasing, while other things such as tastes, income and prices of other goods remain constant. - Marginal utility is defined as the additional satisfaction obtained from consuming one more unit of the good. Concept / Approach: The law of diminishing marginal utility states that as a consumer consumes more and more units of a good, the additional satisfaction from each extra unit tends to fall, beyond a certain point. The first unit of a good usually gives high utility because it satisfies the most urgent want. Later units satisfy less urgent wants and therefore yield lower additional satisfaction. This law does not say that total utility must fall, only that the marginal utility of successive units declines. So we must choose the option that captures this idea of a falling marginal utility as quantity increases. Step-by-Step Solution: Step 1: Examine option A, improve. If marginal utility improved or increased with each additional unit consumed, the consumer would get more and more extra satisfaction from later units, which contradicts the basic law and would lead to an upward sloping demand curve. So this option is inconsistent with standard theory.Step 2: Examine option B, diminish. This states that marginal utility decreases as consumption increases, which is exactly what the law of diminishing marginal utility says. It fits the textbook definition.Step 3: Examine option C, remain constant. If marginal utility stayed constant, each unit would give the same additional satisfaction, and there would be no particular reason for the demand curve to slope downwards with price. This contradicts observed consumer behaviour and standard models.Step 4: Examine option D, first diminish and then improve. The law of diminishing marginal utility does not describe such a pattern. It says that beyond a certain point marginal utility tends to decline and may eventually even become zero or negative, but it does not say that marginal utility later rises again as more units are consumed. Verification / Alternative check: You can verify your answer by thinking of a simple example, such as drinking glasses of water when you are thirsty. The first glass gives a lot of satisfaction, the second slightly less, and by the time you reach the fourth or fifth glass you may get very little extra satisfaction and might even feel discomfort if you are forced to drink more. This real life pattern illustrates diminishing marginal utility. Similar examples apply to many goods such as slices of pizza, cups of tea or the same movie watched repeatedly. Why Other Options Are Wrong: Option A is wrong because it suggests increasing marginal utility, which would mean each additional unit gives more extra satisfaction than the previous one. This would imply unrealistic ever rising willingness to pay. Option C is wrong because constant marginal utility is not consistent with downward sloping demand and the need to allocate limited income across many goods. Option D is wrong because the law does not include an improvement phase after diminishing; that idea would require a more complex and specific story, not the general law taught in elementary microeconomics. Common Pitfalls: One common confusion is between total utility and marginal utility. Total utility can still be rising even when marginal utility is falling, as long as marginal utility remains positive. Another error is to assume that diminishing marginal utility must occur immediately from the first unit. In reality the law says beyond a certain reasonable level of consumption, marginal utility tends to diminish. Understanding this distinction helps to apply the concept correctly to demand analysis and consumer choice problems. Final Answer: According to the law of diminishing marginal utility, the marginal utility of additional units of a good tends to diminish as the amount consumed increases.

Question 13

Which one of the following types of unemployment in economics is also regarded as disguised unemployment, especially in the context of agriculture and developing economies?

Accepted Answer

Introduction / Context: Disguised unemployment is a standard concept in development economics and labour economics, particularly when analysing rural and agricultural labour markets in developing countries. Many objective type questions ask you to identify the term that best matches a verbal description. Here the question asks which form of unemployment is also known as disguised unemployment. Understanding the meaning of disguised unemployment and how it differs from other types of unemployment is essential. Given Data / Assumptions: - The focus is on the concept of disguised unemployment as defined in economics textbooks. - Four types of unemployment are listed: underemployment, frictional, seasonal and cyclical unemployment. - You must choose the term that essentially describes a situation where more workers are engaged than actually needed, with some of them contributing almost zero marginal productivity. Concept / Approach: Disguised unemployment refers to a situation where the number of workers employed on a job is more than actually required to produce the existing level of output. If a few of these workers were withdrawn, total output would not fall. In this case the marginal productivity of some workers is nearly zero. This is commonly seen in over crowded agricultural holdings or informal sector activities. Such workers are technically employed but are not fully utilised, so they are effectively underemployed. Therefore, underemployment is closely associated with and often considered another name for disguised unemployment. Step-by-Step Solution: Step 1: Recall the definition of underemployment. Underemployment occurs when a worker is employed, but not in a job that fully uses their time, skills or productive capacity. For example, five family members may be working on a small farm that actually needs only three full time workers.Step 2: Connect this with disguised unemployment. In such a scenario, removal of two workers from the farm would not reduce total output, so those extra workers are in disguised unemployment. They appear employed but effectively add little or no extra output.Step 3: Consider frictional unemployment. This arises when people are temporarily between jobs or searching for new work. It is not about surplus workers on the same job, so it is different from disguised unemployment.Step 4: Consider seasonal unemployment. This occurs when workers are employed only during certain seasons, such as harvesting. It reflects a lack of year round employment rather than surplus labour on a given task.Step 5: Consider cyclical unemployment. This is associated with downturns in the business cycle, such as recessions. Again, it is not about hidden surplus labour on an existing activity. Verification / Alternative check: To verify your answer, think of the classic textbook example from Indian agriculture. A piece of land can be farmed efficiently by three workers, but extra family members also work on it because there are no alternative jobs. If two of them shift to non farm work, farm output remains unchanged. Those two were in disguised unemployment and at the same time underemployed, because their potential was not used elsewhere. This thought experiment confirms that underemployment is the closest match. Why Other Options Are Wrong: Frictional unemployment is wrong because it deals with short term job search and mobility, not surplus workers on a single job. Seasonal unemployment is wrong because it describes periods without work in certain seasons, rather than excessive labour in the same season. Cyclical unemployment is wrong because it is linked to macroeconomic fluctuations, not hidden surplus labour in a specific activity. Common Pitfalls: Candidates sometimes confuse seasonal and disguised unemployment because both are common in agriculture. However, seasonal unemployment means no work in off season, whereas disguised unemployment means too many people sharing the same work in season. Another pitfall is to think that any form of unemployment in rural areas is disguised, which is not correct. The technical definition is tied to zero or very low marginal productivity of some workers who still appear employed. Final Answer: The type of unemployment that is also regarded as disguised unemployment is Underemployment.

Question 14

When there is only one buyer and only one seller of a particular product in a market, the situation is technically known as which one of the following?

Accepted Answer

Introduction / Context: Market structure is a core topic in microeconomics. Different names are given to markets depending on how many buyers and sellers they contain. You may already know monopoly, where there is one seller and many buyers, and monopsony, where there is one buyer and many sellers. This question goes one step further and asks what we call a situation where there is only one buyer and only one seller facing each other in a particular market. Given Data / Assumptions: - There is a single seller of a product in the relevant market. - There is also a single buyer for that product in the same market. - Other possible buyers and sellers are not considered, so effectively one firm and one customer interact with each other. - You must choose the correct technical term for this combined situation. Concept / Approach: A monopoly is one seller facing many buyers. A monopsony is one buyer facing many sellers. When both sides are restricted to a single participant, we have a mixture of these features. The term used in industrial organisation theory is bilateral monopoly. In a bilateral monopoly, the monopolist seller and the monopsonist buyer bargain over price and quantity. The outcome depends on bargaining power, negotiated contracts and sometimes government regulation. Therefore, we should look for the option that explicitly mentions bilateral monopoly, as that is the standard name for one buyer and one seller facing each other. Step-by-Step Solution: Step 1: Examine option A, public monopoly. This usually refers to a monopoly owned or controlled by the government, such as a public utility, and does not say anything about the number of buyers.Step 2: Examine option B, bilateral monopoly. The word bilateral means two sided. In economics, a bilateral monopoly exists when there is a single seller with monopoly power and a single buyer with monopsony power in the same market.Step 3: Examine option C, franchised monopoly. This refers to a private firm given exclusive rights to supply a market by the government, for example through a franchise agreement, but it again does not limit the number of buyers.Step 4: Examine option D, monopsony. A pure monopsony is one buyer facing many sellers, not just one seller, so this does not match the information in the question. Verification / Alternative check: You can quickly verify your answer by linking the word parts. Mono refers to one, poly to many, and bilateral to two sides. A bilateral monopoly therefore emphasises that both sides of the market have a single dominant participant. This is different from simple monopoly or monopsony. In policy discussions, bilateral monopoly is often used to analyse negotiations between a major employer and a major trade union or between a dominant supplier and a dominant buyer. Why Other Options Are Wrong: Public monopoly is wrong because it focuses on ownership, not on the number of buyers. Franchised monopoly is wrong because it describes a granted exclusive right, again without limiting buyers. Monopsony is wrong because it only captures the one buyer part, not the one seller part. Common Pitfalls: A frequent mistake is to choose monopsony simply because the phrase one buyer appears in the stem. However, the question clearly states there is also only one seller, so monopsony alone is incomplete. Another error is to think that any market with one seller must be a monopoly, ignoring the role of the buyer side. Careful reading of both the buyer and seller conditions helps to avoid such confusion. Final Answer: The situation with only one buyer and one seller of a product is called a Bilateral monopoly.

Question 15

Which among the following is NOT usually treated as a distinct account under the standard Balance of Payments (BoP) classification of a country's international transactions?

Accepted Answer

Introduction / Context: The Balance of Payments is a systematic record of all economic transactions between residents of a country and the rest of the world during a given period. It is usually divided into a small number of main accounts or broad heads. Examinations often test whether you know which headings genuinely appear in the standard classification and which terms are older or less accurate descriptions. This question asks you to pick the option that is not generally regarded as a separate account under the modern Balance of Payments framework. Given Data / Assumptions: - The topic is the Balance of Payments of a country. - Four names of accounts are given: Current Account, Capital Account, Official Reserves Account and Unilateral Payments Account. - You must identify which of these is not usually recognised as a separate main account in the standard presentation of the Balance of Payments. Concept / Approach: In contemporary macroeconomics and international economics, the Balance of Payments is mainly divided into the Current Account and the Capital and Financial Account. Some presentations also highlight movements in Official Reserve Assets as a separate heading or as part of the financial account. Unilateral transfers such as gifts, donations and remittances without quid pro quo are not a separate account; they are treated as current transfers within the Current Account. The older phrase unilateral payments account is therefore not considered a standard main account in present classifications, even though unilateral transactions are still recorded. Step-by-Step Solution: Step 1: Consider the Current Account. This account records exports and imports of goods, trade in services, income flows such as interest and dividends, and current transfers like remittances. It is an essential and universally accepted part of the Balance of Payments.Step 2: Consider the Capital Account. In many textbooks this term is used broadly along with the financial account to capture capital transfers and financial flows such as foreign investment and loans. It is again a recognised component of the Balance of Payments.Step 3: Consider the Official Reserves Account. Changes in foreign exchange reserves held by the central bank are often shown in a separate section or within the financial account to balance the overall payments position. Thus this heading is acceptable in many presentations as a distinct part.Step 4: Consider the Unilateral Payments Account. Modern Balance of Payments frameworks do not show unilateral payments as a separate main account. Instead, unilateral transfers form one part of the Current Account. The term unilateral payments account is therefore not a standard main heading. Verification / Alternative check: You can verify this by recalling how international agencies like the IMF or central banks present Balance of Payments tables. The main headings are Current Account and Capital and Financial Account, along with changes in reserves and any errors and omissions. Transfers without quid pro quo, such as remittances, foreign aid grants and gifts, are listed under current transfers, not under a separate unilateral payments account. This reassures you that option D is the odd one out. Why Other Options Are Wrong: Option A is wrong as an answer because the Current Account is a standard and important part of the Balance of Payments. Option B is wrong because the Capital Account or the broader Capital and Financial Account is also central. Option C is wrong because movements in official reserves are clearly tracked and are often presented as their own section in Balance of Payments accounts. Common Pitfalls: One common error is to assume that every phrase containing the word account must represent a distinct main account, without checking how official statistics are actually structured. Another pitfall is confusion between unilateral transfers and unilateral payments account as a heading. Remember that unilateral transfers do exist, but they are placed under the Current Account rather than treated as a standalone account. Keeping in mind the standard IMF style layout will help you answer similar questions correctly. Final Answer: The term that is not usually treated as a separate main account under the Balance of Payments is Unilateral Payments Account.

Question 16

Which one of the following is NOT used by the Reserve Bank of India as an instrument of credit control or monetary policy in India?

Accepted Answer

Introduction / Context: Credit control instruments are tools used by a central bank, such as the Reserve Bank of India, to regulate the volume and cost of credit in the economy. Objective questions often list several terms, some of which are genuine monetary policy instruments and some of which are distractors. This question asks you to identify the option that is not recognised as a standard instrument of credit control in India. Given Data / Assumptions: - The context is monetary policy and credit control by the Reserve Bank of India. - The options include rationing of credit, direct action, open market operations and variable cost reserve ratios. - You need to choose the item that does not correctly name a recognised instrument used by the central bank. Concept / Approach: Broadly, the Reserve Bank of India uses quantitative and qualitative instruments. Quantitative tools include bank rate, open market operations, cash reserve ratio and statutory liquidity ratio. Qualitative tools include selective credit control, moral suasion, direct action and rationing of credit. The phrase variable cost reserve ratios does not match the standard terminology. The correct term in Indian monetary policy is variable cash reserve ratio or simply cash reserve ratio, which refers to the proportion of deposits that banks must keep with the RBI. Therefore the option that mentions variable cost reserve ratios is factually incorrect as a policy instrument name. Step-by-Step Solution: Step 1: Analyse option A, rationing of credit. This is a qualitative method where the central bank limits the total amount of credit that commercial banks can extend or specifies priority sectors. It is recognised as an instrument of credit control.Step 2: Analyse option B, direct action against banks. Direct action includes penalties, restrictions or directives applied to specific banks that do not comply with monetary policy guidelines. This is again a known qualitative tool of credit control.Step 3: Analyse option C, open market operations. These are outright purchases and sales of government securities by the central bank in the open market to influence liquidity and interest rates. They are core quantitative instruments of monetary policy.Step 4: Analyse option D, variable cost reserve ratios. This phrase is not used in standard monetary policy language. The central bank does not talk about cost reserve ratios; instead it changes the cash reserve ratio or statutory liquidity ratio. The incorrect use of the word cost instead of cash shows that this option does not describe a genuine instrument. Verification / Alternative check: You can cross check by listing the usual RBI instruments: bank rate, repo rate, reverse repo rate, open market operations, cash reserve ratio, statutory liquidity ratio, marginal standing facility, moral suasion, direct action and credit rationing. None of these is called a cost reserve ratio. Therefore variable cost reserve ratios cannot be an official credit control instrument, confirming that option D is the correct answer to mark as not used. Why Other Options Are Wrong: Option A is wrong as an answer because rationing of credit is a textbook example of qualitative credit control. Option B is wrong because direct action is mentioned in many RBI guidelines as a measure taken when banks do not follow instructions. Option C is wrong because open market operations are universally recognised central bank tools. Common Pitfalls: Students sometimes skim the options quickly and notice only the words variable and reserve ratio, thinking immediately of the well known cash reserve ratio. This leads them to assume that option D must also be a correct instrument. Careful reading shows that the term cost reserve ratios is unfamiliar and incorrect. In exams, distracting options often mimic real terms with a small but important error, so always read the entire phrase before deciding. Final Answer: The expression that does not represent an instrument of credit control used by the RBI is Variable cost reserve ratios.

Question 17

Which among the following is an example of a microeconomic variable studied in microeconomics rather than in macroeconomics?

Accepted Answer

Introduction / Context: Economics is broadly divided into microeconomics and macroeconomics. Microeconomics focuses on individual economic units such as households, firms and specific markets, while macroeconomics studies the economy as a whole. Many objective questions test your ability to classify variables into these two branches. This question asks you to identify which variable is clearly microeconomic in nature. Given Data / Assumptions: - Four variables or concepts are listed: national income, aggregate supply, overall employment and consumers equilibrium. - You are expected to know whether each variable relates to the entire economy or to individual decision makers. - Microeconomic variables relate to individual markets or units, while macroeconomic variables relate to aggregates. Concept / Approach: National income, aggregate supply and total employment are macroeconomic aggregates. They describe overall levels of output, supply and employment for the entire economy. Consumers equilibrium, on the other hand, is a microeconomic concept that explains how an individual consumer allocates a given income across different goods to maximise satisfaction subject to a budget constraint. To answer correctly, we simply classify each option according to this micro versus macro distinction. Step-by-Step Solution: Step 1: Examine option A, national income. This measures the total income earned by factors of production in an economy over a period. It is clearly a macroeconomic aggregate.Step 2: Examine option B, aggregate supply. This refers to the total quantity of goods and services that firms in an economy are willing to produce at different price levels. By definition it is a macroeconomic concept.Step 3: Examine option C, employment in the whole economy. Overall employment or unemployment rates are also macroeconomic variables describing the labour market at the national level.Step 4: Examine option D, consumers equilibrium. This concept is used in microeconomics to analyse how a single consumer or a representative consumer chooses a combination of goods given prices and income, using tools like indifference curves and budget lines. It deals with individual behaviour, not aggregates. Verification / Alternative check: A quick check is to ask whether the variable is likely to appear in a national income accounting table or a macroeconomic policy report. National income, aggregate supply and overall employment would appear in such reports. Consumers equilibrium, however, appears in microeconomic theory chapters dealing with utility maximisation and does not usually feature in macro data. This contrast confirms that consumers equilibrium is the microeconomic variable among the four. Why Other Options Are Wrong: Option A is wrong as an answer because national income is a central macroeconomic indicator. Option B is wrong because aggregate supply relates to the total supply in the economy, not to an individual market. Option C is wrong because employment in the whole economy is again a macro level variable, used to study labour market trends and business cycles. Common Pitfalls: Some students confuse the word consumer with the idea of total consumption and quickly label it macroeconomic. However, consumers equilibrium is a specific theoretical condition about one consumer or a representative micro unit, not about consumption at the national level. Another mistake is to assume that any variable starting with aggregate must be macroeconomic, which is correct in this question but should still be checked carefully when reading other questions. Final Answer: The variable that is an example of a microeconomic concept is Consumers equilibrium.

Question 18

Which of the following taxes has traditionally been levied only by the State Governments in India under the Constitution framework?

Accepted Answer

Introduction / Context: In India, the Constitution divides the power of taxation between the Union Government and the State Governments through the Union List, State List and Concurrent List. Competitive examinations often ask which authority levies a particular tax. This question focuses on identifying the tax that has been levied only by State Governments, particularly in the period before the full implementation of Goods and Services Tax. Given Data / Assumptions: - Four types of taxes are listed: wealth tax, entertainment tax, income tax and gift tax. - The question asks which tax is levied only by State Governments, not by the Union Government. - The context is the traditional constitutional assignment of taxing powers, not the latest detailed GST sharing arrangements. Concept / Approach: Under the earlier constitutional scheme, income tax on non agricultural income, wealth tax and gift tax were primarily Union level taxes, though some sharing with States existed through Finance Commissions. Entertainment tax, which included tax on cinema, amusement and entertainment shows, was placed in the State List and was therefore levied and collected by State Governments. To answer the question, we recall which of these was exclusively a State subject. Step-by-Step Solution: Step 1: Wealth tax was imposed by the Union Government under the Wealth Tax Act. States did not have independent authority to levy their own wealth tax under the usual framework. Therefore it is not a tax levied only by States.Step 2: Income tax on non agricultural income is a major Union tax under the Income Tax Act. Although part of the proceeds may be shared with States, the power to levy lies with the Union.Step 3: Gift tax was also a Union tax when it existed as a separate law, with the central government having the primary power to levy it.Step 4: Entertainment tax on cinema tickets, shows and amusement was specified in the State List, so State Governments framed their own entertainment tax laws and rates. Traditionally, only States levied this tax. Verification / Alternative check: You can verify your reasoning by remembering typical examples from different States before GST. Cinema tickets used to attract different entertainment tax rates in different States such as Maharashtra, Tamil Nadu or Uttar Pradesh. This variation itself shows that the tax was designed and levied by State Governments rather than a single central law. In contrast, income tax slabs or wealth tax rules were uniform at the national level because they came from Union legislation. Why Other Options Are Wrong: Wealth tax is wrong as an answer because it was a Union level tax, not exclusively a State levy. Income tax is wrong because the Union Parliament legislated on it, and the Central Board of Direct Taxes administered it. Gift tax is wrong because it too was enacted and administered by the Union Government. Common Pitfalls: Students sometimes think that since income tax revenue is shared with States, it must be a State tax as well, which is not correct. Revenue sharing does not change the authority that levies the tax. Another pitfall is confusion caused by the arrival of GST, where entertainment services may now fall under GST. However, this question clearly concerns the traditional constitutional division, in which entertainment tax was a clear State subject. Final Answer: The tax that has traditionally been levied only by State Governments in India is Entertainment tax.

Question 19

The Human Development Index (HDI) prepared by the United Nations Development Programme is an aggregate composite measure of progress in which of the following three basic dimensions of human development?

Accepted Answer

Introduction / Context: The Human Development Index is a widely used composite index that goes beyond simple income measures to capture broader aspects of development. It appears frequently in questions on Indian economy and international organisations. This question asks you to recall the three core dimensions that HDI attempts to measure by combining different indicators. Given Data / Assumptions: - The HDI is described as an aggregate measure of progress in three dimensions. - Four alternative sets of dimensions are offered: health, education and income; food security, employment and income; agriculture, industry and services; and height, weight and colour. - You must pick the set that matches the official HDI framework. Concept / Approach: According to the United Nations Development Programme, the Human Development Index focuses on three basic dimensions of human development. These are a long and healthy life, knowledge, and a decent standard of living. In practice they are captured through indicators such as life expectancy at birth, mean and expected years of schooling, and gross national income per capita. These correspond to health, education and income respectively. Therefore we should select the option that lists exactly these three dimensions. Step-by-Step Solution: Step 1: Option A mentions health, education and income. Health matches the long and healthy life dimension. Education matches the knowledge dimension and income matches the decent standard of living dimension. This aligns well with the HDI design.Step 2: Option B mentions food security, employment and income. While these are important goals, HDI does not use food security or employment as its headline dimensions; they may be related but they are not the official triad.Step 3: Option C mentions agriculture, industry and services. These are the three sectors of production and are related to structural change in an economy, not to the human development framework used for HDI.Step 4: Option D lists height, weight and colour, which are clearly not the intended development dimensions and can be dismissed as incorrect. Verification / Alternative check: You can verify by recalling the typical HDI formula. Life expectancy at birth is used as the health indicator. Education is measured using a combination of mean years of schooling and expected years of schooling. Standard of living is measured using per capita gross national income adjusted for purchasing power. This mapping shows that health, education and income are indeed the three pillars underlying HDI. Why Other Options Are Wrong: Option B is wrong because although food security and employment are important aspects of development, they are not the three headline dimensions of HDI. Option C is wrong because it mixes up sectoral composition of output with human development. Option D is clearly wrong because it lists physical attributes that are not used by development indices in this way. Common Pitfalls: A common mistake is to confuse HDI with broader concepts of human security or with multi dimensional poverty indices that use a larger set of indicators. Another pitfall is to over interpret the word development and assume it refers mainly to sectors like agriculture or industry. Remember that in the HDI framework, human development is about expanding people's capabilities in health, knowledge and living standards. Final Answer: The HDI is an aggregate measure of progress in Health, education and income.

Question 20

In banking terminology, which of the following rates is charged by commercial banks to their most creditworthy and financially sound customers?

Accepted Answer

Introduction / Context: Different interest rates exist in the financial system, each with a specific meaning. Questions in banking awareness frequently ask about the definitions of these rates. This question focuses on the rate that commercial banks charge to their most creditworthy customers, usually large and financially strong borrowers. Understanding this term helps in interpreting lending practices and credit risk. Given Data / Assumptions: - Four rates are mentioned: Prime Lending Rate, Statutory Liquidity Rate, Bank Rate and Repo Rate. - The question specifies that the rate is charged by banks to their most creditworthy customers. - We assume standard usage in commercial banking and exam oriented terminology. Concept / Approach: Prime Lending Rate, often shortened to PLR or now replaced by similar benchmarks, is the interest rate that banks quote for their most reliable corporate borrowers. Other loans are often priced at a spread above or below this prime rate depending on risk. Statutory Liquidity Ratio is a regulatory ratio, not a lending rate. Bank Rate is the rate at which the central bank lends to commercial banks for long term, and Repo Rate is the short term policy rate at which the central bank lends to banks against government securities. Therefore only Prime Lending Rate matches the description given. Step-by-Step Solution: Step 1: Prime Lending Rate is defined as the benchmark interest rate that a bank charges to its most creditworthy borrowers. These borrowers are considered low risk, so they receive the lowest standard lending rate.Step 2: Statutory Liquidity Rate is not a lending rate at all. It is related to the Statutory Liquidity Ratio, which is the proportion of deposits that banks must maintain in liquid assets. It does not describe the price charged to borrowers.Step 3: Bank Rate is the rate at which the central bank provides long term funds to commercial banks. It influences the cost of funds for banks, but it is not directly the rate charged to the bank's customers.Step 4: Repo Rate is the rate at which the central bank lends to commercial banks for short terms against the security of government bonds. Again, it is a policy rate, not the final customer lending rate described in the question. Verification / Alternative check: A quick way to verify is to remember that the word prime here refers to prime or top quality borrowers. Banks may set their lending rate structures with reference to PLR or similar external benchmarks. Regulators, on the other hand, talk about Statutory Liquidity Ratio, Bank Rate and Repo Rate in the context of monetary policy and prudential norms. This separation confirms that only the Prime Lending Rate is directly defined in terms of the bank's best customers. Why Other Options Are Wrong: Statutory Liquidity Rate is wrong because it confuses a regulatory requirement with a lending rate. Bank Rate is wrong because it is a central bank rate, not a retail customer rate. Repo Rate is wrong for the same reason; it is a policy instrument that affects money market conditions rather than being the direct rate for top borrowers. Common Pitfalls: Some candidates mix up Bank Rate or Repo Rate with the rate banks charge borrowers because they all involve interest. Others misread Statutory Liquidity Rate as some sort of lending rate. Carefully distinguishing between central bank policy rates, regulatory ratios and commercial lending benchmarks helps to avoid this confusion. Final Answer: The rate charged by banks to their most creditworthy customers is the Prime Lending Rate.

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