SFG 2022 Level 1 Test 10 Solutions English

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SFG 2022 | LEVEL 1 | Test #10 – Solutions |

Q.1) The concept of ‘Invisible hand’ in relation to an economy entails which of the following?
a) An unobservable market force that helps the demand and supply of goods to reach equilibrium automatically.
b) Unregistered firms in a market which destabilise the market equilibrium by their distortive price policies.
c) Invisible role of Government in controlling the production of goods to maintain the market equilibrium.
d) Distortions in the demand-supply curve in a market due to hoarding and black-marketing of goods.
Ans) a
Exp) Option a is correct.
The Invisible Hand is a metaphor for the unseen forces that move the free market economy, where self-interested
individuals operate through a system of mutual interdependence.
Definition: The unobservable market force that helps the demand and supply of goods in a free market to reach
equilibrium automatically is the invisible hand.
The phrase invisible hand was introduced by Adam Smith in his book 'The Wealth of Nations'. He assumed that
an economy can work well in a free-market scenario where everyone will work for his/her own interest.
In a free-market scenario where there are no regulations or restrictions imposed by the government, if someone
charges less, the customer will buy from him. Therefore, you have to lower your price or offer something better
than your competitor. Whenever enough people demand something, it will be supplied by the market and
everyone will be happy. The seller ends up getting the price and the buyer will get better goods at the desired
price.
Source: Introductory Microeconomics’ Class 11-NCERT
Q.2) The Factor cost of a good include(s) which of the following?

1. Payments for raw materials.
2. Wages to labour for production.
3. Taxes.
Select the correct answer using the code given below:
a) 1 only
b) 1 and 2 only
c) 1, 2 and 3 only
d) 1 and 3 only
Ans) b
Exp) Option b is correct.
Factor cost includes the payment to factors of production (land, labour and capital and entrepreneurship). It does
not include any tax. Thus, factor cost of a good will include payment for raw materials and Wages to labour for
production.
In order to arrive at the market prices, we have to add to the factor cost the total indirect taxes less total
subsidies. The basic prices lie in between: they include the production taxes (less production subsidies) but not
product taxes (less product subsidies). Therefore, in order to arrive at market prices we have to add product
taxes (less product subsidies) to the basic prices.
In India, CSO uses GVA at basic prices as a measure of national income.
Source: Introductory Macroeconomics’ Class 12-NCERT
Q.3) Consider the following statements:

Other things remaining unchanged market demand for a good might increase if:
1. Price of its substitute increases
2. Price of its complement increases
3. The good is an inferior good and income of the consumers increases
4. Its price falls
Which of the above statements are correct?
a) 1 and 4 only
b) 2, 3 and 4 only
c) 1, 3 and 4 only
d) 1, 2 and 3 only
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Ans) a
The main factors that can increase the demand for a good in market are:
1) Prices of related goods (substitute goods)
2) Income
3) Expectations
4) Number of buyers
5) Preferences
The following are the relations between the demand and price of the products with other factors remaining
unchanged:
1) The demand for a good may increase, if the price of one of its substitutes rises. The demand for a good may
decrease, if the price of one of its substitutes falls.
2) The demand for a good may increase, if the price of one of its complement’s falls. For example, ice cream and
fudge sauce.
3) The demand for an inferior good may decrease if income increases. The demand for a normal good may
increase if income increases.
4) If the Price of the good falls, then its demand increases.
Source) UPSC Pre 2021
Q.4) Which of the following are the intended benefits of strategic disinvestment?
1. Meeting budgetary requirements.
2. Reduce fiscal burden.
3. Raise funds to finance growth and development projects.
4. Improve market competitiveness and discipline.
5. Transfer of commercial risks.
a) 2 and 3 only
b) 1, 2 and 3 only
c) 1, 2, 3 and 5 only
d) 1,2,3,4 and 5
Ans) d
Exp) Option d is correct.
Disinvestment means sale or liquidation of assets by the government, usually in Central and state public sector
enterprises, projects, or other fixed assets. The government undertakes disinvestment to reduce the fiscal burden
on the exchequer, or to raise money for meeting specific needs, such as to bridge the revenue shortfall from
other regular sources.
Strategic disinvestment is the transfer of the ownership and control of a public sector entity to some other entity
(mostly to a private sector entity). Unlike the simple disinvestment, strategic sale implies a kind of privatization.
The disinvestment commission defines strategic sale as the sale of a substantial portion of the Government
shareholding of a central public sector enterprises (CPSE) of upto 50%, or such higher percentage as the
competent authority may determine, along with transfer of management control.
Main objectives of strategic Disinvestment;
1) To meet the budgetary needs.
2) To reduce fiscal deficit.
3) To improve public finances and overall economic efficiency
4) To diversify the ownership of PSU for enhancing efficiency of individual enterprise
5) To raise funds for technological upgradation, modernization and expansion of PSUs
6) To introduce, competition and market discipline
7) To fund growth and development programmes
8) To encourage wider share of ownership
9) To depoliticise non-essential services
10) Transfer of Commercial Risks
Source: Introductory Macroeconomics’ Class 12-NCERT + Online resources
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Q.5) Which one of the following statements is incorrect with reference to Gross Fixed Capital Formation?
a) It measures only the value of net additions to fixed assets.
b) It includes only those assets that come into existence as a result of a production process.
c) It excludes land purchases and depreciation.
d) Fixed assets in Gross Fixed Capital Formation includes tangible assets but excludes intangible assets.
Ans) d
Statement a is correct. Gross fixed capital formation (GFCF), is the net amount of fixed capital accumulation
which is called net investment. It measures the increase in the capital stock less the disposal of fixed assets. Thus,
Gross fixed capital formation is not a measure of total investment as only the value of net additions to fixed
assets.
Statement b is correct. Gross fixed capital formation (GFCF), also called "investment", is defined as the acquisition
of produced assets (including purchases of second-hand assets), including the production of such assets by
producers for their own use, minus disposals. The term "produced assets" means that only those assets that come
into existence as a result of a production process are included.
Statement c is correct. Gross fixed capital formation (GFCF), does not include, the purchase of land and natural
resources and depreciation.
Statement d is incorrect. Fixed assets in GFCF includes tangible or intangible assets produced as outputs from
production processes that are used repeatedly, or continuously, for more than one year.
Source: https://data.oecd.org/gdp/investment-gfcf.htm
https://www.igi-global.com/dictionary/gross-fixed-capital-formation/55665
Q.6) The money multiplier in an economy increases with which one of the following?
a) Increase in the Cash Reserve Ratio in the banks
b) Increase in the Statutory Liquidity Ratio in the banks
c) Increase in the banking habit of the people
d) Increase in the population of the country
Ans) c
Exp) Option c is correct.
The multiplier effect is an economic term, referring to the proportional amount of increase, or decrease, in final
income that results from an injection, or withdrawal, of capital in effect. It measures the impact that a change in
economic activity—like investment or spending—will have on the total economic output of something.
Increase in Banking habits of the people can lead to increase in money multiplier in an economy. When a
customer makes a deposit into a short-term deposit account, the banking institution can lend one minus the
reserve requirement to someone else. While the original depositor maintains ownership of their initial deposit,
the funds created through lending are generated based on those funds. If a second borrower subsequently
deposits funds received from the lending institution, this raises the value of the money supply even though no
additional physical currency actually exists to support the new amount.
Increase in the Cash Reserve Ratio in the banks, increase in the Statutory Liquidity Ratio in the banks and increase
in the population of the country will not increase money multiplier.
Q.7) Which of the following were the main causes for stagnation of Indian agricultural sector during colonial
period?
1. Exploitative land revenue settlements.
2. Large scale Commercialisation of agriculture.
3. Lack of irrigation facilities.
4. Low levels of technology.
a) 1 and 2 only
b) 1, 2 and 3 only
c) 1, 3 and 4 only
d) 1, 2, 3 and 4
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Ans) c
Only statements 1, 3 are 4 are correct.
This stagnation in the agricultural sector was caused mainly because of the various systems of land settlement
that were introduced by the colonial government particularly, under the zamindari system. The main interest of
the zamindars was only to collect rent regardless of the economic condition of the cultivators; this caused
immense misery and social tension among the latter.
Besides this, low levels of technology, lack of irrigation facilities and negligible use of fertilisers, all added up to
aggravate the plight of the farmers and contributed to the dismal level of agricultural productivity.
There was, of course, some evidence of a relatively higher yield of cash crops in certain areas of the country due
to commercialisation of agriculture. But there was no large-scale commercialisation of agriculture and thus could
not be attributed as a reason behind the stagnation of the Indian agriculture sector during the colonial period.
Despite some progress made in irrigation, India’s agriculture was starved of investment in terracing, flood-
control, drainage and desalinisation of soil. While a small section of farmers changed their cropping pattern from
food crops to commercial crops, a large section of tenants, small farmers and sharecroppers neither had
resources and technology nor had incentive to invest in agriculture.
Source: Indian Economic Development’ Class 11-NCERT
Q.8) Which of the following statements is incorrect regarding India’s foreign trade during colonial period?
a) More than half of India’s foreign trade was restricted to Britain only.
b) India was an exporter of primary products such as raw silk and cotton and an importer of finished consumer
goods and capital goods.
c) India was not an export surplus country during colonial period.
d) Most of the revenue generated out of foreign trade was not invested back leading to Drain of wealth from
India.
Ans) c
Statement a is correct. More than half of India’s foreign trade was restricted to Britain only. For all practical
purposes, Britain maintained a monopoly control over India’s exports and imports. As a result, more than half of
India’s foreign trade was restricted to Britain while the rest was allowed with a few other countries like China,
Ceylon (Sri Lanka) and Persia (Iran).
The most important characteristic of India’s foreign trade throughout the colonial period was the generation of
a large export surplus.
Statement b is correct. India has been an important trading nation since ancient times. But the restrictive policies
of commodity production, trade and tariff pursued by the colonial government adversely affected the structure,
composition and volume of India’s foreign trade.
Consequently, India became an exporter of primary products such as raw silk, cotton, wool, sugar, indigo, jute
etc. and an importer of finished consumer goods like cotton, silk and woollen clothes and capital goods like light
machinery produced in the factories of Britain.
Statement c is incorrect. An important characteristic of India’s foreign trade throughout the colonial period was
the generation of large export surplus.
Statement d is correct. Most of the revenue generated out of foreign trade was not invested back in India and as
a result led to Drain of wealth. Export surplus did not result in any flow of gold or silver into India. Rather, this
was used to make payments for the expenses incurred by an office set up by the colonial government in Britain,
expenses on war, again fought by the British government, and the import of invisible items, all of which led to the
drain of Indian wealth.
Q.9) Despite being a high saving economy, capital formation may not result in significant increase in output due
to
a) weak administrative machinery
b) illiteracy
c) high population density
d) high capital-output ratio
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Ans) d
If high capital-output ratio is high, then capital formation may not result in significant increase in output. A high
capital-output ratio means that the capital is less productive and thus even high investments does not guarantee
significant increase in output.
Capital output ratio is the amount of capital needed to produce one unit of output. It assesses the amount of
investment capital necessary for a country or other entity to generate the next unit of production.
Source) UPSC Prelims 2018
Q.10) With reference to the economic development post-independence, what were the reasons for larger
promotion of public sector in the Indian economy?
1. Adoption of a socialistic pattern of economic system.
2. Lack of enough capital with private industrialists.
3. Absence of big markets to encourage private investments.
a) 1 only
b) 1 and 2 only
c) 1 and 3 only
d) 1, 2 and 3
Ans) d
All statements are correct.
At the time of independence, the big question facing the policy makers was — what should be the role of the
government and the private sector in industrial development. In the initial decades, Indian industrialists did not
have the capital to undertake investment in industrial ventures required for the development of Indian economy;
nor was the market big enough to encourage industrialists to undertake major projects even if they had the
capital to do so. It is principally for these reasons that the erstwhile governments had to play an extensive role in
promoting the industrial sector.
In addition, the decision to develop the Indian economy on socialist lines led to the policy of the government
controlling the commanding heights of the economy, as the Second Five Year plan put it.
This meant that the government would have complete control of those industries that were vital for the economy.
The policies of the private sector would have to be complimentary to those of the public sector, with the public
sector leading the way. Moreover, to promote regional equality in growth and development it was necessary to
have a state led control over vital sectors of the economy.
Q.11) Which one of the following statements is correct with reference to Amartya Sen's idea of development?
a) It emphasises on provisioning of basic needs for all.
b) It links the human development to income levels in the society.
c) It sees human beings as beneficiaries of all development activities.
d) It emphasizes on expanding freedom to improve human development.
Ans) d
Option a is incorrect: Basic Needs approach of human development was initially proposed by the International
Labour Organisation (ILO). It identified six basic needs i.e.: health, education, food, water supply, sanitation, and
housing. It ignored the question of human choices.
Option b is incorrect: Income approach links the human development to income. The idea is that the level of
income reflects the level of freedom an individual enjoys.
Option c is incorrect: Welfare approach of human development sees human beings as beneficiaries or targets of
all development activities. People are treated as passive recipients. It is the responsibility of the government for
increasing levels of human development by maximising expenditure on education, health, social secondary and
amenities.
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Option d is correct: Amartya Sen’s idea of development is based on Capability approach. According to him,
development is the process of expanding human freedom. He advocated building human capabilities in the areas
of health, education and access to resources that is the key to increasing human development.
Source: https://ncert.nic.in/ncerts/l/legy104.pdf
Q.12) Economic growth in country X will necessarily have to occur if:

a) there is technical progress in the world economy
b) there is population growth in X
c) there is capital formation in X
d) the volume of trade grows in the world economy
Ans) c
Option c is correct. Capital formation entails net capital accumulation during a specific period, this signifies
economic growth. Generally, higher the capital formation in an economy, faster an economy can grow its
aggregate income.
Source) UPSC 2013
Q.13) With reference to Indian economy, consider the following statements:

1. An increase in economic variables over a period of time is called an economic growth
2. Economic development implies an upward movement of the quality of life in the economy.
3. Economic growth only brings quantitative changes in the economy.
4. Economic development brings qualitative changes in the economy.
Which of the statements given above is/are correct?
a) 1 and 2 only
b) 3 and 4 only
c) 1, 2 and 3 only
d) 1, 2, 3 and 4
Ans) d
Economic development is defined as a sustained improvement in material well being of society. Economic
development is a wider concept than economic growth. Apart from growth of national income, it includes
changes – social, cultural, political as well as economic which contribute to material progress.
Statement 1 is correct. An increase in economic variables over a period of time is economic growth. The term
can be used in an individual case or in the case of an economy or for the whole world. Economic growth refers
to an increase over time in a country`s real output of goods and services (GNP) or real output per capita income.
It relates to a gradual increase in one of the components of Gross Domestic Product: consumption, government
spending, investment, net exports.
Statement 2 is correct. Economic development implies an upward movement of the quality of life in economy.
Increase in entire social system in terms of income, savings and investment along with progressive changes in
socioeconomic structure of country. Development relates to the growth of human capital indexes, a decrease in
inequality figures, and structural changes that improve the general population’s quality of life.
Statement 3 is correct. Economic growth is considered as a Quantitative concept. Increases in real GDP. It only
brings quantitative changes in the economy. Economic growth is a more relevant metric for progress in
developed countries. But it’s widely used in all countries because growth is a necessary condition for
development. Growth is a value neutral term i.e., positive or negative for an economy for a specific period.
Statement 4 is correct. Economic development is a Qualitative concept. It includes HDI (Human Development
Index), gender- related index (GDI), Human poverty index (HPI), infant mortality, literacy rate etc. It
brings Qualitative changes in the economy.
Source: indian economy by Ramesh singh.
https://nios.ac.in/media/documents/SrSec318NEW/318_Economics_Eng/318_Economics_Eng_Lesson3.p
df
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Q.14) Why, despite the implementation of green revolution, a large proportion of India’s workforce continued to
be engaged in the agriculture sector?
1. Agriculture became a highly profitable business in all over India.
2. The industrial sector failed to generate sufficient employment opportunities.
3. The manufacturing and service sector were experiencing negative growth rate until 1991.
a) 1 and 2 only
b) 2 only
c) 1, 2 and 3
d) 1 and 3 only
Ans) b
Although with the advent of Green Revolution, Indian agricultural production increased substantially that
enabled India to attain the status of self-sufficiency in food grains,
Economists have found that as a nation becomes more prosperous, the proportion of GDP contributed by
agriculture as well as the proportion of population working in the sector declines considerably.
In India, between 1950 and 1990, the proportion of GDP contributed by agriculture declined significantly but not
the population depending on it (67.5 per cent in 1950 to 64.9 per cent by 1990).
Statement 1 is incorrect. The Agricultural production increase was limited to wheat and rice. These crops were
produced in few states of India like Punjab Haryana, western UP etc. So, the farmer from other areas started
looking for alternate livelihood. Agriculture did not become a highly profitable business in all over India.
Statement 2 is correct. The industrial sector's growth was not very significant during this period and thus, this
sector could not provide employment opportunities to the surplus labour from agricultural sector.
The industrial sector in India failed to generate significant employment opportunities in order to attract and
absorb excess agricultural labour.
Statement 3 is incorrect. The manufacturing and service sector were facing slow and not negative growth. This
led to disguised unemployment in agriculture.
However, India failed to achieve structural transformation associated with economic growth and development.
Many economists call this an important failure of our policies followed during 1950-1990.
Source: NCERT - Indian Economy 1950-1990: class 11th
https://ncert.nic.in/ncerts/l/keec102.pdf
Q.15) With reference to the provisions made under the National Food Security Act, 2013 consider the following
statements:
1. The families coming under the category of ‘below poverty line (BPL)’ only are eligible to receive subsidized
grains.
2. The eldest woman in a household, of age 18 years or above, shall be the head of the household for the purpose
of issuance of a ration card.
3. Pregnant women and lactating mothers are entitled to a take-home ration of 1600 calories per day during
pregnancy and for six months thereafter.
a) 1 and 2 only
b) 2 only
c) 1 and 3 only
d) 3 only
Ans) b
Statement 1 is incorrect. The enactment of the National Food Security Act, (NFSA) 2013 on July 5, 2013 marks a
paradigm shift in the approach to food security from welfare to rights-based approach. NFSA covers upto 75% of
the rural population and 50% of the urban population under Antyodaya Anna Yojana (AAY) and priority
households. About two thirds of the population therefore is covered under the Act to receive highly subsidized
food grains. The National Food Security Act, (NFSA) 2013is being implemented in all the States/UTs, on an all
India basis.
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While AAY households, which constitute poorest of the poor are entitled to 35 kg of food grains per family per
month, priority households are entitled to 5 kg per person per month.
Section 10 of the Act provides that within the number of persons determined for coverage under TPDS, the State
Government shall identify the households under AAY as per guidelines applicable to the said scheme and the
remaining households as priority households to be covered under TPDS, in accordance with such guidelines as
the State Government may specify.
Statement 2 is correct. Section 13 of the Act states that the eldest woman who is not less than eighteen years of
age, in every eligible household, shall be head of the household for the purpose of issue of ration cards.
The act further states that where a household at any time does not have a woman or a woman of eighteen years
of age or above, but has a female member below the age of eighteen years, then, the eldest male member of the
household shall be the head of the household for the purpose of issue of ration card and the female member, on
attaining the age of eighteen years, shall become the head of the household for such ration cards in place of such
male member.
Statement 3 is incorrect. Pregnant women and lactating mothers are entitled to a take-home ration of 600
calories per day during pregnancy and for six months thereafter.
Q.16) Which of the following was not one of the reasons behind the occurrence of 1991 economic crisis in India?
a) Large fiscal deficit was developed due to huge non-development expenditures.
b) Current account deficits were mainly financed by External borrowing.
c) Monetization of the fiscal deficits by RBI pushing India towards deflation.
d) Instead of generating revenue, Public Sector Undertakings became a liability for the government.
Ans) c
Economic Crisis of 1991 was a culminated outcome of the policy failure in the preceding years. There was a huge
Macroeconomic imbalance of high current account deficit and high fiscal deficit. The crisis did not develop
overnight. It was caused by decades of imprudence. There was reliance on populist measures.
It was in that year the Indian government was experiencing huge fiscal deficits, large balance of payment deficits,
high inflation level and an acute fall in the foreign exchange reserves. Moreover, the gulf crisis of 1990-91 led to
an acute rise in the prices of fuel which further pushed up the inflation level.
Reasons for 1991 Economic crisis
Statement a is correct. Huge Fiscal Deficit: Throughout 1980s, fiscal deficit was getting worse due to huge non-
development expenditures. As a result, gross fiscal deficit rose from 5.7% of GDP to 6.6% of GDP during 1980-81
to 1990-91. Subsequently, a major portion of this deficit was financed by borrowings (both from external and
domestic source).
Statement c is incorrect. High level of Inflation: The high fiscal deficits forced the central government to monetise
the fiscal deficits by borrowings from RBI. RBI printed new money that pushed up the inflation level, thereby,
making the domestic goods more expensive. The rate of inflation rose from 6.7% per annum to 10.3% per annum
during 1980s to 1990-91. In order to lower the inflation rate, government in 1991 had to opt for the economic
reforms.
Now, deflation is a decrease in general price levels throughout the economy and is opposite of inflation.
Statement d is correct. Sick PSUs: Public Sector Undertakings were assigned the prime role of industrialisation
and removal of inequality of income and poverty. But the subsequent years witnessed the failure of PSUs to
perform these roles efficiently and effectively. Instead of being a revenue generator for the central government,
these became liability. The sick PSUs added an extra financial burden on the government’s budget.
Statement b is correct.
Rise in External Debt: The Gulf crisis led to rising fuel prices. The current account deficit was showing a rising
trend and was becoming unsustainable. The current account deficit was mainly financed with costly sources of
external finance such as external commercial borrowings, NRI deposits, etc.
Thus, the balance of payments situation came to the verge of collapse in 1991, mainly because the current account
deficits were mainly financed by borrowing from abroad. The economic situation of India was critical; the
government was close to default. With India’s foreign exchange reserves at USD 1.2 billion in January 1991 and
depleted by half by June, an amount barely enough to cover roughly three weeks of essential imports, India was
only weeks way from defaulting on its external balance of payment obligations.
Knowledge Base:
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Weak BOP Situation: BOP represents the excess of total amount of exports over total amount of imports. Due to
lack of competitiveness of Indian products, India was not able to earn enough foreign exchange through exports
to finance our imports. The current account deficit rose from 1.35% to 3.69% of GDP during 1980-81 to 1990-91.
In order to finance this huge current account deficit, Indian government borrowed a huge amount from the
international market. Consequently, the external debt increased from 12% to 23% of GDP during the same period.
On the other hand, Indian exports were not potent enough to earn sufficient foreign exchange to repay these
external debt obligations. This BOP crisis compelled the need for the economic reforms.
Government of India's immediate response was to secure an emergency loan of USD 2.2 billion from the
International Monetary Fund by pledging 67 tons of India's gold reserves as collateral. The Reserve Bank of India
had to airlift 47 tons of gold to the Bank of England and 20 tons of gold to the Union Bank of Switzerland to raise
USD 600 million.
These moves helped tide over the balance of payment crisis temporarily and kick-started P V Narasimha Rao’s
economic reform process.
Source: NCERT - Liberalisation, Privatisation and Globalisation: An Appraisal: class 11th
http://indiabefore91.in/1991-crisis

1. Economic decisions are made through market systems in imperative planning.
2. Indicative plan recognizes consumers’ sovereignty and producers’ freedom.
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Ans) b
Statement 1 is incorrect. In imperative planning, economic decisions are made through a central planning
authority instead of a market system. There is the absence of institutions of private property, competition and
profit motive of industrialists, etc.
Statement 2 is correct. The essence of indicative planning is that it recognizes not only consumers’ sovereignty
but also producers’ freedom so that the targets and priorities of the plans are achieved. It then involves a middle
path of planning mechanism and market mechanism—a kind of coordination between private and public
activities.
Source: Indian Economy by Ramesh Singh, 12th Edition, Chapter 4

1. Purchasing Power Parity (PPP) exchange rates are calculated by comparing the prices of the same basket of
goods and services in different countries
2. In terms of PPP dollars, India is the sixth largest economy in the world.
Which of the statement given above is/are correct?
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Ans) a
Exp) Option a is correct
Statement 1 is correct. Purchasing Power Parity (PPP) is the rate at which the currency of one country would
have to be converted into that of another country to buy the same amount of goods and services in each country.
Statement 2 is incorrect. In PPP term, India is presently the third largest economy in the world. China is the
largest economy in PPP terms.
Source) UPSC 2019
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Q.19) Which of the following has occurred in agriculture sector after the economic reforms of 1991?
1. Gross capital formation in the agriculture sector has been consistently increasing since 1991.
2. Government subsidies to the agriculture sector has declined.
3. Farmers are facing increased competition from international market.
4. Growth rate of agriculture sector has increased drastically.
a) 1 and 3 only
b) 2, 3 and 4 only
c) 2 and 3 only
d) 3 only
Ans) d
Statement 1 is incorrect. As per estimates, government investment in agriculture infrastructure like roads, power,
irrigation, market linkages, and research and extension has fallen in proportionate terms. As indicated by the
Economic Survey 2020, Gross capital formation (GCF) in agriculture in 2018-19 was only 16.4% compared to 17.7%
in 2013-14 while it is estimated to be above 30% in 1960s.
Statement 2 is incorrect. Government subsidy on agriculture has increased from 2.8% of agriculture-GDP in
1980-81 to 8.1% in 2014-15. The subsidy increased at a much faster rate in recent years, leading to a dip in
investment.
Statement 3 is correct. Policy change under the Liberalization initiative like reduction in import duties on
agricultural products, lifting of quantitative restrictions on imports of agricultural products have increased the
competition faced by farmers from international markets.
Statement 4 is incorrect. During the reform period, the growth of agriculture has declined.
The annual growth rate in real terms in agriculture and its allied sectors was 2.88 per cent from 2014-15 to 2018-
19, according to the Economic Survey 2019-20.
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Q.20) Which of the following factors were responsible for high growth of services sector in India after economic
reforms of 1991?
1. Availability of cheap and skilled manpower
2. High tariffs and tight control over imports.
3. Devaluation of rupee against foreign currencies.
4. High demand for services in foreign markets
a) 1 and 4 only
b) 2 and 3 only
c) 1, 3, and 4 only
d) 2 only
Ans) c
Statement 1 is correct. Due to the availability of cheap labour and reasonable degree of skilled man power in
India, most multinational companies were outsourcing their services to India which contributed to the high
growth of services sector post reform period.
Statement 2 is incorrect. Low tariff and non-tariff barriers on imports by India are responsible for high growth
rate of service sector. The foreign trade reforms enabled the domestic products to interact and compete in the
international markets.
Statement 3 is correct. Devaluation of rupee against foreign currencies led to increase in the flow of foreign
exchange which incentivized many foreign companies to invest in India and thus contributed to the high growth
of services sector post reform period.
Statement 4 is correct. After 1990s there was a high demand for services as final product in global market. India
was a virgin market for service sector. So, when service sector started booming due to business outsourcing from
the developed countries to India, there was very high demand for these services especially for banking, computer
service, advertisement and communication. This high demand in turn led to a high growth rate of service sector.
https://www.economicshelp.org/tertiary-service-sector/

1. The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale Price Index (WPI).
2. The WPI does not capture changes in the prices of services, which CPI does.
3. Reserve Bank of India has now adopted WPI as its key measure of inflation and to decide on changing the key
policy rates.
a) 1 and 2 only
b) 2 only
c) 3 only
d) 1, 2 and 3
Ans) a
Page 12 of 26

Wholesale Price Index is a measure of the average change in the prices of goods in the wholesale market or at
the wholesale level.
Consumer Price index is the measure of changes in the price level of the basket of consumer goods and services
bought by the household.
Statement 1 is correct. The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale
Price Index (WPI). The weightage of food in CPI is around 46% in CPI and around 24% in case of WPI.
Statement 2 is correct. The WPI does not capture changes in the prices of services, which CPI does.
Statement 3 is incorrect. Based on the suggestions of the Urjit Patel committee, in 2014, RBI abandoned WPI and
adopted CPI as the key measure of inflation to decide on changing key policy rates.
Q.22) Consider the following statements with respect to market economy and planned economy:
1. In planned economy, the price is determined by society’s valuation of goods whereas in market economy, price
is determined by demand and supply.
2. Unlike market economy, in planned economy the production and distribution decisions are taken through the
coordination of economic activities brought by price signals.
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Ans) d
A market economy is an economic system where two forces, known as supply and demand, direct the production
of goods and services.
A centrally planned economy, also known as a command economy, is an economic system in which a central
authority, such as a government, makes economic decisions regarding the manufacturing and the distribution of
products.
Statement 1 is incorrect. In a market economy (and not planned economy), the price reflects, on an average, the
society’s valuation of the good or service in question. In this system, all goods or services come with a price
(which is mutually agreed upon by the buyers and sellers) at which the exchanges take place. Thus, the price is
determined by the demand and supply in the market. On the contrary, in a planned economy, the government
takes all important decisions regarding price, demand and supply.
Statement 2 is incorrect. In a centrally planned economy, the government or the central authority takes all
important decisions in the economy regarding production, exchange and consumption of goods and services.
The central authority may try to achieve a particular allocation of resources and a consequent distribution of the
final combination of goods and services which is thought to be desirable for society as a whole. On the contrary,
in a market economy, the central problems regarding how much and what to produce are solved through the
coordination of economic activities brought about by the price signals.
Source: Microeconomics, NCERT XI, Chapter-1, Pg. 5-6
Q.23) An Isoquant curve shows combinations of

a) Income and inequalities
b) Inflation and unemployment
c) Tax rates and the amount of tax revenue collected
d) Capital and labour
Ans) d
An isoquant curve is a concave-shaped line on a graph, used in the study of microeconomics, that charts all the
factors, or inputs, that produce a specified level of output. This graph is used as a metric for the influence that
the inputs most commonly, capital and labour have on the obtainable level of output or production.
Page 13 of 26
Source:
https://www.investopedia.com/terms/i/isoquantcurve.asp#:~:text=An%20isoquant%20curve%20is%20a,a%
20specified%20level%20of%20output.&text=The%20isoquant%20curve%20assists%20companies,maximize%2
0production%2C%20and%20thus%20profits.
NCERT Class 12th Introductory Microeconomics Ch-3 Production and Costs
Q.24) Which among the following steps is most likely to be taken at the time of an economic recession?
a) Cut in tax rates accompanied by increase in interest rate
b) Increase in expenditure on public project
c) Increase in tax rates accompanied by reduction of interest rate
d) Reduction of expenditure on public projects
Ans) b
Economic Recession refers to a significant decline in general economic activity in a designated region. Increase
in expenditure on public projects will have a multiplier effect on the pace of economic growth of the country.
Public expenditure has the expansionary effect on the growth of national income, employment opportunities,
etc.
Private investors are incapable of making massive investments on the various infrastructural projects like road-
bridge-dam construction, power plants, transport and communications, etc. It is imperative that the government
undertakes such projects. Greater the public expenditure, higher is the level of economic development.
Q.25) For which of the following goods, the price elasticity of demand is generally inelastic?
1. Food
2. Essential medical procedures
3. Coffee
4. Petrol/diesel
a) 1, 2 and 4 only
b) 1 and 2 only
c) 3 and 4 only
d) 1, 2, 3 and 4
Ans) a
Price elasticity of demand is a measure of the responsiveness of the demand for a good to changes in its price.
Price elasticity of demand for a good is defined as the percentage change in demand for the good divided by the
percentage change in its price.
Option 1 is correct. Demand for food does not change much even if food prices go up. This is because such goods
are essential for life and the demands for such goods do not change much in response to changes in their prices.
On the other hand, demand for luxuries can be very responsive to price changes. In general, demand for a
necessity is likely to be price inelastic while demand for a luxury good is likely to be price elastic.
Page 14 of 26

Option 2 is correct. Essential medical procedures and drugs have inelastic demand. The patient will pay whatever
he can. In general, products that significantly affect health and well-being have inelastic demand.
Option 3 is incorrect. The price elasticity of demand for a good depends on the nature of the good and the
availability of close substitutes of the good. Coffee is generally widely available at a level of quality that meets the
needs of most buyers. In addition, tea is available as a substitute for coffee. The availability of substitutes and the
fact that the product is sold by many different suppliers in a competitive market, make the demand of coffee
highly elastic.
Option 4 is correct. The demand for petrol/diesel generally is fairly inelastic, especially in the short run. Car
travel requires petrol or diesel and the substitutes for car travel offer less convenience and control. Only in the
long run, more options are available, such as purchasing a more fuel-efficient car or choosing a job that is closer
to where you work. Therefore petrol/ diesel is most likely inelastic.
Source: Microeconomics, NCERT XI, Chapter-2, Pg. 31, 32
Q.26) Which of the following are the features of a perfectly competitive market?
1. In this type of market, each firm produces a different product from other firm.
2. The market consists of a large number of buyers and sellers.
3. The buyers have complete information about the price and quality of product.
4. Firms can freely enter or exit the market.
a) 1, 2 and 3 only
b) 2, 3 and 4 only
c) 1 and 4 only
d) 1, 2, 3 and 4
Ans) b
Pure or perfect competition is a theoretical market structure in which various criteria are met so that the
conditions of monopoly or oligopoly, etc. do not exist. Every seller or buyer has equal chance of entering and
exiting the market without any hinderance.
A perfectly competitive market has the following defining features:
Statement 1 is incorrect. In a perfectly competitive market, each firm produces and sells a homogenous product.
i.e., the product of one firm cannot be differentiated from the product of any other firm. So, a buyer can choose
to buy from any firm in the market, and she gets the same product.
Statement 2 is correct. In a perfectly competitive market, no individual buyer or seller can influence the market
by their size. This is because the market consists of a large number of buyers and sellers which means that each
individual buyer and seller is very small compared to the size of the market.
Statement 3 is correct. The perfectly competitive market is also characterised by the availability of perfect
information. Perfect information implies that all buyers and all sellers are completely informed about the price,
quality and other relevant details about the product, as well as the market.
Statement 4 is correct.
Entry into the perfectly competitive market as well as exit from the market are free for firms. This condition is
essential for the large numbers of firms to exist. If entry was difficult, or restricted, then the number of firms in
the market would be small.
Knowledge Base:
The presence of large number of buyers and sellers producing homogenous product as well as free entry and exit
of firms result in the single most distinguishing characteristic of perfect competition: price taking behaviour. A
price-taking firm believes that if it sets a price above the market price, it will be unable to sell any quantity of the
good that it produces. On the other hand, should the set price be less than or equal to the market price, the firm
can sell as many units of the good as it wants to sell.
Source: NCERT Class 12th Introductory Microeconomics Ch-4 The Theory of The Firm Under Perfect Competition
Microeconomics, NCERT XI, Chapter-4, Pg. 53-54
https://www.investopedia.com/terms/p/perfectcompetition.asp
Q.27) With reference to the funds under Members of Parliament Local Area Development Scheme (MPLADS),
which of the following statements are correct?
1. MPLADS funds must be used to create durable assets like physical infrastructure for health, education etc.
Page 15 of 26

2. A specified portion of each MP’s fund must benefit SC/ST populations.
3. MPLADS funds are sanctioned on yearly basis and the unused funds cannot be carried forward to the next year.
4. The district authority must inspect at least 10% of all works under implementation every year
a) 1 and 2 only
b) 3 and 4 only
c) 1, 2 and 3 only
d) 1, 2 and 4 only
Ans) d
Statements 1 is correct. The Members of Parliament Local Area Development Scheme (MPLADS) is an ongoing
Central Sector Scheme which was launched in 1993-94. The Scheme enables the Members of Parliament to
recommend works for creation of durable community assets based on locally felt needs to be taken up in their
constituencies in the area of national priorities namely drinking water, education, public health, sanitation, roads
etc.
All works to meet locally felt infrastructure and development needs, with an emphasis on creation of durable
assets in the constituency are permissible under MPLADS as prescribed in the scheme guidelines.
The Ministry of Statistics and Programme Implementation has been responsible for the policy formulation,
release of funds and prescribing monitoring mechanism for implementation of the Scheme.
Statements 2 is correct. MPs are to recommend every year, works costing at least 15 per cent of the MPLADS
entitlement for the year for areas inhabited by Scheduled Caste population and 7.5 per cent for areas inhabited
by S.T. population.
Statements 3 is incorrect. The funds under MPLADS are non-lapsable. Thus, funds are not relapsed if unused in
a year but is carried forward to the next year.
Statements 4 is correct. The District Authority would be responsible for overall coordination and supervision of
the works under the scheme at the district level and inspect at least 10% of the works under implementation
every year. The District Authority should involve the MPs in the inspections of projects to the extent feasible.
Q.28) Regarding the opportunity cost, which of the following statements is incorrect?
a) It is the cost of the next best alternative good that is foregone.
b) The opportunity cost of a good can be zero.
c) There is no opportunity cost involved in case of public good since it is free.
d) Returns could not be predicted accurately using opportunity cost always.
Ans) c
Opportunity costs represent the potential benefits an individual, investor, or business misses out on when
choosing one alternative over another.
Statement a is correct. In economics, the concept of opportunity cost of some activity is the gain foregone from
the second best activity. Thus, it is the cost of the next best alternative good foregone. Example: If one decides
to invest Rs 1,000 in family business, the opportunity cost of investing the money in the family business is
therefore the amount of forgone interest from the bank.
Statement b is correct. The formula for calculating opportunity cost is to compare the net benefit of one choice
with the benefit of another option. If the difference between those benefits is zero, then the opportunity cost is
zero, meaning you'd get the same benefit from either choice. Free goods like air, water and sunshine have zero
opportunity cost because their total supply exceeds total demand. Therefore, no sacrifice has to be made to
obtain them.
Also, if no alternative exists, no opportunity cost is involved in keeping it idle. For example, the opportunity cost
of an unused factory space is zero. Similarly, the opportunity cost of a machine that is lying idle for the last two
years is zero. There is no other use to which it could be put.
Statement c is incorrect. For public goods such as street light and defence, opportunity cost is involved.
Government could have spent that much more money on street lights rather than on military expenditure, so
opportunity cost is not zero. To sum it up, opportunity cost in the context of public goods is not really any
different than in any other situation.
Page 16 of 26

Statement d is correct. One of the limitations of opportunity cost is:
1) Future returns could not be predicted accurately using opportunity cost.
2) It is difficult to make quantitative comparison between two available alternatives.
Source: Microeconomics, NCERT XI, Chapter-4, Pg. 61-62
https://www.economicsdiscussion.net/cost/opportunity-cost/measurement-of-opportunity-cost/25125
Q.29) With reference to price ceiling in India consider the following statements:
1. It is only imposed on essential items.
2. It may result in excess demand or shortage of product.
3. Minimum Support Price (MSP) for agricultural goods is a type of price ceiling.
a) 1 and 2 only
b) 2 only
c) 1 and 3 only
d) 1, 2 and 3
Ans) b
Price Ceiling is a situation where government fixes a maximum allowable price for certain goods.
A price floor is an established lower boundary on the price of a commodity in the market.
Statement 1 is incorrect. Price ceiling is generally (and not only) imposed on essential items like wheat, rice,
kerosene, sugar. It is fixed below the market-determined price since at the market-determined price some
section of the population will not be able to afford these goods.
Statement 2 is correct. Price ceiling may end up creating shortage of a product. For example - To ensure
availability of wheat to everyone, ration coupons are issued to the consumers so that no individual can buy more
than a certain amount of wheat and this stipulated amount of wheat is sold through ration shops. But since all
consumers may not be satisfied by the quantity of the goods that they get from the fair price shop, some of them
will be willing to pay higher price for it. This may result in the creation of black market.
Statement 3 is incorrect. MSPs are not price ceiling. For certain goods and services, fall in price below a particular
level is not desirable and hence the government sets floors or minimum prices for these goods and services. The
government imposed lower limit on the price that may be charged for a particular good or service is called price
floor. Most well-known examples of imposition of price floor are agricultural price support programmes (MSP)
and the minimum wage legislation.
Knowledge Base: Imposition of price ceiling below the equilibrium price leads to an excess demand. Imposition
of price floor above the equilibrium price leads to an excess supply.
Source: NCERT Class 12th Introductory Microeconomics Ch-5 Market Equilibrium Pg-82, 83
Q.30) With reference to India’s Five -Year Plans, which of the following statements is/are correct?
1. From the Second Five -Year Plan, there was a determined thrust towards substitution of basic and capital good
industries.
2. The Fourth Five -Year Plan adopted the objective of correcting the earlier trend of increased concentration of
wealth and economic power.
3. In the Fifth Five -Year Plan, for the first time, the financial sector was included as an integral part of the Plan.
Select the correct answer using the code given below.
a) 1 and 2 only
b) 2 only
c) 3 only
d) 1, 2 and 3
Ans) a
Statement 1 is correct. From the Second Five -Year Plan, there was a determined thrust towards substitution of
basic and capital good industries. India adopted the strategy of Import Substitution
Industrialization (ISI) with the objective to build a self -reliant economy.
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Statement 2 is correct. The Fourth Five -Year Plan adopted the objective of correcting the earlier trend of
increased concentration of wealth and economic power. The Plan now aimed to assist the less prosperous
sections of agriculture to improve their position and make a yet bigger contribution to the national economy.
Statement 3 is incorrect. For the first time in Indian planning, Financial sector became an integral part of the plan
in the Ninth Five – Year Plan.
Source) UPSC 2019
Q.31) In this market, there exist few sellers having large market shares. The firms are producing homogenous or
differentiated products. Firms under this market are interdependent and fall in price of one firm affects the
profits of all firms in the industry.
The above paragraph best describes which of the following markets?
a) Perfect competition
b) Monopoly
c) Monopolistic competition
d) Oligopoly
Ans) d
Exp) Option d is correct
Oligopoly refers to a market situation in which there are a few firms selling homogeneous or differentiated
products. In India, markets for automobiles, cement, steel, aluminium, etc., are the examples of oligopolistic
market.
1) Each firm produces a significant portion of the total output. There exists severe competition among different
firms and each firm try to manipulate both prices and volume of production to outsmart each other.
2) Every seller influences and is influenced by the behaviour of other firms.
3) Firms under oligopoly are interdependent. A firm considers the action and reaction of the rival firms while
determining its price and output levels. A change in output or price by one firm evokes reaction from other
firms operating in the market. For example, market for cars in India is dominated by few firms (Maruti, Tata,
Hyundai, Ford, Honda, etc.). A change by any one firm in any of its vehicle will induce other firms to make
changes in their respective vehicles.
Knowledge Base:
Other features:
1) There are barriers to entry in oligopoly market. Patents, requirement of large capital, control over crucial raw
materials, etc., are some of the reasons, which prevent new firms from entering into industry.
2) The oligopoly is likely to lie somewhere between the two extremes of monopoly and perfect competition.
Source: Microeconomics, NCERT XI, Chapter-6, Pg. 99
https://www.yourarticlelibrary.com/oligopoly-market/the-oligopoly-market-example-types-and-features-
micro-economics/9140
Q.32) With reference to the Competitive Behaviour and Competitive Structure, consider the following:
1. Generally the more competitive the market structure, less competitive is the behaviour of the firms.
2. The greater the ability of an individual firm to influence the market in which it sells its product, the less
competitive will be the market structure.
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Ans) c
Statement 1 is correct. Competitive behaviour and competitive market structure are, in general, inversely related;
the more competitive the market structure, less competitive is the behaviour of the firms. On the other hand, the
less competitive the market structure, the more competitive is the behaviour of firms towards each other.
For instance, Coca cola and Pepsi compete with each other in a variety of ways to achieve a higher level of sales
or a greater share of the market.
Page 18 of 26

Conversely, we do not find individual farmers competing among themselves to sell a larger amount of crop. This
is because both Coke and Pepsi possess the power to influence the market price of soft drinks, while the individual
farmer does not.
Statement 2 is correct. A perfectly competitive market has been defined as one where an individual firm is unable
to influence the price at which the product is sold in the market. The greater the ability of an individual firm to
influence the market in which it sells its product, the less competitive the market structure.
Knowledge Base: Competitive behaviour is the degree to which individual firms compete against each other to
gain higher market shares, earn higher profits, etc. It is also the manner in which firms compete against each
other (advertising, pricing policies, customer service, etc.)
Source: NCERT Class 12th Introductory Microeconomics Ch-6 Non-Competitive Markets Pg-87
https://discusseconomics.com/microeconomics/microeconomics-competitive-market-behavior/
Q.33) The national income of a country for a given period is equal to the
a) total value of goods and services produced by the nationals
b) sum of total consumption and investment expenditure
c) sum of personal income of all individuals
d) money value of final goods and services produced
Ans) d
Exp) Option d is correct
Option d is correct. National income means the value of goods and services produced by a country during a
financial year. Thus, it is the net result of all economic activities of any country during a period of one year and
is valued in terms of money.
Source) UPSC 2013
Q.34) Consider the following pairs:

Type of Goods Description
1. Inferior Demand increases
goods with decrease in
consumer’s income
2. Giffen Demand decreases
goods with increase in
price
3. Veblen Demand increases
Goods with increase in
price
Which of the pairs given above is/are correctly matched?
a) 1 and 2 only
b) 2 only
c) 1 and 3 only
d) 1, 2 and 3
Ans) c
Pair 1 is correct. An inferior good is one whose demand drops when people's incomes rise.
The demands for inferior goods move in the opposite direction of the income of the consumer. Examples of
inferior goods include low quality food items like coarse cereals. As the income of the consumer increases, the
demand for an inferior good fall, and as the income decreases, the demand for an inferior good rise. This is
because when the income of the consumer increases, he will substitute these goods with superior goods like
wheat and rice. However, if the income of the consumer declines, he will spend substantial part of his income on
this good.
Pair 2 is incorrect. A Giffen good is a low income, non-luxury product that defies standard economic and
consumer demand theory. Demand for Giffen goods rises when the price rises and falls when the price falls. In
econometrics, this results in an upward-sloping demand curve, contrary to the fundamental laws of demand
which create a downward sloping demand curve.
Page 19 of 26

Pair 3 is correct. A Veblen good is a good for which demand increases as the price increases. Veblen goods are
typically high-quality goods that are made well, are exclusive, and are a status symbol. Examples of Veblen goods
include designer jewellery, yachts, and luxury cars.
Source: Microeconomics, NCERT XI, Chapter-2, Pg. 24
https://www.investopedia.com/terms/g/giffen-good.asp
https://www.investopedia.com/terms/v/veblen-good.asp
Q.35) Which one of the following statements is incorrect with reference to effective demand?
a) By stimulating the effective demand, higher level of employment can be achieved.
b) The principle of effective demand supports Say’s law of markets.
c) The level of employment is determined by effective demand.
d) Aggregate demand and aggregate supply are the two determinants of effective demand.
Ans) b
Statement a is correct. According to Keynes’ theory, unemployment is due to the deficiency of effective demand.
Only by stimulating effective demand can a higher level of employment be achieved.
Statement b is incorrect. The principle of effective demand repudiates (and not supports) Say’s law of markets.
According to Says law supply creates its own demand and that full employment equilibrium is a normal situation
in the economy. But the principle of effective demand points out that underemployment equilibrium is a normal
situation and full employment equilibrium is accidental.
Statement c is correct. According to Keynes, the level of employment is determined by effective demand which,
in turn, is determined by aggregate demand price and aggregate supply price.
Statement d is correct. Aggregate demand and aggregate supply are the two determinants of effective demand.
Source: http://ppup.ac.in/download/econtent/pdf/theprincipleofeffectivedemand-141119045032-
conversion-gate01.pdf
https://www.economicsdiscussion.net/employment-theories/keynes-theory-of-employment-concept-of-
effective-demand-with-diagram/6213
Q.36) Increase is absolute and per capital real GNP do not connote a higher level of economic development, if
a) industrial output fails to keep pace with agricultural output.
b) agricultural output fails to keep pace with industrial output.
c) poverty and unemployment increase.
d) imports grow faster than exports.
Ans) c
Economic development is a qualitative criterion. For economic development to happen all the sections of society
must benefit from economic growth. Economic growth does not necessarily connote economic development
which is a holistic concept representing the well-being of the population rather than only increased income.
Thus, if the poverty and unemployment in an economy increases, it means not all the sections of the society have
benefitted from economic growth. This means economic growth has not led to economic development.
Source) UPSC 2018
Q.37) Which of the following best explains the Law of variable proportions?
a) It is the change in total production cost that comes from making or producing one additional unit.
b) It states that as we increase the quantity of only one input the total product increases at an increasing rate in
the beginning but production falls in later stage.
c) It states that when we applied more and more units of variable factor to a given quantity of fixed factor, total
product increases at a diminishing rate and marginal product falls.
d) It refers to factors which cannot be changed in the short run and do not vary directly with the output.
Ans) b
Option a is incorrect. Marginal cost of production is the change in total production cost that comes from making
or producing one additional unit. The purpose of analyzing marginal cost is to determine at what point an
Page 20 of 26

organization can achieve economies of scale to optimize production and overall operations. If the marginal cost
of producing one additional unit is lower than the per-unit price, the producer has the potential to gain a profit.
Option b is correct. Law of variable proportion states that as we increase the quantity of only one input, keeping
other inputs fixed, the total product increases at an increasing rate in the beginning, then increases at
diminishing rate and after a level of output ultimately falls.
Option c is incorrect. Law of diminishing marginal return states that when we applied more and more units of
variable factor to a given quantity of fixed factor, total product increases at a diminishing rate and marginal
product falls.
Option d is incorrect. Fixed factors refer to those factors which cannot be changed in the short run. They do not
vary directly with the output. For example, Capital, land, plant and machinery, etc.
Source: class 12th Microeconomics glossary
Q.38) Under which of the following circumstances, the behaviour of a consumer can be said to be monotonic?
a) when greater consumption of a commodity always offers him a higher level of satisfaction.
b) when greater consumption of a commodity always offers him a lower level of satisfaction.
c) when lesser consumption of a commodity always offers him a lower level of satisfaction.
d) when lesser consumption of a commodity always offers him a higher level of satisfaction.
Ans) a
Monotonic preferences mean the consumer preferences are such that greater consumption of a commodity
always offers him a higher level of satisfaction.
Consumer’s preferences are assumed to be such that between any two bundles (x1, x2) and (y1, y2), if (x1, x2) has
more of at least one of the goods and no less of the other good compared to (y1, y2), then the consumer prefers
(x1, x2) to (y1, y2). Preferences of this kind are called monotonic preferences. Thus, a consumer’s preferences are
monotonic if and only if between any two bundles, the consumer prefers the bundle which has more of at least
one of the goods and no less of the other good as compared to the other bundle.
Source: Theory of consumer behaviour class 12th Microeconomics
Q.39) If you withdraw Rs. 1,00,000 in cash from your Demand Deposit Account at your bank, the immediate effect
on aggregate money supply in the economy will be:
a) to reduce it by Rs. 1,00,000
b) to increase it by Rs. 1,00,000
c) to increase it by more than Rs. 1,00,000
d) to leave it unchanged
Ans) d
Option d is correct. Money supply refers to “total stock of money available for use in the economy”. Demand
Deposits are a basic component of the money supply, thus any withdrawal from such a deposit would leave the
money supply in the economy unchanged.
Source) UPSC 2020
Q.40) What would be impact of free entry and exit of firms in the market while other factors remaining same?
a) The profit will necessarily fall for all firms in the long term.
b) The profit will necessarily rise for old firms.
c) Each firm will earn supernormal profit.
d) Each firm will always earn normal profit in the long term.
Ans) d
The presumption of free entry and exit implies that in equilibrium, there is no enterprise that earns a supernormal
profit or sustains an acute loss by remaining in the production. The equilibrium cost price will be equal to the
minimum average cost of the enterprises. Suppose, the market has a possibility of earning a supernormal profit,
this will attract some enterprises to freely enter the market and compete.
Page 21 of 26

As new firms enter the market supply curve shifts rightward. However, demand remains unchanged. This causes
market price to fall. As prices fall, supernormal profits are eventually wiped out. At this point, with all firms in the
market earning normal profit, no more firms will have incentive to enter. Similarly, if the firms are earning less
than normal profit at the prevailing price, some firms will exit which will lead to an increase in price, and with
sufficient number of firms, the profits of each firm will increase to the level of normal profit. At this point, no
more firm will want to leave since they will be earning normal profit here. Thus, with free entry and exit, in the
long run each firm will always earn normal profit at the prevailing market price.
Source: Market equilibrium class 12th Microeconomics

1. Personal income is the income actually received by the individual households from all sources in the form of
current transfer payment and factor incomes.
2. Personal disposable income is the amount available to the households and the non-corporate businesses after
the deduction of all tax obligations to the government.
3. National Disposable Income (NDI) is the maximum, the country can afford to spend on consumption of goods
or services during an accounting year.
a) 1 only
b) 2 and 3 only
c) 2 only
d) 1, 2 and 3
Ans) d
Income is money that a person or a business receives in return for working, providing a product or service, or
investing capital.
Statement 1 is correct. Personal income is the income actually received by the individual households from all
sources in the form of current transfer payment and factor incomes. Personal income refers to total earnings
generated by an individual from investments, salaries, dividends, bonuses, pensions, social benefits, and other
ventures over a given period.
Personal Income = Private Income – Corporation Tax – Retained Earnings or Corporate Savings.
Statement 2 is correct. Personal disposable income is the amount, which is actually available to the households
and the non-corporate businesses after the deduction of all tax obligations to the government.
Personal Disposable Income = Personal Income – Direct Personal Taxes
Statement 3 is correct. National Disposable Income (NDI) is defined as the maximum, the country can afford to
spend on consumption of goods or services during an accounting year without having to finance its expenditure
by disposing of assets or by increasing its liabilities.
Net National Disposable Income = NNPFC + Net Indirect Taxes + Net Current Transfers from Rest of the World
Source: National Income Accounting: Class 12th Macroeconomics
Q.42) Indian Government bond yields are influenced by which of the following?
1. Action of the United States Federal Reserve.
2. Action of the Reserve Bank of India.
3. Inflation and short-term interest rates.
Select the correct answer using the code given below.
a) 1 and 2 only
b) 2 only
c) 3 only
d) 1, 2 and 3
Ans) d
Hike in interest rate in the US by United States Federal Reserve leads not only to an outflow of funds from equities
into US treasury bonds, but also to an outflow of funds from emerging economies to the US. Thus, it
impacts Indian Government Bond Yields in negative manner.
Page 22 of 26

The multifaceted roles played by the RBI in the payment system, monetary policy, financial stability policy, and
policy coordination with the Treasury gives it the operational ability to influence government bonds’ nominal
yields by setting and changing the short-term interest rate and using other tools of monetary policy as it deems
appropriate.
Short-term interest rate and pace of inflation are the key drivers of interest rates on government bonds.
Source) UPSC 2021
Q.43) With reference to GDP deflator, which of the following statements is correct?
a) It measures the changes in prices on year-on-year basis without any base year.
b) It measures the changes in prices for all of the goods and services produced in an economy.
c) It includes prices of local goods as well as imported goods.
d) It measures the changes in price of only goods.
Ans) b
Statement a is incorrect. GDP deflator measures the changes in prices by establishing a base year and, secondly,
by comparing current prices to prices in the base year. The GDP price deflator factor the impact of inflation or
rising prices into its results. It does it by showing the effect of price changes on GDP, first by establishing a base
year and, secondly, by comparing current prices to prices in the base year.
Statement b is correct. The GDP price deflator measures the changes in prices for all of the goods and services
produced in an economy. Using the GDP price deflator helps economists compare the levels of real economic
activity from one year to another. The GDP price deflator is a more comprehensive inflation measure than the
CPI index because it isn't based on a fixed basket of goods.
Statement c is incorrect. GDP deflator does not include prices of imported goods. Whereas, CPI includes prices
of goods consumed by the representative consumer; hence it includes prices of imported goods.
Statement d is incorrect. GDP deflator measures changes in the prices of both goods and services. It is a more
comprehensive measure of inflation as it covers the entire range of goods and services produced in the economy.
Knowledge Base: Consumer price index (CPI) is referred to as that index that is used in calculating the retail
inflation in the economy by tracking the changes in prices of most commonly used goods and services.
The Wholesale Price Index (WPI) represents the price of a basket of wholesale goods. WPI focuses on the price
of goods that are traded between corporations.
Source: National Income Accounting: Class 12th Macroeconomics
https://www.economicsdiscussion.net/differences-between/difference-between-cpi-and-gdp-
deflator/11320
Q.44) With reference to Incremental Capital Output Ratio (ICOR), consider the following statements:
1. It is the relationship between the level of investment made in the economy and the consequent increase in
GDP.
2. Higher ICOR represents less efficient use of capital.
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Ans) c
Capital output ratio is the amount of capital needed to produce one unit of output.
Statement 1 is correct. The incremental capital output ratio (ICOR) explains the relationship between the level of
investment made in the economy and the consequent increase in GDP. ICOR is a metric that assesses the
marginal amount of investment capital necessary for a country or other entity to generate the next unit of
production.
Statement 2 is correct. The higher the ICOR, the less efficient we are in the use of capital. It is the ratio of
investment to growth. The higher the incremental capital-output ratio, the lesser the productivity of capital, and
Page 23 of 26

lower the incremental capital-output ratio, the higher the productivity of capital. Thus it shows the measure of
inefficiency with regards to capital.
Source: https://www.thehindu.com/opinion/lead/sharpen-the-focus-on-growth/article17763234.ece
https://capital.com/incremental-capital-output-ratio-definition
Q.45) Consider the following:

1. Foreign currency convertible bonds.
2. Foreign institutional investment with certain conditions.
3. Global depository receipts.
4. Non-resident external deposits.
Which of the above can be included in Foreign Direct Investments?
a) 1, 2 and 3 only
b) 3 only
c) 2 and 4 only
d) 1 and 4 only
Ans) a
Statements 1, 2 and 3 are correct.
‘Foreign Currency Convertible Bond’ (FCCB) is a bond issued under the Issue of Foreign Currency Convertible
Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993, as amended from time to
time.
Automatic Route for Issue of Foreign Currency Convertible Bonds (FCCBs) is allowed.
Foreign Portfolio Investment is any investment made by a person resident outside India in capital instruments
where such investment is (a) less than 10 percent of the post issue paid-up equity capital on a fully diluted basis
of a listed Indian company or (b) less than 10 percent of the paid up value of each series of capital instruments of
a listed Indian company.
It is the percentage which defines whether it is direct or institutional investment.
FII made above 10 percent of the post issue paid-up equity capital will be considered as FDI. But Once an FDI
always an FDI.
Foreign investment in Indian securities has been made possible through the purchase of Global Depository
Receipts, Foreign Currency Convertible Bonds and Foreign Currency Bonds issued by Indian issuers which are
listed, traded and settled overseas.
Statement 4 is incorrect.
A Non-Resident External (NRE) account is a rupee dominated account opened by an NRI to facilitate deposit of
foreign currency earnings. It is not an FDI.
Source) UPSC 2021

1. Production done by a foreign entity within a country is included in Gross Domestic Product (GDP) of that
country.
2. Gross National Product (GNP) includes private remittances received from Indian nationals working outside
India.
3. Net Domestic Product (NDP) is used to compare economies of the world.
4. In case of India, Net National Product (NNP) is more than Gross National Product (GNP).
Which of the above statements are correct?
a) 1, 2 and 3 only
b) 2, 3 and 4 only
c) 1 and 2 only
d) 1, 2, 3 and 4
Ans) c
National income accounting, a set of principles and methods used to measure the income and production of a
country.
Page 24 of 26

Statement 1 is correct. Since Gross Domestic Product is the market value of final goods produced within a
territory of a country. It therefore includes all production done by the national residents or the non-residents in
a country, regardless of whether that production is owned by a local company or a foreign entity.
Statement 2 is correct. Gross National Product is the Gross Domestic Product of a country added with its income
from abroad. It includes private remittances by Indian nationals working outside India. At the same time, it
excludes private remittances of foreign nationals working within India.
Statement 3 is incorrect. Net Domestic Product has domestic use only. It is not used in comparative economics
i.e., to compare the economies of the world. It is because of difference in rate of depreciation set by different
economies of the world.
Statement 4 is incorrect. Net National Product is the Gross National Product after deducting the loss due to
depreciation (Depreciation is the wear and tear that happens in the assets). Therefore, Net National Product will
always be lesser than the Gross National Product.
Source: Old NCERT Introductory Macroeconomics, class XII, chapter 3 National Income Accounting, page no-31
Q.47) Which of the following components are included in Net Factor Income from Abroad for a country?
1. Net compensation to employees.
2. Net income from property which includes rent.
3. Net income from entrepreneurship.
4. Net retained earnings of resident companies abroad.
a) 1 and 4 only
b) 2, 3 and 4 only
c) 1 and 3 only
d) 1, 2, 3 and 4
Ans) d
Net factor income from abroad = Factor income earned by the domestic factors of production employed in the
rest of the world – Factor income earned by the factors of production of the rest of the world employed in the
domestic economy.
All the options are correct. The net factor income from rest of the world consists of (i) net compensation of
employees, and (ii) net income from property and entrepreneurship (i.e., interest, rent, dividend and profit)
including reinvested earning of foreign companies and net retained earnings of resident companies abroad. Here
the term ‘net’ stands for receipts of current income by residents abroad minus disbursements of current income
to non-residents in India.
Knowledge Base: Net Retained Earnings:
It refers to difference between retained earnings of resident companies located abroad and retained earnings of
non-resident companies located within the domestic territory of the country.
Retained Earnings refer to that part of profits which is kept as reserve after paying the corporate tax and
dividends.
Source:
http://mospi.nic.in/sites/default/files/reports_and_publication/statistical_manual/Chapter%203.pdf
National Income Accounting: Class 12th Macroeconomics
Q.48) A family spends 25% of their income on food at an income level of 50,000 per month. If their income
increases to 100,000 per month, they will spend less than 25% of money on food while increasing spending in
other areas.
Which one of the following law/theories correctly describes the situation given above?
a) Engel's Law
b) Misery index
c) Phillips curve
d) Kuznets curve
Ans) a
Page 25 of 26

Statement a is correct: Engel's Law is an economic theory that states that as the household's income increases,
the percentage of income spent on food decreases while the proportion spent on other goods (such as luxury
goods) increases.
Statement b is incorrect: The misery index measures the degree of economic distress felt by everyday people,
due to the risk of joblessness combined with an increasing cost of living.
Statement c is incorrect: The Phillips curve is an economic concept that states that inflation and unemployment
have a stable and inverse relationship. The theory claims that with economic growth comes inflation, which in
turn should lead to more jobs and less unemployment.
Statement d is incorrect: Kuznets Curve shows the relationship between economic growth and inequality. It is
inverted U shaped meaning that as initially economic growth leads to greater inequality, followed later by the
reduction of inequality.
Source: https://www.investopedia.com/terms/e/engels-law.asp
https://www.investopedia.com/terms/p/phillipscurve.asp
https://www.investopedia.com/terms/m/miseryindex.asp
https://www.investopedia.com/terms/s/simon-kuznets.asp
Q.49) During summer, ice-creams become more favourable to people. What is the likely impact of this situation
on the demand curve for ice-creams?
a) There is upward movement along the demand curve.
b) There is a leftward shift in the demand curve.
c) There is downward movement along the demand curve.
d) There is a rightward shift in the demand curve.
Ans) d
Since during summer ice-creams become more favourable to people, the demand curve for ice-creams is likely
to shift rightwards.
The demand curve can shift due to a change in the tastes and preferences of the consumer. If the consumer’s
preferences change in favour of a good, the demand curve for such a good shift rightward. On the other hand,
the demand curve shifts leftward due to an unfavourable change in the preferences of the consumer. Thus, the
demand curve for ice-creams is likely to shift rightward in the summer because of preference for ice-creams
goes up in summer.
Source: Introductory Microeconomics, NCERT XII, Chapter-2, Pg. 25-26
Q.50) Consider the following statements with reference to the income inequality:
1. Lorenz curve measures the degree of inequality in income and wealth in a given population or economy.
2. Gini coefficient value of “one” indicates a perfect income equality while “zero” indicates a situation of absolute
inequality.
3. India’s Gini coefficient has steadily decreased in the last decade.
a) 1 only
b) 2 and 3 only
c) 1 and 3 only
d) 3 only
Ans) a
The Lorenz Curve (the actual distribution of income curve), a graphical distribution of wealth developed by Max
Lorenzin 1906, shows the proportion of income earned by any given percentage of the population.
Statement 1 is correct. Lorenz curve is a graph showing the degree of inequality in income and wealth in a given
population or economy. It is a rigorous way to measure income inequality. The line at the 45º angle shows
perfectly equal income distribution, while the other line shows the actual distribution of income. The further
Page 26 of 26

away from the diagonal, the more unequal the size of the distribution of income
Statement 2 is incorrect. The Gini Coefficient, which is derived from the Lorenz Curve, can be used as an indicator
of economic development in a country. The Gini Coefficient measures the degree of income equality in a
population. The Gini Coefficient can vary from 0 (perfect equality) to 1 (perfect inequality).A Gini Coefficient of
zero means that everyone has the same income means perfect equality , while a Coefficient of 1 represents a
single individual receiving all the income means absolute inequality.
Statement 3 is incorrect. The Gini (inequality in income distribution) coefficient points to an increasing inequality
in India. The coefficient in 2014 was 0.34. The coefficient increased from 0.35 in 2011 and to 0.479 in 2018. In the
last 1 decade there has been increase in inequality (not decreased) but there has not been steady increase in
inequality in India eg. In 2011 it was 0.35 and in 2014 it dropped to 0.34. Thus, there has neither been steady
increase nor decrease of Gini coefficient in India. India is only second to Russia in the world in terms of inequality.
India’s per capita gross domestic product (GDP) increased five times between 2000 and 2019; to $2014 in 2019
from $443 in 2000. This doesn’t mean that income of the entire population has increased. The top one per cent
in India earned 21 per cent of total country’s income in 2019. This was 11 per cent in 1990. The top 10 per cent
earned 56 per cent of the country’s total income in 2019; the bottom 10 per cent earned only 3.5 per cent.
Source: Indian economy by Ramesh Singh
https://www.downtoearth.org.in/blog/economy/why-inequality-is-india-s-worst-enemy-
75778#:~:text=The%20Gini%20(inequality%20in%20income,47.9%20per%20cent%20in%202018.

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Page 1 of 26

SFG 2022 | LEVEL 1 | Test #10 – Solutions |

Q.2) The Factor cost of a good include(s) which of the following?

Q.3) Consider the following statements:

SFG 2022 | LEVEL 1 | Test #10 – Solutions |

SFG 2022 | LEVEL 1 | Test #10 – Solutions |

SFG 2022 | LEVEL 1 | Test #10 – Solutions |

SFG 2022 | LEVEL 1 | Test #10 – Solutions |

SFG 2022 | LEVEL 1 | Test #10 – Solutions |

Q.12) Economic growth in country X will necessarily have to occur if:

Q.13) With reference to Indian economy, consider the following statements:

SFG 2022 | LEVEL 1 | Test #10 – Solutions |

SFG 2022 | LEVEL 1 | Test #10 – Solutions |

SFG 2022 | LEVEL 1 | Test #10 – Solutions |

Q.17) Consider the following statements:

Q.18) Consider the following statements:

SFG 2022 | LEVEL 1 | Test #10 – Solutions |

SFG 2022 | LEVEL 1 | Test #10 – Solutions |

Source: NCERT - Liberalisation, Privatisation and Globalisation: An Appraisal: class 11th

Q.21) Consider the following statements:

SFG 2022 | LEVEL 1 | Test #10 – Solutions |

Q.23) An Isoquant curve shows combinations of

SFG 2022 | LEVEL 1 | Test #10 – Solutions |

SFG 2022 | LEVEL 1 | Test #10 – Solutions |

SFG 2022 | LEVEL 1 | Test #10 – Solutions |

SFG 2022 | LEVEL 1 | Test #10 – Solutions |

SFG 2022 | LEVEL 1 | Test #10 – Solutions |

SFG 2022 | LEVEL 1 | Test #10 – Solutions |

Q.34) Consider the following pairs:

SFG 2022 | LEVEL 1 | Test #10 – Solutions |

SFG 2022 | LEVEL 1 | Test #10 – Solutions |

SFG 2022 | LEVEL 1 | Test #10 – Solutions |

Q.41) Consider the following statements:

SFG 2022 | LEVEL 1 | Test #10 – Solutions |

SFG 2022 | LEVEL 1 | Test #10 – Solutions |

Q.45) Consider the following:

Q.46) Consider the following statements:

SFG 2022 | LEVEL 1 | Test #10 – Solutions |

SFG 2022 | LEVEL 1 | Test #10 – Solutions |

SFG 2022 | LEVEL 1 | Test #10 – Solutions |

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