SMB104 WB

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AN INTRODUCTION TO DIFFERENTIATED LEARNING TOOLS
Participants in flexible learning programs have limitations on the nature of the

time they can spend on learning. Typically they are employed fully or partially,
pursuing higher studies or have other social and familial responsibilities.
Availability of time is a great constraint to these students.
To aid the participants, we have developed four unique learning tools as below:
 Bullet Notes : Helps in introducing the important concepts in each unit
of curriculum, equip the student during preparation of examinations and
placement interviews
 Case Studies : Illustrate the concepts through real life experiences
 Workbook : Helps absorption of learning through questions based on real life nuggets
 PEP Notes : Sharing notes of practices and experiences in the Industry will help the student
to rightly perceive and get inspired to learn concepts at the cutting edge
application level.
Why are these needed?
 Adults learn differently from B. School or college going
students who spend long hours at campus.
 Enhancing analytical skills through application related learning
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kits trigger experiential learning
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 Availability of time is a challenge.
 Career success increasingly depends on continuous learning
and success
What makes it relevant?

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 Practitioners can use their real life knowledge and skill to enhance learning skills.
 Immediate visualization of the practical dimension of the concept will offer a rich learning
experience.
How is it useful?
 Through these tools, the learning bytes are right sized for ease of learning for time challenged
participants.
 The content starts from practice and connect to precept making it easy to connect to industry
and retain.
 They can be connected to continuous assessment process of the academic program.
Where does this lead to?
 Helps stay motivated and connected.
 Easier to move ahead in the learning process.
 Will facilitate the student to complete the program earlier than
otherwise.
When is it useful?
 As and when you get 5 to 10 minutes you can read one of these and absorb and comprehend.
Spending more time is your choice.
 You can use the time in travel, waiting for meetings, lunch time, small breaks or at home
usefully.
Economics for
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Workbook
© The ICFAI Foundation for Higher Education (IFHE), Hyderabad,
May, 2015. All rights reserved
No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or
transmitted in any form or by any means – electronic, mechanical, photocopying or otherwise – without
prior permission in writing from The ICFAI Foundation for Higher Education (IFHE), Hyderabad.
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Ref. No. EFM-WB-IFHE – 052015
For any clarification regarding this book, the students may please write to The ICFAI Foundation for Higher
Education (IFHE), Hyderabad giving the above reference number of this book specifying chapter and page
number.
While every possible care has been taken in type-setting and printing this book, The ICFAI Foundation for
Higher Education (IFHE), Hyderabad welcomes suggestions from students for improvement in future
editions.
Our E-mail ID: cwfeedback@icfaiuniversity.in
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INTRODUCTION
Participants in ICFAI University Programs are eager to learn more from practice. They realize that
application orientation can enhance their learning and subsequent usage of management precepts and
practices. Picking out the principle behind real world events is critical to this learning, as also identifying the
alternative/solution using the principle. Towards this end the institution has reengineered the Workbook.
The Workbook is a set of questions which typically illustrate a real life context from contemporary
corporate happenings and then poses a question to the student for reflection. The narration of question helps
the reader to reinforce the concept and facilitates the student to enhance his/her capabilities in analyzing and
interpreting the conceptual frameworks.
The examples depicting the names of existing persons or companies are taken from news clippings/
published articles from various public domain websites or website of respective companies. Since live
examples reinforce the understanding of the students, the possible responses are connected to the concepts
taught directly or indirectly. In many cases the alternatives provided are choices in a work situation based on
alternative approaches.
These questions provoke the learner to start thinking from the application side and connect to the knowledge
that he will use to solve. Practitioners can connect better thereby improving the learning experience. This
form of assessment improves learning while assessing whereas the conventional form is more about
assessment of learning.
The learning outcomes expected are:

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1. The examples are linked back to application of theoretical knowledge in the illustrated real-time
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situation. This facilitates the student to develop analytical approach in similar or related situations.
2. Application based approach which enhances absorption and retention significantly.
3. Exposure to the current incidences and situations in relation to important concepts of the subject.
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The Workbook format is also used for Assessment.
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DETAILED CURRICULUM
UNIT 1: INTRODUCTION TO MICROECONOMICS
Nature and Scope of Economics - Relevance of Microeconomics: Importance of microeconomic analysis –

Maximizes resource utilization, Basis of welfare economics, Provides tools for evaluating economic policies,
Construction and use of models, Limitations of microeconomics - Scarcity and Choice: Market economy,
Command economy, Mixed economy - Production Possibility Curve (with a Given Technology) - Partial
Equilibrium and General Equilibrium Analysis.
UNIT 2: THEORY OF DEMAND AND SUPPLY
Demand Theory: Law of demand, Individual demand, Market demand, Nature of Demand Curve, Shift in
demand curve-Elasticity of Demand: Price elasticity of demand, Cross elasticity of demand, Income
elasticity of demand, Advertising or Promotional elasticity of demand-Supply Theory: Law of supply-
Elasticity of Supply: Types of supply elasticity – Perfectly elastic supply, Perfectly inelastic supply-
Relatively elastic supply, Relatively inelastic supply, Unitary elastic supply-Equilibrium of Demand and
Supply-Demand Forecasting: Quantitative techniques – Time series, Barometric analysis, Qualitative
techniques – Expert opinion, Survey, Market experiment. I
UNIT 3: CONSUMER BEHAVIOR
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Choice and Utility Theory: Measurement of utility, Assumptions of utility theory, Consumers are rational
Consumers always prefer a larger quantity, and Consumers are ready to make tradeoff, Diminishing
marginal rate of substitution, Total utility, and Marginal utility- Law of Diminishing Marginal Utility:
Application and uses of the law of diminishing marginal utility- Equimarginal Utility- Substitution and
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Income Effect- Indifference Curve Analysis: Marginal rate of substitution, Budget constraint, Consumer
equilibrium - Consumer surplus: Applications of consumer surplus.
UNIT 4: PRODUCTION FUNCTION
Production Function - Concepts of Product: Total Product, Average Product, Marginal Product - The Three
Stage of Production - Short-Run and Long-Run - Technological Change - Production with One Variable
Input: Diminishing marginal returns - Returns to Scale: Increasing returns to scale, Constant returns to scale,
Decreasing returns to scale - Production with Two Variable Inputs: The Production isoquant, Marginal rate
of technical substitution, The production isocost, Least cost combinations, Expansion path.
UNIT 5: ANALYSIS OF COSTS
Types of Costs: Opportunity cost, Implicit costs, Explicit costs, Economic costs, Marginal, incremental and
sunk costs, Direct and Indirect costs, Fixed and variable costs - Cost Function and Production Function:
Short-run cost functions, Long-run cost functions - Break-Even Analysis: Merits of Break-even analysis,
Demerits of Break-even analysis - Shutdown Point - Economies of Scale: Real economies of scale,
Production economies of scale, Selling economies, Managerial economies, Storage and transport economies,
Pecuniary economies of scale, Diseconomies of scale.
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UNIT 6: PERFECT COMPETITION
Characteristics of a Perfectly Competitive Market: Large numbers of buyers and sellers, Homogenous
product, Free entry and exit of firms, Perfect mobility, Absence of transportation cost, Perfect knowledge
among buyers and sellers about market conditions - Supply and Demand in Perfect Competition - Short Run
Equilibrium of the Competitive Firm - Long Run Equilibrium of the Competitive Firm - Efficiency of
Competitive Markets: Long run competitive equilibrium and allocative efficiency, Efficient output of a
good, Efficiency in competitive markets - Effect of Taxes on Price and Output: Imposition of a lump sum
tax, Imposition of a profit tax, Imposition of a specific sales tax.
UNIT 7: IMPERFECT COMPETITION
Monopoly: Price discrimination – Types of price discrimination, Natural monopolies - Monopolistic

Competition: Product differentiation, physical features, Location, Services, Product image - Oligopoly:
Kinked demand curve, Cartel formation, Cartels aiming at joint profit maximization, Market sharing cartels,
Price Leadership, Game Theory – Pay-off Matrix, Dominant Strategy, Nash equilibrium, Maxi-min Strategy.
UNIT 8: RENT AND WAGES
Theories of Factor Pricing: Marginal productivity theory of factor pricing, Modern theory of factor pricing -
Meaning of Rent: Rent as a differential surplus, Scarcity rent, Quasi-rent - Theories of Rent: Ricardian
Theory, The modern theory of rent - Relationship between Rent and Price: Ricardian Analysis, Modern
Analysis - Concept of Wages - Distinction between Real wages and Nominal wages - Factors Determining
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Real Wages - Theories of Wages: The standard of living theory of wages, Bargaining theory of wages,
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Modern theory of wages - Wages and Trade Unions: Productivity of unionized workers, Limited supply of
workers.
UNIT 9: INTEREST AND PROFIT

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The Concept of Interest: Basic Concepts – Gross interest, Net interest - Theories of Interest: The Classical
Theory of the Rate of Interest, The Liquidity Preference Theory of Rate of Interest - The Concept of Profit -
Theories of Profit: Traditional Theories – Walker’s rent theory of profit, Modern Theories – Dynamic theory
of profit, Innovation theory of profit, Uncertainty-bearing theory - Profit Policies: Standards of Reasonable
Profits, Reasons for Limiting Profits.
UNIT 10: FORECASTING AND DECISION MAKING
Economic Forecasting - Demand Forecasting - Risk and Decision Making: Risk and Uncertainty,
Uncertainty and Decision Making - Capital Budgeting: Capital Budgeting Process- Project Selection,
Sources of capital, Criterial for resource allocation, Evaluation of Projects – Making a list of investment
proposals, Projecting cash flows of different projects, Evaluating project feasibility using different methods.
UNIT 11: INTRODUCTION TO MACROECONOMICS
Development of Macroeconomics - Objectives and Instruments of Macroeconomics: Gross Domestic

Product (GDP), Full Employment level, Price Stability, Sustainable balance of payment, Economic growth -
Instruments of Macroeconomic Policy: Fiscal Policy, Monetary policy, International trade policy, Exchange
rate policy, Prices and income policy, Employment policy - Basic Concepts in Macroeconomics: Stock and
flow variables, Equilibrium and disequilibrium, Statics and dynamics.
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UNIT 12: NATIONAL INCOME
Circular Flow of Income: Circular flow of income in the two-sector model without savings, Circular flow of
income in the two section model with savings, Circular flow of income in a three-sector economy, Circular
flow of income in a four sector economy - Factors Affecting the Size of a Nation’s Income: Natural
resources, Human resources, Capital resources - Approaches to National Income: Product approach, Income
approach, Expenditure approach - Measures of Aggregate Income: Gross and net concepts - Domestic and
national concepts, Market prices and factor cost; Aggregate income measures – Gross domestic product
(GDP) at market price, GDP at factor cost, Gross national product (GNP) at factor cost, Net national product
at factor cost, Nominal and Real GDP, The GDP deflator, Personal income, Disposable income - Difficulties
in Measuring National Income: Non market production, Imputed values, The underground economy, Side
effects and Economic “bads”, Leisure and human cost, Double counting - The Uses of National Income
Statistics: As an instrument of economic planning and review, As a means of indicating changes in a
country’s standard of living, To indicate changes in economic growth of a country, As a means of comparing
the economic performance of different countries.
UNIT 13: CONSUMPTION AND INVESTMENT FUNCTION
Aggregate Supply and Aggregate Demand: Keynesian aggregate supply function, Aggregate demand,
Marginal propensity to consume - Simple Equilibrium without Government Intervention: Equilibrium with
large-scale unemployment, Changes in investment demand – the multiplier, Alternative approach – savings
and investment - Economy with Government Intervention – Three Sector Model: Recessionary situation ,
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Inflationary situation - Equilibrium in an Economy with Government Intervention - Four Sector Model.
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UNIT 14: CLASSICAL AND KEYNESIAN ECONOMICS
The Classical Tradition - The Keynesian Revolution - The Monetarist Approach: The velocity of money,
The Quantity theory of prices, Modern monetarism, Comparison of Monetarist and Keynesian approaches -
New Classical Macro Economics: Rational expectations - Supply-side Economics: Factors Determining
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Economic Growth in Supply-side Economics – Role of incentives, Tax-cuts, Criticism.
UNIT 15: FISCAL POLICY AND BUDGET DEFICIT
Objectives of Fiscal Policy: Mobilization of resources, Economic development and growth, Reduction of
disparities of income, Expansion of employment, Price stability - Constituents of Fiscal Policy: Public
expenditure, Rising defense expenditure, Rise in price level, Economic planning, Basic infrastructure,
Population growth, Taxation, Direct taxes, Indirect taxes, Public borrowings, Deficit financing - Fiscal
Policy and Efficiency Issues - Fiscal Policy and Stabilization: Automatic stabilizers, Changes in tax
revenues, Unemployment compensation and welfare payments, Discretionary fiscal policy - Fiscal Policy
and Economic Growth: Role of fiscal policy, The Laffer Curve Paradox - Budget Deficit and Debt: What is a
Budget? What is Budget Deficit? What is National Debt? Components of national debt - Government
Budgetary Policy: Part A – General Economic Survey, Elimination of poverty and unemployment , Bharat
Nirman, Investment, Agriculture, Manufacturing, Financial sector, other proposals; Part B – Taxation
Proposals – Indirect taxes - Limitations of Fiscal Policy: Lags in fiscal policy, Problems in tax policy,
Burden of public debt.
UNIT 16: BANKING AND MONEY SUPPLY
Indian Financial System - The Banking system: Lending money, Classification of loans, Priority sector
loans, Commercial lending, Remittance business - Money Supply and Components of Money Supply:
Concepts of Cash Reserve Ratio, Required Reserve Ratio, Excess Reserves, Statutory Liquidity Ratio, High
Powered Money, Money multiplier; The measures of monetary aggregates, The money multiplier approach,
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The balance sheet approach or the structural approach - Creation of Money and Banking System: Credit
creation, Multiple expansion -Equilibrium in Money Markets: Financial development – Finance ration (FR),
Financial interrelations ratio (FIR), New issue ration (NIR), Intermediation ratio (IR).
UNIT 17: MONETARY POLICY
Objectives of Monetary Policy: Price stability, Exchange rate stability, Full employment and maximum
output, High rate of growth - Instruments of Monetary Policy: Open market operations, Sterilization of
foreign exchange flows, Bank rate policy, Reserve requirement changes, Selective credit controls, Rationing
of credit, Direct action, Changes in margin requirements, Moral suasion - Problems in Monetary Policy:
Lags in monetary policy, Pressure of financial intermediaries, Contradictions in objectives, underdeveloped
nature of money and capital markets - Monetary Targeting - Monetary Policy in a Developing Economy -
Policy in an Open Economy: Reserve flows, the role of the exchange rate system, the foreign desk - Link
between Monetary Policy and Fiscal Policy.
UNIT 18: INFLATION
Types of Inflation: creeping inflation, running inflation, galloping or hyperinflation - Sources of Inflation:
Aggregate Demand and Aggregate Supply, Demand-pull inflation, The real factors, The monetary factors,
Cost-push inflation - Measuring Inflation: Wholesale price index, Consumer price index - The Economic
Impact of Inflation: Effect of inflation on the distribution of income and wealth - Debtors and Creditors,
Producers, Investors; Effect of inflation on production - Phillips Curve - Measures to Control Inflation:
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Monetary measures, Fiscal measures, Public expenditure, Taxation, Public borrowing, Other measures -
Price control and rationing, Wage policy.
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UNIT 19: INTERNATIONAL TRADE AND BALANCE OF PAYMENTS
Basis of International Trade: Theory of absolute advantage, Theory of comparative advantage, Haberler’s
Opportunity Cost Theory, Heckscher-Ohlin Theory – Limitations, Imitation – Gap Theory, International
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product life cycle theory - Barriers to International Trade: Tariffs, Non tariff barriers, Quotas, Subsidies,
Licensing, Administered protection, Health and safety standards - Trends in International Trade: Closed
economy, Open economy, Economic Integration, Forms of Economic Integration – Free trade area, Customs
union, Common market, Economic union, WTO - Balance of Payment and its Components – A distinction
between Balance of Trade and Balance of Payments - Causes and Types of Disequilibrium in BoP: Cyclical
disequilibrium, Secular disequilibrium, Structural disequilibrium - Methods of Correcting Disequilibrium:
Monetary measures, Deflation, Exchange rate depreciation, Devaluation, Exchange control, Non monetary
measures - Exchange Rate Policy: Foreign Exchange Rate System, Determination of Exchange Rate, Gold
standard system, Paper currency system - India’s Balance of Payment and Trade Policy: The crisis of the
early 1990’s, Trade policy, Foreign Exchange Reserves - Forex Reserves and India
UNIT 20: ECONOMIC INDICATORS
The Concept of Economic Indicators - Features of Economic Indicators: Related to Business

Cycle/Economy, Frequency of the Data, Timing - Classification of Economic Indicators: General Indicators
– GDP, Inflation, Interest rates, Unemployment rate, Foreign exchange reserves, International trade.
Business Indicators – Industrial production, Capacity utilization, Wholesale prices index/producer price
index, Consumer price index (CPI), Retail sales, Construction spending Consumption Indicators – Consumer
confidence index (CCI), Employee cost index (ECI), Building permits, Personal Income, Income
distribution, Fixed investment.
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UNIT 21: BUSINESS CYCLES
Characteristics of Business Cycles - Theories of Business Cycles: Multiplier-Accelerator theory, Demand

induced cycles, Other theories Forecasting Business Cycles - Employment Fluctuations: What is
unemployment? – Keynes’ concept of unemployment; the concept of full employment, The rate of
unemployment or rate of employment – some measurement problems, Nature of unemployment and
employment trends in India, Disguised unemployment.
UNIT 22: ECONOMIC GROWTH, DEVELOPMENT & PLANNING
The Process of Economic Growth: Economic Growth, Measurement of Economic Growth, Economic
Growth Theories – The Classical Model, The Neo-classical Model, The problem of economic growth -
Economic Development: Differences between Economic Growth and Economic Development, Factors
contributing to Economic Development – Natural resources, Human resources, Capital formation, Technical
knowledge, Human Development Index (HDI) - Economic Reforms in India: Need for Economic Planning,
Importance of Economic Planning for India - concepts of LPG, Economic Reforms undertaken by the
Indian Government – Reforms in Indian Industrial Policy, Financial sector reforms, Trade sector reforms,
Public sector reforms, Impact of Economic Reforms in India - Future Economic Scenario of India:
Globalization, Population Growth, Foreign Exchange Reserves, Financial System in India, Unemployment.
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CONTENTS
Multiple Choice Questions

Unit 1 – Introduction to Microeconomics 11
Unit 2 – Theory of Demand and Supply 14
Unit 3 – Consumer Behavior 16
Unit 4 – Production Function 18
Unit 5 – Analysis of Costs 21
Unit 6 – Perfect Competition 23
Unit 7 – Imperfect Competition 25
Unit 8 – Rent and Wages 27
Unit 9 – Interest and Profit 29
Unit 10 – Forecasting and Decision–Making 31
Unit 11 – Introduction to Macroeconomics 33
Unit 12– National Income I 35
Unit 13 – Consumption and Investment Function 37
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Unit 14 – Classical and Keynesian Economics 39
Unit 15 – Fiscal Policy and Budget Deficit 41
Unit 16 – Banking and Money Supply 43
Unit 17 – Monetary Policy 45
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Unit 18 – Inflation 47
Unit 19 – International Trade and Balance of Payments 50
Unit 20 – Economic Indicators 52
Unit 21– Business Cycles 56
Unit 22 –Economic Growth, Development and Planning 59
Multiple Choice – Answers and Explanations

Unit 1– Introduction to Microeconomics 61
Unit 2 – Theory of Demand and Supply 62
Unit 3 – Consumer Behavior 63
Unit 4 – Production Function 64
Unit 5 – Analysis of Costs 65
Unit 6 – Perfect Competition 67
Unit 7 – Imperfect Competition 68
Unit 8 – Rent and Wages 70
Unit 9 – Interest and Profit 71
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Unit 10 – Forecasting and Decision–Making 73
Unit 11 – Introduction to Macroeconomics 74
Unit 12– National Income 75
Unit 13 – Consumption and Investment Function 76
Unit 14 – Classical and Keynesian Economics 77
Unit 15 – Fiscal Policy and Budget Deficit 78
Unit 16 – Banking and Money Supply 79
Unit 17 – Monetary Policy 81
Unit 18 – Inflation 82
Unit 19 – International Trade and Balance of Payments 84
Unit 20 – Economic Indicators 86
Unit 21 – Business Cycles 87
Unit 22 – Economic Growth, Development and Planning 88
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MULTIPLE CHOICE QUESTIONS
UNIT 1 – INTRODUCTION TO MICROECONOMICS
1. World’s developed economies such as the United States, Canada, Australia, and Japan have features
like government intervention and private enterprises. Government intervenes in certain areas of
economy pertaining to regulation and spending money on public services. Identify the economy of
developed countries:
a) Market economy b) Command economy
c) Traditional economy d) Mixed economy
e) All of the above
2. ACC Ltd. is a cement manufacturing company. In 2014-15, net profit of a company dropped by 4.5%
compared to 2013-14. To understand the situation, they examined the internal factors such as allocation
of resources of commodities and services, supply and demand forces, which determined the price levels
in cement industry. They fixed production capacity so as to maximize production at lower prices to
compete better in the industry. Further, they did not ignore business environment created by
government such as taxes and regulations. This type of study is known as__________.
a) Microeconomics b) Macroeconomics
c) Microeconomics & Macroeconomics d) Mixed economic system
e) Command economy
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3. Mrs. Shiney Fernandes, a housewife is allocating resources for household expenses. She has limited
source of revenue. On account of inflation, prices of groceries and vegetables, school fees of her
children, maintenance amount of her flat, etc., increased. She has to reallocate limited resources for
purchasing monthly groceries. Hence, she substituted expensive goods and services with the cheaper
alternative options available in the market and resorted to cost cutting and waste management wherever
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possible in the household functioning.. The activity is a part of:

a) Microeconomics & Macroeconomics b) Microeconomics
c) Command economy d) Macroeconomics
e) None of the above
4. Ireland economy produced two goods namely potatoes and rice. From 2014 to 2015 Ireland
government decided to produce either only potatoes, or only rice or a combination of the two according
to the following table.
Potatoes Rice
0 15
5 14
9 12
12 9
14 5
15 0
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Economics for Managers: Workbook
The curve shows the combination of goods produced with the given resources and technology. It
assumed that economic resources available during the year are fixed, resources can be used to produce
two broad classes of goods and technology remains the same during the year. The curve is known as:
a) Demand and supply curve b) Supply curve
c) Phillips curve d) Production Possibility Curve
e) Demand curve
5. In an economy, larger part of production, distribution and import and export is controlled by private
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enterprises. In such type of economy, government intervention is minimal. Countries like Mexico,
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Germany, and United Kingdom determine prices of goods and services, based on supply and demand in
economy. Such type of economy is determined as_________.
a) Command economy b) Mixed economy
c) Traditional economy d) Market economy
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e) Command economy & Mixed economy

6. In an inflationary environment, a tax rise does not affect the price of wrist watches. However, rise in
tax on gasoline could lead to increase in price of gasoline and fuel inefficient automobile. The impact
of price rise of gasoline differs in the case of fuel inefficient cars and gasoline. Supply and demand of
gasoline is determined in the market. As a result, a fuel inefficient automobile price does not increase
in same proportion to gasoline prices. Such condition in a economy is known as_______.
a) Partial Equilibrium Analysis b) General Equilibrium Analysis
c) Partial Equilibrium Analysis and d) Production possibility curve
General Equilibrium Analysis e) All of the above
7. National Institution for Transforming India (NITI) Aayog, is a policy think tank of the government of
India. It provides strategic and technical advice to central and state governments. The organization
studies several factors in an economy such as consumers, producers, resource owners and workers. All
such factors are observed to maximize profits. Which economic system studies such factors?
a) Partial Equilibrium Analysis b) Partial Equilibrium Analysis and
c) General Equilibrium Analysis General Equilibrium Analysis
d) Production possibility curve e) All of the above
8. In 2015, government of India deputed SBI Capital Markets Ltd to evaluate coal linkages in the country.
They will study the option for auction which would allot even allocation of limited natural resources
companies. Considering the success of coal block auctions, the central government is considering a
plan to adopt a similar new and old coal linkage. Such type of study for limited resources reflects
which type of economic activity?
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a) Scarcity and choice b) Relevance of Microeconomics

c) Nature and scope of economics d) Microeconomic analysis
e) All of the above
9. In 2014, Shri Radha Mohan Singh, Agriculture Minister announced his decision to finance 5 lakh
joint farming groups of ‘"Bhoomi Heen Kisan" through NABARD for the financial year 2014-15.
Agriculture ministry observed factors such as large number of landless farmers are unable to provide land
title as guarantee, institutional finance is denied to them and they become vulnerable to money lenders'
usurious lending. In addition to the factors, NABARD expressed concerns about the impact of imbalance use
of different types of fertilizers on the soil. Therefore, agriculture ministry framed several guidelines under
Bhartiya Paramparagat Krishi Vikash Pariyojana to promote organic farming and to develop potential
markets for organic products. Under which heading will you categorize this microeconomic analysis of eco-
friendly cultivation?
a) Scarcity and choice b) Relevance of Microeconomics
c) Maximizes resource utilization d) Microeconomic analysis
e) All of the above
10. In 2013, India recorded less growth in consumer spending due to high inflation, muted salary hikes and
slower economic growth which affected both real and nominal wages. According to official estimates,
Private Final Consumption Expenditure (PFCE) fell by 3.68%. Experts observed five economic
variables --rural and new consumer segments, sales and discounts, new launches and expansion,
emerging segments and trade channels, and premiumization could boost economic activity. What is the
theoretical underpinning to the given concept?
a) Relevance of Microeconomics
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b) Scarcity and choice
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c) Construction and use of models d) Microeconomic analysis
e) All of the above
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UNIT 2 – THEORY OF DEMAND AND SUPPLY
11. In 2015, Institute of Company Secretaries of India (ICSI) expected a sharp rise in company secretaries
due to comprehensive implementation of Companies Act 2013 and Secretarial Audit provisions. In
2014-15, 3,500 company secretaries completed the course and were employed to meet industry
demand. Atul Mehta, President of ICSI informed in a press conference that the new audit provisions
required tracking NPAs (Non Performing Accounts) of 7000 companies. This would lead to increase in
aggregate demand for ICSI. Which demand over a period of time could meet the demand of ICSI.
a) Individual demand b) Market demand
c) Law of demand d) Law of demand and Market demand
e) Elasticity of demand
12. Petroleum Planning and Analysis Cell (PPAC) expected consumption of 166.87 million metric tons
refined fuels in 2015-16 compared to 161.57 million metric tons in 2014-15. PPAC forecasted use of
diesel to rise 4.1% (71.32 million metric tons) while 7.2% for gasoline (19.72 million metric tons).
Demand for kerosene, naptha and fuel oil in India declined by 3.7%, 5.3% and 4.9% respectively.
PPAC and government of India encouraged use of liquefied petroleum gas which was expected to rise
by 3.5%. This type of prediction is known as__________.
a) Equilibrium of demand and Supply b) Quantity demanded
c) Quantity supplied d) Demand forecasting
e) All the above
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13. Demand for “Rockstar Ink Pens” increased from 60 to 65 because of a fall in price from Rs.25 to
Rs.24. What is the price elasticity of demand for Rockstar Ink pens.
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a) 1.5 b) 2.5
c) 5 d) 1.9
e) 2
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14. In April 2011, Ford conducted market experiment to launch ‘Fiesta’. It conducted a consumer
immersion programme to understand the test group in Delhi market. Ford management team and
agency partners met families across Delhi to understand their lifestyles, family structure; buying
behavior etc. Later, based on feedback, Ford designed marketing and communication strategy for Fiesta
and launched ‘Ford Fiesta Classic’ in 2012. This type of market experiment is recognized as:
a) Test marketing b) Controlled experiment
c) Supply Forecasting d) Test marketing and controlled experiment
15. A footwear manufacturer makes shoes exclusively for ladies. He sells 3000 pairs of shoes per month.
He plans to reduce the price from Rs. 155 to Rs.150 per pair to encourage sales. The elasticity of
demand for shoes is estimated at 0.68. What would be the new demand for the shoes as a result of the
decrease in the price?
a) 3,066 pairs of shoes b 2,265 pairs of shoes
c) 1,965 pairs of shoes d) 3,000 pairs of shoes
e) 3,060 pairs of shoes
16. Vivek Ltd., headquartered at Chennai is a retail chain which sells consumer durables, electronics, IT
and telecom products across south India. The company tied up with Vector Consulting to study supply
theory/chain and inventory management. Vivek estimated better results through redesigning the supply
chain. This could improve quality of inventory and availability of almost 99 per cent of all fast-moving
SKUs (stock keeping units) in stores. Further it could also increase their sales and profitability. This
case depicts which economic theory.
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a) Demand Forecasting b) Demand Theory

c) Supply Theory d) Law of supply
e) Supply Theory and Law of supply
17. Demand for cement in India is growing at an exponential rate. Construction industry has grown at
11.1% of compounded annual growth rate (CAGR) in the last decade. Factors such as infrastructure,
transportation and urbanization contributed towards growth of cement industry. The increase in prices
of limestone – (a raw material for cement) due to fall in supply is one the reasons for the increase in the
demand for cement. This is known as substitution effect. Later in 2013 prices of cement fell by 10%.
This is an example of which concept in microeconomics?
a) Elasticity of supply b) Perfectly elastic supply
c) Price elasticity of demand d) Elasticity of supply and
e) All of the above perfectly elastic supply
18. The market demand function of a product is Qd = 10500-50 P and its supply function is Ms =2000+20 P.
Compute the equilibrium price of the product.
a) 121 b) 20
c) 120 d) 150
e) 75
19. UN population report published in Science journal in association with University of Washington and
United Nations on 18th September 2014, used Bayesian statistics and predicted world population could
increase by 9.6% to 12.3 billion in 2100. Majority of the projected growth would come from Africa.
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The population is expected to grow from around 1 billion to 4 billion by the end of 2100. . The
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projection was based on frequent future life expectancy, fertility rates and market research. The new
method used the combination of government data and expert forecasts for such phenomena as mortality
rates, fertility rates and international migration. Which type of qualitative technique is used in the case?
a) Surveys b) Expert Opinion and Surveys
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c) Expert Opinion d) Market experiment

e) Market experiment and Expert Opinion
20. Vuclip is a leading premium mobile video application. Its dynamic adaptive transcodingTM provides an
amazing unbuffered viewing experience to viewers across all mobile devices. In 2014, opinions from
12000 people were collected, out of which 67% respondents preferred mobile as the preferred medium
for watching their favorite movies, music videos, etc. Respondents showed desire for payments through
mobile apps for a better video experience, such as HD and unbuffered video content and TV shows. In
the study, 81% respondents were from emerging markets of India, the Middle East, and Southeast Asia.
This technique is known as_________.
a) Surveys b) Expert Opinion and Surveys
c) Expert Opinion d) Market experiment
e) Market experiment and Expert Opinion
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UNIT 3 – CONSUMER BEHAVIOR
21. McDonald launched products based on consumer choice and behaviour across the globe. McDonald
introduced a McBaguette in France (with french baguette and Dijon mustard), a Chicken Maharaja Mac
and a Masala Grill Chicken in India (with Indian spices) as well as a Mega Teriyaki Burger (with
teriyaki sauce) or Gurakoro (with macaroni gratin and croquettes) in Japan. By doing so, McDonalds
had a better reach to wider consumer base, taking care of “wants” of different culture and different
markets. Such type of phenomenon in economics is defined as_________.
a) Measurement of utility b) Utility
c) Consumer behavior d) Marginal Utility
e) All of the above
22. Kirti purchased and consumed three ice creams at one time. If first ice-cream gave satisfaction of 20
utils and 2nd one gave a satisfaction of 16 utils utility obtained from two ice creams were 20+16=36
utils. If third ice-cream generated satisfaction of 10 utils the accumulated satisfaction from ice cream
was 20+16+10=46 utils. Kirti’s total satisfaction was obtained from consumption of all three ice
creams. Which type of utility is referred here ?
a) Marginal Utility b) Utility and total utility
c) Total utility d) Choice and utility theory
23. A consumer consumes three units of a product. Marginal utilities derived from the three units are
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Rs.300, Rs.250 and Rs.200 respectively. If the price of the good is Rs.200 per unit, the consumer
surplus is:
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a) 100 b) 140
c) 50 d) 150
e) 125
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24. In 2014, Bharti Airtel Ltd, lowered prices for internet communications services such as Skype. These
services are used for free calling, text messages etc.. Airtel profit margin jumped to 4.3% comparaed to
Idea Cellular’s profit margin of 4.1% in 2014. This decreased the customer base and demand for data
plans of Idea, Aircel, Vodafone, etc. Such type of effect is known as_______.
a) Substitution effect b) Income effect
c) Income effect and Substitution effect d) Diminishing marginal utility
e) Indifference curve analysis
25. Mr. Ashok is a credit analyst at CICIC bank in Chennai. He is a workaholic. He stretched beyond
office hours in the evening. From previous 6 months he gained 8 kgs due to sitting at one place and
continuously working on his PC. He drank 8 cups of tea in a day. His colleague Ms. Seema suggested
changing his lifestyle so as to adopt healthy habits such as exercises, yoga, etc. Ashok substituted tea
with green tea and he liked the taste flavor and derived same level of satisfaction. Which type of
microeconomic activity is mentioned in the case?
Combination of two products that yield the same level of Utility

Utility Quantity of green tea consumed Quantity of tea consumed
20 8 2
20 6 4
20 4 6
20 2 8
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a) Substitution effect b) Income effect

c) Diminishing marginal utility d) Consumer equilibrium
e) Marginal rate of substitution
26. The marginal utilities of product A and product B are 600 and 350 at equilibrium respectively. If the
price of the product B is Rs.50, what is the price of product A at equilibrium?
a) 85.7 b) 85.8
c) 85 d) 85.5
27. In 2015, the global brokerage firm, Morgan Stanley conducted a study on current account deficit. They
observed fast reductions in current accounts since 2012 in India which was estimated 1.6% of GDP in
2014. Morgan Stanley estimated current account to increase by 0.3% of GDP in 2015. They attributed
the increase to drop in global commodity prices (specifically oil) and increase in trade. Such
estimations by Morgan Stanley will be helpful in calculating ____________.
a) Consumer equilibrium b) Income effect
c) Marginal rate of substitution d) Consumer Surplus
e) All of the above
28. The total utility that Sam derives after eating 4 watermelons is 10 and the total utility after eating the 5th
watermelon is 9. What is the marginal utility for the 5th watermelon?
a) +1 b) -1
c) 0
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d) 1.5
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29. Rashmi maximizes her consumption of apple juice with 3 glasses of apple juice, where the total utility
is 100 units. When she consumes the 4th glass of apple juice the total utility increases to 120 units.
What is Rashmi’s marginal utility for the fourth glass of apple juice?
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a) 100 b) 115
c) 20 d) 30
e) 25
30. In the financial year 2013, household brands such as Babool toothpaste, Sani Fresh, Hajmola and
Glucose-D launched ‘project double’ programme to increase its customer base from 14,000 villages to
40,000. However, the demand for these products in rural areas continued to decline. Similarly, in
October 2014, sales of tractors in rural areas, also declined by 12% to 77,983 units. Analysts believed
that higher food prices, a patchy monsoon and lower rural wages are the factors of low demand.
a) Consumer demand
b) Consumer behavior theory
c) Demand theory
d) Choice and Utility theory
e) Income effect
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UNIT 4 – PRODUCTION FUNCTION
31. Yebhi.com started online footwear business in 2009. Later, in 2011 it changed its business model from
selling footwear to selling fashion accessories and apparels. As per Crunch Base data, Yebhi raised $40
million (around Rs.240 Crores) since its inception. In 2014, Yebhi adopted strategies such as partnering
with nine leading fashion portals and starting 40 more online and offline stores. They introduced
variety of merchandise from all online and local stores on competitive prices and discount offers. The
online portal suggested apparel which suits individual users tastes, social circles and body structure.
With the new model Yebhi targeted $5-60 million revenues by end of the fiscal year. Such strategy is
known as___________.
a) Production function b) Technological change
c) Process innovation d) Product innovation
32. Twitter is an online networking website launched in 2006. It started as an application which helped in
sending sms with only 140 character messages called ‘tweets’. Later with new features it became “real-
time information tool.” In December 2014, Twitter had more than 500 million users. Similarly Flipkart
and Snapdeal have shaped the Indian e-commerce market with market-place models with minimal/zero
inventory. Such technological innovations are known as___________.
a) Technological change b) Production function
c) Product innovation d) Diminishing marginal returns
e) Process innovation
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33. In 2015, government of India estimated 33% drop in production of rubber in the country. As per the
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statistics total annual production of rubber in 2014-15 was expected to reach 650,000 metric tons.
However, actual production was less than the forecasted supply. On the other hand, demand for rubber
rose by 0.6% to 840,000 metric tons in January 2015. To meet the demand, import increased by 14% to
360,000 metric tonnes. The main reasons identified for increase in imports was fall in domestic
production as rubber plantations were obsolete, process of tapping rubber plants were prohibited by
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state government in Kerala and farmers deviated for farming to high margin products. As per experts, if
government policy coupled with suitable technological change can help in raising the production of
rubber in India, then it would help her to be one of the largest producers, just behind Thailand,
Indonesia, Vietnam and Malaysia in rubber production. Which is best associated to the example cited
above?
a) Long-run production b) Product innovation
c) Short-run production d) Process innovation
34. Sati Ltd, a manufacturer of steel, increased 250 labours in an existing plant at Haryana. The plant
produced additional 10,000 metric tons in December 2014. The total production increased to 25000
metric tons. How will the marginal product be represented?
a) MPL = Product of change in Q and change in L
b) MPL = Sum of change in Q and change in L
c) MPL = Change in Q divided by change in L
d) MPL = Change in L divided by change in Q
35. Average product is defined as the total product per unit of a factor employed in the production process.
Calculate the average product values in the following table given below:
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Unit of Labor Total Product Average Product

2 220 -
4 440 -
6 180 -
8 400 -
10 1000 -
a) 100, 50, 30,110,110 b) 30, 50, 100, 110, 110
c) 110, 110,30, 50, 100 d) 50, 110, 100, 110, 30
e) None of the above combination
36. National Horticultural Research and Development Foundation (NHRDF) estimated overall growth in
crops by 42 million metric tons in 2015 as in rabi season, domestic crops could increase compared to
2014. This could lead to fall in prices in India and abroad. Such type of increase in demand is known
as:
a) Product b) Inputs into outputs
c) Production d) Average product
e) Marginal Product
37. Softec Ltd, used various combination of two techniques for production of solar turbines. For example,
in Softec Ltd, machines were operated at two possible speeds, fast and slow. If machine runs fast then a
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relatively small amount of labour is used together with moderately large amount of raw material (some
material is wasted). If machine runs slow then comparatively large amount of labour is used together
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with small amount of raw material. A firm can run some of its machines fast, and some slow. Only raw
material and labor are considered as inputs. Identify AB line.
Y
Raw
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material A
All machines are fast
Some machines are fast and some are slow
B
All machines are slow
Labor
a) The production isocost

b) Isoquant
c) Least cost combination
d) Expansion path
e) All of the above
38. Mercury House Education and Accessories Ltd, an educational service company provided quality and
education through schools, pre-schools and early childhood training courses. The company’s profit was
reported at 39% in 2014. The reasons for profits were cited as follows. As they operated 300 centers
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out of 379 centers by themselves, they generated additional revenue after school hours through
teachers-training programmes and activity classes for dance, music and art, leading to greater asset
utilization up to 30%. Which type of returns to scale is observed in this case?
a) Increasing returns to scale b) Constant returns to scale
c) Decreasing returns to scale d) Increasing returns to scale and
e) None of the above Constant returns to scale
39. In 2015, United Public Bus operator in Thailand introduced new customized and designer buses for
public service. It spent approximately 50% of its profit for buying buses such as Volvo buses, flat
buses, double decker buses, sleek buses. Further, they increased frequency of existing buses for
corporate clients traveiing towards electronic city. However, at the end of last quarter of 2014-15,
United Public Ltd generated 50% profit margin. Which type of scale of economics is observed in the
case?
a) Increasing returns to scale and b) Increasing returns to scale
Constant returns to scale c) Constant returns to scale
d) Decreasing returns to scale e) All of the above
40. In 2008, Petronet LNG’s Indian Oil and Gas Company scaled up its capacity from 5 MMTPA to 17.5
MMTPA up to 2012. Eleventh 5 Year Plan estimated the demand for gas in India as 283 mmscmd till
2012. However, in the same period, only 180 mmscmd was supplied by domestic supplier from the KG
basin. Therefore, India was dependant for imports to fill up the demand-supply gap. To meet the
deficiency Petronet LNG’s produced extra gas at economical price. Name such economic activity.
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a) The production isocost
b) Isoquant
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c) Least cost combination
d) Expansion path
e) All of the above
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UNIT 5 – ANALYSIS OF COSTS
41. In 2010, Mahindra Navistar Automotives Ltd, a joint venture (JV) between Mahindra and Mahindra
Ltd (M&M) and truck and engine manufacturer Navistar Inc was formed. to sell tractor trailers and
tippers ranging between 16 tonnes and 31 tonnes to the construction sector, and heavy-duty lorries to
ferry automobiles and consumer goods. Since inception, it has sold 2500 trucks from plant at Chakan
near Pune in Maharashtra. The plant has a capacity to produce 50,000 trucks a year. They planned to
produce products on no profit- no loss basis up to 2012. Such economic activity is known
as___________.
a) Break even analysis b) Shut down point
c) Real economies of scale d) Selling economies
e) All of the above
42. In 2012, Indian railways linked freight rates to the prevailing price of fuel. This resulted in increased
transportation cost for iron ore, coal and food grain through railways. This move resulted into raising
fuel costs for railways. Experts felt that increase in freight rates as a result of an increase in fuel prices
could lead to increase in fare rate for end customers. The increase of freight rates leads to increase in:
a) Fixed costs b) Variable costs
c) Implicit costs d) Direct costs
e) All of the above
43. In 2012, Society of Indian Automobile Manufacturers estimated that sales of medium and heavy trucks
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would decrease by 237,824 units in India. Therefore, Tata Motors employed multi-layered strategy to
increase sales in a sluggish market and to compete against new competitors such as Daimler AG of
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Germany and Beiqi Foton Motor Co. Ltd of China. Since September 2012, Tata motors launched
specially designed trailers without truckers for heavy-duty trucks and buses for long destinations. For
the new launch, they incurred Rs.15,000-30,000 costs exclusively based on vehicle type and distance
covered. Such types of costs are referred to as_________.
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a) Variable costs b) Direct costs

c) Implicit costs d) Fixed costs
e) Incremental costs
44. A. If the average total cost is Rs 50 for 5 units of output and Rs 72 for 6 units of output. Then the
marginal cost of producing the 6th unit is__________.
a) 182 b) 180
c) 179 d) 2
e) 185
45. A firm producing hairpin incurs a total cost of Rs 15,000 to produce 3,780 units of LED digital clock.
If the firm decreases its production to 2,000 units, the total cost incurred is Rs 10,000. What would be
the average variable cost of producing each hairpin?
a) Rs. 1.50 b) Rs. 2
c) Rs. 2.8 d) Rs. 10
e) Rs. 5
46. Assume the total revenue function of a firm is TR = 6Q, and the total cost function is TC = 20,000 + 4
Q. Determine the breakeven quantity of the firm.
a) 10,000 b) 2,000
c) 2,500 d) 5,000
e) 10,000
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47. If a company breaks even at 500 units, at a fixed cost of Rs 2,00,000 and the average variable cost is Rs
50. At what price is the company selling the product?
a) 400 b) 350
c) 217 d) 215
e) 200
48. The total cost function of a firm producing a particular electrical switching system is TC = 30,000 –
200Q + Q2. If the revenue function of the firm is TR = 20,000 + 200Q +Q2. What will be the breakeven
quantity of the firm?
a) 40 b) 35
c) 21 d) 25
e) 20
49. In 2014, Tata Motors luxury car unit Jaguar Land Rover (JLR) decided to slash number of car
platforms from seven to five to save costs. They decided to launch 21 new models up to 2019.
Reduction in car platforms could help Tata Motors to reuse car components for new models which
would reduce 60-70% of costs, reduce inventory and boost productivity. With this strategy, they
planned to increase operating margin by 150 basis points. Name the economic phenomenon being
addressed in the case.
a) Variable costs b) Real economies of scale
c) Economies of scale d) Fixed costs
e) Production costs
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50. Saitech Steels Industries Ltd, have five units in a Bihar based plant. They have a 26" and 28" structural
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mill with a capacity to produce 3, 55,000 MT structural steel. Saitech Steels constantly pursues
excellence with keen customer focus and provides steel customized to customer requirements. To
achieve sophisticated state-of-the-art factories they employed skilled production mangers for all five
units. All managers were experienced and worked over modern technologies for steel production. Such
skilled employment is categorized as:
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a) Managerial economies b) Commercial economies

c) Labor economies d) Technical economies
e) Inventory economies
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UNIT 6 – PERFECT COMPETITION
51. There are many onion farmers, anyone can plant onions, and the onions of one farmer cannot be
distinguished from the onions of another farmer. The market structure in which farmers operates is:
a) Perfect competition b) Imperfect competition
c) Monopoly d) Oligopoly
52. Mr. Kailash and his friends from Madhepur brought Mirchi produced in his fields to market and priced
the mirchis at Rs 2000 per 50 kilos, whereas other farmers from Ramapur brought Mirchi and priced it
at Rs.1900 per 50 Kilos bag. Mr. Kailash and his friends could not sell their product in the market,
where as his competitors are able to sell their products. The demand for the product is:
a) Upward sloping b) Downward sloping
c) Horizontal d) Vertical
53. M/s. Raman Enterprises is part of perfect competitive market and it has to sell its products at the
market price. To maximize its profits, the firm has to adjust its:
a) Cost of inputs b) Advertising expenses
c) Labor cost d) Production
e) Both a and b
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54. M/s. Perfect Stationers sells pens in the market. Quantity sold and price per unit are:
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Quantity Price
10 Rs.30
11 Rs.30
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12 Rs.30
Quantity sold increases from 11 to 12. The Marginal Revenue is:

a) Rs.90 b) Rs.60
c) Rs.30 d) Rs.120
e) Rs.45
55. The relation between Price, Marginal Cost and Marginal Revenue for a competitive firm is:
a) P > MR >MC b) P= MR > MC
c) P> MR = MC d) P< MR < MC
e) P= MR = MC
56. The demand function for a perfectly competitive industry is QD = 21 - 2P. The supply function is
QS = 3 + P. The market will be in equilibrium if:
a) P=6Q=9 b) P=6Q=6
c) P=9Q=9 d) P=9Q=6
e) P=3Q=9
57. Mr. Rajan is producing maize and production in tons and total cost (fixed cost plus variable costs) per
production are:
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Output(in tons) Total cost (Rs. in thousands)

10 25
20 30
30 35
40 40
50 45
60 50
If market price is Rs.10,000/ per ton the profit becomes positive when output is:
a) 60 tons b) 40 tons
c) 20 tons d) Between 40 and 50 tons
e) 50 tons
58. Mr. Shah Sports is a perfectly competitive firm selling cricket balls in packs of six at a price of Rs.120
per box. Total fixed costs per day are Rs.2,000. Total quantity of boxes per day and variable costs per
day are as follows. The point of profit maximization for the firm using marginal revenue and marginal
cost approach is:
Quantity per day Boxes Total variable cost (in Rs.)

5 1000
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6 1075
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7 1150
8 1250
9 1370
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10 1500
11 1650
a) 5 b) 11
c) 9 d) 7
e) 6
59. In a perfectly competitive market if net profit is taxed how would the same impact the market:
a) MC is not affected b) Equilibrium of the firm and industry
c) Profits dip below normal in long run will not change in the short run.
.d) Firms which cannot cover costs will exit e) All the above
60. M/s. Regal Computer Services is a perfectly competitive firm. It services 50 computers per week. In
the short run marginal cost of the firm became higher than service charges it receives. The option
before the firm to increase profit is:
a) Increase the charges per service b) Decrease the charges per service
c) Increase the number of computers d) Decrease the number of computers
to be serviced to be charged
e) Exit from the activity.
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UNIT 7 – IMPERFECT COMPETITION
61. In UK Sky film has control over pay –TV movie rights, restricting competition leading to higher prices
and reduced choice. Sky has twice as many pay TV subscribers as all its rivals combined have. Sky has
exclusive rights from many Hollywood studios to be the first to air their new releases. This is an
example of:
a) Perfect competition b) Duopoly
c) Monopoly d) Monopolistic
e) Oligopoly
62. State Electricity Boards in various states charge different rates per unit of electricity consumed by
farmers, house hold users, commercial users and industrial users. This important characteristic of
monopoly is called
a) Entry barrier b) Government protection
c) Price discrimination d) Third degree of price discrimination
e) Both c and d
63. Typical example of monopoly is Indian Railways where other players cannot enter due to following
entry barrier:
a) Large Capital Expenditure b) Government Policies
c) Large Research and Development budget d) Administered Price
e) All the above
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64. In India market research is done by Neilsen, GFK, IDC and Gartner. Each sector has one or two
players. Case in the point is, Nielsen in FMCG, GFK in consumer durables, IDC and GFK in mobile
phones and Gartner and IDC in computers research. Market structure of Market Research is:
a) Perfect competition b) Monopoly
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c) Oligopoly d) Monopolistic
e) Duopoly
65. Mobile telecom industry in India is dominated by Airtel, Vodafone, Idea , Reliance and BSNL which
share about 80% of the market share. Market is dominated by small number of large firms. This type of
market structure is:
a) Oligopoly b) Monopoly
c) Duopoly d) Monopolistic
e) Perfect competition
66. Maruti Suzuki India Ltd, Hyundai Motors India Ltd, Tata Motors and Mahindra & Mahindra have
major share in small car segment business in India. Maruti announces discount in prices during festive
season which will be followed by other players in the market. This behavior of firms in price setting is
explained by:
a) Supply curve b) Demand curve
c) Kinked Demand Curve d) Oligopoly
e) Both c and d
67. Recently Savings Bank interest rate (4%) offered by Public Sector Banks is under Competition
Commission of India (CCI) lens to find out existence of:
a) Price wars b) Rate liberalization
c) Lower Interest rate d) Cartelization
e) Administered interest rates
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68. State Bank of India is always the dominant player in Indian Banking Industry. State Bank of India fixes
the interest rates and other banks soon follow the pricing policy. This oligopolistic business behavior is
called:
a) Cartelization b) Price leadership by low cost firm
c) Price leadership by the dominant firm d) Barometric price behavior
e) Price fixation
69. Coca Cola and Pepsi rivalry in Indian market is intense and both of them would do whatever it takes to
gain competitive advantage and control over the marketplace. Coca Cola charges Rs11/- per bottle of
100 ml and Pepsi charges Rs10/- per bottle of 100 ml. For Coco Cola and Pepsi the cost of production
per bottle of beverage is Rs.8. As per pay off matrix profits to be earned by Pepsi and Coca Cola are:
a) Both Pepsi and Coca cola earn profits b) Both Pepsi and coco cola earn losses
c) Pepsi earns all profits d) Coca Cola earns all profits
e) Pepsi can gain higher market share and higher profits than Coca Cola
70. Ravi and Raju have been arrested for indulging in a theft. Police Officers kept them in separate rooms
for investigation. Police officer has offered them some options with possible pay offs. If both of them
confess, they would get imprisonment of 3 years each. If one confesses and other does not, he would
get 1 year imprisonment and the other 10 years imprisonment. If both deny they will be given 2 years
imprisonment each. They cannot interact with other. The dilemma is that punishment is dependent on
the behavior of other person. There is every possibility of cheating by confessing and getting minimum
punishment of one year. They might also have better pay-off of just 2 years if both deny Fearing that
the other may cheat, the safest option both consider is to confess. The strategy adopted by Ravi and
Raju is:
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a) Maxi-min strategy b) Dominant strategy
c) Compromise strategy d) Cheating strategy
e) Nash equilibrium strategy.
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UNIT 8 – RENT AND WAGES
71. Identify the factors of production:

a) Land b) Labour
c) Capital d) Entrepreneurship
e) All the above.
72. A firm uses 10 kilos of raw material and total revenue is Rs.1500 and the firm increases raw materials
to 11 kilos and total revenue increases to Rs.1800. It is assumed that other factors of production are
kept constant. The marginal revenue productivity (MRP) is:
a) Rs.1800 b) Rs.1500
c) Rs.300 d) Rs.150
e) Rs.172.72
73. Demand for an input to a production process is dependent on the output of a final or finished product.
These inputs include factors of production (capital ,labor, land).This demand for factors of production
is called:
a) Derived demand b) Latent Demand
c) Negative Demand d) Declining Demand
e) Irregular Demand
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74. Supply of land from point of view of all human beings is fixed. Supply of land from point of view of
Joe, an individual farmer is not fixed. As it is _______in former case and it is_______ in latter case.
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a) Monopolistic , Monopolistic b) Inelastic : Elastic
c) Inelastic ; Monopolistic d) Inelastic ; Inelastic
e) Elastic: elastic
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75. According to Ricardo the rent paid to a marginal land is:

a) High rent is paid b) Marginal rent is paid
c) No rent is paid d) Differential rent is paid
76. Mr. Jai has 5 acres of land in Nizamabad District. He has cultivated cotton in his land and earned
Rs.20,000 per acre. He can cultivate turmeric also, but the earnings will be Rs.16,000 per acre. The rent
for per acre of land according to modern theory of rent is:
a) Rs.20000 b) Rs.16000
c) Rs.3200 d) Rs.4000
e) Cannot be calculated.
77. Rampur village has 100 hectares of agriculture land with water facilities. Output of paddy in the lands
is highest in the country. People want to take lands on lease and do cultivation. Villagers are
demanding higher rent as the demand for land is high and supply of land is limited. The rent charged is:
a) Nominal rent b) Differential rent
c) Scarcity rent d) Quasi rent
78. Mr. Murthy was earning Rs.5,000/- in 1970 when price level is 1 (base year). Price level has increased
to 7 in the year 2010. What should be Nominal wages of Mr. Murthy during 2010 to have same real
wages as 1970?
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a) 35000 b) 25000
c) 10000 d) 30000
e) 5000
79. The relation between average wage, marginal wage, average revenue productivity, and marginal
revenue productivity at equilibrium wage level in the long run according to Modern theory of wage is:
a) MRP>ARP=AW=MW. b) MRP=ARP=AW=MW.
c) MRP<ARP=AW=MW d) MRP=ARP=AW>MW.
e) MRP=ARP=AW<MW.
80. In India agricultural labor get low wages because:
a) Agriculture is an non-unionized sector b) Bargaining power of workers is low
c) Bargaining power of producers is high d) All the above
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FA
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UNIT 9 – INTEREST AND PROFIT
81. Your Bank charges 12% interest on advances for housing sector. Risk premium is 2.5% to cover non-
performing-assets in the sector. It charges 2.0% towards tenor premium for managing the portfolio. The
net interest rate earned by the bank on housing loans will be:
a) 12.0% b) 14.5%
c) 14.0% d) 16.5%
e) 7.5%
82. Which of the following is correct with regard to demand for capital, supply of capital and interest rate?
a) Demand curve of capital is upward sloping
b) Supply curve of capital is downward sloping
c) Borrowers demand more capital at higher rate of interest
d) Demand for capital increases as long as return on investment is more than or equal to interest rate
to be paid on capital.
e) If demand for capital increases the demand curve shift towards left causing the equilibrium
interest rate to fall.
83. RBI changes important policy rate in monetary policy review to control the demand and supply of
capital in the economy, This rate is known as:
a) Cash Reserve Ratio b) Statutory Liquidity Ratio
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c) Repo rate and Reverse Repo rate d) Bank rate
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e) All the above
84. If RBI increases Cash Reserve Ratio which one of the following is incorrect regarding the effect on
lendable money with banks?
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a) Less funds are available with banks

b) Banks may charge higher interest rate on loans
c) Banks may pay higher interest rate on deposits
d) More money is available with banks for lending and investment
e) Lower the CRR means more funds are available for lending
85. Which of the following is not incorrect with regard to speculative motive of liquidity?
a) Mohan needs more liquidity when the prices of securities are low and may go up
b) Rakesh does not need much liquidity when the prices of securities are high and may go down
c) Vineet needs liquidity when the interest rates on bonds are high.
d) Raju does not need liquidity when the interest rates on bonds are low
e) All the above.
86. Banks pay interest rate of 4% in Savings and 8% on term deposits. If due to increased money supply
the interest rates decrease and banks pay 3% interest on savings bank and term deposits, what
depositors should do in such a situation:
a) They are likely to keep the funds in savings
b) They may not invest in fixed deposits
c) They will not purchase bonds because interest may not go down further.
d) They sell bonds when interest rates are going to increase
e) All the above because of liquidity trap
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87. Prem manufactures 1000 toys per month in his SSI unit. He sells each toy @ Rs100.
Cost of raw materials, power and labor is Rs. 60/- per toy. Other administrative expenses amount to
Rs.20/- per toy. Profit for Prem per month is:
a) Rs.20000 b) Rs.60000
c) Rs.100000 d) Rs.25000
e) Rs.10000
88. In the question 7 Gross profit and net profit earned by Prem are:
a) Rs.20000, 20000 b) Rs.40000, 20000
c) Rs.20000, 40000 d) Rs.40000, 40000
e) Rs.60000, 60000
89. Nirma detergent powder was introduced in 1969 at Rs.3.50 per Kg. Its aim was to offer a product at an
affordable cost and replace the 'washing soap. Washing with detergent powder is easier than washing
with detergent soaps. Nirma detergent powder was introduced as a competitor to Hindustan Lever’s
product- Surf, which was selling at Rs.15/- per Kg at that time. Nirma soon became a household name
all over India. Hindustan Lever launched its washing bar soap branch Wheel in powder form at an
affordable price. Wheel now tops the HUL brands, with sales well over Rs 2,000 crore. This is an
example of:
a) Walker’s rent theory of profit b) Clark’s dynamic theory
c) Schumpeter’s innovation theory, d) Hawley’s risk theory,
e) Knight’s uncertainty-bearing theory.
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90. One of the following is not the reason for business houses to limit their profits:
a) To be a leader in the industry, the level of profit should be consistent with capital employed, labor
employed and output produced.
b) To become a monopoly power in the industry.
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c) To restrict entry of competitors in the market

d) To restrict demand of employees for higher wages and bonus
e) To avoid risk this is high under profit maximization.
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UNIT 10 – FORECASTING AND DECISION-MAKING
91. Macro level indicator of economic growth of the country is:

a) GDP Annual growth rate b) Exports growth rate
c) Industrial and Manufacturing d) Foreign exchange reserves
production growth rate e) All the above
92. Sales of Indian automobiles in 1998 was 530 thousands units, in 2009 , 2262 thousands units and in
2015- 5070 thousands units have been sold. The forecast for 2020 is that Indian automobile market
would exceed the EU market in size.
With this forecast of growth, the variables Maruti should track are:
a) New Model launches b) Vehicle prices
c) Intersegment competition d) a, b, c above
e) a and b
93. In a demand forecasting technique we have to sum up the sales for a specified period of time (e.g.
weeks or months) and then divide the total sales by the time periods. The method of demand
forecasting is:
a) Exponential smoothing b) Moving averages
c) Weighed moving average d) Barometric analysis
e) Surveys
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94. In the quantitative measure used to convert a condition of uncertainty to a condition of certainty
equivalent risk, the decision maker selects the most promising outcomes from among all the outcomes
in a pay-off matrix and chooses that outcome which according to him/her, is the ‘best among the best’.
a) Maximin criterion b) Minimax criterion
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c) Maximax criterion d) Laplace decision criterion

e) Minimin criterion
95. Mr. Shyam has purchased the share of a company @ Rs.100. He anticipates that during the year the
share price may go up. To calculate the expected price of the share he assigned the following
probabilities to the prices:
Scenario Probability Price of the share
1) 0. 10 95 2) 0. 20 110
3) 0. 30 115 4) 0. 40 120
Expected value of share during the next year is:
a) Rs.100 b) Rs.110
c) Rs.115 d) Rs.114
e) Rs. 95
96. M/s. Radheshyam Pvt. Ltd wants to expand its manufacturing capacity for which it needs additional
investments and working capital. What are the sources it can look for?
a) Infusion of additional capital by promoters b) Borrowings from bank
c) Funds from capital market d) Retained earnings of the company
e) All the above
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97. The above company wants to construct a Hospital where medical facilities can be utilized by the
employees of the company free of cost and others at minimum charges:
The proposed investment in the project of the company is a
a) Expansion project b) Replacement project
c) Welfare project d) Good will project
e) Both c and d
98. Mr. Ram invested Rs,500,000 in a project and the present value of the returns for three years are
Rs.100,000, Rs.200,000 and Rs.250,000. Net present value of the project will be:
a) Rs.50,000 b) Rs.100,000
c) Rs.200,000 d) Rs.250,000
e) Rs.500,000
99. For a specific project the NPV is negative at 8% discount rate, NPV is Zero at 9% discount rate and
NPV is positive at 10% discount rate. The Internal Rate of return (IRR) for the project is:
a) 10% b) 8%
c) 9% d) 9.5%
e) 8.5%
100. Mr. Businessman needs to choose between four projects for investment. He has used profitability index
for evaluating project feasibility. Profitability index of the projects are A: 0.25 B: 1.00 C:
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0.50 D: 1.25. Which project is he likely to select for investment?
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a) A b) B
c) C d) D
e) Either B or D
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UNIT 11 – INTRODUCTION TO MACROECONOMICS
101. Macroeconomics is the study of economics which analyzes the various causes of problems such as
unemployment, low economic growth, fluctuation in business cycles, etc. as they relate to the economy
as a whole. The scope of macro-economics does not comprise:
a) An understanding of working of the Economy
b) For understanding of the behavior of individual units
c) Economic policy d) Monetary problems
e) Product pricing policy
102. In 2014, Varun purchased a 2007 Ford Escort from his neighbor for his son, purchased a 2010 "one
owner" Hyundai i-10 for his wife, bought a 2014 new Ford for himself and sold his 2008 Maruti Alto
to his teenage nephew. Which, if any, of these transactions will be included in GDP in 2014?
a) Only the purchase of the Ford b) The purchase of the Ford and
c) All four transactions the Hyundai i-10
d) All three purchases but not the sale e) Only sale of the Maruti Alto
103. As per Economic Survey of India, 2015, the real growth rate of the economy averaged around 7.17%
with the rate of growth of population showing some declining trend and stood at 1.25%. What is the
per capita GDP of the country? I
a) 5.25 % b) 5.58%
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c) 5.85% d) 5.95%
e) 4.05%
104. Devaluation of currency can improve the balance of payments (BOP) only when the elasticity of
demand for imports and elasticity of demand for exports is:
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a) Equal to one b) Greater than one

c) Lesser than one d) Zero
e) Not equal to one
105. A country wants to provide a great deal of goods and services to its people but the government do not
have enough funds collected from tax and non-tax revenues. In this, case how will the government
immediately mobilize the fund to maintain its fiscal policy?
a) Increasing tax b) Public debt
c) Increasing export d) Decreasing import
e) Decreasing expenditure
106. Assume that the central bank of the country, where the currency is rupee, increases the monetary base
by Rs. 1 billion when the reserve requirement is 1/7. As a result the money supply will:
a) Increase by Rs. 1 billion b) Increase by Rs. 7 billion
c) Decrease by Rs. 1 billion d) Increase by Rs. 143 million
e) Decrease by Rs. 107 million
107. Government controls economic activity through its spending on infrastructure projects, financial
assistance to elderly people and the unemployed, salaries to public servants, etc. thus influencing the
GDP level. Which one of the following causes accounted most for the enormous growth of central
public expenditure during the last 25 years in India?
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a) Rise in defense expenditure b) Rise in rate of inflation

c) Interest
d) Rise in salaries of Central Government employees
e) Interest payments of Central Government loans
108. Assume that the market for the stock of Microsoft is in equilibrium. Then, both buyers and sellers
expect that the new Android (a competitor of Microsoft Windows 8) will be a large success, reducing
Windows 8 sales. When the new equilibrium is reached:
a) The price and quantity of the stock will both rise
b) The price and quantity of the stock will both fall
c) The quantity of the stock will fall and the price will rise
d) The quantity of the stock will fall but the effect on price cannot be determined
e) The price of the stock will fall but the effect on quantity cannot be determined
109. If the official Actual budget shows a deficit of Rs. 200 billion while the structural budget has a surplus
of Rs. 200 billion, it can be concluded that:
a) The intent of fiscal policy is expansionary
b) There is hyperinflation
c) The unemployment rate is well above the natural rate
d) State and local governments have large surpluses
e) Off-budget spending is counted in the official deficit but not in the structural deficit
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110. Assume that India and Great Britain are both on the Gold Standard of exchange rate. There is inflation
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in India but not in Great Britain. As a result of the inflation in India:
a) Gold would leave India and go to Great Britain
b) Gold would leave Great Britain and go to India
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c) Indian Rupee would depreciate

d) Indian money supply would increase
e) Great Britain money supply would increase
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UNIT 12 – NATIONAL INCOME
111. Which of the following factors would lead to an increase in national income?
a) A 15% increase in value added tax
b) Increased investment in domestic-made capital goods and increase in the exports of locally
produced machinery
c) A decrease in goods sold abroad
d) Imposing a progressive tax on individuals’ income
e) Increased investment in a foreign country
112. There is a circular flow of income in a closed economy. Refer to the following circular flow diagram to
answer the question below. What do X and Y represent?
Factors of Production
Payments of Factors
X Y
Consumer Expenditure
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Goods and Services
a) Households and government b) Firms and government

c) Households and firms d) Government and external world
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e) External world and firms

113. The table below shows the GNP and the population of five different countries: Considering only the
below information. Which country has the highest average standard of living?
Country Population GNP (in millions)

1 500,000 5,000
2 1200,000 6,000
3 3,000,000 10,000
4 2,000,000 25,000
5 1,0000,000 40,000
a) 1 b) 2
c) 3 d) 4
e) 5
114. Which of the following factors determine nation’s income and output?
a) Y = E + S : Income = Expenditure + Savings & Y = C + I: Income = Consumption + Investments
b) Y = E + C : Income = Expenditure + Consumption & Y = S + I: Income = Savings + Investments
Saving and Inflation
c) Y = C + S: Income = Consumption + Savings & Y = C + I: Income = Consumption + Investments
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d) Y = I + C : Income = Investment + Consumption & Y = S + I: Income = Savings + Investments

e) Y = E + I : Income = Expenditure + Investment & Y = S + E: Income = Savings + Expenditure
115. What would be the effect of an increase in investments in an economy?
a) The level of the national income would rise, as investments are injections.
b) National income would decrease, as investments are leakages.
c) National income would fall and then remain constant for a period of time.
d) Increased investment in an economy would not affect national income.
e) Injections would be equal to leakages; therefore national income would not be affected.
116. The GDP per person in North Korea is $957, and in South Korea is $10,067. What does this difference
indicate?
a) Standard of living in North Korea is higher than in South Korea
b) Standard of living in South Korea is much higher than in North Korea
c) GDP per person does not decide the standard of living in a particular country
d) GDP is the only way to decide the standard of living of a person in a particular country
e) Standard of living in both the countries are same
117. In a country AAA, the GNP at market prices is Rs,10,200,000 crore, subsidies are Rs820,000 crore,
indirect taxes are Rs1,350,000 crore, and depreciation is Rs950,000 crore, what will be the national
income of the country? I
a) Rs. 8980000 crore b) Rs.10620000 crore
c) Rs. 8720000 crore d) Rs. 7080000 crore
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e) Rs. 13320000 crore
118. Assume that a country with national income of Rs. 12500,000 crores providing subsidies of Rs. 750,000
crores and levying indirect taxes of Rs. 1200,000 crore, corporate taxes of Rs. 1050,000 crore. Its
retained earnings are Rs. 550,000 crore and income from personal taxes is Rs. 750,000 crore. Country’s
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depreciation is Rs. 650,000 crore. What could be the personal disposable income of this country?
a) Rs. 7,550,000 crore b) Rs. 9,050,000 crore
c) Rs. 16,150,000 crore d) Rs. 10,350,000 crore
e) Rs. 10,150,000 crore
119. Assume that, in a certain year, the Ministry of Trade and Industry in India stated that GDP grew by
5.4% in the previous year. This produced higher revenues from taxation and resulted in a budget
surplus. What is implication of this statement?
a) The gross national income of the country had increased and so more production was done
b) Inflation in the country had increased and so more was paid for the expenditure
c) The national income of the country had increased and so more was paid in taxes
d) Savings has increased so more leakage from the circular flow of income
e) More government expenditure resulted into improved economy
120. “GDP of a country may not be a good indicator of changes in a country’s standard of living”. One of
the reasons for this is:
a) The increase in personal disposable income may rise more than the country’s GDP
b) The size of a country’s population may rise more quickly than the national income
c) The pace of increase in price of products may be less than the national income
d) Increase in production of goods and services may be more than an increase in national income
e) Fast decrease in savings as compare to decrease in national income
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UNIT 13 – CONSUMPTION AND INVESTMENT FUNCTION
121. Assume that a country’s economy is facing deflation and experiencing a situation of decrease in the
prices of products. According to Keynesian’s aggregate demand concept, what will be the affect on the
economy if central bank takes a decision to increase money supply?
a) Interest rates to fall, investment spending to rise, and aggregate demand to rise
b) Interest rates to rise, investment spending to rise, and aggregate demand to rise
c) Interest rates to rise, investment spending to fall, and aggregate demand to fall
d) Interest rates to fall, investment spending to fall, and aggregate demand to fall
e) No change in interest rates, investment spending and aggregate demand
122. At an income of Rs.100,000, I spent Rs.90,000 on consumer goods. When my income rose to
Rs.200,000, I spent Rs.160,000 on consumer goods. My marginal propensity to consume (MPC) is:
a) 0.9 b) 0.8
c) 0.7 d) 1
e) Rs.70,000
123. Consider two economies that are identical, with the exception that one has a high MPC and one has a
low MPC. If the money supply increases by the same amount in each economy, the high MPC
economy will experience:
a)
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A larger increase in output and a smaller decrease in the interest rate.
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b) A smaller increase in output and a smaller decrease in the interest rate.
c) A larger increase in output and a larger decrease in the interest rate.
d) A smaller increase in output and a larger decrease in the interest rate.
e) None of the above.
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124. Assume that net exports of country XYZ increases by Rs.1 billion. As an effect, its equilibrium real
GDP will rise by more than Rs.1 billion. Explain why is there a multiplier?
a) An increase in net exports appreciates the rupee causing a further increase in net exports
b) An increase in net exports causes an increase in tax revenues which increases government
spending
c) An increase in net exports increases income causing an increase in induced consumption
d) An increase in net exports causes an increase in the money supply
e) An increase in net exports results in an increase in inflation
125. Suppose country ABC’s government increases its spending by ΔG. Which curve will shift if any?
a) Investment saving (IS) curve will shift to left b) IS curve will shift to right
c) No change in IS curve d) Both (a) and (b)
126. When the consumption curve of an economy is a straight line, the marginal propensity to save (MPS):
a) Is equal to one plus the MPC b) Increases as income increases
c) Is equal to one minus the MPC d) Decreases as income increases
e) Is that part of national income not spent on consumption
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127. A section of the economy has a disposable income of Rs1,000 crores and their consumption is Rs800
crores. With an increase in the income levels, the disposable income increases to Rs1,500 crores. At
this level of disposable income, their consumption is Rs. 1,000 crores. At this level of disposable
income and consumption, find the marginal propensity to save (MPS):
a) 0.5 b) 0.4
c) 0.7 d) 0.6
e) 0.2
128. A country has decided to increase the autonomous investment by Rs 2,000 crores. As a result national
product increased to Rs 25,000 crores from Rs.15,000 crores. What is the value of the investment
multiplier?
a) 15 b) 12.5
c) 7.5 d) 6.2
e) 5
129. In an economy, the GDP at market price is Rs15,000 crore, the total consumption expenditure on goods
and services is Rs 5,000 crore, the gross investment is Rs. 4,500 crore, and the government expenditure
is Rs 3.500 crore. If exports are Rs. 2,500 crore, what would be the imports in the economy?
a) Rs. 4,500 crore b) Rs. 5500 crore
c) Rs. 500 crore d) Rs. 3,500 crore
e) Rs. 2,500 crore I
130. Suppose the government decides to cut taxes instead of increasing spending, what could be the effect of
this fiscal policy on the economy?
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a) Lower tax rates will lead to increase in consumptions or savings
b) Decrease in tax rates will lead to decrease in consumptions and savings
c) Cuts in taxes will not have any effect on the economy
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d) Government spending will be reduced by cuts in taxes

e) Government spending will not have any relation with cuts in taxes
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UNIT 14 – CLASSICAL AND KEYNESIAN ECONOMICS
131. The Keynesian, Classical and Intermediate ranges apply to:

a) The shape of the individual market supply curve
b) The slope of the individual market demand curve
c) The slope of aggregate demand and aggregate supply curve
d) The slope of the aggregate demand curve only
e) The shape of an individual demand curve
132. Suppose as a reaction to terrorist attacks, the Indian government was to create a new branch of the
military employing 1,000,000 new service men and women to monitor malls, large sporting events, and
infrastructure (bridges, dams, refineries, etc.). Hiring and paying these people would lead to likely:
a) Increase aggregate demand b) Increase aggregate supply
c) Decrease aggregate demand d) Decrease aggregate supply
e) No change in aggregate supply and demand
133. Reduction of marginal tax rates undertaken explicitly to increase incentives of “innovate, take risks,
and work hard” would be an example of:
a) Supply-side economics b) Incentives-based deprecation
c) Keynesian economics d) Progressivism
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e) Say’s Law of market
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134. According to the monetarist acceleration theory, in the long-run:,
a) The actual unemployment rate will be below the natural rate of unemployment
b) The actual unemployment rate will be equal to the natural rate of unemployment
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c) The actual inflation rate will be equal to the natural inflation rate
d) The budget deficit will be equal to zero
e) The money supply per year will be growing at a constant rate per year
135. In the loan funds market, what is implied by a vertical demand curve for the government?
a) Government does not play any role in determining the equilibrium interest rate.
b) Government’s decision on the level of the deficit is not affected by the private demand for funds.
c) Government does not play any role in determining aggregate demand for funds.
d) Government’s decision on the level of the deficit is not affected by the market interest rate.
e) Government’s decision on the level of expenditure will affect the aggregate demand
136. In the money market equilibrium equation: M=kPY, assume that k (the proportion of income held as
cash) is constant. Which of the following statements is true?
a) An increase in the money supply of Rs. 200 million will increase the equilibrium GDP by Rs. 200
million.
b) An increase in GDP may increase the money supply and reduce the price level at the same time.
c) A 10% increase in money supply will increase the price level by 10%.
d) If the price level increases by 5% either the money supply will increase by 5% or GDP will
decrease by 5%
e) An increase in money supply will have proportionate increase the income
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137. Which of the following is true about the concept of complete crowding out in the classical model?
a) Any change in government policy can have no effect on the economy.
b) Any change in the government deficit can have no effect on the economy.
c) Any change in the government deficit can have no effect on total spending.
d) Any change in the government deficit is counteracted by the same change in investment (private
demand for loanable funds).
e) Economy operates at full employment or at its potential output
138. Assume that the velocity of money in an economy is 6.1 and the money supply (MS) is Rs. 530 crore.
Determine the equilibrium level of output in the economy:
a) Rs86.89 crores b) Rs 88.86 crores
c) Rs3323 crores d) Rs3233 crores
e) Rs.3332 crores
139. If in response to a weak employment picture, a law was passed to increase the number of lanes on all
interstate highways by at least one lane this would likely :
a) Increase aggregate demand b) Increase aggregate supply
c) Decrease aggregate demand d) Decrease aggregate supply
e) Decrease in economic growth
140. A decrease in taxes and creating an environment that is conducive for workers to work and save, as per
supply side economists, will cause:
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a) Aggregate Demand to increase b) Aggregate Demand to decrease
c) Aggregate Supply to increase d) Aggregate Supply to decrease
e) Aggregate Supply equals to Aggregate Demand
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UNIT 15 – FISCAL POLICY AND BUDGET DEFICIT
141. According to the Keynesian model, the optimal fiscal policy is to:
a) Decrease cyclical but not structural deficits during recession

b) Reduce cyclical and structural deficits during a recession
c) Increase structural deficits during a recession
d) Maintain a balanced budget in case of national emergency
e) Increase cyclical but not structural deficits during a recession
142. Assume that production in India is valued at Rs. 100,000 crore. National income is therefore Rs.
100,000. Of their income, workers pay Rs. 10,000 crore in taxes, save Rs. 5,000 crore, spend Rs.
80,000 crore on consumer goods, and spend Rs. 5,000 crore on imports. Businesses spend Rs. 10,000
crore in new investment spending and, foreigners spend Rs. 5000 crore on exports. In order to avoid
any problems of inflation or unemployment, the government should have a budget deficit or surplus of:
a) 0 b) Rs. 5000 crore deficit

c) Rs. 5000 crore surplus d) Rs. 10000 crore deficit
e) Rs. 20000 crore deficit
143. Several adjustments have been suggested by various economists to the official budget deficit to be able
to measure the effects of the budget deficit on the economy. For which of the following would the
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adjusted deficit be larger than the official budget deficit?
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a) State and local budget surpluses need to be added to the official budget deficit
b) The effects of unemployment need to be taken out of the official budget deficit
c) The effects of inflation need to be taken out of the official budget deficit
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d) Off-budget spending needs to be added to the official budget deficit

e) The effects of decreasing prices need to be taken out of the official budget deficit
144. If lowering output was the main objective of central bank when it raised the interest rate, can fiscal
policy achieve the same objective?
a) No, fiscal policy can’t achieve the same objective

b) Yes, fiscal policy can achieve the same objective
c) Fiscal policy’s objective will be diluted
d) There will be no effect in the objective of fiscal policy with raise in interest rate
e) Can’t say
145. In which cases would the deficit of a government be considered problematic by the majority of the
economists?
a) When the deficit was the result of mainly capital spending (eg infrastructure)
b) When the deficit was brought about by a stabilization program during a probably temporary
recession
c) When the deficit adds to an existing budget surplus
d) When private and public lenders lose faith in the capacity of the government to pay back its debts
e) When the deficit was the outcome of increase in tax rates
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146. If the actual unemployment rate is below the natural rate of unemployment, it would be expected that:
a) The rate of inflation would increase
b) The Phillips curve would shift to the left
c) Wages would fall
d) The natural rate of unemployment would fall
e) The actual rate of unemployment would fall
147. The role of the progressive tax system as an autonomous fiscal stabilizer requires that the budget:
a) Should require actual deficits be equal to zero on an average
b) Should go into a surplus at appropriate points in the business cycle
c) Cannot have a structural deficit component
d) Both a & b
148. When automatic fiscal stabilizers are in place, a shock that causes a fall in the level of economic
activity automatically:
a) Results in a decline in the government budget deficit that lessens the fall in income
b) Will increase employment in the economy
c) Requires the central government to balance the budget
d) Will lead to a permanent increase in the budget deficit
e)
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Results in a rise in the government budget deficit that lessens the fall in income
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149. If the central government wants to use fiscal policy to increase output then an appropriate policy tool
would be:
a) To increase marginal income tax rates b) Increase individual income tax rates
c) To decrease marginal income tax rates d) Decrease the money supply
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e) Increase corporate income tax rates

150. Assuming that the economy slides into recession and national income declines, which of the following
provides the best example of an automatic fiscal stabilizer?
a) Transfer payments decrease and income tax revenue increases
b) Transfer payments decrease and income tax revenue decreases
c) Transfer payments increase and income tax revenue increases
d) Transfer payments increase and income tax revenue decreases
e) Transfer payments and income tax revenue equalize
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UNIT 16 – BANKING AND MONEY SUPPLY
151. In 2015, aggregate loan portfolio of India’s for-profit microfinance institutions (MFIs) registered with
the Reserve Bank of India (RBI) as non-banking financial companies (NBFCs) recorded financials of
Rs. 31,450 crore and disbursed to 28.7 million borrowers as of 31st December 2014. MFI does not allot
loans beyond Rs.50000 and average loan amount disbursed per account was Rs.16.194. In an analysis, it
was observed that MFI did not match requirements of small entrepreneurs who were opting for amount
more than Rs.50,000 lakhs and up to few lakhs. Whereas commercial banks were too reluctant to aid
such type of requirements. As a result, 57.7 million small business units (4% of aggregate) were
benefitting with MFI’s. Therefore, central government plans to set up Mudra Bank (Micro Units
Development Refinance Agency Bank) to meet the entrepreneur’s requirement. Mudra bank will have a
corpus of Rs. 20,000 crore to refinance all types of MFI’s . It will have a credit guarantee corpus of Rs.
3,000 crore. Such type of bank falls under which financial system?
a) Indian financial system b) Banking system
c) Money markets d) Money and Banking system
e) All of the above
152. Assume that the currency in circulation is Rs.700, demand deposits in banks are Rs.200, other deposits
in the central bank are Rs.175 and post office savings deposits are Rs.350 ( All figures are in crores)
Determine M1 .
a) 900 b) 500
c) 1075 d) 1000
e) 1070
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153. In an economy, primary issues are 400 and secondary issues are 90. The finance ratio is 0.2. What is the
national income of the economy?
a) 1450 b) 2400
c) 2500 d) 2455
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e) 2450
154. If primary issues are equal to 210, secondary issues are equal to 150 and national income is 22000,
what is the finance ratio?
a) 0.016 b) 0.026
c) 0.036 d) 0.006
e) 0.001
155. Assume that M1 is Rs. 1700 crore. M2 is Rs. 1800 crore, post office savings bank deposits are Rs. 300
crore, and time deposits in banks are Rs.350 crore. Determine the value of M3.
a) Rs,2050 crores b) Rs.1750 crores
c) Rs.2055 crores d) Rs. 2000 crores
e) Rs. 1800 crores
156. Assume that M1 for an economy is Rs. 1600, demand deposits in banks are Rs. 450, other deposits with
the RBI are Rs. 250, post office savings deposits are Rs. 250, and time deposits with the RBI are Rs.
200 (all figures are in crores). The currency in circulation is ____________ .
a) 850 b) 800
c) 750 d) 900
e) 950
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157. In 2015, the Development Bank of Singapore decided to slow the rate of investment in India. Since
2010, DBS has recorded profit of Rs. 15,155 crore till March 2014. But from March 2014 to September
2014 it has shown a slight increase of Rs.1,649 crore. Later in 2015, after reviewing its growth
portfolio, they decided to stop lending to infrastructure as they have sharp rise in non-performing assets
(NPAs) in financial year 2013-14. Such type of lending is known as________.
a) Priority sector lending b) Remittance business
c) Commercial lending d) Lending money
e) All of the above
158. In an economy, the currency with the public is Rs. 6200 crore and the bank reserves are Rs. 1200 crores.
The currency deposit ratio is 0.42 and the reserve ratio imposed by the bank is 0.14. Find the amount of
money supply in the economy.
a) Rs. 2054 crores b) Rs. 2000 crores
c) Rs. 18075 crores d) Rs. 18764 crores
e) Rs. 18700 crores
159. Find the value of the multiplier, given C/D ratio = 1 and R/D ratio as 0.2
a) 1.67 b) 1.76
b) 6.17 c) 7.16
e) 0.67 I
160. In March 2015, Central government of India proposed to introduce lending certificates. This was a part
of government’s “re-orientation” for lending schemes where banks received targets to provide credit to
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specific sectors such as exports and agriculture. Lending certificates provide a market-driven incentive
for performing sectors in market. Till 2014 such sector were provided lending over Rs.21.54 lakh crore
through organized lending market. Through lending certificates renewable energy sector is given Rs.
10 crore loans and Rs.5 crore for social infrastructure such as schools, healthcare facilities, drinking
water facilities and sanitation facilities. To enhance credit to small and marginal farmers, a separate sub
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limit of 8% was introduced in the lending reform. Such type of lending certificate is categorized in
which type of lending?
a) Lending money b) Remittance business
c) Commercial lending d) Priority sector lending
e) All of the above
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UNIT 17 – MONETARY POLICY
161. When the Government of a country conducts open market purchases,
a) It buys Treasury securities, which increases the money supply

b) It buys Treasury securities, which decreases the money supply
c) It borrows from member banks, which increases the money supply
d) It sells treasury securities, which increases money supply
e) It lends money to member banks, which decreases the money supply.
162. When the value of money rises, the amount in rupees terms needed to buy a representative basket of
goods
a) Increases, and so the price level rise

b) Increases, and so the price level fall
c) Decreases, and so the price level rise
d) Will not have any change and so the price level fall
e) Decreases, and so the price level fall
163. Which of the following is incorrect in the long run? I

a) Higher money supply growth leads to higher output growth
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b) Higher money supply growth leads to slow down economic growth
c) An unemployment rate of zero is unobtainable
d) Per-capita real GDP depends on productivity
e) An increase in the money supply raises the price level.
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164. Which of the following policies would someone, who wants the government to follow an active
stabilization policy, recommend when the economy is experiencing unemployment above the natural
rate?
a) Decrease the money supply b) Increase government expenditures

c) Increase taxes d) Decrease taxes
e) All of the above are correct.
165. If workers continually demand higher wages, which are accommodated by expansionary monetary
policy, the resulting inflation is known as:
a) Demand-pull inflation. b) Supply-side inflation.

c) Supply-shock inflation. d) Cost-push inflation.
e) Demand-push inflation
166. Suppose that households became mistrustful of the banking system and decide to decrease their
checking accounts and increase their holdings of currency. Using the money demand and money supply
model and assuming everything else is held constant, the equilibrium interest rate should:
a) Not change b) Increase

c) Decrease, then increase d) Increase, then decrease
e) Decrease
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167. If the central bank can act as a lender of last resort during a banking panic, banks can
a) Satisfy customer withdrawal needs and eventually restore the public’s faith in the banking system
or call in their loans to their customers and eventually restore the public’s faith in the banking
system.
b) Allow public to withdraw their savings and close off their respective accounts
c) Borrow more and more money from the central bank, and this will lower its reserves and decrease
the public’s faith in the banking system.
d) Encourage the public to borrow directly from the central bank, and this will worsen the banking
panic.
e) Discourage the public to borrow directly from the central bank so that banking panic can be
restored.
168. The banking system has reserves of Rs. 6500 crore and the SLR (reserve requirement) is 21 percent. If
the reserve requirement is increased to 22 percent, the banking system’s capacity to support demand
deposits decreases by
a) Rs1,406.93 crores b) Rs2,945.45 crores
c) Rs 3,052.38 crores d) Rs1,606.95 crores
e) Rs. 1,046.39 crores
169. Suppose an economic analyst suggests that investors should now hold cash instead of stocks or bonds.
The analyst is probably encouraging an increase in money balances for which reason?
a) Present value demand b) Precautionary demand
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c) Speculative demand d) Transaction demand
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e) Insufficient information
170. Refer to the table. Assume that Bank XYZ is operating with no excess reserves. What is their actual
reserve ratio?
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Bank XYZ’s Balance Sheet

(Amount in Rs.)
Assets Liabilities
Reserves 3000 Deposits 20000
Loans 22000 Capital 5000
Total 25000 Total 25000
a) 15% b) 13.6%
c) 20% d) 12%
e) 25%
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UNIT 18 – INFLATION
171. Organization of Petroleum Exporting Countries (OPEC) which is an intergovernmental organization

aims at maintaining stability in the oil prices through efficient and regular supply of petroleum. In
1973, OPEC announced oil embargo, which resulted in increase of oil prices from $3 per barrel to $12.
Again in 1979, the decision of OPEC to decrease oil output due to Iranian revolution caused the oil
prices to reach $ 39.5 in less than a year. As oil is an input for most of the products being produced in
the country, prices of all such commodities have increased leading to inflation. This type of inflation is
_____ .
a. Demand-Pull Inflation b. Wage-Pull Inflation
c. Profit-Pull Inflation d. Supply-Shock Inflation
e. Cost-push Inflation.
172. Consumer Price Index (CPI) values of India were at 113.8 and 119.7 in January 2014 and January 2015
respectively. The rate of inflation in January 2015 is approximately.
a. 4.37% b. 5.18%
c. 6.33% d. 6.98%
e. 7.12%.
173. Debtors balance in the balance sheet of Associated Cement Companies (ACC), is at Rs. 410.71 crores
and creditors balance is Rs. 1,052 crores. Which of the following statements is true?
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a. ACC will be benefitted, as its debtors balance is less than its creditors balance
b. ACC will lose, as in nominal terms the amount it pays is more than the amount it receives
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c. ACC will lose, as in real terms, the increase in the value of money it has to pay is more than the
increase in the value of money it receives
d. ACC will be benefitted, as in real terms; the decrease in the value of money it has to pay is more
than the decrease in the value of money it receives
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e. ACC will be benefitted, as in real terms; the amount it has to pay is less than the amount it
receives.
174. Which of the following assets which are part of your investment portfolio are likely to experience
decline in its value due to inflation?
a. Equity Shares b. Bank Deposits
c. Gold d. Real Estate
e. Mutual Funds.
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[For questions 175-176]:

Look at the following diagram indicating the unemployment rate and inflation in the US economy from 1978
to 2011:
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175. Based on the above diagram, identify in which of the following periods, did the concept of Phillips
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Curve hold good?

a. 1986 b. 1994
c. 2003 d. 2008
e. 2011.
176. Based on the above diagram, identify in which of the following periods concept of Phillips Curve did
not hold good?
a. 1979 b. 1982
c. 1991 d. 2008
e. 2011
177. Recent cut of benchmark repo rate by 25 basis points to 7.5% is an attempt of monetary regulator, RBI:
a. To reduce inflation
b. To boost growth
c. To increase the cost of money
d. To discourage the production activity of corporate
e. To reduce the lending capacity of the banks
178. Historically, it has been observed that whenever Indian economy experienced double digit inflation
during the periods like 1990, 1996, 2009, RBI and Government undertook certain measures to control
the inflation. Which of the following measures is usually undertaken by the Government?
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a. Increasing Repo Rate b. Increasing Statutory Liquidity Ratio

c. Increasing Cash Reserve Ratio d. Issue of New Bonds
e. Increasing Bank Rate.
179. Mr. Chetan opened a Xerox shop and employed three workers to take photo copies. The maximum
number of workers that can be employed on a Xerox machine is two; one is to place the A3 or A4
sheets into the machine and the other one is to take out the photocopied sheets. Hence, there is no
benefit of employing the third worker. This phenomenon is called?
a. Natural unemployment b. Disguised unemployment
c. Frictional unemployment d. Cyclical unemployment
e. Structural unemployment.
180. From November 1990 to July 1992, Indian economy suffered cumulative impact of a large fiscal
deficit. Adding fuel to this, rupee depreciated against dollar by 32%. At the same time, the prices of
administered items and excise duties went up. As a result, inflation went up beyond 15%. This type of
inflation is called____.
a. Creeping inflation b. Running inflation
c. Galloping inflation d. Mild inflation
e. Major inflation.
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UNIT 19 – INTERNATIONAL TRADE AND BALANCE OF PAYMENTS
181. Brazil can produce a unit of Coffee using 5 units of labour and China requires 10 units of labour to
produce the same. China produces a unit of Steel with 5 units of labour and Brazil requires 10 units
to produce the same. All other factors are used in the same proportion by both the countries. In this
context,_________________________.
a. China should specialize in producing coffee and exchange it with Brazil for Steel, as it has
absolute advantage in producing coffee
b. Brazil should specialize in producing coffee and exchange it with China for steel, as it has
comparative advantage in producing coffee
c. Brazil should specialize in producing steel and exchange it with China for steel, as it has absolute
advantage in producing steel
d. China should specialize in producing steel and exchange it with Brazil for coffee, as it has
absolute advantage in producing steel
e. China should specialize in producing both steel and coffee, as it has comparative advantage in
both.
182. Apple Inc., a US based Multinational Corporation, designs and markets iPad which was released in the
market in 2010. According to the data provided by a Massachusetts-based premier global market
intelligence firm, IDC, the shipments of iPad to India rose to a record level by the end of year 2014.
Applying the Imitation Gap Theory proposed by Posner to this context, which of the following
statements is more likely to justify the shipments of iPad to India?
a. Demand lag is shorter than imitation lag
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b. There are no tariff barriers between India and US
c. Imitation lag is shorter than demand lag
d. There is a stability of exchange rates between India and Germany
e. India is a population rich country and hence Apple started exporting to India.
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[For questions 183-184]:

183. Russia can produce a diamond using 10 units of labour and the US requires 20 units of labour to
produce the same. The US produces a unit of oil with 25 units of labour and Russia requires 20 units to
produce the same. All other factors are used in the same proportion by both the countries.
Based on the above, which of the following statements is true?
a. Russia has a comparative advantage in producing oil
b. The US has an absolute advantage in producing diamond
c. The US has an absolute advantage in producing oil
d. The US has no comparative advantage in producing both oil and diamond
e. The US has a comparative advantage in producing oil
184. In the above scenario, if both the countries should benefit from international trade, the optimal decision
would be
a. Russia should specialize in producing diamond and exchange it with the US for oil
b. The US should specialize in producing diamond and exchange it with China for oil
c. The US should specialize in producing oil and exchange it with Russia for diamond
d. Russia should specialize in producing oil and exchange it with the US for diamond
e. Both (a) and (c) above.
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185. In the budget 2015-16, Union Finance Minister, announced an increase in the customs duty on
commercial vehicles from 10% to 40 %. Which of the following is not the possible consequence of the
increase in customs duty on commercial vehicles?
a. Inefficient production by local producers
b. Revenue generation for the government
c. Reduction in the demand of high priced commercial vehicles
d. No protection to local producers
e. Reduction in the foreign currency expenditure.
186. Which of the following international transactions that took place between India and other countries is
shown as a debit transaction in India’s Balance of Payments?
a. Oil imports by Essar Oil from Iran
b. US based foreign investor investing in Indian bond market
c. Mr. Agarwal, a Non Resident Indian investing in SBI term deposit account
d. External commercial borrowings by Tata Steel
e. Remittance of money by Software engineer working in the US to his parents.
187. Foreign exchange reserves of India at the beginning of a month were at $327.88 bns. Its current
account has a deficit of $ 10.2 bns and capital account has a surplus of $ 23.45 bn. Its foreign exchange
reserves, at the end of the month were
a. $ 323.67 bns b. $ 341.13 bns
c. $ 350.12 bns
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d. $ 352.17 bns
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e. $ 358.12 bns
188. Export of software products by Infosys is recorded in which of the following accounts of India’s
balance of payments?
a. Merchandise trade account b. Current account
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c. Capital account d. Invisibles account

e. Both (b) and (c) above.
189. In India, during the financial year 2013-14, import and export values of mineral fuels, mineral oils and
other related products which are price inelastic in nature were US$ 181,940.23 million and US $
64,512.58 million respectively. The contribution of these products to total imports and exports during
the year was 41% and 21% respectively. Under such a scenario, _____________.
a. Depreciation of rupee is likely to have a positive effect on India’s balance of payments position
b. Appreciation of rupee is likely to have a positive effect on India’s balance of payments position
c. Depreciation of rupee is likely to have a negative effect on India’s balance of payments position
d. Appreciation of rupee is likely to have a negative effect on India’s balance of payments position
e. Both (b) and (c) above.
190. During subprime crisis in 2008-09, Indian import bill went up mainly due to huge amount of oil bill. At
the same time, the demand for our exports came down due to decline in consumption expenditure in the
US and EU. As a result, there was an increase in current account deficit causing disequilibrium in
India’s balance of payments. This type of disequilibrium is called as __________________.
a. Structural disequilibrium b. Cyclical disequilibrium
c. Secular disequilibrium d. Short-run disequilibrium
e. Long-disequilibrium.
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UNIT 20 – ECONOMIC INDICATORS
For Questions 191-192:

The chart below indicates the performance of S&P CNX Nifty, stock index of NSE from April 2014 –
March 2015:
191. Stock index is one of the economic indicators. As an analyst, which of the following can you infer from
the performance of the given index?
a.
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Economy is likely to experience recession in the near future
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b. GDP of Indian economy is likely to experience better growth rate in the near future
c. Indian economy has experienced super normal growth rate in the year 2013-14
d. Stock prices of the companies in cyclical industries will come down
e. Inflation rate in the economy went up in the year 2014-15
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192. The given stock index is an example of which of the following indicators?
a. Lagging indicators b. Leading indicators
c. Coincidental indicators d. Acyclical indicators
e. Countercyclical indicators.
The following is the interest rate scenario in India in the year from February 2011 – December 2011.
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193. Which of the following is the likely effect of the above situation on the performance of Indian
economy?
a. Financial cost of the corporate will go up
b. The demand for automobile products will go up
c. The demand for housing loans will go up
d. Corporate go for expansion of their business
e. The demand for personal loans will go up
The following figure indicates the performance of India’s external sector with respect to Balance of
Trade from January 2014- January 2015:
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194. During November-December 2014, there has been a significant increase in trade deficit. Considering
‘balance of trade’ as a countercyclical indicator, what do you analyze about the performance of Indian
economy in November 2014?
a. Indian economy was in boom phase
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b. Indian economy was in recession phase

c Indian economy was in depression phase
d. India’s foreign exchange reserves were increased
e. India’s investments in other countries went up.
For Question 195-196:
Consider the following diagram indicating the capacity utilization of Indian manufacturing sector:
Source: www.rbi.gov.in
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195. The capacity utilization of Indian manufacturing sector started declining from the first quarter of the
2008 and reached to minimum level by first quarter of the year 2009. What do you interpret about the
performance of Indian economy during the period under consideration?
a. Indian economy was in recession phase
b. Indian economy was in boom phase
c. Indian economy was in recovery phase
d. It was the time that the companies expanded their business
e. Indian economy was in maturity phase.
196. The capacity utilization is an example of which of the following indicators?
a. Lagging indicator b. Leading indicator
c. Procyclic indicator d. Acyclic indicator
e. Countercyclical indicator.
The following graph reflects the consumer confidence index of United States from January 2014 to
April 2015:
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197. Which of the following is not your likely inference from the above chart?
a. From July 2014 to January 2015, there is an evidence of consumer’s savings going up and
spending coming down
b. After January 2015, confidence of consumers about the stability of their income increased
c. From July 2014 to January 2015, there is an indication of the economy performing well
d. From May 2014 to July 2014, economy is almost stable, as consumer spending is also almost
stable
e. As a whole, from January 2014 to April 2015, there has been a trend of increasing consumer
spending and decreasing savings.
198. Which of the following is a general economic indicator of the well being of an economy?
a. Employee cost index b. Consumer price index
c. Foreign exchange reserves d. Employee cost index
e. Capacity utilization.
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199. Which of the following is an indication of economy getting into depression?

a. Increase in construction spending b. Increase in consumer price index
c. Increase in capacity utilization d. Increase in unemployment rate
e. Increase in personal spending.
200. Distribution of income among the individuals in an economy is an example of which of the following
indicators?
a. Leading indicator b. Acyclic indicator
c. Procyclic indicator d. Lagging indicator
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UNIT 21 – BUSINESS CYCLES
For question 201-202:

In India, it is observed that for every one rupee of increase in income, people consume Rs.0.75. I the
autonomous spending of Indian economy is:Rs.2 trillion.
201. The multiplier of Indian economy is:
a. 0.25 b. 0.75
c. 1.00 d. 2.00
e. 4.00.
202. Equilibrium income of the economy (in trillion) is:
a. 0.25 b. 0.75
c. 0.50 d. 2.00
e. 4.00
For Questions 203-204:
Consider the following diagram of housing inventories of the US economy
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203. The period between 2007 and 2008 indicates which phase of the business cycle?
a. Prosperity b. Recession
c. Depression d. Recovery
e. Normal.
204. During the period 2013, which of the following is most likely to be true about the performance of the
US economy?
a. Increase in interest rate b. Increase in inflation rate
c. Decrease in production activity d. Increase in consumer spending
e. Increase in unemployment rate
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205. Consider the following characteristics of recession phase of the business cycle:
I. Fall in Consumer Spending II. Accumulation of Inventories
III. Fall in Production Activity IV. Increase in Unemployment Rate
Which of the following is the most likely sequence of recession phase of business cycles?
a. I, III, IV and II b. I, II, IV and III
c. I, IV, III and II d. I, II, III and IV
e. I, III, IV and II.
Consider the following graph which indicates consumption function of an economy:
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206. If Marginal Propensity to Consume (MPC), in the above graph is 0.8, which of the following statements
is true?
a) When income increases by 1 unit, consumption comes down by 0.8 unit
b) When income decreases by 1 unit, consumption decreases by 0.8 unit
c) When income increases by 1 unit, savings decrease by 1 unit
d) When income decreases by 1 unit, savings decrease by 0.8 unit
e) When income increases by 1 unit, consumption increases by 0.8 unit
207. M/s. Colours Home, an interior designer firm is looking for the candidates, who have Diploma in
Interior Designing. At the same time, Ms. Sruthi with Post Graduate Diploma in Interior Designing is
looking for the suitable job opportunity. However, Ms. Sruthi is unaware of the opportunity with M/s.
Colours Home and vice versa. Resultantly, Ms. Sruthi is unemployed. This type of unemployment is
called:
a. Cyclical Unemployment b Frictional Unemployment
c. Structural Unemployment d. Disguised Unemployment
e. Critical Unemployment.
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For questions 208-209:

The following diagram represents short run supply (SRS), Aggregate demand (AD) and price (P) lines:
208. Which of the following is not implied in the following diagram, if initial short-run equilibrium is at the
price P and aggregate demand AD?
AGGREGATE DEMAND AND SUPPLY
SRS
P
r
P
i
c
e P1 AD
AD1
Real GDP
a) Decrease in government expenditure b) Fall in real GDP

c) Fall in price d) Increase in short-run supply
e) No change in short-run supply.
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209. In the above diagram, if AD line shifts rightward, without any change in SRS line, what does it imply?
a) Decrease in government expenditure b) Decrease in real GDP
c) Increase in price d) Decrease in private spending
e) Change in equilibrium.
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210. Consider the following chart representing actual and natural unemployment rates in an economy:
The economy under consideration is likely to experience which phase of business cycles during the
time period 5?
a) Boom b) Recession
c) Normal d) Recovery
e) Prosperity
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UNIT 22 – ECONOMIC GROWTH, DEVELOPMENT AND PLANNING
211. Which of the following does not necessarily imply economic development?
a. Increasing GDP growth rate b. Optimal use of natural resources
c. Effective use of human resources d. Access to advanced technology
e. Efficient capital formation.
For questions 212-213:
The following graph indicates the per capita income and GDP of the given six countries, as per the estimates
for the year 2013.
Per Capita
GDP
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Source: www.cia.gov
212. If per capita income is considered as a measure of economic growth, which of the following countries
has the highest growth?
a) Switzerland b) United States
c) Japan d) United Kingdom
e) China
213. If GDP is considered as a measure of economic growth, which of the following countries has the lowest
growth?
a) India b) United States
c) Japan d) United Kingdom
e) Switzerland
214. Which of the following statements is not true with respect to Production Possibility Curve (PPC)?
a. It implies the relationship between capital and consumer goods
b. It is usually concave to the origin
c. Outward shift of PPC indicates economic growth
d. Outward shift of PPC indicates economic development
e. Both (a) and (c)
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215. Which of the following statements is not true with respect to Classical Theory of Thomas Carlyle?
a) It highlights the importance of the availability of natural resources for economic growth
b) A subsistence of level of wages has to be maintained
c) It describes economics as dismal science
d) More emphasis is laid on capital accumulation
e) With the increase in population, law of diminishing marginal utility applies.
216. Which of the following is not a non-renewable natural resource?
a) Coal b) Oil
c) Natural Gas d) Fossil Fuel
e) Solar Energy
217. Which of the following is not a part of financial sector reforms?
a) Reduction in Statutory Liquidity Ratio
b) Revision in the format of bank’s balance sheet and profit & loss account
c) Establishment of Special Recovery Tribunals for faster recovery of arrears in loans
d) Reduction in Cash Reserve Ratio.
e) All the above
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218. Which of the following is not an assumption of Neo-Classical Model?
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a) The economy is competitive
b) The economy does not operate at full employment
c) The technology remains constant
d) Output is homogeneous
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e) Increase in output per worker is the sum of capital deepening and technological change
219. The main theme of 1991 economic reforms in India is
a) Liberalization, Securitization and Privatization
b) Privatization, Securitization and Liberalization
c) Liberalization, Privatization and Globalization
d) Privatization, Securitization and Globalization
e) Globalization, Securitization and Liberalization.
220. Which of the following is/are factors contributing to the economic development?
I. Natural resources II. Human resources
III. Capital formation IV. Technical knowledge
a) Only (II) above b) Both (I) and (III) above
c) Both (II) and (IV) above d) (I), (III) and (IV) above
e) All (I), (II), (III) and (IV) above.
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MULTIPLE CHOICE – ANSWERS AND EXPLANATIONS
UNIT 1 – INTRODUCTION TO MICROECONOMICS
1. d. Mixed economy: A combination of free market economy and command economy is known as
mixed economy. The government controls price fluctuation of certain essential goods to achieve certain
objectives such as low level of inflation and high level of unemployment.
2. a. Microeconomics: Microeconomics is the branch of economics that is concerned with the behaviour
of individual units for example - the person, firm and household. It is concerned about the individual
behavior, forces of supply and demand at the level of a single market.
3. d. Macroeconomics: Macroeconomics is concerned about inflation, unemployment, economic growth,
etc. Macroeconomics looks at a larger picture and is study of economy as a whole.
4. d. The Production Possibility Curve: The Production Possibility Curve shows the maximum output
combination for two or more goods given at a set of inputs (resources, labour, etc). The PPC assumes
that all inputs are used efficiently.
5. d. Market Economy: In this system, allocation of resources takes place on the basis of the market
forces. Consumers indicate their preferences for various goods at various prices through their demand
schedules, while suppliers indicate what is available and at what price through their supply schedules.
When the price of the good supplied matches with the price at which it is demanded, the market price is
determined, and the amount of demand and supply coincides at this price. The role of government is
negligible and free market forces playa vital role.
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6. a. Partial Equilibrium Analysis: In Partial Equilibrium Analysis, a market is studied in isolation from
the rest of the economy. The impact of market forces (demand and supply) on price changes is
analyzed.
7. c. General Equilibrium Analysis (GEA): In an economic system, there are various markets for
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commodities and factors of production. There are many decision-making agents — consumers,
producers, resource owners, and workers, whose decisions are made with a view to maximizing their
individual profits. GEA studies how these various factors function simultaneously in an economy.
Thus, it considers simultaneous equilibrium of all markets and studies the economy as a whole.
8. a. Scarcity and choice: Scarcity leads to the necessity of making choices.
9. b. Relevance of Microeconomics: Resources is scarce but requirements are many, therefore, resources
should be allocated efficiently. Microeconomics aims atsolving the problem of scarce resources and
unlimited wants by allocating resources efficiently among competing needs at the level of the
individual and the firm.
10. c. Construction and use of models: Construction and use of models facilitates the process of
understanding complicated situations by constructing simplified models.
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UNIT 2 – THEORY OF DEMAND AND SUPPLY
11. b. Market Demand: Market demand is the sum of demand of all individual consumers for a product in
a given period of a time.
12. d. Demand forecasting: Demand forecasting can be described as prediction of the future level of
demand on the basis of past and present knowledge and experience, with a view to avoid
underproduction or under production.
13. d. Price elasticity of the product =Δp/Δp×p/q
Δq=65-60=5
Δp=25-24=1
Therefore ep=5/1×25/65=1.9
14. a. Test Marketing: Test marketing is a method where a test area represents a whole market. It is
chosen to launch the product. The consumer’s response is measured.
15. a. Elasticity of price (ep ) = Δp/Δp×p/q
Q=3000 pairs of shoes
P=155
Δp=155-150=5
ep =0.68
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Δq= x
0.68=x/5 × 155/3000
X = 0.68×5×3000/155
Δq= x=65.7 units
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As the price has decreased the change in quantity demanded is 65.7. So the new quantity demanded
will be 3000+65.7=3065.7 or 3066 units
16. c. Supply Theory: The supply of a product refers to the various quantities of a product that could be
offered by the seller at various prices in a specific period of time. Apart from prices, factors such as
cost of production, possibility of the supplier switching to complementary or substitute products,
climatic conditions and changes in government policies affect the supply of a product.
17. c. Price elasticity of Demand :Price elasticity of demand can be defined as the percentage change in
the quantity demanded in relation to the percentage change in its price with other factors remaining
constant.
18. a.121. Equilibrium price and quantity is determined by equating demand and supply functions.
10500- 50 P=2000+20 P
70 P=8500
P=Rs.121
19. c. Expert Opinion: The expert opinion method is also known as expert consensus method. In this
method the findings of market research and the opinions of management executives, consultants, trade
association officials and sector analysts are considered and based on these the demand is estimated.
20. a. Surveys: Surveys are forecasting methods where information is collected through mail, e-mail,
telephone or personally interacting with respondents in order to determine demand.
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UNIT 3 – CONSUMER BEHAVIOR
21. b. Utility: Utility in economics means the extent of satisfaction obtained from the consumption of
products and services by consumers. The concept of utility was developed by economists to explain the
basic principles of consumer choice and behavior.
22. c. Total Utility: Total utility can be defined as the amount of utility derived by a person from the
consumption of particular product in specific period of time; the total utility varies with the number of
units consumed by the person.
23. d. 150
Consumer surplus can be defined as the difference between what a consumer would like to pay for a
product and what he actually pays. In the given problem; Consumer surplus from 1st product = 300 –
200 = 100 Consumer surplus from 2nd product = 250 – 200 = 50 There is no consumer surplus for the
consumer after consumption of 3rd product as the satisfaction level is same as the price. Therefore,
total consumer surplus = 100+50 = 150.
24. a. Substitution effect: Substitution effect refers to the change in the quantity of various commodities
bought due to change in relative prices of commodities, real income of the consumer remaining
constant.
25. e. Marginal rate of Substitution: The marginal rate of substitution is the rate at which a consumer is
willing to substitute one product for another, while maintaining the same level of satisfaction.
26. a. If A and B are the products and MU and P represents marginal utility and price respectively,
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consumer reaches an equilibrium point where MUa/ Pi = MUb /Pb … 600/P = 350/50
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P=600×50/350=Rs.85.7
27. d. Consumer Surplus: Consumer surplus is helpful in the implementation of tax policies. Consumer
surplus is also of great importance to a monopolist in setting the prices for his products. The concept is
further useful in measuring the gains from international trade.
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28. b. -1
Marginal utility is addition made to total utility. Here, there has been a decline in the total utility
derived.
29. c. 20 utils
Marginal utility can be defined as the additional utility that a consumer derives after consuming one
more unit of the same commodity. In this case, the utility after consuming the third apple juice was 100
utils, whereas, after consuming the fourth glass, utility was 120 utils. Hence, the marginal utility is 20
utils. Marginal utility can be defined as the additional utility that a consumer derives after consuming
one more unit of the same commodity. In this case, the utility after consuming the third apple juice was
100 utils, whereas, after consuming the fourth glass, utility was 120 utils. Hence, the marginal utility is
20 utils.
30. b. Consumer behavior theory: Consumer behavior theory explains the relationship between changes
in price and consumer demand.
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UNIT 4 – PRODUCTION FUNCTION
31. b. Technological change: Technological change can be described as the advancement in the
procedures and processes of production of goods and services. Technological advancements help to
increase productivity by reducing costs and preventing wastages by increasing efficiency of the
production process.
32. c. Product Innovation:- Product innovation is the introduction of a new product in the market with
new features. It is difficult to determine the value of product innovation, when compared to process
innovation. But product innovation helps to improve the standard of living of people and can also
generate fresh demand.
33. a. Long run production: In the long-run period, all the inputs are variable and this enables a change in
the scale of production. The change in the quantity of inputs brings about a change in the size of the
firm and scale of output.
34. c. MPL= Change in Q divided by change in L
The marginal product of an input is the extra output added by one extra unit of that input, while other
inputs are held constant. In this situation, marginal productivity of labor has to be analysed, keeping
other things constant. The marginal productivity of labour can be arrived by calculating the ratio of
change in the quantity produced and the change in the input variable i.e. labour.
35. c. 110, 110, 30, 50, 100
The average product can be represented as AP = Q / L, where Q is total product and L is the number of
a variable factor employed.
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36. c. Production: Production can be defined as the transformation of inputs into outputs.
37. b. Isoquant: Isoquant denotes different ways to produce a given rate of output. After determining the
optimal combination of capital and labour, the next step is to add information on the cost of these
inputs. An isocost line is defined as the locus of various combinations of factors which a firm or an
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organization can buy at a given level of output. As the isocost line shows the cost of various
combinations, it is also referred as ‘price line’.
38. a. Increasing returns to scale: Increasing returns to scale is observed when the increase in the total
output is greater than the proportional increase in inputs.
39. c. Constant returns to scale: Constant returns to scale occur when the increase in the total output is
proportional or equal to the increase in inputs.
40. d. Expansion Path: The expansion path for the firm is the locus of different equilibrium points when
the firm’s expenditure increases without any change in the price of inputs.
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UNIT 5 – ANALYSIS OF COSTS
41. a. Break even analysis: The break-even point can be defined as a situation where a firm makes no
profit and no loss. The break-even point depends upon the revenue-output and cost-output functions.
42. d. Direct Costs: Direct costs are costs that are associated with the production of output. These are also
called ‘traceable costs’.
43. e. Incremental costs: Incremental costs are the total additional costs that are incurred in the execution
of a major change in the nature of business activity or managerial decisions. The change can take
several forms such as – extension of a product line, replacement of a machine or equipment, etc.
44. a. 182
Marginal cost is the change in the total cost of a firm as a result of change in one unit of output. In this
case, the additional total cost incurred to produce the 6th unit is
= (average cost of producing sixth unit x number of units) - (average cost ofproducing fifth unit x
number of units)
= 72× 6 – 50×5
=432 – 250 = Rs.182
45. c. 2.8 I
Total cost incurred to produce 3,780 units = Rs 15,000
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Total cost incurred to produce 2,000 units = Rs 10,000
Number of additional units produced (N) = 1780
Cost incurred to produce additional number of units(C) = Rs 5,000
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AVC = C /N
AVC = 5,000/ 1780
AVC = Rs.2.8
46. e: 10,000
6Q = 20,000+4Q
2Q = 20,000
At break-even, TC=TR; therefore,Q = 10,000 units
47. c: Rs217
BEP = Fixed Cost / P - AVC
600 = 1, 00, 000 / P - 50
600 (P – 50) = 1,00, 000
600P - 30,000 = 1,00, 000
P = 1, 30, 000 /600
P = Rs.217
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48. d: 25
At break even quantity, firm has zero profit, hence TR=TC
Equating TR and TC
20000+200Q+Q2 = 30000-200Q+Q2
400Q =30000-20000
400 Q = 10000
Q = 25 units
49. b. Real economies of scale: Real economies of scale are through reduction in the quantity of inputs
such as raw materials, labour and, per unit cost of output.
50. a. Managerial economies: A managerial economy is the efficiency of management increases with an
increase in the size of the company. Here division of managerial tasks are undertaken as the firm
employs persons for each separate task such as sales manager, production manager, etc.
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UNIT 6 – PERFECT COMPETITION
51. a. Perfect competition: In perfect competition there is large number of buyers and sellers selling
homogenous products; free entry and exit of firms. A single buyer or seller cannot affect the price of a
product.
52. c. Horizontal: In perfect competition, the demand curve of a firm is perfectly horizontal at the market
price. The market price has infinite effect on the quantity demanded.
53. d. Production : The firm takes the market price as given and accordingly adjusts its production to
maximize profits in the short run under perfect competition. The objective of the firm is to maximize
profits. The firm adjusts its output level so as to maximize profits.
54. c. Rs.30
Marginal revenue: The addition to total revenue resulting from the sale of one additional unit of output.
55. e. P=MR=MC
The demand curve of a firm in perfect competition is horizontal as the price is determined by supply
and demand forces in the industry. Therefore, the equilibrium price P = MR = MC.
56. a. P= 6 and Q=9
At equilibrium QD= QS 21-2P=3+P P = Rs.6 and Q= 9 units.
57. d. Between 40 metric tonnes and 50 metric tonnes. For 40 metric tonnes total revenue is equal to
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total cost (i.e.Rs.400,000) and for 50 metric tonnes total revenue (Rs.500,000) exceeds total cost (ie
Rs450,000). Hence, the company earns profit between 40 metric tonnes and 50 metric tonnes.
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58. c. Rs.9
The conditions for profit maximization under MC-MR approach are : (i) MC=MR and (ii) MC should
cut MR from below;
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Given Q, TFC = 2000; P = 120 per box

Quantity TFC TVC TC=TFC+TVC MC TR=PXQ MR
5 2000 1000 3000 - 600 -
6 2000 1075 3075 75 720 120
7 2000 1150 3150 75 840 120
8 2000 1250 3250 100 960 120
9 2000 1370 3370 120 1080 120
10 2000 1500 3500 130 1200 120
11 2000 1650 3650 150 1320 120
Condition (i) MC=MR = 120 is at 9th unit
Condition (ii) at 10th unit of production, MC>MR, i.e. MC lies above MR. Therefore, only 9th unit satisfy
condition (ii)
59. e. All the above. The tax on net profits, while reducing the profits (by adding to the cash expenses of
the firm), will not affect its MC. Hence, in the short run, the equilibrium of the firm and the industry
will not change. If all the firms in the industry were earning only normal profits in the pre-tax period,
the profits dip to below normal level in the long run, and firms which cannot cover all the costs when a
part of the revenue is taken as tax, exit from the industry.
60. d. Decrease the number of computers to be serviced: The firm takes the market price as given and
accordingly adjusts its production to maximize profits in the short run.
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UNIT 7 – IMPERFECT COMPETITION
61. c. Monopoly: Monopoly is a type of market structure where there is only one supplier of a good or
service. The good/service has no close substitute, and there are barriers preventing new firms from
entering the market. The firm operating in the monopoly can either determine the price or the quantity
demanded. They can either sell a smaller quantity at a higher price or sell a larger quantity at a lower
price.
62. e. Price discrimination and Third degree of price discrimination: Characteristic of a monopoly
structure is price discrimination, which means that a monopoly firm charges different prices to different
classes of customers. Third degree of discrimination is when the firm charges different prices for the
same product in different segments of the market. This type of discrimination is based on the
geography, time, nature of use and personal characteristics of consumers.
63. e. All the above: A key feature of a monopoly is the existence of barriers, which prevent the entry of
new firms into the market. Some of the barriers are: control over vital raw materials, tariff protection
from importers, protective government legislation, temporary low prices to force out competition, and
large research and development budgets.
64. d. Monopolistic: Monopolistic competition arises in an imperfect market in which there are many
sellers who produce and sell goods that are differentiated from the goods of others in the industry. The
key feature of monopolistic competition is product differentiation. Product differentiation implies that
each firm makes its product slightly different from the products of other competing firms in the market.
Firms can sell their products at different prices as cost and demand vary from firm to firm. The
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products offered in this imperfect market structure act as close substitutes.
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65. a. Oligopoly: Oligopoly is a market structure, which is dominated by a small number of large firms.
Firms supply either identical or differentiated products, and there are barriers preventing the entry of
new firms into the industry. In oligopoly, the action of one producer has a large effect on the
production decisions of the others in the industry; therefore each oligopolist keeps a close track of his
rivals.
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66. e. Both c and d: The kinked demand curve explains the behaviour of firms relative to the price setting.
Firms under oligopoly stick to one price and no firm in the market either increases or decreases the
price of its products. This happens because a firm fears a sharp decline in its sales if it does not
conform to the price setting behavior of its competitors. Since there are only a few sellers in the
oligopolistic market, each seller has a relatively big slice of the market. If the oligopolist increases his
price, all his buyers will shift to the other lower priced sellers. If the firm decreases the prices,
competitors will also resort to price cuts fearing a substantial loss of market share.
67. d. Cartelisation: An agreement among two or more firms to co-operate in price setting and/or
restricting the amount of output that has to be produced is known as cartel formation.
68. c. Price leadership by the dominant firm: Price leadership is a situation where the market leader sets
the price of a product and other firms try to follow it. The same price is charged by all firms if the
product is homogenous. If the product is differentiated, firms vary their prices according to the
differences. The most common types of price leadership are:
 Price leadership by a low cost firm
 Price leadership by the dominant firm
 Barometric price leadership

69. e. Pepsi can gain higher market share and higher profits than Coca Cola::. The Game theory was
developed in the 1950s by Oskar Morgenstern and John Von Neumann. ‘Game’ is a situation in which
the decisions of one player are dependent on those of his rival players. In the Game theory, the pay-off
matrix is used to represent the outcome of incomes for various players. As per the pay-off matrix, both
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firms earn profits when they operate at normal prices; both firms suffer losses if both decrease prices;
there is a difference in the pay-offs when only one of the firms cuts prices and the other operates at
normal price. If Pepsi charged lower price per bottle than Pepsi would obtain all profit and Coca Cola
would get nothing.
70. a. Max-min strategy: The Game theory is a technique which helps in evaluating a situation when
different individuals or organizations differ in their objectives. The theory provides guidelines to
managers based on which they can take business decisions while considering the moves of competing
firms. The various strategies which players can adopt are:
 Dominant strategy
 Nash equilibrium strategy
 Maxi-min strategy
According to the game theory, if players are risk averse they will try to derive the maximum benefit
from the worst possible outcome by adopting the maxi-min strategy.
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UNIT 8 – RENT AND WAGES
71. e. All the above: Resources such as land, labour, capital, and entrepreneurship, which contribute to the
production of goods and services are the main factors of production.
72. c. Rs.300: Marginal Revenue Productivity (MRP) is the change in the total revenue for the producer
when an additional unit of a factor of production is employed while the quantity of other factors is kept
constant.
73. a. Derived Demand: Factors of production have a derived demand which is dependent on the
productivity of the factors unlike the demand for goods which is direct. The demand for the goods
produced using these factors also influences the demand for the factors of production.
74. b. Inelastic and elastic: The supply of land remains perfectly inelastic for a society as a whole. Size of
the earth cannot be changed. The supply of land can be increased for an individual, firm or organization
by paying a higher price.
75. c. No rent is paid: Marginal land is defined as that area of land which barely covers its costs with the
market value of its produce. Rent is the differential surplus of marginal land and intra-marginal land,
which is land with better productivity than marginal land.
76. d. Rs.4000: Actual earning is Rs. 20000 and transfer earning is Rs.16000. Difference in Rent is
Rs.4000. According to Joan Robinson, rent is a surplus over ‘transfer earning’, which is the term used
to refer to the income earned by a factor of production in its alternative use. The amount of income
which a factor of production earns from its present work or industry is the actual earning of the factor
of production. According to Robinson, rent is equal to the difference between actual earning and
transfer earning.
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77. d. Scarcity rent: According to modern theory of rent, rent arises due to relative scarcity of land in
relation to its demand. The greater the demand for land, the higher will be the rent for the land. Thus
the basis for formation of rent, according to this theory, is the scarcity of land.
78. a. Rs.35000/: According to Prof. Thomas, “Real wages or real earnings refer to the purchasing power
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of the worker’s remuneration.” The real wage is the nominal wage adjusted for the price level. Real
wage = Nominal wage / price level. Real wage in Rs.1970 =5000/1= 5000 Nominal wage in 2010 to
have same real wage of 1970 = Real wage x price level = 5000 x 7 = Rs.35000
79. b. MRP=ARP=AW=MW: In the long run, the equilibrium wage level is reached at a point where
marginal revenue productivity(MRP), average revenue productivity(ARP), average wage(AW), and
marginal wage(MW) are all equal i.e., the long run equilibrium condition is MRP=ARP=AW=MW.
80. d. All the above: According to the Bargaining Theory of wages, the bargaining power of producers and
workers is the basis for determining wages. If the workers have high bargaining power, the wage level
will be set high. On the other hand, the wage level is low if the bargaining power of the producers is
high. The wages of unionized workers are significantly higher than those of non-unionized workers.
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UNIT 9 – INTEREST AND PROFIT
81. e. 7.5%
Gross Interest = Price of the Capital (Net Interest) + Reward for taking risk of money lending +
Reward for management of Loan + others (such as the reward for accepting the inconveniences
involved in money lending). i.e., 12% = net interest + 2.5% + 2% = 12% - 2.5% - 2%.
82. d. Demand for capital increases as long as return on investment is more than or equal to interest
rate to be paid on capital: Demand for capital increases as long as return on investment is more than
or equal to interest rate to be paid on capital. Demand curve of capital is downward sloping. Supply
curve of capital is upward sloping. Borrowers demand more capital at lower rate of interest. If demand
for capital increases, then the demand curve shifts towards the right, this causes the equilibrium interest
rate also to increase.
83. e. All the above: CRR: Banks in India are required to hold a certain proportion of their deposits in the
form of cash. However, actually banks do not hold these as cash with themselves, but deposit such
cases with the Reserve Bank of India (RBI) / currency chests, which is considered as an equivalent to
holding cash with the RBI.
SLR: Every bank is required to maintain at the close of business every day, a minimum proportion of
their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and un-encumbered
approved securities. Repo and Reverse Repo: Repo (Repurchase) rate is the rate at which the RBI lends
shot-term money to the banks against securities. Reverse Repo rate is the rate at which banks park their
short-term excess liquidity with the RBI.
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Bank Rate: This is the rate at which central bank (RBI) lends money to other banks or financial
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institutions.
84. d. More money is available with banks for lending and investment: More money is available with
banks for lending and investment. When the CRR is increased, the amount of funds that a bank can
lend decreases. Banks increase the interest rate to garner more funds (deposits). Cost of funds for loan
seekers will be increased. Whereas lowering of CRR will result in more loan funds in the hands of
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banks.
85. e. All the above: People demand higher liquidity if they think that the prices of securities will increase
in the future. People’s demand for liquidity is less if they think that the prices of securities will go
down in the future. Interest rates fall when there is a rise in the prices of bonds and securities and vice
versa. Rate of interest and the prices of securities have an inverse relationship. People’s demand for
liquidity is dependent upon their expectations with respect to the prices of bonds and securities.
86. e. All the above: According to Keynes, the interest rate cannot come down further below an
institutionally-determined minimum limit. Further, interest rate could never be negative or zero. This
concept is popularly referred to as the ‘liquidity trap. After the rate of interest has fallen to a certain
level, liquidity-preference may become virtually absolute in the sense that almost everyone prefers cash
to holding a debt which yields so low a rate of interest.
87. a. Rs.20000 Profits = Value of outputs – Value of inputs
(1000 x 100)- { (1000 x 60) + (1000 x 20) }
100000 – 80000
Rs.20000
88. b. 40000, 20000 Gross profits: The amount remaining with the entrepreneur after deducting all the
explicit costs have been deducted from the revenues of the business is known as gross profit. Gross
profit does not exclude implicit costs such as rent forgone by entrepreneur for utilizing his own land for
business purposes, interest forgone on his own capital, etc.
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The amount remaining with the entrepreneur after the explicit as well as implicit costs have been
deducted from the business revenues is known as net profit
Gross Profit = Rs.(1000 x 100) – (1000 x 60) = Rs.40000
Net Profit = Rs.(1000 x 100) - { (1000 x 60) + (1000 x 20) }= Rs.20000
89. c. Schumpeter’s innovation theory: According to innovation theory of profit by Joseph
Schumpeter, an entrepreneur earns the reward of profit if he introduces innovations in business
processes and the innovations prove successful in the marketplace. There would be differences between
costs and prices of the product as a result of continuous innovations in the marketplace.
90. b. To become monopoly power in the industry: High profits are often considered as an index of
monopoly power and the government may introduce price control and profit regulation policies.
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UNIT 10 – FORECASTING AND DECISION-MAKING
91. e. All the above : GDP annual growth rate, exports growth rate, industrial and manufacturing
production growth rate and level of foreign exchange reserves are some of the indicators of economic
growth of the country.
92. d. a,b,c above : As economic forecasting predicts the rate of growth of the economy, it helps
individuals and businessmen in making prudent investment and business decisions.
93. b. Moving averageThe moving average is a series of arithmetic averages. One can use simple moving
average or weighted moving average. In the simple moving average method, we have to sum up the
sales for a specified period of time (e.g. weeks or months) and then divide the total sales by the number
of periods used.
94. c. Maximax Criterion: While making decisions under the maximax criterion, the decision maker takes
an optimistic view about the possible outcomes or pay-offs. He/she selects the most promising
outcomes from among all the outcomes in a pay-off matrix and chooses that outcome which, according
to him/her, is the ‘best among the best’.
95. d. Rs.114.
(0.10)*(95) + (0.20)*(110) + (0.30)*(115) + (0.40)*(120) = 114
He anticipates that in the particular year, the share prices may go up and that he may get more returns.
However, the actual returns may be more than or less than his expectations. There is an element of risk.
The shareholder can approximately estimate the gain or loss by comparing it with the existing share
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price. Therefore, the risk is measurable. Also, risk is associated with returns. Mr. Shyam can measure
his risk in terms of the returns on his/her investment.
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96. e. All the above: The company needs financial resources for implementation of the expansion projects.
The company can gather financial resources from external sources (borrowing from bank, funds from
capital market, capital infusion) or internal sources (retained earnings of the company).
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97. e. both c and d: Those investment projects from which the company does not repay direct benefits but
gains indirect benefits in the form of improved labour efficiency, employee and customer goodwill,
etc., are known as ‘welfare projects’.
98. a. Rs.50000
Total of present value cash inflows = 100000 + 200000 + 250000 = Rs.550000
Present value of cash outflows =Rs. 500000
Net Present value of the cash flows of the project = (Rs.550000-500000) = Rs.50000
The net present value (NPV) method of evaluating projects which considers and compares the present
values of cash inflows and cash outflows. If the net present value of cash inflows is greater than the net
present value of cash outflows, then the company selects the project.
99. c. 9%: In the internal rate of return (IRR) method, the company finds out a discount rate (with the help
of the trial and error method) which when applied equates the present value of cash inflows and the
present value of cash outflows (i.e. NPV) to Zero. In other words, the discount rate which give NPV=0
is the IRR.
100. e. Either b or d: In the profitability index method, the company calculates the Ratio of the present
value of cash inflows to the present value of cash outflows. It selects the project if the profitability
index is equal to or more than 1.
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UNIT 11 – INTRODUCTION TO MACROECONOMICS
101. e. Product pricing policies: Product Pricing policies are decided by the individual firm, its market
structure and demand and supply of the products in the particular market. It comes under the scope of
micro-economics.
102. a. GDP measures the market value of all products produced using factors of production during a
specified period of time and within the boundaries of a country. Here only purchase in the year 2014 is
Ford car.
103. a. 5.85% : It the GDP is growing at g% per annum and population at p% per annum, per capita GDP
must be growing by [(1+g)/(1+p)] – 1. Here, g=7.17% = 7.17/100 and p = 1.25% = 1.25/100
Substituting the values in the formula [(1+0.0717) / (1+0.0125)] – 1 = 0.5846 = 5.85%
104. d. Zero: Balance of Payment is the account of export and import of a country. If the elasticity of export
and import is zero then only devaluation of currency will help in balancing BOP as it will encourage
exports and check on imports.
105. b. Public debt: There are three ways of maintaining fiscal policy of any country i.e. government
expenditure, government income (indirect and direct tax revenue) and public debt. In case of immediate
need of expenditure, government borrows from capital market in form of treasury bills, bonds, FDI, etc.
106. b. Increase by Rs. 7 billion: Money supply is always in proportion to reserve requirement.
107. e. Interest payments of Central Government loans: In the last 25 years, central government of India
has borrowed from capital market in the form of public debt and as a result interest payment of these
borrowing has lead to increased government expenditure.
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108. e. The price of the stock will fall but the effect on quantity cannot be determined: With the entry
of Android and its success, Microsoft’s stock’s equilibrium will be disturbed and as a result there will
bea reduction in the sales. This will have an adverse impact on stock prices. However, at this juncture it
is not possible to gauge the quantitative impact on the stock price.
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109. c. The unemployment rate is well above the natural rate: The budget of any government shows the
planning of expenditure for a particular period. It also provides sources of revenue to the government.
If in case for a given period, the unemployment rates are high, government can’t collect the revenue as
expected in the budget and this causes differences in Official Actual budget and structural budget.
110. a. Gold would leave India and go to Great Britain: High inflation will make gold dearer in India and
hence it would lead to decrease in demand whereas there is no rise in inflation in Great Britain so gold
will move from India to Great Britain.
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UNIT 12 – NATIONAL INCOME
111. b. increased investments in domestic: Manufactured capital goods and increase in the exports of
locally produced machinery – National income of any country will be injected by increase in export
and domestic capital investment and production
112. c. Households and firms: This is a simple circular flow of money and income between the two sectors
in the in the economy, households and business firms.
113. d. 4: National income statistics enables economists to compare the standard of living in two different
countries. Proportion of a country’s population and its GNP indicates its standard of living or the per
capita income of the country. i.e. GNP / Population. Country 1 = 5000/5,00,000=0.01; country
2=6000/1200000=0.005; country 3 = 0.0033; country 4 = 25000/2000000 = 0.0125; country 5 =
40,000/10000000=0.004. Here country 4 is having highest i.e. 0.0125% as compared to other
countries.
114. c. Y = C + S: Income = Consumption + Savings & Y = C + I: Income = Consumption + Investments
– Factors that determine nation’s income and output are:- Y = C + S: Income = Consumption + Savings
(income that households receive can be either consumed or saved) & Y = C + I: Income =
Consumption + Investments (Income = aggregate demand which includes consumption and
investments)
115. a. The level of the national income would rise, as investments are injections: With increase in
investment, country’s capacity of producing domestic-made capital goods will increase which will
result in an increase in national income
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116. b. The figures tell us that the average person in South Korea is earning $10,067 while the average
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person in North Korea is making $957 per annum. This indicates that the standard of living in the
South is much higher than those in the North. However, two very important factors are missing here:
the rate of inflation in the two countries and the distribution of income. Without this information it is
not possible to make an accurate comparison between the living standards in the two countries.
117. c. Rs. 8720,000 crore: National Income = NNP at factor cost = GNP at market prices + subsidies –
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Indirect taxes – Depreciation: 10200000+ 820000 – 1350000 – 950000 = Rs.8720000 crore

118. e. Rs. 10150.000 crore: Personal Disposable Income=National Income – Retained earnings –
Corporate Taxes – Personal Taxes: = 12500000 – 550000 –1050000 – 750000 = Rs 10150,000 crore
119. c. The national income of the country had increased and so more was paid in taxes: With the
growth in GDP, revenue increases and as a result there is a surplus in the country’s budget. That means
there is an increase in the national income by more production at domestic level. This will contribute to
increase in payment of taxes.
120. b. The size of a country’s population may rise more quickly than national income: The size of a
country’s population may rise more quickly than national income, and if so, there will be fewer goods
available for each individual. GDP does not take care of a country’s population and that is why it is not
a correct indicator to measure standard of living of any country. National income is the right indicator
to do so.
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UNIT 13 – CONSUMPTION AND INVESTMENT FUNCTION
121. a. Interest rates to fall, investment spending to rise, and aggregate demand to rise: With an
increase in money supply, purchasing power will increase and that will lead to increase in
consumption, investment and aggregate demand as a whole. As an effect, there will be more disposable
income than consumption which will lead to an increase in savings and which forces decrease in
interest rates.
122. c. 0.7: Marginal Propensity to Consume = Change in consumption / Change in disposable income:
MPC = (160000-90000)/ (200000-100000) = 0.7
123. a. A larger increase in output and a smaller decrease in the interest rate: There is a flatter IS
(investment saving) curve in the high MPC economy. Here LM means Liquidity preference money
supply.
Original LM
I LM after increase
in Money Supply
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IS curve for high MPC
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IS curve for low economy
MPC economy
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124. c. An increase in net exports increases income causing an increase in induced consumption:
According to Keynes’s Four Sector model, an increase in aggregate demand will have a multiplier
effect on the economy. Increase in export means increase in government income. This will enhance
government spending on productive purposes that will create employment opportunities in the
economy. This in turn, will increase disposable income and consumption in the economy.
125. b. IS curve will shift to the right: In a three sector model, a unit increase in government spending
will increase output, holding interest rate constant. Thus, in our case, the IS curve will shift to right
causing higher interest rates and expansion in real economy (real GDP or Y).
126. c. Is equal to one minus the MPC: Marginal propensity to save (MPS), which is the slope of the
saving curve, is analogous to the MPC. If there is no increase in the consumption of the consumer
despite an increase in income, the part of income that is increased is saved which is MPS. In other
words, 1-MPC = MPS
127. d. 0.6- MPS: Change in saving / Change in disposable income. Change in saving= 500-200=Rs.300.
Change in disposable income = 1500-1000=Rs.500. Therefore, MPS = 300/500 = 0.6
128. e. 5: Multiplier = Change in national product/ change in investment demand. Here the national product
increases by Rs 10,000 crore when investment demand increases by Rs2,000 crore. Therefore,
Multiplier= 10000/2000 = 5
129. c. Rs. 500 crore - GDP at market prices = C + I +G + (X- M), 15000 = 5000 + 4500 + 3500 + (2500 –
M), 15000 = 15500 – M, M = 15500 – 15000. Therefore, Imports = Rs.500 crores
130. a. Lower tax rates will increase in consumptions or savings: With the cut in the taxes, there will be
additional money in the economy which will increase either consumption or savings.
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UNIT 14 – CLASSICAL AND KEYNESIAN ECONOMICS
131. c. The slope of aggregate demand and aggregate supply curve: Keynesian, Classical and
Intermediate ranges discussed slope of aggregate demand and aggregate supply curve.
132. a. Increase aggregate demand: According to Keynes’s analysis, optimum output and employment can
be achieved through the efficient implementation of monetary and fiscal policies by the government.
By hiring new workforce, government expenditure is increasing. And as per his analysis, an increase in
government expenditure will increase the aggregate demand which will result into an increased output.
133. a. Supply-side economics: The supply-side economists believed that implementing tax-cuts would
provide incentives to people to work more and increase their consumption and savings. This would
result in an increase of the aggregate supply in the economy. In the same way, huge tax-cuts would also
induce capitalists to infuse more capital in the economy. Thus, tax-cuts would help in increasing the
aggregate supply in the economy.
134. b. The actual unemployment rate will be equal to the natural rate of unemployment: According to
Monetarist, growth of money is the factor that influences nominal GDP in the short run and prices in
the long run. They also believe that aggregate demand is affected by money supply and that the impact
of money on aggregate demand is stable. In this case, in the long-run, the actual unemployment rate
will be equal to the natural rate of unemployment.
135. d. Government’s decision on the level of the deficit is not affected by the market interest rate:
When the government runs into a deficit it enters the funds market with a vertical demand curve for
money. It needs to borrow money regardless of the interest rates charged. However, firms are sensitive
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to changes in the interest rate. If the interest rate is too high they will decide not to invest at the present
time. Government and firms combine to form the market demand curve in the funds market.
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136. c. A 10% increase in money supply will increase the price level by 10%.: Classical economists
believe that if transaction patterns are stable, k remains constant. If k is constant, the price level moves
proportionately with money supply. Stability in the money supply leads to stability in prices, while an
increase in money supply causes rise in prices. The quantity theory of money and prices posits that
prices move proportionately with money supply.
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137. d. Any change in the government deficit is counteracted by the same change in investment
(private demand for loan funds): Crowding out refers to when government must finance its spending
with taxes and/or with deficit spending, leaving businesses with less money and effectively "crowding
them out." But as per classical economy, there is a natural tendency towards an equilibrium position
due to the interaction of individual economic agents. Therefore, there is no need for any kind of
government intervention in the economy; market forces guided by the price mechanism would lead the
economy to a full employment level within a short period of time.
138. d. Rs. 3,233 crore: Rs 3,233 crore: Velocity of Money (V) = Y / MS. Therefore, Y = V × MS= 6.1 ×
530 = Rs3,233 crore
139. a. Increase aggregate demand: According to Keynesian approach, government’s intervention will
help decrease unemployment. Situation given in the questions highlights governments’ effort to
increase employment by constructing interstate highways which is an increase in government spending.
This will ultimately increase the aggregate demand.
140. c. Aggregate Supply to increase: Supply-side economists advocated that huge tax-cuts would induce
people to work more and save more. This in turn, would increase aggregate supply, in the economy,
contributing to the nation’s economic growth.
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UNIT 15 – FISCAL POLICY AND BUDGET DEFICIT
141. e. Increase cyclical but not structural deficits during a recession: Keynesian economics isof the
view that in the short run, especially during recessions, economic output is strongly influenced by
aggregate demand (total spending in the economy). In the Keynesian view, aggregate demand does not
necessarily equal the productive capacity of the economy that results into structural deficit.
142. c. Rs. 5000 surplus: We know that Y = C+S+T and Y = C+I+G+(X-M). Equalize these two equations
and drop C, you will find an equation Y = S+T = I+G+(X-M).
100000 = 5000+10000 = 10000+80000+ (5000-5000). Therefore, the surplus is Rs. 5000 crores
143. d. Off-budget spending needs to be added to the official budget deficit:A fiscal adjustment is a
reduction in the government primary budget deficit, and it can result from a reduction in government
expenditures, an increase in tax revenues, or both simultaneously. Government needs to adjust its
budget for economic stability. By adding off-budget spending to the official budget, government can
adjust deficit to be larger than the official budget deficit. Eg. Central assistance routed directly to
government agencies under various schemes, Expenditure by state departments/agencies from user
charges collected, Public Private Partnership (PPP) Project, etc.
144. b. Yes, fiscal policy can achieve the same objective: One of the main objectives of fiscal policy is to
control inflation and stabilize price. Therefore, the government aims to control inflation by reducing the
fiscal deficit, introducing tax savings schemes, productive use of financial resources, etc. One such
measure is lowering down of production with increasing interest rates so that inflation can be
controlled.
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145. d. When private and public lenders lose faith in the capacity of the government to pay back its
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debts: When the private and public lenders lose faith in the capacity of the government to pay back its
debts, the deficit of a government is considered problematic by the majority of the economists. This
happens in case of high national debt
146. a. The rate of inflation would increase: “Actual” unemployment refers to the actual number of people
out of work in a specific economy whereas “natural” unemployment refers to those people who would
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be out of the work if and only if the economy was producing at its full capacity. If actual
unemployment is lower than the natural unemployment it means, the natural production rate would be
fairly low i.e. full utilization of the land and existing machinery would likely be taken up by a fairly
small proportion of the available labour which will result in rise in prices tends that increase in rate of
inflation.
147. b. Should go into a surplus at appropriate points in the business cycle: Progressive taxes are
imposed in an attempt to reduce the tax incidence of people with a lower ability-to-pay, as such taxes
shift the incidence increasingly to those with a higher ability-to-pay. Therefore, with the use of
progressive tax system, GNP will increase and tax revenue will also increase. This will have surplus
effect on the budget.
148. e. Results in a rise in the government budget deficit that lessens the fall in income
This is because of the automatic stabilizer which is a structural features of government spending and
taxation that smoothens fluctuation in disposable income, and hence consumption, over the business
cycle.
149. c. To decrease marginal income tax rates: With the objective of increasing output, government
needs to reduce the tax burden both for the corporate and individuals. This will inject money flow into
the economy to increase production.
150. d. Transfer payments increase and income tax revenue decreases: An automatic stabilizer can be
described as an expenditure program or as a tax law that automatically increases expenditure or
decreases taxes when an economy is in recession.
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UNIT 16 – BANKING AND MONEY SUPPLY
151. b. Banking system: The banking regulation Act of India, 1949, defines banking as “accepting, for the
purpose of lending or investment, of deposits of money from the public, repayable on demand or
otherwise and withdrawal by cheques, draft, order or otherwise.
152. c. Rs.1075 crore

M1 = Currency in circulation + Demand Deposits with the Banking System + Other Deposits with the
RBI
=700 + 200 + 175
153. e. Rs.2450
Financial ratio is the ratio of total financial claims during the year to national income of that year.
Total issues = 400 + 90 = 490

Finance ratio = 0.2
Finance ratio = Total issues/ national income
0.2 = 290/ national income
National income = 490/ 0.2

National income = 2450
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154. a. 0.016
The finance ratio is the ratio of the total financial claims issues during the year to national income.
Total issues in the year = Primary issues + secondary issues
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= 210 + 150
= 360
Finance ratio = 360 / 22000
= 0.0163
155. a. 2050
M3 = M1 + Time deposits with the banking
M3 = 1700 + 350
M3 = 2050
156. d. 900
M1 = Currency in circulation + demand deposits with the banking system + other deposits with the RBI
1600 = Currency in circulation + 450 +250
Currency in circulation = 1600 – 700
Currency in circulation = 900
157. c. Commercial Lending: It is through commercial lending that banks earn profits.
158. d. Rs.18,764 crore
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Money Supply (Ms) = 1 + c

× (H)
c+r
c is currency deposit ratio = 0.42
r = reserve ratio = 0.14
H = High powered money
High powered money = Currency with public + Bank reserves
= Rs.6200 + Rs.1200
High powered money =Rs.7400 crores
H = Rs.7400 crores
Replacing the values in formula
Ms = 1+0.42
× (7400)
0.42 + 0.14
= 1.42
× (7400)
0.56
= 10508
0.56
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s
M = 18764
The total money supply in the economy is Rs. 18,764
159. a.1.67
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Money multiplier m= (1+cr)/(1+rr) = (1+1)/(1+0.2) = 2/1.2 = 1.666 = 1.67
160. Ans:d- Priority sector lending: Under instructions from the government of India, the RBI makes it
mandatory for banks to ensure that a certain percentage of the money they lend goes to sectors which
do not have an organized lending market or cannot afford to pay interest at the commercial rate. This
type of lending is called as Priority sector lending.
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UNIT 17 – MONETARY POLICY
161. a. It buys Treasury securities, which increases the money supply: Open market operations refer to
the buying or selling of securities by the Central Bank. The securities involved are government
securities (treasury securities), banker’s acceptances or foreign exchange. With the purpose of
increasing money supply, government conducts open market purchase of treasury securities.
162. e. Decreases, and so the price level falls: One of the objectives of monetary policy is priceand
exchange rate stability. When the value of money rises, the purchasing power and the real income
increases that leads to increase in the value of money which in turn leads to fall in price level.
163. a. Higher money supply growth leads to higher output growth: The monetary policy should be
conducive for economic growth. Monetary policy can influence the levels of output and employment
only in the short run. So in the short run, higher money supply growth leads to higher output growth
whereas in the long run, increase in money supply slows down the economic growth.
164. b. Increased government expenditures: The central bank of the country has the responsibility of
stabilizing the economy and take steps through its monetary policy to smoothen sharp variations in
output and employment. According to this, if any economy experiencing unemployment above the
natural rate, it is advisable to increase government expenditures.
165. d. Cost-push inflation - Cost push inflation is inflation caused by an increase in prices of inputs like
labour, raw material, etc.
166. b. Increase: In case of holding back money as currency component (liquid form), supply of money in
the economy will decrease which will cause shifting of AD curve to the left. But according to Keynes,
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to achieve equilibrium, the central bank will put effort to shift AD towards right by increasing interest
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rate hence increasing money supply.
167. a. Satisfy customer withdrawal needs and eventually restore the public’s faith in the banking
system or call in their loans to their customers and eventually restore public’s faith in the
banking system: Central bank acts as bankers to the government and other commercial bank. In case
of banking panic, banks can satisfy customer withdrawal needs and eventually restore public faith in
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the banking system or call in their loans to their customers and eventually restore the public’s faith in
the banking system
168. a. Rs1406.93 crore: The banking system has reserves of Rs. 6, 500 crore and the reserve requirement is
21 percent. So, the system can support demand deposits upto the limit of6,500/0.21 = 30952.38 crores.
If the reserve requirement is increased to 22 percent, the system will support demand deposits only to
the extent of 6500/0.22 = 29545.45 crores. Therefore, banking system’s capacity to support demand
deposits, decreases by Rs1406.93 crores (Rs30952.38 crores – Rs29545.45 crores)
169. c. Speculative demand -In economic theory, specifically Keynesian economics speculative demand is
one of the determinants of demand for money and credit. It refers to demand for financial assets such
as securities, money, or foreign currency, that is not dictated by real transactions such
as trade or financing. Speculative demand arises from the need for cash to take advantage of investment
opportunities that may arise
170. a. 15%: Actual reserve ratio = Total Deposit/Reserve = Rs.20000/Rs.3000 = 15%
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UNIT 18 – INFLATION
171. d. Supply-Shock Inflation: Supply shock means a drastic reduction in the supply such as crop failure
due to bad weather, ban on imports of a critical raw material, reduction in the supply of oil by the
OPEC etc. Inflation caused by such shocks is called supply shock inflation. Wage-push inflation is a
result of the increase in the money wages of the workers at a higher rate than the increase in the
productivity. Profit-push inflation results from the increase in prices more than the increase in the cost
of production. Here, the slice of profit has increased without any corresponding increase in productivity
of the profit earner, while all other factor costs have remained constant. When the demand for the
output exceeds the supply available at the existing prices, then there will be a rise in the price of the
output.
172. b. 5.18% : Inflation rate in January 2015 = (CPI in January 2015 - CPI in January 2014)/ CPI in
January 2015 ×100 = (119.7-113.8)/113.8 × 100 = 5.18%
173. d. ACC will be benefitted, as in real terms; the decrease in the value of money it has to pay is
more than the decrease in the value of money it receives: Debtors are benefited by inflation as it
causes a fall in the value of money that they must repay in the future. The price level increases at a
higher rate than the interest rates. Creditors, however, are at a disadvantage as they receive less than the
amount in real terms. Since ACC has more creditors than debtors, the decrease in the value of money it
has to pay is more than the decrease in the value of money it receives and hence, it will be benefitted
from inflation.
174. b. Bank Deposits: The effects of inflation on investors are based on two factors – the investor’s
investment in equity, gold, real estate and mutual funds and his investment in fixed income securities.
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First part of investments generally rises in value during inflation, benefiting investors because of the
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increase in the prices of such assets. Investments in fixed income securities results in loss to investors
in real terms as the real income from the investment falls. Since, bank deposits is fixed income
investment, it is likely to experience decline in its value.
175. d. 2008: The Phillips curve represents the relationship between inflation and unemployment rates and
represents inverse relationship between both and hence a tradeoff between them. Policy makers can
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choose a particular combination of inflation and unemployment from the menu indicated by the
Phillips curve. The implication of this concept for inflation is that any increase in unemployment above
the natural rate results in deflationary pressure. Conversely a drop in unemployment below the natural
rate causes inflationary pressure in the economy. In the above diagram, there are situations, where there
is a trade-off between unemployment and inflation. For example, between 1979 and 1983, inflation fell
from 15% to 2.5%. During this period, unemployment rose from 5% to 11%. In 2008, the recession
caused a sharp rise in unemployment and inflation became negative, indicating a trade-off between
both.
176. a. 1979: Followed by the above explanation, from the given options, in 1979 both inflation and
unemployment went up. In 1982, 1991, 2008 and 2011, there was an evidence of unemployment going
up and inflation coming down. Hence, there was no evidence of Phillips curve holding good in 1979.
177. b. To boost growth: Reserve Bank of India aims at tradeoff between growth and inflation. When
inflation goes up, it leads to higher policy benchmark rates like repo rate, CRR and SLR etc. to control
the money circulation in the economy and to keep the inflation under control. During the periods of
subdued growth, it reduces the policy rates which in turn lead to lower cost of money and thereby
encourage the banks to lend more to its corporate and individual customers so that economic growth
can be boosted.
178. d. Issue of New Bonds: When an economy experiences inflation, monetary and fiscal measures are
taken by the central bank and government of the country to control the same. Monetary measures
include quantitative measures like bank rate, repo rate, cash reserve ratio, statutory liquidity ratio, open
market operations etc., and qualitative measures like the regulation of the consumer credit, directives,
moral suasion, publicity etc. Fiscal measures undertaken by the government include controlling public
expenditure, taxation, public borrowings through the ‘new bond issue’ etc.
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179. b. Disguised unemployment: Disguised unemployment is a situation when an excessive number of

workers are employed over what is optimally desirable. Since Mr. Chetan employed more number of
people than actually required, it can be considered as disguised unemployment.
180. c. Galloping inflation: Creeping inflation can be described as a situation where the rate of increase in
the price level is small or gradual. If creeping inflation continues for a longer period of time and is not
properly controlled, it becomes running inflation. During running inflation, the price increase is
between 8-10 percent per annum. If monetary authorities lose control over running inflation, it becomes
galloping inflation. Galloping inflation occurs when the inflation reaches double- or triple-digit figures.
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UNIT 19 – INTERNATIONAL TRADE AND BALANCE OF PAYMENTS
181. d. China should specialize in producing steel and exchange it with Brazil for coffee, as it has
absolute advantage in producing steel:
Labour Units Required

Country
For one Unit of Coffee For one Unit of Steel
Brazil 5 10
China 10 5
From the above, it can be said that Brazil has an absolute advantage in producing coffee and China has
an absolute advantage in producing steel. Hence, as per the Theory of Absolute advantage proposed by
Adam Smith in 1776, a country enjoying absolute advantage in using a factor of production should
fully deploy that factor in producing that product and export the surplus to the remaining countries to
benefit from international trade. Accordingly, Brazil should specialize in producing coffee and export it
to China and China should specialize in producing steel and export it to Brazil to benefit from
international trade.
182. a. Demand lag is shorter than imitation lag: The time gap between the launch of a new product in
the country and its demand by consumers in another country is called demand lag. The time gap
between the launch of a new product in one country and its production in another country by the
producers of that country is called imitation lag. When the demand lag is shorter than imitation lag,
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trade opportunities exists between the countries. Since Indian consumers started demanding iPad before
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the Indian producers start producing the same, Apple’s shipments of iPad went up implying that
Demand lag is shorter than Imitation lag.
183. e.The US has a comparative advantage in producing oil:
Labour Units Required

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Country
For one Unit of Diamond For one Unit of Oil
Russia 10 20
US 20 25
From the above, it can be said that Russia has an absolute advantage in producing both the products
and the US has less disadvantage in producing oil; in other words, it enjoys comparative advantage in
producing oil. If 1000 units of labour hours are available, Russia can produce 100 units of Diamond
and the US can produce 50 units. When it comes to oil, Russia can produce 50 units and the US can
produce 40 units. Thus, Russia can produce either 100 units of Diamond or 50 units of oil. The
opportunity cost of product diamond for China would be 0.5 (50/100) and for oil, it would be 2
(100/50). Similarly, for the US, opportunity cost of producing one unit of diamond would be 1.25
(50/40) and of oil is 0.8 (40/50). Hence, Russia has less opportunity cost in producing diamond and
hence enjoys comparative advantage in producing the same, while the US enjoys the same advantage in
producing oil.
184. e. Both (a) and (c) above: As per the Theory of Comparative Advantage proposed by Ricardo in 1817,
two countries can gain in trade, even if one of them has an absolute advantage in producing both
goods, but has a comparative advantage of producing at least one good over the other country. Here
comparative advantage implies lesser opportunity cost in producing a commodity. In the above case,
opportunity cost is less for the US in producing oil compared to diamond. Russia enjoys comparative
advantage in diamond. Hence, Russia should produce diamond and the US should produce oil and
exchange with each other.
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185. d. No protection to local producers: When duty is levied on the imported goods, it is a source of
revenue to the government and improves the economic condition of the country. It protects the
domestic industry that has great growth potential and acts as a retaliator for other countries imposing
trade barriers. It reduces expenditure in foreign currencies by the citizens, to improve balance of
payment situation. Except for option (d), all other cases are the possible consequences of the customs
duty on commercial vehicles.
186. a. Oil imports by Essar Oil from Iran: Except oil imports by Essar Oil from Iran that causes outflow
of foreign currency, all other transactions cause inflow of foreign currency. Hence, all the transactions
which involve inflow will be credited and outflow will be debited. Accordingly, oil import by Essar oil
from Iran will be shown as a debit transaction in the balance of payment of India.
187. b.$ 341.13 bn: Foreign exchange reserves at the end of the period = Foreign exchange reserves at
the beginning of the period + Current account surplus (- Current account deficit) + Capital account
surplus (- Capital account deficit) = 327.88 – 10.2 + 23.45 = $ 341.13 bn
188. e. Both (b) and (d) above: Export of software products by Infosys comes under export of services and
is recorded in invisible account which is a part of current account.
189. e. Both (b) and (c) above: Disequilibrium in BoP can be corrected by reducing the value of domestic
currency. Exchange rate depreciation devalues the domestic currency relative to foreign currency. This
results in imports becoming costlier and exports becoming cheaper. However, the advantage of it being
cheaper can be enjoyed only if majority of the exports are price elastic and the costly imports are
discouraged. However, in the given case, since products which are a major component of export and
import business are price inelastic in nature, depreciation of rupee is likely to have negative impact on
BOP and appreciation is likely to have a positive effect.
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190. b. Cyclical disequilibrium: Crisis in the US market impacting the international businesses of other
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countries can be attributed to the business cycles. Hence, the disequilibrium in BoP in the said case can
be called cyclical disequilibrium.
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UNIT 20 – ECONOMIC INDICATORS
191. b.GDP of Indian economy is likely to experience better growth rate in the near future: The
changes in stock prices in an economy occur prior to the changes in the business cycles. Thus, stock
prices are leading indicators of economic activity. Since there is an increasing trend in the stock price
index during 2014-15, it can be inferred as a lead indication about the better performance of Indian
economy during the coming period.
192. b. Leading indicators: The changes in stock prices in an economy occur prior to the changes in the
business cycles. Thus, stock prices are leading indicators of economic activity.
193. a. Financial cost of the corporate goes up: There has been a continuous increase in interest rates from
February 2011 to December 2011. It causes an increase in the finance cost of corporates as well as
individuals. Mainly the demand for automobile and housing products is driven by the availability of
loans. Whenever loans become expensive due to increase in interest rates, both corporate and
individuals feel discouraged to take loans and hence there will be less demand for the products of
“interest rate sensitive sectors” like automobile, construction etc. Corporates postpone their expansion
plans.
194. a. Indian economy was in boom phase: When a country’s exports are more than its imports, the
difference between the two is called net exports. Net imports occur when the imports of a nation are
greater than its exports. This signifies a trade deficit in the nation. Also, during a boom period, a
country’s trade balance shows more imports and fewer exports. Therefore, the trade balance is a
counter-cyclical indicator of economic activity. I
195. a. Indian economy was in recession phase: Capacity utilization is an economic statistic that measures
the utilization level in relation to the total capacity of industries. It is measured as a ratio of actual and
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potential output of industries in a country. Thus, capacity utilization can be effectively used to measure
the degree to which a nation’s capital is being used for production of goods. Capacity utilization
increases during boom periods and decreases during recessionary periods.
196. c. Procyclic indicator: A procyclic economic indicator is one that moves in the same direction as the
economy. If the economy is doing well, this number is usually increasing, whereas if we're in a
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recession this indicator is decreasing.; Capacity utilization is a pro-cyclic indicator of economic

activity.
197. d. From May 2014 to July 2014, economy is almost stable, as consumer spending is also almost
stable: The consumer confidence index (CCI) is an economic statistic that captures the sentiments of
consumers regarding the present and future economic state of the nation. A positive CCI implies that
the consumer perceives the economy to be growing. When consumers have a positive perception of the
economy, they tend to spend more and save less. This in turn contributes to the growth of the economy.
198. c. Foreign exchange reserves: Foreign exchange reserves are general economic indicators. Consumer
price index and capacity utilization are business indicators. Employee cost index and personal income
are consumption indicators.
199. d. Increase in unemployment rate: Increase in unemployment rate is an indication of economy
getting into recession. All other indicators imply that economy is in boom.
200. c. Procyclic indicator: A procyclic economic indicator is one that moves in the same direction as the
economy. The number of poor people in a country and the average quality of life depend on how well
the income is distributed in the country.
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UNIT 21 – BUSINESS CYCLES
201. e. 4.00: Multiplier =1/1-Marginal Propensity to Consume= 1/Marginal Propensity to Save

Marginal Propensity to Save = 1-Marginal Propensity to Consume 1-0.75=0.25
Multiplier = 1/0.25 = 4
202. c. 0.50: Equilibrium income = Autonomous Spending/Multiplier = Rs.2 trillion/4 = 0.5 trillion or 50
billion
203. b. Recession: During the period 2007-08, there is an evidence of accumulation of housing inventory
due to fall in consumer spending, which can be attributed to recession.
204. d. Increase in consumer spending: During the period 2007-08, there is an evidence of drastic fall in
housing inventory. The most likely reason among the given options is increase in consumer spending,
leading to fall in inventory levels.
205. d. I, II, III and IV: During the recessionary phase, there is a fall in consumer spending, which leads to
accumulation of inventories. Accumulation of inventories discourages producers from producing more,
leading to a fall in the production of goods and investment in plant and machinery. This results in a fall
in the real GDP. Reduction in production results in a decline in the demand for labour, which in turn
leads to layoffs and higher levels of unemployment. The decline in the demand for raw materials due to
the decrease in output causes a fall in the price, which is followed by overall deflation (fall in the
general price level). There is a decline in profits during the recessionary period. Due to fall in demand
for credit, interest rates also fall.
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206. e. When income increases by 1 unit, consumption increases by 0.8 unit: The above graph indicates
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the relationship between disposable income and consumption It can be deduced from the graph that
there exists a positive relationship between both. Hence, when MPC is 0.8, it indicates that for every 1
unit of increase in income, consumption increases by 0.8 units.
207. b. Frictional Unemployment: Frictional unemployment is the type of unemployment that occurs due
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to the constant changes in the labour market. It is caused because of: a) lack of awareness among
employers about the availability of workers b) lack of knowledge among workers about existing job
opportunities.
208. d. Increase in short-run supply: There is a leftward shift in aggregate demand curve indicating the
decline in demand which can be attributed to decrease in government expenditure, private expenditure
and household expenditure. The downward shift in aggregate demand without change in supply results
in fall in price which leads to real GDP bringing new equilibrium.
209. c. Increase in price: There is an upward shift in aggregate demand curve, thus indicating an increase
in demand, which could be attributed to increase in government expenditure, private expenditure and
house-hold expenditure. The rightward shift in aggregate demand without change in supply results in
increase in price, which leads to real GDP bringing new equilibrium.
210. b. Recession: The natural rate of unemployment is the average rate of unemployment, which results
from various frictional and structural changes in the labor market, over a period of time. During the
period 5, actual rate is above nature rate; hence recessionary phase is likely to continue.
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UNIT 22 – ECONOMIC GROWTH, DEVELOPMENT AND PLANNING
211. a. Increasing GDP growth rate: Economic growth is a reflection of the real output or productive
capacity of an economy. The concept of economic development is more comprehensive than that of
economic growth. It considers various aspects relating to the structure of the economy, social attitudes,
cultural set-up, techniques of production, and institutional framework, along with the real output or per
capita income of the economy.
212. a. Switzerland: As the per capita income of Switzerland is the highest, it can be considered as the
countries having the highest growth.
213. e. Switzerland: As the GDP of Switzerland is the lowest, it can be considered as the country having
the lowest growth.
214. d. Outward shift of PPC indicates economic development: Outward shift of PPC implies economic
growth not necessarily economic development. All other given statements regarding PPC are correct.
215. d. More emphasis is laid on capital accumulation: Adam Smith and T.R. Malthus developed the
classical model highlighting the importance of the availability of natural resources for economic
growth. According to the theory, as population increases, more land is brought under cultivation and as
there is no capital formation, the national output doubles when the population doubles. With a further
increase in population, land becomes scarce and the law of diminishing utility becomes applicable,
resulting in a decline in the wage rate. Hence, a subsistence level of wages has to be maintained to
maintain the equilibrium of population. This is because when the wage level increases beyond the
subsistence level, there will be an increase in population and with the wage level below the subsistence
I
level, the mortality rate increases. Based on this explanation, Thomas Carlyle described economics as a
‘dismal science’.
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216. e. Solar Energy: Non- renewable resources cannot be replaced as it takes a long time to form naturally.
Examples of non-renewable resources are coal, oil, natural gas, fossil fuel etc. Renewable natural
resources can be replaced in a short period of time. The examples of renewable resources are animals,
insects, reptiles, plants, trees, water, grass, solar and wind energy.
IC
217. e. All the above: Financial sector reforms included a reduction in the SLR and CRR in order to
control money supply in the economy. A revision in the format of bank’s balance sheet and
establishment of Special Recovery Tribunal for recovery of arrear loans were also part of reforms. To
enhance exports and increase foreign exchange reserves, measures were introduced to supplement trade
reforms.
218. b. The economy does not operate at full employment: One of the assumptions of Neo-Classical
Model is that the economy operates at full employment. All other statements are true with respect to
Neo-Classical Model.
219. c. Liberalization, Privatization and Globalization: The main theme of 1991 economic reforms is
Liberalization (easing of licensing procedures), Privatization (more participation by the private sector)
and Globalization (opening the gates of the Indian economy for foreign investment and trade).
220. e. All (I), (II), (III) and (IV) above: All the given factors contribute to the economic development.
Economic growth is reflection of the real output or productive capacity of an economy. The concept of
economic development is more comprehensive than that of economic growth and considers various
aspects relating to the structure of the economy, social attitudes, cultural set-up, techniques of
production, and institutional framework along with the real output or per capita income of the
economy.
88
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Participants in flexible learning programs have limitations on the nature of the

What makes it relevant?

Ref. No. EFM-WB-IFHE – 052015

Our E-mail ID: cwfeedback@icfaiuniversity.in

The learning outcomes expected are:

2. Application based approach which enhances absorption and retention significantly.

The Workbook format is also used for Assessment.

UNIT 1: INTRODUCTION TO MICROECONOMICS

Nature and Scope of Economics - Relevance of Microeconomics: Importance of microeconomic analysis –

UNIT 2: THEORY OF DEMAND AND SUPPLY

UNIT 4: PRODUCTION FUNCTION

UNIT 5: ANALYSIS OF COSTS

UNIT 7: IMPERFECT COMPETITION

Monopoly: Price discrimination – Types of price discrimination, Natural monopolies - Monopolistic

UNIT 8: RENT AND WAGES

UNIT 9: INTEREST AND PROFIT

UNIT 10: FORECASTING AND DECISION MAKING

UNIT 11: INTRODUCTION TO MACROECONOMICS

Development of Macroeconomics - Objectives and Instruments of Macroeconomics: Gross Domestic

UNIT 13: CONSUMPTION AND INVESTMENT FUNCTION

Economic Growth in Supply-side Economics – Role of incentives, Tax-cuts, Criticism.

UNIT 15: FISCAL POLICY AND BUDGET DEFICIT

UNIT 16: BANKING AND MONEY SUPPLY

UNIT 17: MONETARY POLICY

UNIT 18: INFLATION

UNIT 20: ECONOMIC INDICATORS

The Concept of Economic Indicators - Features of Economic Indicators: Related to Business

Characteristics of Business Cycles - Theories of Business Cycles: Multiplier-Accelerator theory, Demand

UNIT 22: ECONOMIC GROWTH, DEVELOPMENT & PLANNING

Multiple Choice Questions

Multiple Choice – Answers and Explanations

UNIT 1 – INTRODUCTION TO MICROECONOMICS

possible in the household functioning.. The activity is a part of:

e) Command economy & Mixed economy

a) Scarcity and choice b) Relevance of Microeconomics

UNIT 2 – THEORY OF DEMAND AND SUPPLY

a) Demand Forecasting b) Demand Theory

c) Expert Opinion d) Market experiment

UNIT 3 – CONSUMER BEHAVIOR

Combination of two products that yield the same level of Utility

a) Substitution effect b) Income effect

UNIT 4 – PRODUCTION FUNCTION

Unit of Labor Total Product Average Product

All machines are fast

Some machines are fast and some are slow

a) The production isocost

UNIT 5 – ANALYSIS OF COSTS

a) Variable costs b) Direct costs

a) Managerial economies b) Commercial economies

UNIT 6 – PERFECT COMPETITION

Quantity sold increases from 11 to 12. The Marginal Revenue is:

Output(in tons) Total cost (Rs. in thousands)

Quantity per day Boxes Total variable cost (in Rs.)

UNIT 7 – IMPERFECT COMPETITION

UNIT 8 – RENT AND WAGES

71. Identify the factors of production:

75. According to Ricardo the rent paid to a marginal land is:

UNIT 9 – INTEREST AND PROFIT

a) Less funds are available with banks

c) To restrict entry of competitors in the market

UNIT 10 – FORECASTING AND DECISION-MAKING

91. Macro level indicator of economic growth of the country is: