Daily Static Quiz (Economy) March 4, 2025
Daily Static Quiz (Economy)
UPSC Prelims Multiple Choice Questions on Indian Economy
The following set of questions addresses advanced economic concepts commonly tested in the UPSC Civil Services Preliminary Examination. These questions are designed to assess your understanding of key economic theories, principles, and their applications in the Indian context.
Question Paper
Q. 1 Which of the following best illustrates the economic principle that states “roughly 80% of effects come from 20% of causes”?
a) Focusing on 20% of critical reforms that could address 80% of economic inefficiencies
b) Allocating 80% of government expenditure to sectors that contribute 20% of GDP
c) Targeting subsidies to the bottom 20% of the population to achieve 80% poverty reduction
d) Ensuring that 80% of tax revenue comes from 20% of the highest income earners
With reference to the relationship between inflation and unemployment in India, consider the following statements:
Q.2 It consistently shows a strong inverse relationship across all time periods.
Studies covering the period 1991-2021 found the relationship to be weak or inconsistent.
During 2005-2008, India’s economic data showed alignment with the traditional inverse relationship theory.
The curve representing this relationship in India is significantly steeper than in developed economies.
Which of the statements given above are correct?
a) 1 and 3 only
b) 2 and 3 only
c) 1, 3 and 4 only
d) 2, 3 and 4 only
According to an established economic law, by how much would GDP typically decrease if unemployment increases by 1%?
a) 0.5%
b) 1%
c) 2%
d) 3%
Q.3 With reference to economic indicators in India, consider the following statements:
One indicator measures the economy from the demand side while another measures it from the supply side.
The difference between these two indicators is primarily taxes minus subsidies.
When one indicator’s growth exceeds the other’s, it generally indicates stronger performance in subsidized sectors.
India’s quarterly economic performance is officially reported using only one of these indicators.
Which of the statements given above are correct?
a) 1 and 2 only
b) 1, 2 and 3 only
c) 3 and 4 only
d) 1, 2, 3 and 4
Q.4 In a macroeconomic equation where M represents money supply, V represents velocity of money, P represents price level, and T represents volume of transactions, if the money supply increases by 10% and velocity of money remains constant, which of the following must be true?
a) Price level must increase by exactly 10%
b) Real output must decrease by 10%
c) The product of price level and real output must increase by 10%
d) Nominal interest rates must increase by 10%
Q.5 According to a certain economic theorem, why might fiscal stimulus through government borrowing fail to boost aggregate demand?
a) Because private investment is always more efficient than public spending
b) Because central banks will always counteract fiscal expansion with monetary contraction
c) Because economic agents increase savings to meet anticipated future tax liabilities
d) Because government borrowing inevitably leads to inflation, neutralizing any real effects
Q.6 If a country decides to maintain a fixed exchange rate and allow free capital mobility, what would be the necessary implication according to a well-established economic trilemma?
a) It must relinquish control over its domestic monetary policy
b) It must impose capital controls to maintain economic stability
c) It can maintain independent monetary policy but with limited effectiveness
d) It must increase its foreign exchange reserves proportionally to GDP growth
Q.7 Which economic curve illustrates that beyond a certain point, increasing a particular government policy measure may actually reduce the desired outcome?
a) The curve showing optimal level of public debt
b) The curve depicting relationship between tax rates and tax revenues
c) The curve illustrating trade-off between inflation and unemployment
d) The curve demonstrating environmental costs of economic growth
Q.8 Consider the following statements about two closely related national income measures:
1.For countries with significant overseas economic activities, one measure may be substantially higher than the other.
2. If a foreign company’s factory in India remits profits abroad, it contributes to one measure but not entirely to the other.
3. Worker remittances from abroad are included in calculating both measures.
4. The gap between these two measures indicates the extent of a country’s integration with the global economy.
Which of the statements given above are correct?
a) 1 and 2 only
b) 2 and 3 only
c) 1, 2 and 4 only
d) 1, 3 and 4 only
Which of the following economic phenomena would most likely occur together in an economy experiencing stagflation?
a) Rising unemployment and decreasing inflation, contradicting established economic theory
b) Declining tax revenues despite higher tax rates, illustrating diminishing returns
c) Inability to maintain stable exchange rates while pursuing independent monetary policy
d) High unemployment with high inflation, challenging conventional economic assumptions
Answer Key with Explanations
- Answer : a) Focusing on 20% of critical reforms that could address 80% of economic inefficiencies
Explanation: This question tests understanding of the Pareto principle (also known as the 80/20 rule), which states that roughly 80% of effects come from 20% of causes. Option (a) correctly illustrates this principle in economic policy formulation, where focusing on the most important 20% of reforms could potentially solve 80% of economic problems. As explained in the search results, “if you just study the most important 20% topics/questions, that would help you score 80% marks!”
2. Answer: b) 2 and 3 only
Explanation: This question refers to the Phillips curve, which traditionally suggests an inverse relationship between inflation and unemployment. According to the research paper cited in the search results, over the full period (1991-2021), the relationship between inflation and unemployment in India was found to be weak or inconsistent, making statement 2 correct. The same study found that specifically during 2005-2008, the inverse relation as suggested by Phillips held true, making statement 3 correct. Statements 1 and 4 are not supported by the evidence in the search results.
3. Answer : c) 2%
Explanation: This question tests knowledge of Okun’s law, which states that “one extra percent of unemployment costs two percent of the Gross Domestic Product (GDP).” Okun’s law is based on the observation that there is a negative relationship between unemployment and GDP. The search results explicitly state that “the exact relationship between unemployment and GDP is not constant, but Okun’s law typically assumes that a 1% increase in unemployment will lead to a 2% decrease in GDP.”
4. Answer: a) 1 and 2 only
Explanation: This question tests understanding of the difference between GDP and GVA. Statement 1 is correct as “GDP measures the economy from the demand side while GVA measures it from the supply side.” Statement 2 is correct as the difference between GDP and GVA is “taxes minus subsidies.” Statements 3 and 4 are not supported by the information provided in the search results. According to the search results, “GDP and GVA are the two main ways to ascertain the country’s economic performance.”
5. Answer: c) The product of price level and real output must increase by 10%
Explanation: This question tests understanding of Irving Fisher’s equation of exchange, MV = PT, where M is money supply, V is velocity of money, P is price level, and T is volume of transactions (or real output). If M increases by 10% and V remains constant, then the product PT must also increase by 10% for the equation to remain balanced. This doesn’t necessarily mean either P or T must increase by 10% individually; only their product must increase by 10%.
6. Answer: c) Because economic agents increase savings to meet anticipated future tax liabilities
Explanation: This question tests understanding of Ricardian equivalence. According to the search results, Ricardian equivalence suggests that “financing government spending out of current taxes or future taxes (and current deficits) will have equivalent effects on the overall economy.” This means stimulus through deficit spending may not be effective because “investors and consumers understand that the debt will eventually have to be paid for in the form of future taxes,” so they increase savings to meet these anticipated future tax liabilities.
7. Answer: a) It must relinquish control over its domestic monetary policy
Explanation: This question tests understanding of Mundell’s impossible trinity (or trilemma). According to the search results, “the impossible trinity, or the trilemma, refers to the idea that an economy cannot pursue independent monetary policy, maintain a fixed exchange rate, and allow the free flow of capital across its borders at the same time.” If a country chooses to maintain a fixed exchange rate and allow free capital mobility, it must necessarily give up control over its domestic monetary policy.
8. Answer: b) The curve depicting relationship between tax rates and tax revenues
Explanation: This question refers to the Laffer curve, which illustrates the relationship between tax rates and the resulting levels of government revenue. The Laffer curve suggests that beyond a certain point, increasing tax rates can actually lead to decreased tax revenue.8
9. Answer: a) 1 and 2 only
Explanation: This question tests understanding of the difference between GDP and GNP. Statement 1 is correct because GNP includes net income from abroad, so countries with significant overseas activities may have a substantially different GNP compared to GDP. Statement 2 is correct because profits remitted abroad by foreign companies operating in India contribute to India’s GDP but reduce the GNP relative to GDP. Statement 3 is incorrect because remittances are included in GNP, not GDP. Statement 4 is a generalization that isn’t necessarily true in all cases.
10. Answer: d) High unemployment with high inflation, challenging conventional economic assumptions
Explanation: This question tests understanding of stagflation, which refers to the combination of high unemployment and high inflation occurring simultaneously. This phenomenon challenges the conventional Phillips curve assumption of an inverse relationship between inflation and unemployment. The Phillips curve traditionally suggests that when unemployment is high, inflation should be low, and vice versa. Stagflation contradicts this assumption by presenting a scenario where both unemployment and inflation are high.
