UPSC STATIC QUIZ – Economy : 16 March 2024
Kartavya Desk Staff
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We will post 5 questions daily on static topics mentioned in the UPSC civil services preliminary examination syllabus. Each week will focus on a specific topic from the syllabus, such as History of India and Indian National Movement, Indian and World Geography, and more.
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• Question 1 of 5 1. Question Heating up of the economy can be observed in which of the following phases of the business cycle? Stagflation Boom Recovery How many of the above options is/are correct? (a) Only one (b) Only two (c) All three (d) None Correct Solution: a) Only option 2 is correct. The length of a business cycle is the period of time containing a single boom and contraction in sequence. These fluctuations typically involve shifts over time between periods of relatively rapid economic growth (expansions or booms) and periods of relative stagnation or decline (contractions or recessions). Boom is the only stage where the demand is so huge that it greatly exceeds the existing supply/production levels. It is called over heating or heating up of the economy. It does not happen in the other stages as the demand is yet to recover fully. Incorrect Solution: a) Only option 2 is correct. The length of a business cycle is the period of time containing a single boom and contraction in sequence. These fluctuations typically involve shifts over time between periods of relatively rapid economic growth (expansions or booms) and periods of relative stagnation or decline (contractions or recessions). Boom is the only stage where the demand is so huge that it greatly exceeds the existing supply/production levels. It is called over heating or heating up of the economy. It does not happen in the other stages as the demand is yet to recover fully.
#### 1. Question
Heating up of the economy can be observed in which of the following phases of the business cycle?
• Stagflation
How many of the above options is/are correct?
• (a) Only one
• (b) Only two
• (c) All three
Solution: a)
Only option 2 is correct.
The length of a business cycle is the period of time containing a single boom and contraction in sequence. These fluctuations typically involve shifts over time between periods of relatively rapid economic growth (expansions or booms) and periods of relative stagnation or decline (contractions or recessions).
Boom is the only stage where the demand is so huge that it greatly exceeds the existing supply/production levels. It is called over heating or heating up of the economy. It does not happen in the other stages as the demand is yet to recover fully.
Solution: a)
Only option 2 is correct.
The length of a business cycle is the period of time containing a single boom and contraction in sequence. These fluctuations typically involve shifts over time between periods of relatively rapid economic growth (expansions or booms) and periods of relative stagnation or decline (contractions or recessions).
Boom is the only stage where the demand is so huge that it greatly exceeds the existing supply/production levels. It is called over heating or heating up of the economy. It does not happen in the other stages as the demand is yet to recover fully.
• Question 2 of 5 2. Question Consider the following statements. The RBI Monetary Policy stance tells us whether the Monetary Policy Committee (MPC) is trying to contain inflation or boost growth. A Goldilocks scenario for an economy refers to a point where the economy is in a very bad state and requires the intervention of World Bank or IMF. Which of the above statements are incorrect? a) Only one b) Only two c) Both 1 and 2 d) Neither 1 nor 2 Correct Solution: b) The policy stance tells everyone what the MPC is trying to achieve by its actions. A policy stance tells us whether the MPC is trying to contain inflation or boost growth while containing inflation or simply being neutral. There are two more things that observers watch out for in MPC statements: the outlooks on GDP growth and inflation. A Goldilocks scenario for an economy refers to a point where it is running just perfectly — neither too hot (implying high inflation) nor too cold (referring to faltering GDP growth). Incorrect Solution: b) The policy stance tells everyone what the MPC is trying to achieve by its actions. A policy stance tells us whether the MPC is trying to contain inflation or boost growth while containing inflation or simply being neutral. There are two more things that observers watch out for in MPC statements: the outlooks on GDP growth and inflation. A Goldilocks scenario for an economy refers to a point where it is running just perfectly — neither too hot (implying high inflation) nor too cold (referring to faltering GDP growth).
#### 2. Question
Consider the following statements.
• The RBI Monetary Policy stance tells us whether the Monetary Policy Committee (MPC) is trying to contain inflation or boost growth.
• A Goldilocks scenario for an economy refers to a point where the economy is in a very bad state and requires the intervention of World Bank or IMF.
Which of the above statements are incorrect?
• a) Only one
• b) Only two
• c) Both 1 and 2
• d) Neither 1 nor 2
Solution: b)
The policy stance tells everyone what the MPC is trying to achieve by its actions. A policy stance tells us whether the MPC is trying to contain inflation or boost growth while containing inflation or simply being neutral.
There are two more things that observers watch out for in MPC statements: the outlooks on GDP growth and inflation.
A Goldilocks scenario for an economy refers to a point where it is running just perfectly — neither too hot (implying high inflation) nor too cold (referring to faltering GDP growth).
Solution: b)
The policy stance tells everyone what the MPC is trying to achieve by its actions. A policy stance tells us whether the MPC is trying to contain inflation or boost growth while containing inflation or simply being neutral.
There are two more things that observers watch out for in MPC statements: the outlooks on GDP growth and inflation.
A Goldilocks scenario for an economy refers to a point where it is running just perfectly — neither too hot (implying high inflation) nor too cold (referring to faltering GDP growth).
• Question 3 of 5 3. Question Gross capital formation will necessarily increase if: Gross domestic savings increases Gross domestic consumption increases GDP increases How many of the above options is/are correct? a) Only one b) Only two c) All three d) None Correct Solution: d) Gross capital formation, in simple terms is equivalent to investment made. It was earlier called gross domestic investment. The part of GDP that is used is called gross domestic consumption, while the part that is saved is gross domestic savings (GDS). Some part of this GDS will be re-invested back, and that is called gross capital formation. Now, an increase in GDP or GDS will not necessarily lead to an increase in capital formation. Because how much is invested back will depend on many other factors. Incorrect Solution: d) Gross capital formation, in simple terms is equivalent to investment made. It was earlier called gross domestic investment. The part of GDP that is used is called gross domestic consumption, while the part that is saved is gross domestic savings (GDS). Some part of this GDS will be re-invested back, and that is called gross capital formation. Now, an increase in GDP or GDS will not necessarily lead to an increase in capital formation. Because how much is invested back will depend on many other factors.
#### 3. Question
Gross capital formation will necessarily increase if:
• Gross domestic savings increases
• Gross domestic consumption increases
• GDP increases
How many of the above options is/are correct?
• a) Only one
• b) Only two
• c) All three
Solution: d)
Gross capital formation, in simple terms is equivalent to investment made. It was earlier called gross domestic investment. The part of GDP that is used is called gross domestic consumption, while the part that is saved is gross domestic savings (GDS). Some part of this GDS will be re-invested back, and that is called gross capital formation. Now, an increase in GDP or GDS will not necessarily lead to an increase in capital formation. Because how much is invested back will depend on many other factors.
Solution: d)
Gross capital formation, in simple terms is equivalent to investment made. It was earlier called gross domestic investment. The part of GDP that is used is called gross domestic consumption, while the part that is saved is gross domestic savings (GDS). Some part of this GDS will be re-invested back, and that is called gross capital formation. Now, an increase in GDP or GDS will not necessarily lead to an increase in capital formation. Because how much is invested back will depend on many other factors.
• Question 4 of 5 4. Question Which of the following can lead to Demand-Pull Inflation? Depreciation of rupee Increase in Forex reserves Deficit financing by the government A growing economy How many of the above statements is/are correct? a) Only one b) Only two c) Only three d) All four Correct Solution: d) Demand-Pull Inflation This type of inflation is caused due to an increase in aggregate demand in the economy. Causes of Demand-Pull Inflation: A growing economy or increase in the supply of money – When consumers feel confident, they spend more and take on more debt. This leads to a steady increase in demand, which means higher prices. Asset inflation or Increase in Forex reserves. Government spending or Deficit financing by the government – When the government spends more freely, prices go up. Due to fiscal stimulus. Increased borrowing. Depreciation of rupee. Low unemployment rate. Effects of Demand-Pull Inflation: Shortage in supply Increase in the prices of the goods (inflation). The overall increase in the cost of living. Incorrect Solution: d) Demand-Pull Inflation This type of inflation is caused due to an increase in aggregate demand in the economy. Causes of Demand-Pull Inflation: A growing economy or increase in the supply of money – When consumers feel confident, they spend more and take on more debt. This leads to a steady increase in demand, which means higher prices. Asset inflation or Increase in Forex reserves. Government spending or Deficit financing by the government – When the government spends more freely, prices go up. Due to fiscal stimulus. Increased borrowing. Depreciation of rupee. Low unemployment rate. Effects of Demand-Pull Inflation: Shortage in supply Increase in the prices of the goods (inflation). The overall increase in the cost of living.
#### 4. Question
Which of the following can lead to Demand-Pull Inflation?
• Depreciation of rupee
• Increase in Forex reserves
• Deficit financing by the government
• A growing economy
How many of the above statements is/are correct?
• a) Only one
• b) Only two
• c) Only three
• d) All four
Solution: d)
Demand-Pull Inflation
This type of inflation is caused due to an increase in aggregate demand in the economy.
Causes of Demand-Pull Inflation:
• A growing economy or increase in the supply of money – When consumers feel confident, they spend more and take on more debt. This leads to a steady increase in demand, which means higher prices.
• Asset inflation or Increase in Forex reserves.
• Government spending or Deficit financing by the government – When the government spends more freely, prices go up.
• Due to fiscal stimulus.
• Increased borrowing.
• Depreciation of rupee.
• Low unemployment rate.
Effects of Demand-Pull Inflation:
• Shortage in supply
• Increase in the prices of the goods (inflation).
• The overall increase in the cost of living.
Solution: d)
Demand-Pull Inflation
This type of inflation is caused due to an increase in aggregate demand in the economy.
Causes of Demand-Pull Inflation:
• A growing economy or increase in the supply of money – When consumers feel confident, they spend more and take on more debt. This leads to a steady increase in demand, which means higher prices.
• Asset inflation or Increase in Forex reserves.
• Government spending or Deficit financing by the government – When the government spends more freely, prices go up.
• Due to fiscal stimulus.
• Increased borrowing.
• Depreciation of rupee.
• Low unemployment rate.
Effects of Demand-Pull Inflation:
• Shortage in supply
• Increase in the prices of the goods (inflation).
• The overall increase in the cost of living.
• Question 5 of 5 5. Question Consider the following statements. Interest rate growth rate differential (IRGD) is a key indicator of an economy’s long-run debt sustainability. When the cost of raising debt is higher than the gross domestic product (GDP) growth rate, then public debt comes with low fiscal costs. Which of the above statements is/are correct? a) 1 only b) 2 only c) Both 1 and 2 d) Neither 1 nor 2 Correct Solution: a) A key indicator of an economy’s long-run debt sustainability is the differential between interest paid on government debt and the economy’s nominal growth rate. When the cost of raising debt is lower than the gross domestic product (GDP) growth rate, public debt comes with low fiscal costs. In such a situation, the debt-to-GDP ratio of the economy declines as debts are rolled over. Incorrect Solution: a) A key indicator of an economy’s long-run debt sustainability is the differential between interest paid on government debt and the economy’s nominal growth rate. When the cost of raising debt is lower than the gross domestic product (GDP) growth rate, public debt comes with low fiscal costs. In such a situation, the debt-to-GDP ratio of the economy declines as debts are rolled over.
#### 5. Question
Consider the following statements.
• Interest rate growth rate differential (IRGD) is a key indicator of an economy’s long-run debt sustainability.
• When the cost of raising debt is higher than the gross domestic product (GDP) growth rate, then public debt comes with low fiscal costs.
Which of the above statements is/are correct?
• c) Both 1 and 2
• d) Neither 1 nor 2
Solution: a)
A key indicator of an economy’s long-run debt sustainability is the differential between interest paid on government debt and the economy’s nominal growth rate. When the cost of raising debt is lower than the gross domestic product (GDP) growth rate, public debt comes with low fiscal costs. In such a situation, the debt-to-GDP ratio of the economy declines as debts are rolled over.
Solution: a)
A key indicator of an economy’s long-run debt sustainability is the differential between interest paid on government debt and the economy’s nominal growth rate. When the cost of raising debt is lower than the gross domestic product (GDP) growth rate, public debt comes with low fiscal costs. In such a situation, the debt-to-GDP ratio of the economy declines as debts are rolled over.
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