eereistoriacnat Dee a eet we Seed MCQs with answers Objective Economic & Social Development GENERAL STUDIES Paper-l For Civil Services Preliminary Examinationwww.visionias.net WINNING. McGRAW HILL EDUCATION SERIES EpGt Objective Economic & Social Development cS Si St PAPER-I FOR CIVIL SERVICES PRELIMINARY EXAMINATION Ramesh Singh Educational Consultant eter McGraw Hill Education (India) Private Limited NEW DELHI McGraw Hill Education Offices New Delhi NewYork StLouis San Francisco Auckland Bogota Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal San Juan Santiago Singapore Sydney Tokyo Torontowww.visionias.net Contents Preface 2) Fundamentals of Economics 1.3 - 1.96 1é Li i1Z 125 133 141 149 1.57 Los 173 3 aL Set-24 Par Indian Economy (Current Aspects) 1.3 - 1.144 uLs L13 UL19 112www.visionias.net Fundamentals of Economics © Set-1 © Set-7 e Set-2 © Set-8 © Set-3 © Set-9 © Set-4 © Set-10 © Set-5 © Set-11 e Set-6 © Set-12www.visionias.net i; @ ) History of India and Indian and Indian National World Geography Movement / ( © Indian Polity and jovernance Environmental Ecology, Bio-diversity and Climate Change e e General General Knowledge Science and Current Events —_4 ___4L www.visionias.net Set Which of the recent reports has emphasised the need to link economic development to the behavioural dimensions of the target poulation? (a) Social Forum Report, 2015 (b) World Economie Outlook, 2015 (c) World Development Report, 2015 (ad) Human Development Report, 2014 Consider the following statements and select the correct code: 1. Nominal Capital of a company is the limit up to which the company can i pital through shares 2. Subscribed Capital of a company is that part of the Authorised Capital, which has been paid or committed by the shareholders to contribute Code (a) Lis correct (b) 2is correct (©) 1 and 2 are correct. (@) Neither I nor 2 is correct ue What is correct about ‘opportunity cost’? (a) The amount of money that today’s s will cost in future (b) hhe total amount of money spent on earching an opportunity (©) The cost of something in terms of alternatives that had to be given up but could have been chosen instead (d) None of the above Consider the following statements and select the correct code about a ‘market economy” 1. Government facilitates the private sector’s choice of produced goods and services. 2. Price mechanism is usually not allowed due to welfare reasons, Code (a) Only 1 (b) Only 2 (c) Both | and 2 (d) Neither | nor 2 Which of the following is correct about “comparative advantage"? (a) One firm having comparative edge on the other due to its specialities (b) The situation neutralizing the edge between two companies with the right kind of comparative measureswww.visionias.net 1.6 | Objective Economic & Social Development 6. (©) Specializing in the production of things that individuals/companies are relatively good at and trading with others who specialize in what they are relatively good at (d) Both (a) and (c) are correct Consider the following statements and select the ‘normative’ ones regarding policy making by a democratic government 1. India spent Rs. 50,000 crore on welfare schemes. 2. India should do more to promote irrigation. 3. India’s reservation policy needs expansion 4. Express Highways are serving economic purpose Code (a) Land 2 (b) 2 and3 (c) 3and4 (@) Land 4 In the case of agricultural goods if the government fixes the price above the market-clearing price together — with banning exports and buys up surpluses in production, which one of the following will characterise the market outcome? (a) Consumers pay more for their food while producers get higher revenues (b) Consumers get cheaper foods while producers get higher revenues (©) Consumers pay more for foods while producers get lower revenues (a) Consumers gain but whether producers gain it cannot be said. Select the international organisation/Report which recently concluded — “Development policies become more effective when com- bined with insights into human behaviour” ~ from the given list (a) World Development Report 2015 (b) World Happiness Report 2013 (c) World Economic Forum, 2015 (@) Human Development Report 2015 10. i 12 Ticket prices of cinema halls fell down last year and so happened with the cinema- goers’. Which of the following statements best explains this situation? (a) Opening of new multiplexes incre: the seats in cinema halls (b) A significant increase was seen in cinema-watching since cinema visits are a normal good. (©) Prices of drama shows, TV, DVDs fell, which are all substitutes of cinema (d) Running cost of cinema increased: that is why the number of cinema-goers came down cd In the context of balance of payments, ‘portfolio investment’ relates to (a) Takeover of foreign companies (b) Purchase of shares in foreign companies (©) Purchase of real estate in foreign countries (d) Private remittances to foreign countries Which of the following will not be true if exchange rates are determined according to purchasing power parity (PPP)? (a) If two countries have zero rate of inflation, their bilateral exchange rate will be constant (b) In response to a monetary sho will occur a overshooting of rates, (©) The prices of goods will be the same in all the countries when converted at the going rate of exchange (d) Exchange rate between any two currencies will be equal to the inflation differential between the two concerned economies While operating a “pegged exchange rate’, a government must do which of the following? (a) Use its forex reserves to intervene in the forex market—foreign currency is sold when the domestic currency is in excess supply and foreign currency is bought when domestic currency is in excess demandwww.visionias.net set) | L7 13 4 (b) Use its forex reserves to intervene in the forex market—foreign currency is bought when the domestic currency is in excess supply and foreign currency is sold when domestic currency is in excess demand (c) Peg its currency with the strongest currency of the world on voluntary basis (@) None of the above Which of the following will be correct if an economy follows a ‘floating exchange rate” regime? (a) The exchange rate will adjust to keep the current account deficit/surplus just equal to the capital account surplus/ deficit (b) The government does not need to maintain a forex reserve (©) Forsuch regime to follow, the economy ‘must maintain more foreign assets than foreign liabilities (@) The current account deficit must be maintained at the zero level by the economy Which of the following statements relates to the trade in ‘invisibles"? (a) Specialised trading in financial assets (b) Trade in services, such as project reports, business process outsourcing. ete. (c) Trade in illegal items, such as drugs (a) Share trading in the companies, which are registered abroad Which of the following is not a reason why unexpected inflation is generally considered undesirable? (a) Because wages tend to catch up with prices (b) Because it redistributes income from creditors to debtors (c) Because it gives incentives for speculative activity rather than productive investment activity (@) Because it distorts the signals that are provided by the price mechanism 16. 17 18, 19, One of the following is a correct statement regarding the trade-off between “inflation” and “unemployment (a) There is a short-run but not a long- mun trade-off between inflation and unemployment (b) ‘There is always a trade-off between inflation and unemployment (c) There is a long-run trade-off between inflation and unemployment. (d) There is a long-run but no short- mun trade-off between inflation and unemployment What does a short-run ‘Phillips curve” show? (a) The rate of money-wage inflation for each level of possible unemployment and for a specific expected rate of inflation (b) The rate of money—wage inflation that is generated at full-employment (©) The rate of money—wage inflation, which was already expected (d) None of the above What does a long-run ‘Phillips curve’ show? (a) The level of unemployment at which expectations of and the actual outcome for inflation will be the same (b) ‘The rate of inflation at which structural and frictional unemployment will be eliminated (©) The rate of unemployment at which inflation will fall (d) The rate of inflation at which unemployment will be in equilibrium Consider the following statements about ‘hidden price rise’ and select the correct code: 1. A situation of reduction in quality or amount of a product offered at an unchanged price 2. A situation of increase in indirect taxes on goods, which compromises on the quality of the goods offered for salewww.visionias.net L8_ | Objective Economic & Social Development cost of the other’s sale. This situation can be v1 best described as (b) Only 2 (a) Zero-sum game (©) Land 2 both (b) Constant market theory (@) Neither I nor 2 (c) Indifference market 20. Which of the following is correct about (d) None of the above ‘hedging’? Select your answer using the 23. ‘A line that traces the relationship between code given below the rates of return on bonds of different 1. This is an act of reducing uncertainty maturities’ is called about future price movements. (a) Marginal Line 2. Itmay be done in commodity, security (b) Profit Indifference and currency. (c) Coupling of Rates 3. This may be done by forward sales or (d) Yield Curve purchases. 24, ‘Williamson trade-off Model’ is related to Code which of the following? (a) Only 1 (a) Merger of companies (b) Land 2 (b) Takeover of companies (©) 2and3 (©) Balance sheet making of an MNC (d) 1,2 and3 (d) Allof the above 21. One among the following is ‘a measure 5 What is “winner's of the degree of seller concentration in a (i) ‘In tekeoversof onapanica ot Gmes,cie market that takes into account the total ‘ed senetreeerehememney- cer number of firms in the market and their ‘aléen EE relative size distribution’ (b) The possibility that the winning bidder (a) Gini Coefficient in an auction will pay too much cost for (b) Krugman Curve enioset (c) Friedman Index (©) In mergers, usually the stronger firm @) Herfindah! Index gains but it pays a very high cost 22. Two firms are competing against each other (d) None of the above in a mature market with no expansion in the market size—one increasing its sales at the [ answer key 1 8. 15. 22. © 2. ©) 3. (©) 4. dd) @ 9% (©) 10. (b) LL. (by (a) 16. (a) 17. (a) 18. (a) (a) 23. @) 24. (a) 25. (b) 5. ©) 6. ) 7. (a) 12. (a) 13. (a) 14. (b) 19. (a) 20. @) 2. @)www.visionias.net set) | £9 [ answers and explanations 1 wv 9 This is the first such report from the World Bank which accepts the importance of behaviour in the domain of Economics. Experts take this instance as the arrival of the ‘behavioural economies’ in the twin international bodies ~ the IMF and WB Nominal Capital (known as Authorised/ Registered Capital) of a company is fixed in the Memorandum of Association (MoA) and the Article of Association (AoA) as required by the Companies Act at the time of the company formation. Basically, opportunity cost is the cost forgone of an alternative In a market economy, it is the private sector, which decides what to produce and the market forces (i.¢., demand and supply) decide the prices of the goods and services This is a situation when nations’/firms” strengths and weaknesses become beneficial for one another and all get benefitted. In a normative statement, some standards or rules of behaviour are set or prescribed. For example, suggesting the government to do something Such situations have occurred in the countries. with high personal income together with a presence of agro-lobby, for example, western Europe and the USA of 1980s and 1990s ‘The World Bank has argued this in its World Development Report 2015: Mind, Society, and Behaviour. The report has found that policy decisions informed by “behavioural economies’ have delivered improvements in healthcare and education in parts of India impressive The question is related to the effect of substitutes on the goods and services, which sell in the market economy. 10. i 12 13. 14, 16, 17 18, India allowed foreigners to purchase shares of the Indian companies in 1994, via only the foreign institutional investors (FIIs)— later extended to individuals too (2012— 13). Similarly, Indian financial institutions (IFIs) as well as individuals may invest in the shares of the foreign companies—all of these transactions are related to India’s current account therefore all are related to the balance of payments In practice, exchange rates are not calculated in this way. But if need be, we may do so. In the situations of exchange instability the central banks of countries intervene in the foreign exchange market (provided the country is following the principles of market economy) with such variable choic Practically, there is no country in the world with pure form of ‘floating exchange rate” Exports and imports are often classified into ‘visibles’ (goods — the things we can see) and ‘invisibles’ (services — the things we cannot see). Options (b), (c) and (d) all are correct in the situations of comparatively higher rates of inflations. Basically, in short-run while increasing inflation induces higher employment in long-run it stops doing so. This is a curve depicting an empirical observation (based on the works of the British economist A. W. Phillips) of the relationship between the level of unemployment and the rate of change of money-wage and, by inference, the rate of change of prices (inflation) In this curve, the expectation for inflation in an economy at a rate of unemployment equalises the real prevailing rate of inflation certainwww.visionias.net 1.10 | Objective Economic & Social Development 19. 20. 21 For example, reduction in the weight of a packet of chocolate sold at the same price as before. This may take place in quality, too. Hedging is just avoiding the risk of loss—it may be due to various reasons—one reason being the price Forward sales and purchases are allowed by the security regulating bodies in the countries for hedging—in such situation hedging becomes legal fluctuations. Herfindahl Index deals with the issue of seller’s concentration in a particular market. The question is based on the Game ‘Theory—a situation in which game players compete for the given total pay-off, so that 24. gains by one player are at the direct expense of the other player/players The slope of this line suggests whether interest rates are tending to rise or fall. This is a concept of the Capital Market This model evaluates the possible benefits (lower costs) and detriments (higher prices) of a proposed merger. This takes place duc to the fact that the winning bidder places a higher value on the asset than all other bidders—ultimately paying too much for the asset (thus, the curse of winner is that it wins but after paying very high a cost)www.visionias.net Set Two 1. Which of the following sectors of an 4 economy the maximum risk of ‘adverse selection"? (a) Rain-fed farming (b) Insurance business (c) Foreign direct investment (d) Computer hardware and software covers 2. A method of accounting, which conside revenues and expenses as they accrue, even though cash would not have been received or paid during the period of accrual (a) Actuarial Basis (b) Accrual Basis (©) Zero-based System (@) Golden Budgeting 3. The “activity rate’ of an economy depends upon so many factors, such as 1. School leaving age 2. Popularity of higher education 3. Social customs 4. Retirement age 6. Code (a) land2 (b) 2 and 3 (©) 2.3and4 @ 1,2,3.and4 Consider the following statements and select the correct code 1. Alpine Convertible Bond (ACB) is a bond issued by the Indian companies to the West European investors. 2. The ACBs are a kind of foreign currency convertible bond (FCCB), Code (a) Only 1 (b) Only 2 (©) Both land2 (4) Neither 1 nor 2 Consider the following statements and select the correct code 1. ‘Confidence’, considered as one of the essential ingredients of prosperity is called ‘animal spirit? 2. Animal spirit is a ‘naive optimism’ Code (a) Only 1 (b) Only 2 (©) Both | and 2 (d) Neither | nor 2 Consider the following statements and select the correct code 1, Most of the governments run unbal- anced budgets. 2. In a balance budget there could be budget surplus but no budget deficit. ‘onomicwww.visionias.net L.12_ | Objective Economic & Social Development 9 Code (a) Only 1 (b) Only 2 (c) Both 1 and 2 (d) Neither 1 nor 2 Select the statement/statements regarding a ‘parallel loan’ using the code given below 1. Two companies of different economies borrow in each other’s currency 2. Such loans are repaid on the same date in the respe the companies belong. 3. Exchange rate fluctuations are the greatest hurdle to such loans Code (a) Only 1 (b) Land 2 (©) 2and3 @) 1,2and3 Consider the following statements and select the correct code: 1. In “basing point price system’ a differ- ential price is fixed. 2. It differentiates among the customers on the basis of their location. Code (a) Only 1 (b) Only 2 (c) Both | and 2 (@) Neither I nor 2 Consider the following statements and select the correct code 1. A share which often reflects the state of the whole stock market of an economy is called ‘Bellwhether Stock” Such stocks are demarcated as such by the security regulating body of the economy Code (a) Only 1 (b) Only 2 (c) Both | and 2 (@) Neither I nor 2 correct ive currencies to which 10. i 12. 13, Which one of the following statements is not correct about “bond”? (a) Itis an instrument of raising long-term capital (b) Bond-issuing body pays interest on it which is known as ‘contango rate” (c) It may be issued by both governments and private companies. (d) ‘Bonds’ and ‘debentures’ are different in nature. “Increasing incomes due to inflation pushes individuals into higher tax slabs and leaves them worse off’, This phenomenon. is known (a) Black-Scholes (b) Bracket Creep (c) Backwardation (d) Pauperisation What is correct about ‘budget line”? (a) The alternate combinations of goods that can be purch 1 with a given income at given prices. (b) The segregated items of expenditure which are taken into account when a government makes its budget (©) The expenditure pattern of a household which depends solely on fixed income (d) The classical dilemma of budgeting when expenditures usually try to cross the total income of the government Select the statement which best explains the concept of ‘bubble’ — (a) Manipulative price rise of an asset usually riding the expectations of novice investors. (b) Price rise of an asset unexplained by the fundamentals yet people showing interest to hold it (c) Speculative price rise of an asset when inflation is higher and employment shows expansion. (d) A phase of boom in an economy with bubble of strong fundamentals besides strong investors’ confidence.