Daily Static Quiz (Economy) Oct 24, 2025
Daily Static Quiz (Economy) Oct 24, 2025
1. Consider the following statements regarding a country’s development metrics:
I. A country achieving 8% real GDP growth but with stagnant life expectancy and declining literacy rates demonstrates that economic growth alone is insufficient for comprehensive development.
II. The Human Development Index measures a nation’s progress through three dimensions: health, education, and standard of living, unlike GDP which solely captures economic output.
III. An increase in per capita GNI does not necessarily correlate with improvements in infant mortality rates or access to quality healthcare.
Which of the statements given above are correct?
(a) I and II only
(b) II and III only
(c) I and III only
(d) I, II and III
2. With reference to macroeconomic indicators and measurement methods, consider the following:
Statement I: The income method of calculating GDP focuses on the earnings generated during the production of goods and services (wages, profits, rent, interest), while the expenditure method calculates GDP by summing consumer spending, investment, government expenditure, and net exports.
Statement II: Both methods, when correctly calculated, should yield identical GDP figures due to the fundamental accounting identity that total income equals total expenditure in an economy.
Which of the following is correct regarding these statements?
(a) Both Statement I and Statement II are correct and Statement II explains Statement I
(b) Both Statement I and Statement II are correct but Statement II does not explain Statement I
(c) Statement I is correct but Statement II is incorrect
(d) Statement I is incorrect but Statement II is correct
3. In economic theory, the “free rider problem” refers to a situation where:
I. Market participants benefit from a public good or service without bearing the cost of its provision.
II. The free rider problem typically leads to the undersupply of public goods in a market economy because the private market cannot exclude non-payers.
III. Education subsidies and national defense are examples where free rider problems may necessitate government intervention.
Which of the statements given above is/are correct?
(a) I only
(b) I and II only
(c) II and III only
(d) I, II and III
4. Consider the following scenarios related to economic decision-making:
Scenario A: An individual choosing between pursuing an MBA program or accepting a job offer with a salary of ₹8 lakhs per annum must consider the foregone salary as a cost of pursuing the degree.
Scenario B: A government investing in infrastructure development faces an opportunity cost in terms of healthcare expenditure that could have been undertaken with those resources.
Scenario C: A farmer allocating 100 hectares of land to wheat cultivation forgoes the potential revenue from rice cultivation on the same land.
Which of the above scenarios best exemplify the concept of “opportunity cost”?
(a) Scenario A only
(b) Scenarios A and C only
(c) Scenarios B and C only
(d) All scenarios (A, B and C)
5. With reference to Total Factor Productivity (TFP) in an economy, consider the following statements:
I. TFP measures the efficiency with which an economy combines labor and capital to produce output, representing technological progress and organizational improvements.
II. An increase in TFP growth rate while maintaining the same levels of capital and labor inputs results in higher economic growth without requiring proportional increases in factor inputs.
III. TFP growth in developing economies like India is constrained primarily by inadequate physical capital accumulation rather than human capital development or institutional factors.
Which of the statements given above are correct?
(a) I and II only
(b) II and III only
(c) I and III only
(d) I, II and III
6. Consider the following statements regarding “Social Marginal Cost” in the context of economic policy:
Statement I: Social Marginal Cost includes both private costs borne by firms and external costs imposed on society (negative externalities), while private marginal cost reflects only the firm’s direct production costs.
Statement II: When Social Marginal Cost exceeds private marginal cost, market failure occurs, and governments typically use taxation or regulation to align private incentives with social welfare.
Statement III: Pollution from manufacturing units, noise from airports, and carbon emissions represent scenarios where Social Marginal Cost is higher than private marginal cost.
Which of the statements given above are correct?
(a) I and II only
(b) II and III only
(c) I and III only
(d) I, II and III
7. The Fisher Effect in economics describes the relationship between:
I. Nominal interest rates, real interest rates, and inflation rates, expressed as: nominal interest rate ≈ real interest rate + inflation rate.
II. International capital flows and exchange rates, where higher inflation differentials between countries lead to currency depreciation of the higher-inflation country.
III. Central bank monetary policy decisions and asset price inflation, where expansionary monetary policies primarily inflate asset prices rather than consumer prices.
Which of the statements given above are correct?
(a) I only
(b) I and II only
(c) II and III only
(d) I, II and III
**8. The Phillips Curve concept, when applied to modern economies, reveals which of the following?
I. There exists a stable, long-run tradeoff between the inflation rate and unemployment rate that policymakers can exploit permanently.
II. In the short-run, lower unemployment rates are associated with higher inflation rates, but this relationship weakens or disappears in the long-run when inflation expectations adjust.
III. The Phillips Curve shifted outward during the 1970s stagflation period, demonstrating that the inflation-unemployment tradeoff can be unstable over time.
Which of the statements given above are correct?
(a) I and II only
(b) II and III only
(c) I and III only
(d) I, II and III
9. Okun’s Law establishes a relationship between unemployment and economic growth. Consider the following statements:
I. According to Okun’s Law, for every 1% increase in unemployment above the natural rate, GDP falls by approximately 2% below its potential level.
II. The empirical validity of Okun’s Law has remained consistent across all time periods and economic cycles, making it a universally reliable tool for policy formulation.
III. Okun’s Law helps explain why reducing unemployment below the natural rate requires GDP growth to exceed the economy’s potential growth rate.
Which of the statements given above is/are correct?
(a) I and III only
(b) II and III only
(c) I only
(d) I, II and III
10. With reference to the Mundell Impossible Trinity (Mundell-Fleming Trilemma), consider the following:
A country cannot simultaneously maintain:
Free capital mobility (unrestricted cross-border capital flows)
Fixed exchange rate (stable currency value)
Independent monetary policy (autonomy in setting interest rates and money supply)
Based on this framework:
I. A country pursuing free capital mobility and exchange rate flexibility can conduct independent monetary policy.
II. China’s experience with attempting to maintain capital controls while fixing its exchange rate reflects a choice that preserves monetary policy independence.
III. The European Union’s adoption of a common currency (Euro) effectively constrains member states’ monetary policy autonomy despite capital mobility and exchange rate fixity at the eurozone level.
Which of the statements given above are correct?
(a) I and II only
(b) I and III only
(c) II and III only
(d) I, II and III
ANSWER KEY WITH EXPLANATIONS
QUESTION 1: Answer (d) – I, II and III
Explanation:
Statement I is correct: The disconnect between GDP growth and human development is a well-documented phenomenon. India’s experience exemplifies this—despite robust 7-8% GDP growth in recent years, the country ranks 134th in HDI (2022), indicating that growth has not proportionally translated into improvements in health, education, and living standards. This highlights the limitation of using GDP as the sole development metric.
Statement II is correct: This accurately defines the distinction between HDI and GDP. The Human Development Index (introduced by UNDP in 1990 through the work of Mahbub ul-Haq) captures three dimensions: life expectancy (health), expected years of schooling and mean years of schooling (education), and Gross National Income per capita (standard of living). GDP, conversely, only measures the total monetary value of goods and services produced, ignoring distributional aspects and quality-of-life indicators.
Statement III is correct: This represents a fundamental critique of GDP-focused development models. A country can experience rising per capita GNI while simultaneously experiencing increased infant mortality, declining life expectancy, or declining literacy—reflecting unequal income distribution and inadequate social service provisioning. This phenomenon illustrates why the Inequality-Adjusted HDI (IHDI) is considered superior to simple HDI for assessing inclusive development.
QUESTION 2: Answer (a) – Both Statement I and Statement II are correct and Statement II explains Statement I
Explanation:
Statement I is correct: This accurately describes the two primary methods of calculating GDP:
Income Method: GDP = Wages + Profits + Rent + Interest (i.e., factor incomes)
Expenditure Method: GDP = C + I + G + (X-M), where C=consumption, I=investment, G=government expenditure, X-M=net exports
Statement II is correct: The fundamental accounting identity in national income accounting ensures that:
Total Income ≡ Total Expenditure
This is because every rupee spent on goods and services becomes income to the factors of production (labor, capital, land, entrepreneurship). Therefore, both methods must yield identical results when correctly calculated.
Relationship: Statement II directly explains Statement I—the reason both methods yield the same GDP is precisely this accounting identity. Every expenditure in the economy corresponds to an equal income generated through the production process.
QUESTION 3: Answer (d) – I, II and III
Explanation:
Statement I is correct: The free rider problem occurs when individuals consume or benefit from public goods or services without bearing the cost of provision. Classic examples include:
National defense (citizens enjoy security without directly paying)
Clean air/environment (people benefit without compensating)
Research and development (innovation benefits society broadly)
Statement II is correct: This reflects the fundamental market failure caused by free riders. Since providers cannot easily exclude non-payers and consumers cannot be effectively charged individually, private markets under-supply public goods. The rational response for providers is to reduce supply below the socially optimal level, necessitating government intervention.
Statement III is correct: All three represent scenarios where government must intervene to address free rider problems:
Education subsidies: Without subsidies, free riders would access educated workforce without bearing training costs
National defense: Cannot exclude citizens from defense benefits; requires collective/government funding
Public health programs: Vaccination creates positive externalities; without government support, undersupply occurs
QUESTION 4: Answer (d) – All scenarios (A, B and C)
Explanation:
Opportunity Cost is defined as the value of the next best alternative foregone when making an economic choice.
Scenario A is correct: The individual’s opportunity cost of pursuing an MBA is the ₹8 lakh annual salary foregone. If the MBA lasts 2 years, the total opportunity cost is ₹16 lakhs plus forgone career progression and benefits. This is a classic example used in economics education.
Scenario B is correct: When the government allocates resources to infrastructure, it forgoes the opportunity to spend on healthcare, education, or defense. Each spending choice involves opportunity costs. This is central to public expenditure analysis and fiscal policy discussions in UPSC.
Scenario C is correct: The farmer’s opportunity cost of cultivating wheat is the revenue foregone from rice cultivation. If rice yields ₹5,000/hectare more profit, the opportunity cost of growing wheat is ₹500,000 (100 hectares × ₹5,000). Agricultural decisions inherently involve such tradeoffs.
Concept Integration: Opportunity cost underpins rational economic decision-making across all three scenarios—individual, government, and business sectors.
QUESTION 5: Answer (a) – I and II only
Explanation:
Statement I is correct: TFP (also called Solow Residual) measures the portion of output growth not explained by increases in capital and labor inputs. It captures:
Technological progress (better production techniques)
Organizational efficiency improvements
Management innovations
Institutional reforms
Formula: TFP growth = Output growth – (αK × Capital growth + αL × Labor growth)
Statement II is correct: This precisely describes the benefit of TFP improvements. If TFP increases by 2% while capital and labor remain constant, output grows by 2% without proportional factor increases. This is why developing countries like India must focus on TFP growth—it enables sustainable growth without requiring massive capital accumulation.
UPSC Context: India’s Economic Survey frequently highlights TFP growth as crucial for achieving sustainable 7-8% GDP growth rates without unsustainable factor input growth.
Statement III is INCORRECT: This statement is too restrictive. TFP growth in India is constrained by multiple factors, not just physical capital:
Human capital deficits (low literacy rates, skill gaps)
Institutional weaknesses (regulatory burden, contract enforcement issues)
Infrastructure constraints (though this is partially physical capital)
Innovation ecosystem underdevelopment
Therefore, addressing only capital accumulation would be insufficient; comprehensive human capital and institutional development are equally critical.
QUESTION 6: Answer (d) – I, II and III
Explanation:
Statement I is correct:
Private Marginal Cost (PMC): Costs directly incurred by the firm (wages, raw materials, utilities)
Social Marginal Cost (SMC): PMC + External Costs (costs borne by society, not the firm)
For a pollution-generating factory: SMC includes both production costs and health/environmental damage costs imposed on nearby communities.
Statement II is correct: When SMC > PMC (i.e., negative externalities exist), market failure occurs because:
The firm only considers its private costs, producing beyond the socially optimal quantity
Governments typically intervene through:
Pigou taxes on pollution
Regulation (emission standards)
Tradable permits (cap-and-trade)
This brings private incentives into alignment with social welfare by internalizing external costs.
Statement III is correct: All examples represent negative externalities where SMC exceeds PMC:
Manufacturing pollution: Firms bear production costs; society bears health costs
Airport noise: Airlines bear operational costs; residents bear noise damage costs
Carbon emissions: Fossil fuel industries bear extraction costs; global society bears climate change costs
QUESTION 7: Answer (b) – I and II only
Explanation:
The Fisher Effect is named after economist Irving Fisher and represents the relationship between nominal rates, real rates, and inflation.
Statement I is correct: The Fisher Equation states:
Nominal Interest Rate ≈ Real Interest Rate + Inflation Rate
Or rearranged: Real Interest Rate ≈ Nominal Interest Rate – Inflation Rate
Example: If nominal interest rates are 8% and inflation is 5%, real interest rate ≈ 3%. This relationship is fundamental to understanding:
Debt real burdens
Investment decisions
Savings incentives
Monetary policy effectiveness
Statement II is correct: The Fisher Effect also extends to international finance:
Countries with higher inflation see currency depreciation
This is the International Fisher Effect: interest rate differentials between countries predict exchange rate changes
Example: If India has 6% inflation while the US has 2%, the rupee tends to depreciate approximately 4% annually relative to the dollar
This mechanism prevents long-term interest rate arbitrage opportunities between countries and is crucial for understanding capital flows and exchange rates.
Statement III is INCORRECT: This conflates the Fisher Effect with monetary policy transmission mechanisms. The Fisher Effect specifically concerns the nominal-real rate-inflation relationship and currency depreciation patterns. It does not primarily describe the relationship between monetary policy and asset price inflation—that’s a separate phenomenon involving wealth effects, portfolio rebalancing, and credit conditions.
QUESTION 8: Answer (b) – II and III only
Explanation:
The Phillips Curve, discovered by A.W. Phillips (1958), describes inflation-unemployment tradeoffs.
Statement I is INCORRECT: This represented the original Phillips Curve understanding but has been fundamentally challenged:
Expectation-Augmented Phillips Curve (1960s-1970s) showed the tradeoff is only temporary
Stagflation of the 1970s proved no permanent tradeoff exists
Long-run Phillips Curve is essentially vertical at the natural unemployment rate
Policymakers cannot permanently exploit inflation-unemployment tradeoffs
Statement II is CORRECT: The modern understanding distinguishes:
Short-run Phillips Curve: Shows inverse inflation-unemployment relationship as firms face sticky prices and wages adapt slowly
Long-run Phillips Curve: Vertical at the natural rate of unemployment; inflation expectations have adjusted
Implication: Reducing unemployment below natural rate causes accelerating inflation, unsustainable long-term
Statement III is CORRECT: The Phillips Curve “shifted outward” during 1970s stagflation:
Traditional curve predicted that inflation falls as unemployment rises
Instead, both inflation AND unemployment rose simultaneously (stagflation)
Explanation: Adverse supply shocks (oil crises) + expectation shifts made both unemployment and inflation increase
This demonstrated the Phillips Curve instability and the importance of inflation expectations
QUESTION 9: Answer (a) – I and III only
Explanation:
Okun’s Law (formulated by Arthur Okun, 1962) quantifies the unemployment-GDP relationship.
Statement I is CORRECT: The standard formulation states:
% Change in Unemployment ≈ -0.5 × (% GDP Growth – Trend Growth Rate)
Or equivalently: For every 1% increase in unemployment, GDP falls approximately 2% below potential
This 2:1 coefficient (Okun’s Coefficient) reflects:
Labor force participation changes
Hours worked variations
Worker productivity effects
Statement II is INCORRECT: Okun’s Law empirical stability has been questioned:
Long-term shifts: The relationship has weakened over decades
Financial crises: 2008-2009 showed “jobless recovery”—GDP recovered without unemployment falling proportionally
Structural changes: Labor market transformations, gig economy growth, automation
Time-varying coefficient: Okun’s coefficient differs across countries and time periods
Therefore, it’s NOT universally reliable for precise policy formulation; it’s more of a stylized rule-of-thumb.
Statement III is CORRECT: This logically follows from Okun’s Law. Since reducing unemployment requires GDP growth, and since full-employment GDP growth (potential growth) maintains unemployment at natural rate:
To reduce unemployment, actual growth must exceed potential growth
If potential growth is 3% and natural unemployment corresponds to 2% growth, achieving lower unemployment requires >3% growth
This explains why sustained unemployment reduction requires above-potential growth rates
QUESTION 10: Answer (b) – I and III only
Explanation:
The Mundell Impossible Trinity (also called Trilemma) states a country cannot simultaneously achieve three policy objectives:
Free capital mobility
Fixed exchange rate
Independent monetary policy
Statement I is CORRECT: Under Floating Exchange Rate Regime:
Capital flows freely across borders
Exchange rate adjusts to equalize supply and demand
Monetary policy is autonomous (central bank can set interest rates independently)
Mechanism: If a country pursues expansionary monetary policy under floating rates:
Interest rates fall → capital outflows → rupee depreciates
Depreciation makes exports competitive, maintaining external balance
This is the scenario most developed countries pursue (e.g., US, UK, India)
Statement II is INCORRECT: China’s situation is mischaracterized:
China does NOT have free capital mobility (maintains capital controls)
China DOES have a managed exchange rate (not fully fixed but not freely floating)
China DOES maintain monetary policy independence
Choice made: Sacrificed free capital mobility to preserve both exchange rate management and monetary autonomy
This represents choosing position C (fixed rate + independent policy + capital controls), not the scenario described.
Statement III is CORRECT: The Eurozone represents a special case:
Individual countries: Cannot conduct independent monetary policy (ECB sets policy for all)
Capital mobility: Free within Eurozone (though not globally unlimited)
Exchange rate fixity: Irrevocably fixed (1 euro = 1 euro everywhere)
Result: Individual member states sacrificed monetary autonomy at the national level
However, collectively as the Eurozone (not individual countries), they achieve:
Monetary policy independence (ECB autonomy)
Fixed rates (within Eurozone)
Capital mobility
This works at the Eurozone level but constrains individual member states
Policy Implication: Understanding the Trilemma helps explain why:
Emerging markets often pursue capital controls (like India with some restrictions)
India allows significant capital inflows but maintains monetary autonomy
Fixed exchange rate regimes (like currency boards) sacrifice monetary independence
