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GS - III (Economics)

Multiple Choice Questions

Module I

Q1. As an agreement with WHO conventions, India distributed free

covid-19 vaccines to many third world countries. Which of the following
types of expenditure is this?
a. Revenue expenditure
b. Capital expenditure
c. Both (a) and (b)
d. Neither (a) nor (b)

Q2. Which of the following measures of meeting deficit in budget leads to

an increase in money supply in the economy?
a. Disinvestment
b. Loan from World Bank
c. Deficit financing
d. All of the above

Q3.Rahul dies without a legal heir. His property stands transferred to the
government. The income under this head will be referred to as:
a. Special assessment
b. Death duty
c. Forfeiture
d. Escheat

Q4. Write the correct sequence of options in column II by matching them

with options of column I.

Column I Column II
 A. Recovery of loan (i) Capital receipt
B. Payment of interest (ii) Revenue receipt
C. Collection of tax (iii) Capital expenditure
D. Repayment of loans (iv) Revenue expenditure

Codes
A B C D
a. (i) (ii) (iii) (iv)
b. (ii) (iii) (iv) (i)
c. (iii) (iv) (ii) (i)
d. (i) (iv) (ii) (iii)

Q5. Assertion (A): Government budget is an annual estimated statement

of revenue and expenditure during the coming fiscal year.
Reason (R): Through the government budget, it tries to reduce the
regional variation.
Alternatives:
a. Both (A) and (R) are true and (R) is the correct explanation for (A).
b. Both (A) and (R) are true but (R) is not the correct explanation for
(A).
c. (A) is true but (R) is false.
d. (A) is false but (R) is true.

Q6. Choose the correct statement from below:

a. A tax cut in the economy widens the fiscal deficit.
b. Fiscal deficit increases the burden of taxes on future generations.
c. Higher income groups should be taxed at a progressive rate.
d. All of the above statements are correct.

Q7. Assertion (A): Public goods are non-rivalrous.

Reason (R): The benefits of such goods can be enjoyed by all and are not
restricted to any one person.
Alternatives:
a. Both (A) and (R) are true and (R) is the correct explanation for (A).
b. Both (A) and (R) are true but (R) is not the correct explanation for
(A).
c. (A) is true but (R) is false.
d. (A) is false but (R) is true.

Q8. Which of the following is a part of the expenditure method?

a. Rent and royalty
b. Mixed income
c. Net exports
d. Sales

Q9. Which of the following statements is correct?

a. Real GDP = [Price index/Nominal GDP] x 100
b. Real GDP = [Nominal GDP/Price index] x 100
c. Nominal GDP = [Real GDP/Price index] x 100
d. Nominal GDP = [Price index/Real GDP] x 100

Q10. Which of the following are covered under the domestic territory of
India?
a. State Bank of India in London
b. Google office in India
c. Office of Tata Motors in Australia
d. Russian Embassy in India

Q11. Which of the following is an example of transfer income?

a. Bonus
b. Unemployment allowance
c. Compensation of employees
d. All of the above
Q12. Which of the following is a flow concept?
a. Deposits in a bank
b. Capital
c. Depreciation
d. Wealth

Q13. Factor income paid to non-residents within the domestic territory of

a country leads to:
a. Increase in domestic income
b. Decrease in national income
c. Both (a) and (b)
d. None of the above

Q14. What will be the value of intermediate consumption if purchase of

raw materials is Rs.1200, exports are Rs.600 and imports are of Rs.200.
a. Rs.1200
b. Rs.800
c. Rs.1400
d. Rs.1800

Q15. Which of the following statements is correct with respect to the

demand curve?
a. The flatter the curve, more is its slope and elasticity.
b. The steeper the curve, more is its slope and elasticity.
c. The flatter the curve, less is the slope and more is the elasticity.
d. The flatter the curve less is the elasticity and more is the slope.

Q16. Which of these economic problems deals with technique of

production?
a. What to produce
b. How to produce
c. For whom to produce
d. None of these
Q17. What happens to the production possibility frontier if there is
technological upgradation in case of both the goods?
a. Rightward shift in PPF
b. Leftward shift in PPF
c. Rotation of PPF
d. None of these

Q18. With fall in price of a commodity, demand of the commodity

increases as it becomes relatively cheaper in comparison to other
commodities. This effect is known as:
a. Substitution effect
b. Income effect
c. Law of demand
d. Law of diminishing returns

Q19. Expansion of demand is associated with:

a. Rise in price, rise in quantity demanded
b. Fall in price, fall in quantity demanded
c. Fall in price, rise in quantity demanded
d. Rise in price, fall in quantity demanded

Q20. Which one of the following is a determinant of individual demand?

a. Size and composition of population
b. Season and weather
c. Distribution of income
d. None of these
Solutions and Explanations

Ans1. a.
Those expenditures of the government that do not lead to the creation of
fixed assets are called revenue expenditures. The government spends
money under various accounting heads, such as paying interest on loans,
salaries and pensions, subsidies, spending on different ministries and
departments, etc.

Ans2. d.
Deficit financing means generating funds to finance the deficit which
results from excess expenditure over revenue. The gap is being covered
by borrowing from the public by the sale of bonds or by printing new
money.

Printing new currency notes increases the flow of money in the economy.
This leads to increase in inflationary pressures which leads to rise of
prices of goods and services in the country. Deficit financing is inherently
inflationary. Since deficit financing raises aggregate expenditure and,
hence, increases aggregate demand, the danger of inflation looms large.

Ans3. d.
Escheat refers to the right of a government to take ownership of estate
assets or unclaimed property. It most commonly occurs when an
individual dies with no will and no heirs. Escheat rights can also be
granted when assets are unclaimed for a prolonged period of time.

Ans4. d.

Ans5. b.

Ans6. b.
Fiscal deficit is the gap between total expenditure and total income of
the government. Unlike households, governments usually possess the
ability to live beyond their means by either borrowing or printing money.
The fiscal deficit can arise either due to revenue expenses overshooting
income or increase in capital expenditure. The fiscal deficit matters
because it indicates the extent by which government spending exceeds its
income and the total borrowings needed by it to fill this gap. The
government experiences a fiscal deficit when it spends more money than
it takes in from taxes and other revenues. This gap between income and
spending is then closed by government borrowings, which increase the
national debt. A fiscal deficit is usually calculated and expressed as a
percentage of a country’s Gross Domestic Product (GDP).
Countries run deficits to give a boost to a sluggish economy by putting
more money in the hands of people who can then buy and invest more.
However, long-term deficits can be detrimental to economic growth and
stability. There are differing views on the use of fiscal deficits. Some
economists and policy analysts pitch for higher fiscal deficits to boost
aggregate demand. A counter cyclical fiscal policy, as advocated by John
Maynard Keynes, could be useful during periods of economic strife. Here,
the government undertakes deficit spending to make up for the decline in
investment and boost consumer spending to stabilise aggregate demand.
When economic conditions improve, the spending is retracted, shrinking
the deficit.
But some argue that when the government goes on a borrowing binge,
this crowds out private borrowers like companies, manipulates interest
rates and reduces net exports. This could then lead to either higher
taxes, higher inflation or both. Politicians like to rely on fiscal deficits to
expand popular initiatives such as welfare programs or public works,
without having to raise taxes or cut spending elsewhere in the Budget. In
this context, fiscal deficits encourage rent seeking and politically
motivated appropriations. Many businesses support fiscal deficits if it
means receiving public benefits. Ultimately, voters too seem to think
fiscal deficit is a good idea.
Untrammelled deficits can lead to runaway inflation which hurts our
quality of life. Money printing to fund deficits can devalue paper money.
A significantly high fiscal deficit could also derail macro stability leading
to delays in investment decisions by businesses, which affects hiring.
Any political skirmish on government debt, like the one seen in 2011 in
the US, could unnerve markets and diminish investor confidence. In the
long term, a high level of debt is associated with slower growth. Huge
deficits are seen in a largely negative light by international rating
agencies and economy watchers. High borrowings could distort interest
rates in the economy and prop up non-competitive firms. Persistent
deficits increase government debt and take away a large portion of its
revenues towards interest payouts, leaving a large burden of dues for
future generations to service. The high borrowings that the Indian
government is now resorting to, to fund its Atmanirbhar Bharat package
should be cause for worry as it will raise the deficit and national debt.

Ans7. a.
A pure public good is a good or service that can be consumed
simultaneously by everyone and from which no one can be excluded. A
pure public good is one for which consumption is non-revival and from
which it is impossible to exclude a consumer. Pure public goods pose a
free-rider problem. A pure private good is one for which consumption is
rival and from which consumers can be excluded.
Some goods are non-excludable but are rivals and some goods are
non-rival but are excludable.

Ans8. c.
Components of expenditure method (GDPmp)
C = private final consumption expenditure
I = Investment expenditure
G = government final consumption expenditure
NX = net exports
Thus,
GDPmp = C + I + G + NX

Ans9. b.
 Nominal Gross Domestic Product is a way of measuring the value of all the
goods and services produced by an economy at current market prices in a
Financial Year. It is also known as 'Current Dollar GDP' or 'Chained Dollar
GDP'.
Real Gross Domestic Product is a way of measuring a nation's output in
terms of the value of its goods and services, its investments, government
spendings and exports with the prices of the base year.
In Real GDP, Nominal GDP is taken into account and is adjusted for
inflation or deflation to base year's prices. As a result of this adjustment,
the real GDP is a more accurate representation of a nation's economic
health.

Basis Nominal GDP Real GDP

Meaning Value of all the goods and
services produced by an
economy at current market
prices.
Value of all the goods and
services produced by an
economy, its investments,
government spendings and
exports.

GDP Data The value of the total product The value of the total product
is seen to be higher because it appears low because inflation
does not reduce inflation. is reduced in it.

Reliability Less reliable in comparison to More reliable in comparison

Real GDP. to Nominal GDP.

Worth High Low

Uses Compares different quarters Compares two or more FY.

of an FY.
 Financial Growth Analyzing is difficult Analyzing is easy

Ans10. b.
What domestic (economic) territory includes:
(i) Territory lying within the political frontiers of a country. It includes
territorial waters also.
(ii) Ships and aircrafts owned and operated by the residents between two
or more countries. For Instance, Indian ships moving between the UK and
Pakistan regularly or passenger planes operated by Air India between
Russia and Japan are parts of the domestic territory of India.
(iii) Fishing vessels, oil and natural gas rigs and floating platforms
operated by the residents of a country in the international waters or
engaged in extraction in areas where the country has exclusive rights of
operation. For example, fishing boats operated by Indian fishermen in the
international waters of the Indian Ocean will be considered as a part of
domestic territory of India.
(iv) Embassies, consulates and military establishments of the country
located abroad. To illustrate, Indian embassies in Russia, America and
other countries will form parts of domestic territory of India. Similarly,
embassies of other countries like Japan, Russia, America located in India
are parts of domestic territories of their own countries and not of India.

What domestic territory does not include:

(i) Territorial enclaves (like embassies) used/administered by foreign
governments.
(ii) International organisations which are physically located within
geographical boundaries of a country. Their offices form part of
international territory.

Ans11. b.

BASIS FOR COMPARISON FACTOR INCOME TRANSFER INCOME

Meaning Factor Income refers to an Transfer income refers to any
income that can be income which a recipient receives
derived by selling inputs or without providing any goods,
means of production, i.e. services or assets in return to the
land, labour, capital and payer.
entrepreneur.

Payment Bilateral Unilateral

Concept Earning (earned income) Receipt (unearned income)

Includes Rent, Salary and Wages, Scholarship, Pension, Grant,

Interest and Profit Donation, Gift, Allowance etc.

National Income Included while estimating Not included while estimating

National Income. National Income.

Ans12. c.
A flow concept is a quantity measured over a specific period. For
example; your pocket allowance is 1500 rupees, per month on which you
will get 4% annual interest from the bank. So, this value is a flow concept
because they are measured over an hour, a month and a year.

Ans13. c.

Ans14. a.
Intermediate consumption is a national accounts concept which measures
the value of the goods and services consumed as inputs by a process of
production. It excludes fixed assets whose consumption is recorded as
consumption of fixed capital. The goods and services may be either
transformed or used up by the production process.

Ans15. c.

Ans16. b.
America’s first Nobel Prize winner for economics, the late Paul
Samuelson, is often credited with providing the first clear and simple
explanation of the economic problem – namely, that in order to solve the
economic problem societies must endeavour to answer three basic
questions – What to produce? How to produce? And, For whom to produce?
What to produce?
Societies have to decide the best combination of goods and services to
meet their varied wants and needs. Societies must decide what quantities
of different resources should be allocated to these goods and services.
How to produce?
Societies also have to decide the best combination of factors to create
the desired output of goods and services. For example, precisely how
much land, labour, and capital should be used to produce consumer goods
such as computers and motor cars?
For whom to produce?
Finally, all societies need to decide who will benefit from the output from
its economic activity, and how much they will get. This is often called the
problem of distribution.
Different societies may develop different ways to answer these questions.

Ans17. a.
Production possibility curve shows the different combinations of the
production of two commodities that can be achieved in an economy given
the resources and technology which are to be fully utilised Therefore to
achieve any point beyond PPC which lies on the right side, there is need
for increase in the present supply of resources and technology which
leads to an rightward shift in PPC curve as overall production increases
which results in economic growth.

Ans18. a.

Ans19. c.

Ans20. d.
Determinants of Individual Demand
a. Price of the own commodity
b. Price of related goods
c. Income of the consumer
d. Tastes and preferences of the consumer
e. Expectations about future prices