Economy MCQ Quiz - Objective Question with Answer for Economy - Download Free PDF

The correct answer is 'A high MPC leads to a larger budget multiplier, resulting in a significant increase in aggregate demand and economic output.'

Key Points

• Government Spending and MPC:
  • When the government **increases spending without raising taxes**, it injects more money into the economy, raising overall demand.
  • If the **marginal propensity to consume (MPC)** is high, a larger portion of additional income is spent rather than saved, further increasing demand.
• Effect on the Budget Multiplier:
  • The **budget multiplier effect** is directly influenced by MPC. A high MPC leads to a larger multiplier, amplifying the impact of government spending on total economic output.
  • This results in a **significant increase in aggregate demand** and can lead to higher GDP growth, assuming other factors remain constant.

Additional Information

• Option 1: This is incorrect because a **high MPC leads to a positive multiplier** effect, not a negative one, thereby boosting economic output.
• Option 3: The budget multiplier is affected by **MPC levels**; a higher MPC results in a greater multiplier effect.
• Option 4: While increased spending may lead to some **crowding out of private investment**, the **overall effect on output is positive** when MPC is high.

Important Points

• The multiplier effect is **amplified with a higher MPC**, as each round of spending creates more income for subsequent consumption.
• This mechanism helps stimulate **aggregate demand** significantly in response to increased government spending.

The correct answer is 'Rising debt levels can crowd out private investment by increasing interest rates and borrowing costs.'

Key Points

• Impact of High Public Debt on Investment:
  • As public debt increases, the government often needs to borrow more, which can **drive up interest rates** and make borrowing more costly for private investors.
  • This phenomenon is known as **crowding out**, where government borrowing absorbs a large portion of available capital, leaving less for private sector investment.
• Challenges of Managing High Debt:
  • High public debt can limit the government’s ability to **implement fiscal policies** effectively, as a significant portion of revenue may go toward interest payments on debt.
  • This can **reduce fiscal flexibility**, making it harder for the government to respond to economic downturns or invest in growth-promoting initiatives.

Additional Information

• Option 1: This is incorrect as high public debt can **increase inflationary pressures** if it leads to excessive government spending or borrowing.
• Option 2: Rising debt typically **leads to higher interest rates** on government bonds to attract investors, not lower rates.
• Option 4: Public debt does impact the government’s **fiscal flexibility** due to the obligation of debt servicing, especially at high levels of debt.

Important Points

• High public debt can **reduce the government’s capacity** for future fiscal stimulus due to interest obligations.
• Increased borrowing costs for the government often lead to **higher rates across the economy**, impacting private investment.

The correct answer is 'As income levels rise, the demand for public services like healthcare, education, and infrastructure increases, leading to higher public expenditure.'

Key Points

• Wagner’s Law of Increasing State Activity:
  • According to **Wagner’s Law**, as economies grow and become more industrialized, there is an inherent increase in the demand for public services and infrastructure, leading to a rise in government spending.
  • This phenomenon is often driven by the population’s increased expectations for **better healthcare, education, and social security systems** as living standards improve.
  • Higher public expenditure is also attributed to the need for **developing infrastructure** and maintaining public order to support an industrialized society.

Additional Information

• Option 1: This is incorrect as **government spending typically increases** with economic growth to meet the rising demand for public services rather than decreasing due to private sector efficiency.
• Option 3: Public expenditure generally **grows with economic expansion** rather than remaining constant, as increased revenue from economic growth allows for higher spending on public services.
• Option 4: This option is incorrect, as growth leads to **greater public spending** on infrastructure and services, not necessarily a reduction in welfare needs.

Important Points

• Wagner’s Law is based on the idea that as nations progress, **public demand for welfare and developmental services grows**, requiring expanded government roles and spending.
• Government spending tends to be a **larger percentage of GDP** in wealthier, industrialized countries compared to developing economies.

The correct answer is 'Buyers bear the full tax burden since the quantity demanded does not change with price.'

Key Points

• Perfectly Inelastic Demand and Tax Incidence:
  • In a situation where **demand is perfectly inelastic**, buyers are insensitive to price changes, meaning they will continue to purchase the same quantity regardless of price.
  • This makes it possible for **sellers to pass the entire tax burden onto buyers** since demand remains unchanged even with higher prices due to the tax.
• Implication of Tax Burden:
  • With perfectly inelastic demand, buyers effectively absorb the entire cost of the tax because they are unwilling or unable to reduce their quantity demanded in response to the tax-induced price increase.

Additional Information

• Option 1: This is incorrect because **tax incidence is affected by demand elasticity**; when demand is inelastic, the buyer tends to bear more of the burden.
• Option 2: Sellers do not bear the full tax burden in the case of inelastic demand, as they can pass it on to buyers who will continue purchasing the product.
• Option 4: The government’s role in tax incidence typically does not involve **absorbing part of the tax burden** through subsidies in a standard tax policy scenario.

Important Points

• Tax incidence depends on the **elasticities of demand and supply**: when demand is more inelastic, buyers bear more of the tax burden.
• Perfectly inelastic demand indicates **no change in quantity demanded** regardless of price, allowing sellers to pass the entire tax burden onto buyers.

The correct answer is: 'Progressive taxation applies a higher tax rate on higher income levels, reducing disposable income inequality by taxing wealthier individuals more heavily.'

Key Points

• Progressive taxation applies a higher tax rate on higher income levels, reducing disposable income inequality by taxing wealthier individuals more heavily.
  • This statement is correct.
  • In a progressive tax system, the tax rate increases as income rises. This approach reduces income inequality by taxing higher-income individuals at a higher rate than lower-income individuals, thereby redistributing income more equitably.
  • The additional revenue collected from wealthier individuals can be used to fund public services, welfare programs, and other initiatives that benefit society, particularly lower-income groups.

Incorrect Statements

• In progressive taxation, the tax rate decreases as income rises, leading to increased disposable income for higher earners.
  • This statement is incorrect.
  • Progressive taxation means higher-income levels are taxed at higher rates, not lower. This system aims to reduce, not increase, disposable income inequality.
• Progressive taxation applies a flat rate on all incomes, ensuring equal taxation across all income levels.
  • This statement is incorrect.
  • A flat tax system, not a progressive one, applies the same rate to all income levels, regardless of the income amount. In progressive taxation, rates increase with income.
• Progressive taxation applies only to corporate taxes and is unrelated to individual income taxation.
  • This statement is incorrect.
  • Progressive taxation applies to individual income taxes as well as corporate taxes in some cases, with the primary goal of addressing income inequality through higher taxes on higher incomes.

Hence, option 2 is correct, as it accurately describes the key characteristic of progressive taxation and its impact on income distribution.

Additional Information

• Benefits of Progressive Taxation:
  • Progressive taxation helps reduce income inequality by taxing higher-income individuals at higher rates, ensuring they contribute more to government revenue.
  • It funds social programs and infrastructure that benefit society as a whole, particularly lower-income groups, thus enhancing social equity and reducing poverty.

The correct answer is Russia.

Key Points

• The constitution of India has borrowed most of its provisions from the constitution of different countries in the world.
• According to Dr B R Ambedkar, the constitution of India has been framed after ransacking all the known constitutions of the world.
• The important provisions borrowed from Russia are:
  • Five-year plan.
  • Fundamental duties.

Additional Information

• The important provisions borrowed from Britain are:
  • Parliamentary form of government
  • Rule of Law.
  • Single Citizenship.
  • Office of Comptroller and Auditor General of India.
  • Bicameralism.
  • Writs.
• The important provisions borrowed from the United States are:
  • Fundamental rights.
  • Preamble.
  • Independence of judiciary.
  • Judicial review.
  • Impeachment.
  • Post of vice-president.
• The important provisions borrowed from Germany:
  • Suspension of Fundamental Rights during the emergency.

The correct answer is Horticulture and Honey.

Key Points

• The Golden Revolution is related to Horticulture and Honey.
• It started in 1991 and lasted till 2003.
• Father of Golden Revolution: Nirpakh Tutaj.
• The Golden Fibre Revolution is related to Jute Production.

Additional Information

The correct answer is Second Five Year Plan.

Key Points

• Second Five-year plan (1956 to 1961)
  • The second plan was conceived in an atmosphere of economic stability.
  • It was felt agriculture could be accorded lower priority. 
  • Industries got more importance in the 2nd five-year plan. The focus was mainly on heavy industries. 
  • The Indian government boosted the manufacturing of industrial goods in the country.
  • This was done primarily to develop the public sector.
  • The Plan Focussed on rapid industrialization- heavy & basic industries.
  • Advocated huge imports through foreign loans.
  • Therefore, the Indian Government adopted a mixed economy during the second five-year plan. Hence, Option 2 is correct.
  • The Industrial Policy 1956 was based on the establishment of a socialistic pattern of society as the goal of economic policy.
  • Acute shortage of forex led to pruning of development targets, the price rise was also seen ( about 30%) vis a vis decline in the earlier Plan & the 2nd FYP was only moderately successful.

Important Points

• The 2nd year five-year plan functioned based on the Mahalanobis model. 
• The Mahalanobis model was propounded by the famous Prasanta Chandra Mahalanobis in the year 1953.
• As many as five steel plants including the ones in Durgapur, Rourkela ,Bhilai were set up as per the 2nd five-year plan. 
• During the term of the 2nd five-year plan, Atomic Energy Commission came into being.
• The Commission was established in the year 1957. 
• During the same period, the Tata Institute of Fundamental Research was born.

Additional Information

• First Five Year Plan:
  • It was launched from 1951 to 1956, under the leadership of Jawaharlal Nehru. 
  • It was based on the Harrod-Domar model with a few modifications. 
  • Its main focus was on the agricultural development of the country.
  • This plan was successful and achieved a growth rate of 3.6% (more than its target of 2.1%). 
  • At the end of this plan, five IITs were set up in the country. 
• Third Five Year Plan:
  • It was made from 1961 to 1966.
  • It is also called ‘Gadgil Yojna’, after the Deputy Chairman of Planning Commission D.R. Gadgil.
  • The target of this plan was to make the economy independent.
  • The stress was laid on agriculture and the improvement in the production of wheat. 
  • India was engaged in two wars: (1) the Sino-India war of 1962 and (2) the Indo-Pakistani war of 1965. These wars exposed the weakness in our economy and shifted the focus to the defense industry, the Indian Army, and the stabilization of the price (India witnessed inflation). 
  • The plan was a flop due to wars and drought. The target growth was 5.6% while the achieved growth was 2.4%. 
• Fourth Five Year Plan:
  • Its duration was from 1969 to 1974, under the leadership of Indira Gandhi. 
  • The two main objectives of this plan i.e. growth with stability and progressive achievement of self-reliance.
  • Fourteen major Indian banks were nationalized and the Green Revolution was started.
  • Indo-Pakistani War of 1971 and the Bangladesh Liberation War took place. 
  • Implementation of Family Planning Programmes was amongst major targets of the Plan
  • It failed and could achieve a growth rate of 3.3% only against the target of 5.7%.

The correct answer is Primary sector.

Key Points:

• Activities that generate income are termed as economic activities.
• On the basis of economic activities, the Indian economy can be divided into 3 major sectors that are the primary sector, the secondary sector, and the tertiary sector.
• Dairy comes under the primary sector.
• Primary sector: Primary activities are directly dependent on the environment as these refer to the utilization of the earth’s resources. It, thus includes hunting and gathering, pastoral activities, fishing, apiculture, etc.
• Secondary sector: Secondary activities add value to natural resources by transforming raw materials into valuable products. Therefore, they are concerned with manufacturing, processing and construction industries. For eg: Shoe factory.
• Tertiary sector: Tertiary activities include both production and exchange. The production involves the ‘provision’ of services that are consumed. The exchange involves trade, transport and communication facilities that are used to overcome distance. For eg: Consultancy.

The correct answer is 1956-61.

Key Points

• 1956-61 was the duration of the Second Five Year Plan.
• The Second Five Year Plan was based on Mahalanobis Model.
• ​Its main focus was on the industrial development of the country.
• P. C. Mahalanobis was a famous Indian statistician who founded the Indian Statistical Institute.
• The plan lagged behind the target growth rate of 4.5% and achieved a growth rate of 4.27%.

Additional Information

• The five-year plans were one of the central plans.
• The plans were formulated and were financed by the central government.
• These were launched in 1951, with the first five-year plans covering the years 1951-56.
• There were three breaks in five-year plans during 1966-69, 1978-80, and 1991-92.
• "Twelfth Five Year Plan" duration is from 2012 to 2017, and it was under the leadership of Manmohan Singh.
• It was the last five-year plan because Niti Aayog replaced it with the planning commission.
• Its main theme was “Faster, More Inclusive and Sustainable Growth”.
• Its growth rate target was 8%.​

​

The correct answer is Ellora Caves.

Key Points

• In April 2019, RBI issued new Rs. 20 currency notes in the Mahatma Gandhi (New) series. 
• The new Rs 20 notes have the signature of the Reserve Bank's Governor.
• The base colour of the new note is Greenish Yellow.
• The new (Rs 20) denomination has the motif of Ellora Caves on the reverse side of the note.
• The dimension of the banknote will be 63 mm x 129 mm.

Additional Information

The correct answer is Third five year plan.

Key Points

• The third Five Year Plan was launched from 1961-1966 under the leadership of Pandit Jawaharlal Nehru.
  • The Deputy Chairman of the Planning commission at the time of the third five-year plan was D. R. Gadgil.
  • The plan was also known as the Gadgil Yojana.
  • The independent economy (establishment of a self-reliant and self-generating economy), agriculture, and improvement in the production of wheat were the major objectives of the plan.
  • The third Five Year Plan was affected due to drought and two wars (Sino-India war of 1962 and Indo-Pakistani war of 1965).

Additional Information

• The First five-year plan 
  • This plan was launched from 1951-1956 under the leadership of Pandit Jawaharlal Nehru.
  • It was based on the Harrod-Domar model.
  • The targeted growth rate of the plan was 2.1%.
  • The plan was successful and achieved a growth rate of 3.6% which was more than its target.
  • The agricultural development of the country was the major objective of the plan.
  • At the end of this plan, five IITs were set up in the country.
• The second five-year plan
  • ​​​This plan is based on P.C Mahalanobis Model.
  • It was planned from 1 April 1956 to 31 March 1961.
  • It is popularly known as Mahalanobis Plan.
  • The second five-year plan accords high priority to industrialization, and especially to the development of basic and heavy industries.
  • This plan includes substantial investment in iron and steel, coal and Heavy engineering, Machine building, Heavy chemicals, and Cement Industries.​
• ​Fourth-Five year Plan:
  • ​The duration of this Plan is 1969-1974 under the leadership of Indira Gandhi.
  • The two main objectives of this Plan are growth with Stability and Progressive achievement with self-reliance.
  • During this Plan, 14 major Indian Banks were nationalized.
  • At this time, the Indo-Pak war of 1971 and the Bangladesh liberation war took Place.
  • The main emphasis was on the growth rate of agriculture to enable other sectors to move forward.
  • First, two years of the plan saw record production.
  • The last three years did not measure up due to poor monsoon.
  • Implementation of Family Planning Programmes was amongst the major targets of the Plan.

Important Points

The correct answer is option 4 i.e 1950.

Key Points

• The Planning Commission was an institution which formulated Five-Year Plans in India.
  • Planning Commission set up in 1950.
  • Planning commission was established based on the recommendation of an advisory planning board under the chairmanship of KC Neogy.
  • Headquarters: Yojana Bhavan, New Delhi.
  • Planning commission is only an advisory body.
  • The concept of planning was based on the Russian model introduced by Joseph Stalin.
  • The Prime Minister is the chairman of the planning commission.
  • Jawaharlal Nehru was the first chairman of the planning commission.
  • Deputy chairman of the planning commission was appointed by the Union Cabinet.
  • Gulzarilal Nanda was the first deputy Chairman of the Planning Commission.
• Narendra Modi government dissolved the Planning Commission in 2014.
• The planning commission was replaced by the newly formed NITI Aayog in 2015.

The correct answer is Custom duties.

Important Points

• The tax imposed on the import and export of commodities is called Custom duties.
• This is a form of foreign trade control and a policy that taxes foreign goods to encourage or protect domestic industry.
• Tariffs may be set (a constant sum per unit of imported goods or a percentage of the price) or variable (the amount varies by price). Import taxation means that consumers are less likely to purchase them because they are more costly.
• An excise tax is an indirect tax on the sale of a particular good or service charged by the Government.
• A VAT (Value-added tax) is a consumption tax that is imposed on a product whenever a value is added at each stage of the supply chain, from production to point of sale.
• Goods and Services Tax(GST) is an Indirect tax on the purchase of goods and services used in India.

The correct answer is Fourth Five-year Plan - Family planning programme

Key Points

• Fourth Five-Year Plan (1969-1974)
  • The fourth Five Year Plan was the first plan launched by the Indira Gandhi government amid the pressure of drought, devaluation, and inflationary recession.
  • The country was fighting with population explosion, increased unemployment, poverty, and a shackling economy. In addition, the situation in East Pakistan (now independent Bangladesh) was becoming dire as the Indo-Pakistani War of 1971 and the Bangladesh Liberation War took place.
  • Funds earmarked for industrial development had to be used for the war effort.
  • The result was that this plan period was also no better than the third five-year plan.
  • It gave emphasis on Family planning programs to control the population.​

Additional Information