Economics PYQ

Section C
Explanation
SEBI Grade A questions
Question 1 – The ________ states that other factors being constant (cetris peribus), price and quantity
demanded of any good and service are inversely related to each other. SEBI Grade A - Phase 1 - 2020
A. Law of Demand
B. Law of Supply
C. Law of Diminishing Marginal Utility
D. Law of Variable Proportion
E. None of the above
Answer – Option A
Explanation -
Law of Demand
• The law of demand states that other factors being constant (cetris peribus), price, and quantity demanded
of any good and service are inversely related to each other. When the price of a product increases, the
quantity demanded of the product will fall and when the price of a product decreases, the quantity
demanded of the product will rise. The Law of demand explains consumer choice behavior when the price
changes.
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Law of Supply
• Law of supply states that other factors remaining constant, price and quantity supplied of a good are
directly related to each other. In other words, when the price of a good rises, then suppliers increase the
supply of that good in the market and when the price of a good falls, then suppliers decrease the supply of
that good.
Law of Diminishing Marginal Utility
• The law of diminishing marginal utility states that the satisfaction provided by the consumption of every
additional unit of a good decrease as we increase that good’s consumption. Marginal utility is the change
in the utility derived from consuming another unit of a good.
Law of Variable Proportion
• The law of variable proportions states that as the quantity of factor increases while keeping the other
factors constant, the total product first increases at an increasing rate then increases with a decreasing
rate, and then diminishes.
Question 2 – If the demand curve is downward sloping, it reflects the Law of demand which states that quantity
demanded is inversely related to _______________. SEBI Grade A - Phase 2 - 2020
A. Market
B. Price
C. Supply
D. Both A and B
Answer – Option B

Explanation –
Demand curve is the graphical representation determining the relationship between price and quantity. The
demand curve is downward sloping, indicating the negative\inverse relationship between the price of a product
and the quantity demanded.
The demand curve is downward sloping as it follows the law of Demand which states that there is an inverse
relationship between the price of the good and quantity demanded of the good. When the price of a product
increases, the quantity demanded of the product will fall and when the price of a product decreases, the
quantity demanded of the product will rise.
Question 3 – If the demand is D = 12 – P; and the supply is S= -3 + 4P, what is the equilibrium price and
equilibrium quantity in the market? SEBI Grade A - Phase 1 - 2022
A. Price = 3, Quantity = 9
B. Price = 3, Quantity = 6
C. Price = 3, Quantity = 12
D. Price = 4, Quantity = 12
E. Price = 2, Quantity = 4
Answer – Option A
Equilibrium in the market will be reached at the point where Demand (D) = Supply (S)

Demand (D) = 12-P
Supply (S) = -3+4P
Price = P
D=S
12-P= -3+4P
12+3 = 4P+P
15 = 5P
Thus, the equilibrium price is P = 3
D = 12 – P
D = 12 – 3 = 9
S = -3+4P
S= -3+ 4*3 = 9
Thus, the equilibrium quantity is D = S = 9
Question 4 – Which of the following statements is correct if the demand function is D = 18 – 3P? SEBI Grade A
- Phase 2 - 2022
A. Demand function shows the functional relationship between the Quantity supplied for a commodity and
its various Determinants.
B. The quantity demanded is directly related to price of the product
C. For the given Demand function, Maximum price is 6 and Demand curve is linear with slope -3
D. The above equation shows a curvilinear demand function.
Answer – Option C
Explanation –

Demand Function is a mathematical expression of the relationship between quantity demanded for a
commodity and its various determinants (one of the most important being price of the good).
Here, as we want to analyse the relationship between the price and quantity demanded so we take the demand
function with respect to the price of the good.
• Demand of X (Dx) is the function of Price of X (Px).
• Dx = f (Px) where Dx is the dependent variable (effect) and Px is the independent variable (cause).
• Mathematical form: - Dx = a - b Px, where a (intercept: with 0 price, there will be positive demand that is
shown by ‘a’) and -b (slope of the demand curve: showing the inverse relationship between Dx and Px) are
constants. The – sign before the b shows the inverse or negative relationship between the price of the good
and quantity demanded.
For the given Demand function, Maximum price is 6 and Demand curve is linear with slope -3.
• Price will be maximum when Quantity Demanded is Zero i.e., D=0
• Therefore 18-3P = 0
• => P=6
• The equation, D = 18 – 3P, is of the form f(D) = a- b (P) where -b is the slope of the curve. Hence Slope is -3.
The above Solution is based on the concept provided by NCERT. As per the NCERT, for a Linear Demand
Function D(p) = a - bp, Slope is -b. Please refer the image below.
Thus, The quantity demanded is inversely related to price of the product.

➢ The demand curve is downward sloping as it follows the law of Demand which states that there is an
inverse relationship between the price of the good and quantity demanded of the good. When the price
of a product increases, the quantity demanded of the product will fall and when the price of a product
decreases, the quantity demanded of the product will rise.

The equation –> D = 18 -3P shows a linear demand function as the variables Demand and Price do not have
exponents (power).
Explanation
PFRDA Grade A questions
Question 1 – As per the law of Demand, the Quantity Demanded is ________ related to price. PFRDA Grade A
- Phase 2 - 2021
A. Directly
B. Inversely
C. Not
D. Either A or B
Answer – Option B
Explanation -
The law of demand states that other factors being constant (cetris peribus), price and quantity demanded of
any good and service are inversely related to each other. When the price of a product increases, the quantity
demanded of the product will fall and when the price of a product decreases, the quantity demanded of the
product will rise. The Law of demand explains consumer choice behavior when the price changes.
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The demand curve is downward sloping as it follows the law of Demand which states that there is an
inverse\negative relationship between the price of the good and quantity demanded of the good.
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Section C
Explanation
Question 1 – If the producers bear the tax, what is the elasticity of Demand and Supply? SEBI Grade A - Phase
1 - 2022
A. Taxation has no impact on the elasticity of the curve

B. Elastic Demand and Supply
C. Inelastic Supply and Elastic Demand
D. Inelastic supply and demand
Answer – Option C
Explanation -
Tax incidence is the manner in which the tax burden is divided between buyers and sellers. The tax incidence
depends on the relative price elasticity of supply and demand.
An elastic demand is one in which the change in quantity demanded due to a change in price is large. An inelastic
demand is one in which the change in quantity demanded due to a change in price is small.
An elastic supply is one in which the change in quantity supplied due to a change in price can be large. An
Inelastic supply refers to goods where the level of supply will not significantly change as prices change. Usually,
these are goods where it is hard to add or subtract to the supply.
• When supply is more elastic than demand, buyers bear most of the tax burden. When demand is more elastic
than supply, producers bear most of the cost of the tax.
• Depending on the circumstance, the burden of tax can fall more on consumers or on producers.
• In the case of cigarettes, for example, demand is inelastic—because cigarettes are an addictive substance—
and taxes are mainly passed along to consumers in the form of higher prices.
• When a tax is introduced in a market with an inelastic supply—such as, for example, beachfront hotels—
sellers have no choice but to accept lower prices for their business if the demand is elastic and the

consumers can easily plan some other vacation. Taxes do not greatly affect the equilibrium quantity as the
hotels are fixed. The tax burden in this case is on the sellers.
• Thus, If the producers bear the tax, Demand is elastic, and supply is inelastic that is why the producer cannot
shift the impact of tax on the consumer.
Question 2 – Find the incorrect option regarding the elasticity of commodities. SEBI Grade A - Phase 2 - 2022
A. Salt has perfectly elastic demand

B. Luxury goods have elastic demand
C. Lifesaving drugs have perfectly inelastic demand
D. A commodity with many substitutes has elastic demand
Answer – Option A
Explanation –
Salt has no close substitutes. Due to this, a change in prices of salt has a little impact on its quantity
demanded. Thus, Salt has inelastic demand in which the change in quantity demanded due to a change in price
is small.
Goods like salt are price inelastic because if the price of salt increases, people will generally keep buying it. e.g.,
a 10% increase in price, may reduce demand for salt by only 1%.
Price Elasticity of Demand
Thus, the PED of salt is -1/10 = -0.1 that is PED is less than 1 thus the demand for salt is inelastic.
Demand of a good depends upon Substitute goods also. Substitute goods are alternative goods that could be
used for the same purpose as good X. For example tea and coffee, Pepsi and coke, etc. are substitute goods.
➢ Let's say Good X is Pepsi. When the price of coke rises, the consumers will shift to buy more of Pepsi.
Hence the demand of X (Pepsi) has increased which provide the same purpose.
➢ The quantity demanded of a good would vary positively with the price of the substitute good, while it
will vary negatively with the price of the complementary good.
Availability of substitutes: Demand for a commodity with a large number of substitutes will be more elastic.
With the changes in price, the demand generally changes much. If there are lots of substitutes for a particular

good or service such as good X, then it is easy for consumers to switch to those substitutes when there is a price
increase for that good or service X thus, It is elastic demand.
Demand for a commodity with no or very less number of close substitutes will be inelastic. With the changes
in price, the demand generally changes very less. Consumers can not switch easily to other substitutes (if
present) when there is a price increase for that good or service X thus, It is elastic demand.
• Luxury goods have elastic demand as there are many close substitutes present for a Luxury good.
➢ For example, Suppose, for example, the price of Ford automobiles goes up. There are many close
substitutes for Fords – Chevrolets, Chryslers, Toyotas, and so on. The availability of close substitutes
tends to make the demand for Fords more price elastic. That is if the price of Ford increases, some people
will easily shift to other cars which are relatively cheaper and provide similar comfort and status, as there
are many close substitutes that are present for Ford.
➢ Thus, A commodity with many substitutes has elastic demand. Elastic demand means with a change in
price, there is huge change in quantity demanded.
Lifesaving drugs have perfectly inelastic demand. Perfectly inelastic demand means with a change in price, there
is no change in Quantity demanded. If the prices of Life savings drugs increase, still the demand cannot change
as they are necessary for survival.
Explanation
Question 1 – Demand curve for Giffen goods is _________. PFRDA Grade A - Phase 1 - 2021
A. Downward sloping
B. Upward sloping
C. Vertical
D. Horizontal
E. Non - Existent
Answer – Option B
Explanation -

• A Giffen good, a concept commonly used in economics, refers to a good that people consume more as the
price rises. Therefore, a Giffen good shows an upward-sloping demand curve and violates the fundamental
law of demand. The term Giffen good was named after Scottish economist Sir Robert Giffen.
• The term Giffen good was developed by the economist after he noticed, in the poor Victorian era, that the
rise in the price of a basic food increased the demand for that particular food.
o The concept of a Giffen good sounds counterintuitive – why would an individual consume more of a
good if its price increases?
o Let us assume that the customer has two options to choose from, viz. hamburger and potato, and a
budget of $20 to spend on food. The price of the potato is $1.00, the hamburger is $5 each, and the
customer intends to buy five days’ food for $20 he has.
o The customer intends to buy ten potatoes at the given price level, costing him $10, and two
hamburgers costing him $10. This way, the customer would evenly spread his consumption as he
could have two potatoes each day for five days and two hamburgers for five days. Therefore, the
given quantities are satisfactory based on the average consumption of an individual.
o Now, let us assume that the price of potatoes has increased to $2.00 and the price of hamburgers
has not changed, customers can still choose to spend $10 on buying two hamburgers and manage
with five instead of 10 potatoes, but that would not be sufficient for him and might leave him hungry.
Thus, he would rather decrease his hamburgers to 1 and increase the number of potatoes to 7.
o If potatoes witness a further rise in prices, say to $2.50, the customer would need to reduce their
hamburger consumption further and allocate his entire budget of $20 to buy potatoes. Thus, he would
be able to buy eight potatoes in his budget of $20 and zero hamburgers, and such a quantity of
potatoes will be sufficient for his requirement.

Section C
Explanation
Question 1 – Marginal utility diminishes with ____________. PFRDA Grade A - Phase 1 - 2021
A. Decrease in consumption
B. Increase in taxes
C. Increase in prices
D. Increase in consumption
Answer – Option D
Explanation -
The Law of Diminishing Marginal Utility states the marginal utility gradually decreases with the increase in the
level of consumption, utility being defined as satisfaction or benefit. The Law of Diminishing Marginal Utility is
best understood through an analogy. Consider the following example:
• John is extremely hungry and goes to a restaurant that offers a buffet. He loads up his plate with food
and starts eating. The amount of satisfaction gained by John from a plate of food is directly proportional
to John’s hunger level. Therefore, the first plate of food will give John more satisfaction (utility) than the
second plate of food, which in turn will give John more satisfaction than the third plate of food.
• The situation above occurs because each plate of food reduces John’s hunger level. The reduction in
hunger level results in less satisfaction from the additional plate of food being consumed. Each plate of
food fills John up and thus lessens the amount of satisfaction he will get from the plates of food that
follow. Mathematically, it can be represented by the following table:

Total Utility is an aggregate measure of satisfaction gained from consumption, whereas Marginal Utility is a
measure of the change in satisfaction gained from change in consumption that is it shows the additional utility
gained from additional consumption.
The total Utility (TU) is the sum of Marginal Utility (MU).
TU = 𝛴𝑀𝑈
The Marginal Utility gained from the xth unit of consumption is equal to the difference between the total utility
gained from x units of consumption and the total utility gained from x–1 units of consumption.
MU(x) = TU(x) – TU(x – 1)

Section C
Explanation
Question 1 – Which of the following is not correct w.r.t to monopoly? SEBI Grade A - Phase 2 - 2022
A. A bilateral monopoly exists when a market has only one supplier and one buyer.
B. Monopoly can lead to higher equilibrium price and lower equilibrium quantity, generating a larger welfare
for monopolists than under perfect competition.
C. Monopolies have a downward-sloping Demand Curve
D. There is restriction on the entry of new firms in the monopoly market
E. Monopoly promotes perfect knowledge.
Answer – Option E
Explanation –
Bilateral Monopoly - A market structure where only one supplier and only one buyer exists is a bilateral
monopoly. A bilateral monopoly is the combination of a monopoly (a single seller) and a monopsony (a single
buyer) in a market.
'Monopoly' - A monopoly is defined as a single firm in an industry with no close substitutes.
Characteristics of Monopoly: -
• Monopolies also possess some information that is not known to other sellers. Such as - the technique of
production, technology etc.
• Perfect knowledge is the characteristic in the Perfect competition and not in a monopoly. As it is the wish
of monopolist how much information it wants to share.
• Monopolies are single sellers, selling a unique product in the market. In a monopoly market, the seller faces
no competition, as he is the sole seller of goods with no close substitute.
• In a monopoly market, factors like government license, ownership of resources, copyright and patent, and
high starting cost, create barriers for the new firms to enter. All these factors restrict the entry of other
sellers in the market, helping the monopolist to maintain its position as a single seller.
• The monopoly market has a downward-sloping Demand Curve.

Under Perfect Competition, competitive firms are “price taker.” Thus, a competitive firm has no ability to
change the price of a good. Each competitive firm is small relative to the market, so has no influence on price.
Price Taker = A competitive firm with no ability to set the price of a good.
Characteristics associated with a monopoly market such as, having a unique product with no close substitutes
and barriers to entry, make the single seller the market controller as well as the price maker. He enjoys the
power of setting the price for his goods.
Monopolist Firms can lead to higher equilibrium prices and lower equilibrium quantities, generating larger
welfare for monopolists than under perfect competition.
• This is because the firms are price takers under perfect competition and the price is set by the demand
and supply conditions in the market.
• Under Monopoly, the monopolist is the price setter and can set higher prices as per the cost and revenue
conditions. With a downward-sloping demand curve, if the monopolist decides to increase the price, the
quantity that the monopolist can sell will be low.
The downward-sloping demand curve shows the inverse relationship between Price and Quantity
Demanded that is, when there is an increase in the price there will be fall in the demand and when there is fall
in price, there will be rise in the demand.

Section C
Explanation
Question 1 – Which of the following statements is correct regarding Cournot’s Oligopoly Model? SEBI Grade A
- Phase 1 - 2022
A. Cartel is a non-cooperative oligopoly.

B. Game theory is applied to Cournot’s Oligopoly model to determine the price-output relationship.
C. Firm decides its output based on the assumption that the rival firm keeps its output constant.
D. Perfect competition allows only a few sellers.
E. Oligopoly is more competitive than perfect competition.
Answer – Option C
Explanation -
Cournot Duopoly Model - The earliest duopoly model was developed in 1838 by the French economist
Augustin Cournot.
• It makes the assumption that the duopolists have identical products and identical costs.
• Each firm acts on the assumption that its competitor will not change its output and decides its own output
so as to maximize profit. That is there is no interdependence.
• Each firm acts independently and does not know that the other behaves on the same assumption
• A stable equilibrium is reached in the market.
A Collusive or co-operative Oligopoly is one in which the firms cooperate and not compete, with one another
with respect to price and output.
• A cartel is a special case of oligopoly when competing firms in an industry collude to create explicit, formal
agreements to fix prices and production quantities. It is only practical in an oligopoly where there is a small
number of firms. Thus, A cartel is a form of collusion between suppliers.
Game theory studies interactive decision-making, where the outcome for each participant or "player"
depends on the actions of all\others. If you are a player in such a game, when choosing your course of action

or "strategy" you must take into account the choices of others.
• But in Cournot Model, each firm acts on the assumption that its competitor will not change its output that
is each firm acts independently and does not know that the other behaves on the same assumption. That is,
the firms think that the other will keep their output constant, and thus, they choose their course of action
or "strategy" without taking into account the choices of others. Hence,
• Thus, Game theory cannot be applied to Cournot’s Oligopoly model to determine the price-output
relationship.
Perfect competition describes a market structure where competition is at its greatest possible level. The
greater the number of firms and the greater the similarity of the products of the firms, the greater the
competition is present in the market structure. To make it clearer, a market which exhibits the following
characteristics in its structure is said to show perfect competition:
• Large number of buyers and sellers
• Homogenous product is produced by every firm
• Free entry and exit of firms
• Zero advertising cost
• Consumers have perfect knowledge about the market and are aware of any changes in the market.
Consumers indulge in rational decision making.
• All the factors of production, viz. labor, capital, etc., have perfect mobility in the market and are not hindered
by any market factors or market forces.
• Each firm earns normal profits, and no firms can earn super-normal profits.
• Every firm is a price taker. It takes the price as decided by the forces of demand and supply. No firm can
influence the price of the product.
Question 2 – Which of the following statements is incorrect regarding Monopolistic Competition? SEBI Grade A
- Phase 2 - 2022
A. Monopolistic competition exists when there are large number of buyers and sellers.
B. In the monopolistic competition, there is no barrier to entry and exit for the firms.
C. Monopolistic competition has product differentiation and firms bear selling costs.
D. Monopolistic Competition has less elastic demand than the perfect competition
E. There is no excess capacity in the long run with normal profits
Answer – Option E
Explanation -
Monopolistic competition is a market situation in which there are a relatively large number of small firms
which produce or sell differentiated products, that are close substitutes to each other, to the customers.
• For example, a firm supply branded good 'Lux Soap' in the market. There are many other firms in the market
which sell similar soaps (not identical) with different brand names like Rexona, Palm Rose, etc., etc. The firm
supplying 'Lux Soap' enjoys a monopoly position over the sale of its own product. It also faces competition
from firms selling similar products.
Under monopolistic competition, firms sell differentiated products.

• Product differentiation may be real or imaginary. Real differentiation is done through differences in the
materials used, design, color etc. Imaginary differences may be created through advertisements, brand
names, trademarks etc.
• To create imaginary differences in the mind of consumers and to sell more products, the firms bear selling
costs. Selling expenses are the costs associated with distributing, marketing, and selling a product or
service.
In a Monopolistic competitive market, there are a very large number of buyers of the product. If any consumer
purchases more or purchases less, he is not able to affect the market price of the commodity. His purchase in
the total output is just like a drop in the ocean.
There are No barriers to entry or exit in the industry or market. The firms in a monopolistic market have
complete freedom of entering the market or leaving the industry as and when they desire. There are no legal,
social or technological barriers for the new firms (or new capital) to enter or leave the industry.
The monopolistically competitive firm's long run equilibrium situation is illustrated in Figure below.
• In the long run, if firms under monopolistic competition are making abnormal profit where Average
Revenue > Average Cost i.e., Average Revenue curve\Demand curve is above Average Cost curve, this will
attract new firms, which will enter freely due to no barrier to entry.
➢ This would increase the supply of differentiated products and the demand will be more thinly divided
among the firms i.e., the demand curve for a particular firm will shift to the left due to other companies
entering the market.
➢ Thus, the shift in the demand curve is a result of reduced demand for an individual company’s products
due to increased competition. Such an action reduces economic profits, depending on the magnitude of
the entry of new players. Individual companies will no longer be able to sell their products at above-
average cost.
➢ New firms will stop entering the market once existing firms make zero economic profit (Average
Revenue = Average Cost) that is Average Revenue curve\Demand curve (shifting left) becomes tangent
to Average cost curve.
• On the other side, in the long run, if firms under monopolistic competition are making losses where
Average Revenue < Average Cost i.e., Average Revenue curve\Demand curve is below Average Cost curve,
firms making losses and that are not able to bear losses exit the market, due to not being able to compete
with other firms.
➢ The demand curve for a particular firm will shift to the right due to other companies leaving the market.
Thus, the shift in the demand curve is a result of increased demand for an individual company’s products
due to decreased competition.
➢ Firms will exit until the remaining ones make normal profit again and Average Revenue Curve shifting
right becomes tangent to the Average Cost Curve that is Average Revenue = Average Cost. So, in the long
run, all firms in monopolistic competition earn a normal profit (or zero economic profit).
Normal Profits: When you earn just to cover all the costs including your opportunity cost or any other implicit
Cost
• Normal Profit is when Total Revenue = Total Costs or Average Cost = Average Price
• Normal Profit is also called Zero Economic Profit where Economic Profit = Revenue –Cost. Thus, in the long
run, the competition brought about by the entry of new firms will cause each firm in a monopolistically
competitive market to earn normal profits, just like a perfectly competitive firm.
Excess capacity. Unlike a perfectly competitive firm, a monopolistically competitive firm in the long run with
normal profits, ends up producing a level of output that is below\less than the minimum of the Average Cost
curve and thus, has excess capacity. When the firm produces below the minimum of the Average Cost curve, it
is underutilizing its available resources.
• In this situation, the firm is said to have excess capacity because it can easily accommodate an increase in
production and reach to the minimum of Average cost. This excess capacity is the major social cost of a
monopolistically competitive market structure which is not present in perfect competition.
• Under perfect competition in the long run, firms produce at the minimum of the average cost curve and
earn normal profits.
Monopolistic Competition has less elastic demand than perfect competition. The demand curve\average
revenue curve of perfect competition is perfectly elastic that is horizontal. While the demand curve\average
revenue curve of monopolistic competition is downward sloping and thus is not perfectly elastic.

.

Section C
Explanation
Question 1 – What is the difference between GVA at Basic Price and GDP at Market Prices? SEBI Grade A -
Phase 1 - 2020
A. Investments
B. Taxes and Subsidies
C. Taxes
D. Subsidies
E. None of the Above
Answer – Option B
Explanation -
GVA at basic prices will include production taxes and exclude production subsidies available on the
commodity. GDP at market prices include both production and product taxes and excludes both production
and product subsidies.
• Thus, the difference between GVA at basic prices and GDP at Market prices is of taxes and subsidies as GDP
at market prices also include product taxes and excludes product subsidies which does not happen with
GDP at Basic Prices.
GVA at factor cost includes no taxes and excludes no subsidies.
Production taxes or production subsidies are paid or received with relation to production (for engaging in
production) and are independent of the volume of actual production.
• Some examples of production taxes are stamps and registration fees and tax on profession. These
(production taxes) are imposed even if the products are not produced, such as property. Some production
subsidies include subsidies to Railways, subsidies to village and small industries, administrative subsidies to
corporations or cooperatives, assistance in the creation of a new firm etc.

Product taxes or subsidies are paid or received on per unit of product.
• Some examples of product taxes are excise tax, sales tax, service tax and import and export duties.
Question 2 – In 1991, if the GDP of America is = $5766 and the given GNP is $5796, then what are the possible
reason ___________. SEBI Grade A - Phase 1 - 2022
A. Positive net factor income from abroad is added to GDP to get GNP
B. Negative net factor income from abroad is added to GDP to get GNP
C. Net factor income from abroad is added to GNP to get GDP
D. Positive net factor income from abroad is added to GNP to get GDP
Answer – Option A
Explanation –
Gross Domestic Product (GDP) refers to the value of goods and services that are produced in the domestic
territory in a year. It does not include Net Factor Income from Abroad.
Gross National Product (GNP) refers to the value of goods and services that are produced by the normal
residents of a country in a year. It includes Net Factor Income from Abroad.
• Gross National Product (GNP) = Gross Domestic Product (GDP) + Net Factor Income from Abroad
• Gross Domestic Product (GDP) = Gross National Product (GNP)– Net Factor Income from Abroad
Thus, if Net Factor Income from Abroad is positive then only GNP can be greater than the GDP.
• Net factor income from abroad is the difference between the factor income earned from abroad by
normal residents of a country (say, India) and the factor income earned by non-residents (foreigners) in
the domestic territory of that country (i.e., India). NFIA = Factor incomes received from abroad - Factor
income paid abroad.
• Central Statistical Organization (CSO) of India defines it as “Income attributable to factor services
rendered by the normal residents of the country to the rest of the world, fewer factor services rendered to
them by the rest of the world.”
Question 3 – Calculate National Income or NNP at Factor Cost (FC): SEBI Grade A - Phase 2 - 2022
Particulars Rs in Crores
GNP at Market Price 5069
Indirect Taxes 495

Subsidies 69
Consumption of Fixed Capital 626
A. 4017
B. 3025
C. 4527
D. 5500
E. 4897
Answer – Option A
Explanation –
Net National Product at Factor Cost (NNP at FC) = Gross National Product at Market Price (GNP at MP) -
Consumption of Fixed Capital - Indirect Taxes + Subsidies
• Net = Gross – Depreciation (Consumption of Fixed Capital).

• Thus, we deduct Depreciation (626) to come at Net.
• Gross = Net + Depreciation
• Factor Cost = Market Price – Indirect Taxes + Subsidies
• Thus, we deduct Indirect taxes (495) and add subsidies (69) to come to Factor Cost
• Market Price = Factor Cost + Indirect Taxes - Subsidies
NNP at FC = 5069 – 626 – 495 + 69 = 4017
Explanation
Question 1 – GNP = GDP + _______. PFRDA Grade A - Phase 1 - 2021
A. Taxes
B. Subsidies
C. Net Factor Income from Abroad
D. Both A and B
Answer – Option C
Explanation –
Gross Domestic Product refers to the value of goods and services that are produced in the domestic territory in
a year. It does not include Net Factor Income from Abroad.
Gross National Product refers to the value of goods and services that are produced by the normal residents of
a country in a year. It includes Net Factor Income from Abroad.
• Gross National Product = Gross Domestic Product + Net Factor Income from Abroad
• Gross Domestic Product = Gross National Product – Net Factor Income from Abroad
Net Factor Income from Abroad (NFIFA) is the difference between the factor income earned from abroad by
normal residents of a country (say, India) and the factor income earned by non-residents (foreigners) in the
domestic territory of that country (i.e., India).
• NFIA = Factor incomes received from abroad - Factor income paid abroad.
• The Central Statistical Organization (CSO) of India defines it as “Income attributable to factor services
rendered by the normal residents of the country to the rest of the world, less factor services rendered to
them by the rest of the world.”

Section C
Explanation
Question 1 – Income and employment as per Keynes theory is determined by _____________? SEBI Grade A -
Phase 2 - 2020
A. Price
B. Aggregate Supply
C. Aggregate Demand
D. Effective Demand
Answer – Option D
Explanation -
• Effective demand is that aggregate demand which becomes ‘effective’ when it is equal to aggregate
supply\Output and thus represents short-run equilibrium.
• Effective demand is where the Aggregate demand = Aggregate Supply\Output that is the level of demand
actually being fulfilled in the economy.
o Keynes Aggregate Demand = Consumption + Investment + Government Expenditure + Exports -
Imports
o In a closed economy, exports and imports are not present, and thus, Aggregate Demand is the sum
of Consumer expenditure(C), Government Expenditure (G) and planned\autonomous investment
spending (I). Thus, AD = C + I + G
• Thus, Effective demand is where the AD = AS and there the level of output (income) and employment is
determined, that is at point E and E' in the below diagram represents effective demand.
o The level of income at Effective Demand E is Y and the level of employment will be that level which
is necessary to produce Y level of output.
o The level of income at Effective Demand E’ is Y’ and the level of employment will be that level
which is necessary to produce Y’ level of output.

o
Explanation
Question 1 – As per Keynesian Economics, ___________ may lead to prolonged period of high unemployment.
PFRDA Grade A - Phase 2 - 2021
A. Lack of Demand
B. Lack of Supply
C. Either A or B
D. Both A and B
Answer – Option A
Explanation –
Keynes believed that in the short run, Aggregate Demand is the most important variable that affect the
economic activities like the output\income, employment etc. As in the short run, the resources are
unemployed or underemployed, so as soon as Aggregate demand in the resources increases the unemployed
resources can be utilized to produce more goods and services.
As per Keynes, it is the lack of demand, which leads to prolonged period of high unemployment. If the demand
is low in the economy, prices will be low, producers will produce less output at the less prices and to produce
the low level of the output, less workers will be needed, thus the unemployment will increase. Thus, The
unemployment will remain at high level if the demand is low.

Section C
Explanation
Question 1 – Which of the following denotes the multiplier formula in Economics? PFRDA Grade A - Phase 2 -
2021
A. 1 * (1 - MPC)
B. 1 / (1 - MPC)
C. 1 + (1 - MPC)
D. 1 - (1 - MPC)
Answer – Option B
Explanation –
The multiplier effect refers to how an initial injection of money into the economy can stimulate economic
activity in excess of the initial injection of money. The initial injection can be Government expenditure, reduction
of taxes or investment.
o Or The multiplier effect refers to how an initial leakage of money from the economy can reduce
economic activity in excess of the initial leakage of money. The initial leakage can be through taxes,
exports, savings etc. When the goods are imported, the money is going to foreign countries and thus it
is leakage from the income or money flow of the economy. Taxes are also a leakage as the money is
taken away from the income or money flow from the economy.
Investment Multiplier shows that with an increase in investment in the economy, there is multiple increase in
income level of the economy. Keynesian Investment multiplier shows the change in income with the change
in investment.
Investment Multiplier (Ki)= ∆Y/∆I. Where, ∆Y = Change in Income, ∆I = Change in Investment
• Multiplier can also be calculated from the formula: Ki = 1 / 1-MPC

• Thus, Change in income/change in investment (∆Y/∆I) = 1 / 1-MPC

Marginal Propensity to consume (MPC) refers to change in consumption with change in income. As income
increases consumption increases but not by as much as the increase in income and as income decreases
consumption decreases but not by as much as the decrease in income thus MPC lies between 0 and 1.

Section C
Explanation
Question 1 – What is the difference between M1 and M3 in money supply in India? SEBI Grade A - Phase 2 -
2020
A. Savings deposits with the Post Office savings bank

B. Currency with the public
C. Other deposits with RBI
D. Time Deposits with the banking system
Answer – Option D
Explanation -
• M1 is the narrow measure of the money supply. It is composed of the following items: M1 = C + DD + OD
o Where, C =Currency with the public
o DD =Demand deposits with the public in the Banking System
o OD = Other deposits with Reserve Bank of India
o This money supply is the most liquid and narrowest measure of money supply as the money
included in it can be easily used as a medium of exchange, that is, as a means of making payments
for transactions.
• M3 also known as broad money includes time deposits with the banks in addition to the items of money
supply included in measure M1. Thus, M3 = M1 + Time Deposits with the banks
o It is generally thought that time deposits serve as store of value and represent savings of the people
and are not very liquid as they cannot be withdrawn through drawing cheque on them.
o However, since loans from the banks can be easily obtained against these time deposits, they can be
used if found necessary for transaction purposes in this way. Further, they can be withdrawn at any
time by forgoing some interest earned on them. So, the Time deposits are liquid assets but not as
liquid as demand deposits with commercial or co-operative banks or savings deposits with post office
savings banks
o It may be noted that recently M3 has become a popular measure of money supply.

Thus, the difference between M1 and M3 is of Time Deposits with the banks which id included in M3 but is
not included in M1.
Question 2 – Which of the following defines the monetary base? SEBI Grade A - Phase 2 - 2022
A. The sum of currency in circulation and Bankers’ deposits with the RBI.
B. The sum of currency in circulation and the currency held by commercial banks.
C. The sum of gold and foreign exchange held by the central bank
D. The sum of real assets of the banking sector plus its net worth
Answer – Option A
Explanation –
• Reserve money\High Powered Money\Monetary Base is composed of currency in circulation, bankers’
deposits with the RBI and other deposits with the RBI or Monetary Base is comprised of the currency held
by the public, cash reserves of banks and other deposits of RBI.
• Reserve money has two major components – currency in circulation and banker’s deposits with RBI .
o Currency in Circulation includes notes in circulation, rupee coins and small coins. Rupee coins and
small coins in the balance sheet of the Reserve Bank of India include ten-rupee coins issued since
October 1969, two rupee-coins issued since November 1982 and five-rupee coins issued since
November 1985.
o Bankers’ Deposits with the RBI represent balances maintained by banks in the current account
with the Reserve Bank mainly for maintaining Cash Reserve Ratio (CRR) and as working funds for
clearing adjustments.
• Other Deposits with the Reserve Bank for the purpose of monetary compilation includes deposits from
foreign central banks, multilateral institutions, financial institutions and sundry deposits net of IMF
Account No.1. (Not very important component)
• Reserve Money is also called as high-powered money, base money and central bank money. All these
names suggest that reserve money represents the base level for money supply or it is the high-powered
component of money supply.
•
Explanation
Question 1 – M3 in money supply is known as __________. PFRDA Grade A - Phase 1 - 2021
A. Narrow Money
B. Broad Money
C. Shallow Money
D. Deep Money
E. Easy Mon
Answer – Option B
Explanation –
• M1 is the narrow measure of the money supply. It is composed of the following items: M1 = C + DD + OD
o Where, C =Currency with the public
o DD =Demand deposits with the public in the Banking System
o OD = Other deposits with Reserve Bank of India
o This money supply is the most liquid and narrowest measure of money supply as the money
included in it can be easily used as a medium of exchange, that is, as a means of making payments
for transactions.
• M3 also known as broad money includes time deposits with the banks in addition to the items of money
supply included in measure M1. Thus, M3 = M1 + Time Deposits with the banks
o It is generally thought that time deposits serve as store of value and represent savings of the people
and are not very liquid as they cannot be withdrawn through drawing cheque on them.
o However, since loans from the banks can be easily obtained against these time deposits, they can be
used if found necessary for transaction purposes in this way. Further, they can be withdrawn at any
time by forgoing some interest earned on them. So, the Time deposits are liquid assets but not as
liquid as demand deposits with commercial or co-operative banks or savings deposits with post office
savings banks
o It may be noted that recently M3 has become a popular measure of money supply.

Section C
Explanation
Question 1 – Which of one of the following statements w.r.t LM curve is not correct? SEBI Grade A - Phase 1 -
2022
A. LM Curve shift to left when money demand is increased

B. LM Curve shift to right when money supply is increased
C. High interest rate elasticity leads to steep LM curve
D. LM curve shifts in accordance with Liquidity Preference
Answer – Option C
Explanation -
Law of Demand
The LM curve shows the combination of income and interest rate where the money market is in equilibrium
that is Demand for money = Supply of money.

The LM curve tells at different levels of income what the various rates of interest will be where the Supply of
money is equal to demand of money that is money market is in equilibrium.
There are two factors on which the shape(steepness\flatness) of the LM curve depends: Income elasticity and
the interest elasticity of the demand for money.
• Income-elasticity measures the responsiveness of the demand for money (transaction motive is a
component of Demand for money and it depends on income) to changes in income. As the income
increases the demand curve for money (Md) shifts upward (demand for money increases).
o If the demand for money is income elastic (high interest elasticity), As the income increases the
demand for money (Md) increases very much (large upward shift) and vice versa in case of
demand for money is income inelastic
• While interest elasticity measures the responsiveness of the demand for money for the speculative
motive to changes in the rate of interest. As the interest increases, the demand for money (Md) decreases.
o If the demand for money is interest inelastic (low interest elasticity), As the interest increases the
demand for money (Md) decreases very slightly vice versa in case of demand for money is interest
elastic.
The larger the income-elasticity and the lower the interest-elasticity of the demand for money, the steeper
the LM curve will be.
The smaller the income-elasticity, and the higher the interest-elasticity of the demand for money, the flatter
the LM curve will be.
LM Curve shift to left when money demand is increased
• Change in liquidity preference (money demand function) for a given level of income will cause a shift in
the LM curve. An increase in money demand due to a change in expectations, preferences, or transactions
costs that make people want to hold more money at each interest rate can bring an upward shift in the
Money Demand.
o If the liquidity preference function (Money Demand) for a given level of income shifts upward
that is the money demand increases, this, given the supply of money (Money supply is vertical that
means it is constant), will lead to the rise in the rate of interest for a given level of income as In the
below diagram, demand for money (Md0) = quantity of money supplied (Ms) at r0 and if demand
for money increases from Md0 to Md1 at r0, the money demand is greater than Ms, thus rate of
interest must increase from r0 to r1 to make Md1 = Ms.
• This will bring about a shift in the LM curve to the left from LM2 to LM1. This is because with the given
level of Income Y0, the demand for money shifted upwards from Md0 to Md1, raising the rate of interest
from r0 to r1 to bring the equilibrium in the Money Market where the demand for money = Money supply.
o Thus, LM curve shift to the left from LM2 to LM1 as at the given level of income Yo the rate of
interest increased from r0 to r1.

•
LM Curve shift to right when money supply is increased
• if the monetary authority decides to increase the money supply in the economy that is if the monetary
authority is adopting expansionary monetary policy, with the increase in the money supply, the LM curve
will shift to the right showing that there is a reduction in the rate of interest with the given level of
income.
As in the below diagram when the money supply increased from MS1 to MS2 the LM curve shifted
rightwards from LM curve showing N point to LM curve showing K point that is at the same level of
income the rate of interest decreased from r1 to r2.

Explanation
Question 1 – What are the variables of the IS curve? PFRDA Grade A - Phase 1 - 2021
A. Interest Rate and Taxes

B. Income and Taxes
C. Savings and Income
D. Savings and Interest Rate
E. Income and Interest Rate
Answer – Option E
Explanation -
The IS curve represents all combinations of income (Y) and the interest rate (r) where the market for goods
and services is in equilibrium that is where the Aggregate Demand = Aggregate supply.
• IS curve is the locus of those combinations of rate of interest and the level of income at which goods
market is in equilibrium

• Every point on the IS curve is income - interest rate pair (Y,r) where the aggregate demand for goods
and services is equal to the aggregate supply of goods and services (AD = AS) that is goods market is
in equilibrium or, equivalently, national saving is equal to investment (S = I).

Section C
Explanation
Question 1 – The Phillips Curve is a relationship between ___________. SEBI Grade A - Phase 2 - 2020
A. Inflation and unemployment

B. Inflation and quantity demanded
C. Quantity demand and price
D. Demand and Supply
Answer – Option A
Explanation -
• According to Phillips curve, there is an inverse relationship between rate of unemployment and rate of
inflation. Thus, Phillips curve shows the relationship between unemployment and inflation.
• When there is rise in rate of inflation, unemployment decreases and when there is fall in rate of inflation,
unemployment increases.
•
• i.e.
o For reducing unemployment, price in the form of higher rate of inflation has to be paid.
o For reducing the rate of inflation, price in terms of higher rate of unemployment has to be borne.
Question 2 – Which of the following statements is incorrect regarding the Phillips Curve? SEBI Grade A - Phase
2 - 2022
A. The Phillips Curve states that inflation and unemployment have an inverse relationship.
B. The downward sloping curve of Philips Curve is generally held to be valid only in the short run.
C. In the long run, Philips Curve is usually thought to be Vertical at the Non-Accelerating Inflation Rate of
Unemployment (NAIRU).
D. High inflation and High unemployment are because of recession
Answer – Option D
Explanation –
• According to Phillips curve, there is an inverse relationship between rate of unemployment and rate of
inflation. Thus, Phillips curve shows the relationship between unemployment and inflation.
• When there is rise in rate of inflation, unemployment decreases and when there is fall in rate of inflation,
unemployment increases.
According to the Natural rate hypothesis (Adaptive Expectations Hypothesis),

• In the short run, when aggregate demand increases -->inflation occurs --> higher prices of the commodities
induce firms to produce more --> More labor is required --> unemployment reduces.
But, in long run, the natural rate of unemployment gets restored. Hence, in the long run, the Phillips Curve is
vertical at the Non-Accelerating Inflation Rate of Unemployment (NAIRU) or Natural Rate of Unemployment.
Thus, Downward sloping Phillips curve that shows the inverse relationship between unemployment and
inflation is considered valid only in the short run as in the long run, the Phillips Curve is considered vertical at
the Natural rate of unemployment.
During Recession, the condition of deflation and high unemployment exists and not of inflation. Deflation refers
to continuous\sustained fall in general price level.
Thus, High inflation and High unemployment are because of recession is incorrect. High Inflation and High
Unemployment exists in case of Stagflation.
Question 3 – Which of the following is not the reason for demand pull inflation? SEBI Grade A - Phase 2 - 2022
A. Increase in Population
B. Deficit financing
C. Increase in Administered Price
D. Over expansion of the Money Supply
Answer – Option C
Demand-pull inflation exists when aggregate demand for a good or service outstrips aggregate supply. It starts
with an increase in consumer demand. Sellers meet such an increase with more supply.
Demand Pull Inflation can be due to the following causes:-
• Deficit financing is a practice in which a government spends more money than it receives as revenue, the
difference being made up by borrowing or minting new funds.
o Government spending drives up demand, as Government Spending is a component of Aggregate
Demand (Aggregate demand = Consumption + Investment + Government Expenditure + Net
Exports) and with sluggish supply, Prices rises. For example, military spending raises prices for
military equipment. When the government begins spending on large-scale projects, this often
drives prices up. This is because substantial projects funded by massive amounts of capital that
governments provide creates more demand overall. Fiscal policies that drive demand can also
create demand-pull inflation.
• Over-Expansion of the Money Supply: That's when there is too much money chasing too few goods. That
occurs when the government prints too much money. It does this to pay off its debt. Oversupply of money
is the primary driver of hyperinflation. It can also occur if the RBI puts too much credit into the banking
system. In this case, the popular definition of demand-pull inflation -- "too much money chasing too few
goods" -- applies quite literally. Thus, it causes Demand Pull Inflation.
• Increase in Population – As the population increases, the demand for goods and services also increase. If
the increased supply is sluggish, with the high paced demand, prices rise leading to demand pull inflation.
Administered price is price determined by an individual producer or seller and not purely by market forces
that is this price is not purely determined by the demand and supply forces in the market. Thus, An
administered price is dictated by an entity that can supersede the effects of supply and demand.
• For example, a government regulatory commission can set the price at which electricity will be charged to
customers. Similarly, a company with a monopoly over a key raw material can set a price that is higher
than the market would otherwise pay. Or, an oil cartel sets the price of oil higher than the price that a
freely-functioning market would set.
• These examples are all cases of administered prices . Increase in Administered Prices is at the will of an
individual producer or seller or government and not because of increase in Aggregate Demand faster
than aggregate supply. Hence, an increase in Administered Price can not be a cause of Demand Pull
Inflation.
Explanation
Question 1 – According to the Phillips curve concept, inflation depends on which of the following factors?
PFRDA Grade A - Phase 2- 2021

A. Expected rate of inflation
B. Supply shocks in the economy
C. Deviation of the unemployment rate from the natural rate
D. All of the above
Answer – Option D
Explanation -
According to the Phillips curve concept, inflation depends on 3 factors:
Expected rate of inflation
The extent to which the unemployment rate deviates from the natural rate
Supply shocks in the economy
This is the equation of Phillips curve: - π= π^ - β(U-U ̅ ) + v
• Where, π = Inflation rate

• π^ = Expected Inflation Rate {It forms the expectations of the people, if π^ is high for the future, people
will start demanding more goods in current period, when inflation is considered relatively less due to high
demand in the current period, inflation will start rising in current period}
• U = Total unemployment
• U ̅ = Natural unemployment
• U-U ̅ = Cyclical unemployment {Cyclical unemployment is the type of unemployment that relates to the
cyclic trends in the economy and the business industry. The ups and downs in the growth and production
that take place in the business industry affect the cyclical unemployment.}
• β = Parameter which measures the degree of responsiveness of inflation rate to the rate of cyclical
unemployment
• Negative sign before β shows that there is an inverse relation between inflation and unemployment.
When cyclical unemployment is high, inflation is low and when unemployment is low, inflation is high.
• v = Supply shocks in the economy [An unexpected shift of the aggregate supply (AS) curve] [For example, if
adverse supply shock increases (supply decreases that is supply shift leftwards) inflation will increase, if
adverse supply shock decreases (supply increases) inflation will decrease.]

Section C
Explanation
Question 1 – From the following, select the correct phase of business cycle. SEBI Grade A - Phase 2 - 2020
A. Expansion, Recession, Trough, Recovery

B. Recession, Recovery, Trough, Expansion
C. Trough, Recession, Expansion, Recovery
D. Recession, Expansion, Recovery, Trough
E. Recession, Expansion, Trough, Recovery
Answer – Option A
Explanation -
If the economy starts from expansion phase, In its expansion phase of the business cycle-
• Both output and employment increase till we have near full employment of resources. As employment increases
mean involuntary unemployment falls. (Unemployment can prevail of Voluntary Kind)
• Involuntary unemployment is a situation where workers are willing to work at the market wage or just below but
are unable to find work.
• Production is near the highest possible level with the given productive resource
• Economic activities reach at the peak after expansion
o Both output and employment is at the full-employment of resources
o Production is at the highest possible level with the given productive resources and given technology
Peak phase of the cycle is the highest point. The economy is producing at its maximum level. The economy
becomes overheated i.e. unsustainable.
o Thus, the gap between potential GNP and actual GNP is zero, that is, the level of production is at the
maximum production level.

•
Peak is the turning point of the economy after which the economy sees a downturn (contraction) and goes into a
recession which if deepens leads to depression. Recession and Depression are two part of Contraction. During
contraction-
• There is a fall in GNP and also level of employment is reduced. As a result, involuntary unemployment appears on a
large scale.
• At times of contraction prices also generally fall due to fall in aggregate demand.
• Investment also decreases causing further fall in demand of goods and services.
• A significant feature of contraction phase is the fall in rate of interest. With lower rate of interest people’s demand
for money holdings increases.
• There is a lot of excess capacity as industries producing capital goods and consumer goods work much below their
capacity due to lack of demand.
• Capital goods and durable consumer goods industries are especially hit hard during depression. Depression occurs
when there is a severe contraction or recession deepens of economic activities.
Trough comes after recession and depression where the overall economic activities ie. level of production and
employment are at the lowest level.
• There is a limit to which level of economic activity can fall. The lowest level of economic activity is called trough. All
economic activity touch the bottom and the phase of trough is reached.
• Capital stock is allowed to depreciate without replacement. The progress in technology makes the existing capital
stock obsolete. Trough is the turning point into upswing.
After Trough, recovery (the first part of upswing) starts in the economy that is Expansion phase starts and continues till
boom. In the expansion phase of the Business Cycle-
• Both output and employment increase to reach near full-employment of resources\

• Thus, when expansion gathers momentum and we have prosperity, the gap between potential GNP and actual GNP
is decreases, that is, the level of production is near the maximum production level.
• A good amount of net investment is occurring and demand for durable consumer goods is also high
• Rate of interest rises in expansion phase.
Thus, after exphansion, the phase of Recession will come after which economy will reach its lowest point to trough
and after that the recovery will start.

Section C
Explanation
Question 1 – Which of the following will not affect Current Account Deficit? SEBI Grade A - Phase 2 - 2020
A. Capital Inflow
B. Consumer Spending
C. Forex Outflow
D. Savings rate
E. Natural Resources
Answer – Option E
Explanation -
The current account is a record of all trade between one nation and other nations which includes payments
for imports and exports of both goods and services. It also includes monetary gifts or transfer payments to
and from other nations. The current account of the balance of payments is record of the flow of payments
between one country and other countries that result from:
(1) the exchange of goods (exports and imports), which is the balance of trade
(2) the exchange of services, summarized as the balance of invisibles,
(3) any gifts or transfer payments that do not involve the exchange of goods and services, which is unilateral
transfers.

Current Account is in balance when receipts on current account are equal to the payments on the current
account. Current account surpluses refer to positive current account balances, meaning that a country has
more exports than imports of goods and services. A current account deficit refer to negative current account
balances and indicates that a country is importing more than it is exporting.
The size of current account deficit/surplus is affected by several factors including:
• Forex outflow when we import goods, we pay in dollars or the currency of a particular country with which
the trade is happening, which can lead to a current account deficit if the imports are more than exports of
the goods and current account surplus if the exports are more than imports
• Level of consumer spending (economic growth) and the consumers also spend to buy the imported goods
which can lead to a current account deficit if the imports are more than exports of the goods.
• Capital flows can be in the form of grants of money from India to abroad would be considered in the
current account
• Saving rates – influencing the level of import spending, if the saving rates is low that means the level of
consumer spending (economic growth) and the consumers also spend to buy the imported goods which
can lead to a current account deficit if the imports are more than exports of the goods.
There is no direct Link of Natural Resources in Current Account Deficit
Question 2 – “If Balance of payment is always balanced”. What it means? SEBI Grade A - Phase 1 - 2022
A. Current account Surplus or Deficit is balanced by the Deficit or Surplus of the capital account in the
accounting terms.
B. Current account Surplus or Deficit is more than the Deficit or Surplus of the capital account in the
accounting terms
C. Imports and Exports are balance
D. Export of Services matches with the import
Answer – Option A
Explanation –
Balance of payments: The difference between the funds received by a country and those paid by a country
for all international transactions. The international transactions include the exchange of merchandise (exports
and imports), which is commonly summarized as the balance of trade, plus the exchange of services,
summarized as the balance of services, as well as any gifts or transfer payments that do not involve the exchange
of goods and services. The balance of payments, in effect, indicates the difference between currency coming
into a country and that flowing out of the country. The balance of payments is divided into two major accounts
-- current account (which includes payments for imports, exports, services, and transfers) and capital account
(which includes payments for physical and financial assets).
Balance on current account and balance on capital account are interrelated.

• A deficit in the current account must be balanced by a surplus on the capital account.
• A surplus in the current account must be matched by a deficit on the capital account.

Section C
Explanation
Question 1 – Which of the following is not included in India’s forex reserves?? PFRDA Grade A - Phase 2 - 2021
A. Foreign Currency Assets

B. Gold reserves
C. Special Drawing Rights
D. Diamonds
Answer – Option D
Explanation -
Foreign exchange reserves are assets held on reserve by a central bank in foreign currencies, which can
include bonds, treasury bills and other government securities. It needs to be noted that most foreign exchange
reserves are held in U.S. dollars. These assets serve many purposes but are most significantly held to ensure
that the central bank has backup funds if the national currency rapidly devalues or becomes altogether
insolvent. India’s Forex Reserve include:
• Foreign Currency Assets

• Gold reserves
• Special Drawing Rights
• Reserve position with the International Monetary Fund (IMF)
Thus, Diamonds are not included in India’s forex reserves.

Section C
Explanation
Question 1 – Which of the following constitutes fiscal deficit? SEBI Grade A - Phase 2 - 2020
A. Total expenditure
B. Revenue received – total expenditure
C. Loan expenditure
D. Total Expenditure - Total revenue receipts + Recovered loans by government
E. Total Borrowings
Answer – Option D
Explanation -
Fiscal deficit is the difference between the government’s total expenditure and its total receipts excluding
borrowing.
Total Receipts = Revenue Receipts + Capital Receipts
• The above formula can also be written as:

• Total Receipts = Revenue Receipts + non-debt creating capital receipts + Debt-creating capital receipts
• Borrowing is nothing but Debt-creating capital receipt
The formula for fiscal deficit is:
Fiscal Deficit = Total Expenditure – (Total Receipts excluding borrowing)
Fiscal deficit = Total expenditure – (Revenue receipts + non-debt creating capital receipts)
OR
Fiscal deficit = Total expenditure of the government (capital and revenue expenditure) – Total income of the
government (Revenue receipts + recovery of loans + other receipts)
Non-debt creating capital receipts are those receipts which are not borrowings and, therefore, do not give
rise to debt. Examples are recovery of loans and the proceeds from the sale of PSUs.
The gross fiscal deficit will have to be financed through borrowing. Thus, it indicates the total borrowing
requirements of the government from all sources.
Question 2 – Non-Plan Expenditure constitutes the biggest proportion of the government’s total expenditure.
Which of the following is not a non-planned expenditure? SEBI Grade A - Phase 2 - 2022
A. Defense Expenditure
B. Debt servicing
C. Expenditure on Electricity generation
D. Interest Payments
E. Subsidies
Answer – Option C
The government's total spending can be divided into two broad sub-heads — plan and non-plan — with the
latter constituting the bulk of expenditure.
Non-plan expenditure is what the government spends on the so-called non-productive areas and is mostly
obligatory in nature. It includes interest payments, pensions, statutory transfers to States and Union
Territories governments salaries, subsidies, loans and interest.
Debt service refers to the money required to pay the principal and interest on outstanding debt for a
particular period of time which is also considered as non-productive.
Plan expenditure, on the other hand, pertains to the money set aside for productive purposes like various
projects of ministries. It is spent on productive asset creation through Centrally-sponsored programmes and
flagship schemes.
Thus, Non Planned expenditure is largely the revenue expenditure of the government, although it also includes
capital expenditure. It covers all expenditures not included in the Plan Expenditure.
Non-Plan Expenditure constitutes the biggest proportion of the government’s total expenditure.
• Non-plan revenue expenditure is accounted for by interest payments, subsidies (mainly on food and
fertilizers), wage and salary payments to government employees, grants to States and Union Territories
governments, pensions, police, economic services in various sectors, other general services such as tax
collection, social services, and grants to foreign governments.
• Non-plan capital expenditure mainly includes defense, loans to public enterprises, loans to States, Union
Territories, and foreign governments.
Question 3 – Economic theory and good practice suggest that a government should run deficits during
recessions — when tax revenues are low and government spending is high and deficits should be balanced by
surpluses during booms and when spending needs are low. The theory which explains the process when the
government try to align its expenditure with revenue is termed as ______. SEBI Grade A - Phase 2 - 2022
A. Fiscal Prudence
B. Fiscal Deficit
C. Fiscal Analysis
D. Primary Deficit

Answer – Option A
Fiscal prudence is defined as the ability of a government to sustain smooth monetary operation and long-
standing fiscal condition. Fiscal prudence theory explains the process when the government try to align its
expenditure with revenue. Government will not irrationally increase its own spending causing an upward
pressure on inflation. Government will increase its own spending and\or decrease taxes even leading to
deficit budget when needed that is in case of recession to help generate additional demand and boost the
rate of economic growth and vice versa in case of boom.
The difference between total revenue exclusive of borrowings and total expenditure of the government is
termed as fiscal deficit. It is an indication of the total borrowings needed by the government. While calculating
the total revenue, borrowings are not included.
Fiscal Analysis involves activities such as formulating budget and cost estimates to support plans, programs
and activities. Fiscal Analysts review and evaluate budget requests, review requests for apportionment and
allotments and review, control and report obligations and expenditures.
Primary deficit refers to the difference between the current year's fiscal deficit and interest payment on
previous borrowings. It indicates the borrowing requirements of the government, excluding interest. It also
shows how much of the government's expenses, other than interest payment, can be met through
borrowings.
Explanation
Question 1 – What is the term called when the Government’s expenditure is higher than revenue? PFRDA Grade
A - Phase 1 - 2021
A. Budget Deficit
B. Current Account Deficit
C. No Deficit
D. Both A and B

Answer – Option A
Explanation -
A government budget is said to be a deficit budget if the estimated government expenditure exceeds the
expected government revenue in a particular financial year. This type of budget is best suited for developing
economies, such as India. Especially helpful at times of recession, a deficit budget helps generate additional
demand and boost the rate of economic growth. Here, the government incurs the excessive expenditure to
improve the employment rate. This results in an increase in demand for goods and services which helps in
reviving the economy. The government covers this amount through public borrowings (by issuing government
bonds) or by withdrawing from its accumulated reserve surplus.

Section C
Explanation
Question 1 – NBFCs can accept public deposits for upto how many months? SEBI Grade A - Phase 1 - 2022
A. 12
B. 24
C. 36
D. 48
E. 60
Answer – Option E
Explanation -
All NBFCs are not entitled to accept public deposits. Only those NBFCs to which the Bank had given a specific
authorisation and have an investment grade rating are allowed to accept/ hold public deposits to a limit of 1.5
times of its Net Owned Funds.
• The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum
period of 60 months. They cannot accept deposits repayable on demand.
• NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The
present ceiling is 12.5 per cent per annum. The interest may be paid or compounded at rests not shorter
than monthly rests.
• NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.
• NBFCs should have minimum investment grade credit rating.
• The deposits with NBFCs are not insured by the Deposit Insurance and Credit Guarantee Corporation
(DICGC) which is a wholly-owned subsidiary of the Reserve Bank of India (RBI).
• The repayment of deposits by NBFCs is not guaranteed by RBI.

Question 2 – Which of the following is not the characteristic of NBFCs? SEBI Grade A - Phase 1 - 2022
A. NBFCs cannot accept Demand deposits

B. They need not maintain the CRR and SLR as prescribed by RBI
C. The deposits taken by NBFCs are secured by DICGC
D. NBFCs do not form part of the payment and settlement system of the country
E. They cannot issue cheques drawn on itself
Answer – Option C
NBFCs are those companies which provide banking services without meeting the legal definition of a bank.
• NBFC cannot accept demand deposits. A demand deposit is money deposited into a bank account with
funds that can be withdrawn on-demand at any time.
• As NBFCs do not maintain Demand Deposits, hence they need not maintain Cash Reserve Ratio (CRR) and
Statutory Liquidity Ratio (SLR).
• NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself.
This is because, they can not settle payments without the demand deposits that is without deposits that can
be used on demand by the consumers.
• Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to
depositors of NBFCs, unlike in case of banks - Deposit insurance is insurance for deposits held by customers
in a bank. It is provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC). It includes
commercial public banks and small finance banks. Company deposits are not included in the deposit
insurance. Non-banking financial companies (NBFCs) do not come under its umbrella. All your deposits in a
bank are covered for up to Rs. 5 lakhs.
Question 3 – Identify the Incorrect statement regarding NBFC. SEBI Grade A - Phase 2 - 2022
A. NBFCs do not form part of the payment and settlement system

B. NBFC cannot issue cheques drawn on itself
C. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to
depositors of NBFCs
D. NBFC is a company registered under the Companies Act, 1956 engaged in the business of loans and
advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government
E. NBFC can accept demand deposits
Answer – Option E
NBFCs are those companies which provide banking services without meeting the legal definition of a bank.
• NBFC cannot accept demand deposits. A demand deposit is money deposited into a bank account with
funds that can be withdrawn on-demand at any time.
• As NBFCs do not maintain Demand Deposits, hence they need not maintain Cash Reserve Ratio (CRR) and
Statutory Liquidity Ratio (SLR).
• NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself.
This is because, they can not settle payments without the demand deposits that is without deposits that can
be used on demand by the consumers.
• Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to
depositors of NBFCs, unlike in case of banks - Deposit insurance is insurance for deposits held by customers
in a bank. It is provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
o It includes commercial public banks and small finance banks. Company deposits are not included in
the deposit insurance. Non-banking financial companies (NBFCs) do not come under its umbrella. All
your deposits in a bank are covered for up to Rs. 5 lakhs.
• Non-Banking Financial Company (NBFC) is a company registered under Companies Act, 1956 engaged in
business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by
Government or local authority or other marketable securities of a like nature, leasing, hire-purchase,
insurance business, chit business but does not include any institution whose principal business is that of
agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any
services and sale/purchase/construction of immovable property.

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Section C

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Law of Diminishing Marginal Utility

Law of Variable Proportion

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Thus, The quantity demanded is inversely related to price of the product.

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A. Taxation has no impact on the elasticity of the curve

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A. Salt has perfectly elastic demand

Price Elasticity of Demand

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The total Utility (TU) is the sum of Marginal Utility (MU).

MU(x) = TU(x) – TU(x – 1)

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'Monopoly' - A monopoly is defined as a single firm in an industry with no close substitutes.

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A. Cartel is a non-cooperative oligopoly.

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Under monopolistic competition, firms sell differentiated products.

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GNP at Market Price 5069

Indirect Taxes 495

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Consumption of Fixed Capital 626

• Net = Gross – Depreciation (Consumption of Fixed Capital).

NNP at FC = 5069 – 626 – 495 + 69 = 4017

Question 1 – GNP = GDP + _______. PFRDA Grade A - Phase 1 - 2021

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Investment Multiplier (Ki)= ∆Y/∆I. Where, ∆Y = Change in Income, ∆I = Change in Investment

• Multiplier can also be calculated from the formula: Ki = 1 / 1-MPC

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A. Savings deposits with the Post Office savings bank

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Question 1 – M3 in money supply is known as __________. PFRDA Grade A - Phase 1 - 2021

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A. LM Curve shift to left when money demand is increased

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LM Curve shift to left when money demand is increased

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LM Curve shift to right when money supply is increased

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A. Interest Rate and Taxes

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A. Inflation and unemployment

According to the Natural rate hypothesis (Adaptive Expectations Hypothesis),

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This is the equation of Phillips curve: - π= π^ - β(U-U ̅ ) + v

• Where, π = Inflation rate