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GS Economy Quiz for IAS Prelims – Concepts of Macroeconomics

Sep 15, 2016 18:30 IST

    From UPSC IAS Examination point of view, the Questions based on Indian Economy are very important. The UPSC IAS aspirants must be aware of the every perspective of Indian Economy either it is static or dynamic.

    1. Consider the following statements:
    1.    Macroeconomics is a study of individual markets of demand and supply and the players or the decision-maker seen as trying to maximise their profits(as producers or sellers) and their personal satisfaction or welfare levels(as consumers).
    2.    Even a large company is ‘micro’ in the sense that it had to act in the interest of its own shareholders and not necessarily in the interest of the country as a whole.

    Which of the statements given above is/are correct?
    a.    1 only
    b.    2 only
    c.    Both 1 and 2
    d.    None of these

    Answer .b

    Explanation:


    In macroeconomics we usually simplify the analysis of how the country’s total production and the level of employment are related to attributes (called ‘variables’) like prices, rate of interest, wage rates, profits and so on, by focusing on a single imaginary commodity and what happens to it. We are able to afford this simplification and thus usefully abstain from studying what happens to the many real commodities that actually are bought and sold in the market because we generally see that what happens to the prices, interests, wages and profits etc. for one commodity more or less also happens for the others.

    Particularly, when these attributes start changing fast, like when prices are going up (in what is called an inflation), or employment and production levels are going down (heading for a depression), the general directions of the movements of these variables for all the individual commodities are usually of the same kind as are seen for the aggregates for the economy as a whole.

    2. Macroeconomic policies in India pursued by whom among the followings:
    1.    Government of India
    2.    RBI
    3.    SEBI

    Select the correct answer using the codes given below
    a.    1 and 2
    b.    2 and 3
    c.    1, 2 and 3
    d.    1 only

    Answer. c

    Explanation:


    Microeconomic policies are pursued by the State itself or statutory bodies like the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI) and similar institutions. Typically, each such body will have one or more public goals to pursue as defined by law or the Constitution of India itself. These goals are not those of individual economic agents maximising their private profit or welfare. Thus the macroeconomic agents are basically different from the individual decision-makers.

    GS Economy Quiz for IAS Prelims - External Sector of India

    3. Macroeconomics as a separate branch of economics, emerged after the British economist John Maynard Keynes published is celebrated book
    a.    The Wealth of Nations
    b.    On the Principles of political Economy and Taxation
    c.    The Affluent Society
    d.    The General Theory of Employment, Interest and Money

    Answer. d

    Explanation:


    Macroeconomics, as a separate branch of economics, emerged after the British economist John Maynard Keynes published his celebrated book "The General Theory of Employment, Interest and Money" in 1936.

    The dominant thinking in economics before Keynes was that all the labourers who are ready to work will find employment and all the factories will be working at their full capacity. This school of thought is known as the classical tradition.

    4. Which of these are the factors of production?
     1. Land
     2. Labour
     3. Revenue
     4. Capital

    Select the correct answer using the codes given below:
    a.    1 and 2 only
    b.    1, 2 and 4 only
    c.    1, 2, 3 and 4
    d.    1, 2 and 3 only

    Answer. b

    Explanation:


    In a capitalist country production activities are mainly carried out by capitalist enterprises. A typical capitalist enterprise has one or several entrepreneurs (people who exercise control over major decisions and bear a large part of the risk associated with the firm/enterprise). They may themselves supply the capital needed to run the enterprise, or they may borrow the capital.

    To carry out production they also need natural resources – a part consumed in the process of production (e.g. raw materials) and a part fixed (e.g. plots of land). And they need the most important element of human labour to carry out production. This we shall refer to as labour. After producing output with the help of these three factors of production, namely capital, land and labour, the entrepreneur sells the product in the market.

    The money that is earned is called revenue. Part of the revenue is paid out as rent for the service rendered by land, part of it is paid to capital as interest and part of it goes to labour as wages. The rest of the revenue is the earning of the entrepreneurs and it is called profit.

    5. “An Enquiry into the Nature and Cause of the Wealth of Nations” book is written by:
    a.    Adam Smith
    b.    John Maynard Keynes
    c.    Sir Richard Hicks
    d.    Joseph Stiglitz

    Answer. a

    Explanation:


    An Inquiry into the Nature and Causes of the Wealth of Nations also known as The Wealth of Nations is the magnum opus of the moral philosopher and Scottish economist Adam Smith which was published 1776.

    The book Wealth of Nations set a base for the classical economics which dealt with the broad topics of microeconomics like division of labour, productivity, and free markets.

    6. Consider the following statements:
    1.    Final goods produced in an economy can be classified into consumption goods and capital goods.
    2.    Consumption goods can be further classified into consumer durables and non durable.

    Which of the statements given above is/are correct?
    a.    1 only
    b.    2 only
    c.    Both 1 and 2
    d.    None of these

    Answer. c

    Explanation:


    Each producer of commodities intends to sell her output. So from the smallest items like pins or buttons to the largest ones like aeroplanes, automobiles, giant machinery or any saleable service like that of the doctor, the lawyer or the financial consultant–the goods and services produced are to be sold to the consumers. The consumer may, in turn, be an individual or an enterprise and the good or service purchased by that entity might be for final use or for use in further production. When it is used in further production it often loses its characteristic as that specific good and is transformed through a productive process into another good.
    Thus a farmer producing cotton sells it to a spinning mill where the raw cotton undergoes transformation to yarn; the yarn is, in turn, sold to a textile mill where, through the productive process, it is transformed into cloth; the cloth is, in turn, transformed through another productive process into an article of clothing which is then ready to be sold finally to the consumers for final use. Such an item that is meant for final use and will not pass through any more stages of production or transformations is called a final good.

    7. A market economy requires:
    I.     unrestricted entry of new firms, new ideas, and new technologies so that the forces of competition can guide capital and labour resources to their most productive and dynamic uses.
    II.   easy exit so that resources are forced or enticed away from inefficient and unsustainable uses.
    III.  Restricted entry of new firms, new ideas, and new technologies so that the forces of competition can guide capital and labour resources to their most productive and dynamic uses.

    Which of the following statement(s) is/are correct?
    a.    Only I
    b.    I and II
    c.    I and III
    d.    All of the above

    Answer: d

    Explanation:


    A market economy requires unrestricted entry of new firms, new ideas, and new technologies so that the forces of competition can guide capital and labour resources to their most productive and dynamic uses. But it also requires exit so that resources are forced or enticed away from inefficient and unsustainable uses.

    8. Who among the followings gave the Communist doctrine?
    a.    Adam Smith
    b.    Karl Marx and Frederick Engels
    c.    John Maynard Keynes
    d.    Joseph Stiglitz

    Answer. b

    Explanation:


    Communist doctrine was given by Karl Marx and Frederick Engels. Communism is the doctrine of the conditions of the liberation of the proletariat, class in society which lives entirely from the sale of its labour and does not draw profit from any kind of capital; whose weal and woe, whose life and death, whose sole existence depends on the demand for labour – hence, on the changing state of business, on the vagaries of unbridled competition. The proletariat, or the class of proletarians, is, in a word, the working class of the 19th century.

    9. With reference to calculation of Aggregate value of goods and services produced during a year, consider the following:
    1. Expenditure method

    2. Product method
    3. Revenue method
    4. Income method

    Which of the statements given above is/are correct?
    a.    1 and 2 only
    b.    2 and 3 only
    c.    1, 2, 3 and 4
    d.    1, 2 and 4

    Answer. d

    Explanation:


    We can calculate the aggregate value of goods and services produced in the economy by any of the three methods

    •    Measuring the aggregate value of factor payments (income method)
    •    Measuring the aggregate value of goods and services produced by the firms (product method)
    •    Measuring the aggregate value of spending received by the firms (expenditure method)

    In the product method, to avoid double counting, we need to deduct the value of intermediate goods and take into account only the aggregate value of final goods and services. We derive the formulae for calculating the aggregate income of an economy by each of these methods. We also take note that goods can also be bought for making investments and these add to the productive capacity of the investing firms.

    10. Which of the following methods can be used to estimate national income?
    1. Expenditure method
    2. Output method
    3. Matrix method
    4. Income method

    Codes
    a.    1 and 2 only
    b.    3 and 4 only
    c.    1, 2 and 4 only
    d.    All of these

    Ans. c

    Explanation:


    Generally, there are three methods of measuring national income of a country, namely, product method (output method), income method and expenditure method.

    The Product or Value Added Method: In product method we calculate the aggregate annual value of goods and services produced (if a year is the unit of time).

    Expenditure Method: An alternative way to calculate the GDP is by looking at the demand side of the products. This method is referred to as the expenditure method.

    Income Method: The sum of final expenditures in the economy must be equal to the incomes received by all the factors of production taken together (final expenditure is the spending on final goods; it does not include spending on intermediate goods). This follows from the simple idea that the revenues earned by all the firms put together must be distributed among the factors of production as salaries, wages, profits, interest earnings and rents.

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