ABM Module A

Economics – 100 Questions

Q.1 Which economist defined the Economics as “Enquiry into Nature and Causes of Wealth
of Nations”
Ans Adam Smith – father of Economics
Q.2 “Economics is study of mankind in the ordinary business of life”. Who defined like this?
Ans Alfred Marshal
Q.3 Which economist called Economics as “Science of Human Welfare”?
Ans Alfred Marshal
Q.4 Economics is a science which studies human behavior as a relationship between ends
and scarce means which have alternative uses. Therefore economics is study of means
and ends. Which economist gave this definition of Economics?
Ans Lionel Robbins.
Q.5 Study of behavior of Individual, Household, Firm or Company is
___________ Economics as defined by Robbins.
Ans Micro
Q.6 Study of behavior of Industry, Economy of entire country, whole world like inflation,
deflation, Income, Saving, Investment, GDP and Employment is called
_________Economics
Ans Macro
Q.7 Economy in which Private firms make major decisions is called _________
Ans Capitalist Economy or Market Economy
Q.8 Economy in which Govt plays major role is called ________________
Ans Socialist Economy or Command Economy
Q.9 Which type of economy India is?
Ans Mixed economy in which both Pvt. sector and Govt. sector play important role.
Q.10 How will you define Laisez-Fair economy?
Ans It is extreme case of market economy in which Govt. does not interfere in economic
decisions.
Q.11 What is the slope of Demand curve?
Ans It is negative because of the fact that price and quantity demanded have inverse
relationship. Price rises and Quantity demanded falls and vice-versa. We can also say
that Demand Curve falls downward from left to right.
Q.12 With rise in Income, demand rises and Demand curve shifts upward. This is called
___________in demand. (Increase/Extension)
Ans Increase
Q.13 With fall in price, demand rises on the same demand curve. This is called
___________in demand. (Increase/Extension)
Ans Extension
Q.14 In case of Giffen goods, Demand curve is positive because of the fact
that______________
Ans Demand falls even if there is fall in price.
Q.15 Demand of Coffee rises with rise in the price and the curve is negative because of
inverse relationship. Tea and Coffee are _____________ goods
(Substitute/Supplementary).
Ans Substitute
Q.16 Pen and Ink, Car and Petrol are supplementary goods. The rise in price of one item
 results in fall of quantity demanded of other. In this case, the slope of demand curve is
___________ (Positive/Negative).
Ans Negative
Q.17 Equilibrium price is the point where___________________
Ans Demand Curve and Supply curve intersect each other.
Q.18 The slope of supply curve is _____________(Positive/Negative).
Ans Positive
Q.19 Demand Schedule is relationship between ___________and _____________.
i) Demand and Quantity bought ii) Price and Quantity bought
Ans Price and Quantity bought
Q.20 How will you define Narrow money?
Ans Narrow money i.e. M1 = Currency with Public + Demand Deposits with Banks + Other
deposits with RBI.
Q.21 What is M3
Ans M3 is a concept of Wide money which includes M1 + Saving Deposits of Post offices +
Time deposits with banking system.
Q.22 Increase in cost of production leads to inflation. Which type of Inflation is it (Demand
Pull/Cost Push).
Ans Cost Push Inflation.
Q.23 DA of public sector employees is determined/guided by which index?
Ans Consumer Price Index for Industrial workers. (CPI-IW).
Q.24 What do you mean by GDP deflator?
Ans It is a measure of level of prices of all new domestically produced, final goods and
services in an economy.
Q.25 JM Keynes explained that Rate of Interest is determined by Demand and Supply of
money. Which are 3 motives as explained by Keynes for Which people hold money?
Ans 1) Transaction Motive
2) Speculative Motive
3) Precautionary Motive
Q.26 If Current rate is higher than expected rate in future. People will hold more
___________(Money/Bonds)
Ans Bonds
Q.27 Keynes believes in Two Asset Economy. Which are these?
Ans Money and Bonds
Q.28 In two asset economy, the demand for money by the people depends how they decide
to balance their portfolio between ________and __________.
Ans Money and Bonds
Q.29 Keynes explains that Rate of Interest is determined by Demand and Supply. Demand is
affected by Liquidity Preference. This is why, Keynes theory is called
_______________
Ans Liquidity Preference Theory.
Q.30 This theory also explains that Higher Nominal Rate of Interest and Lower will be
_____________
Ans Demand for Speculative purpose.
Q.31 Higher Nominal Income will lead to more ______________
Ans Portfolio Investment.
Q.32 What are names of Curves in Hicks-Hanson Synthesis?
Ans IS (Investment Saving Curve) and LM (Liquidity Money Supply) curve.
Q.33 IS Curve is Demand Curve, has negative slope and is derived from Classical theory.
 Similarly explain LM Curve.
Ans LM curve id Supply curve has positive slope and is derived from Keynes’ Liquidity
Preference Theory.
Q.34 Production capacity is fully utilized and profits are maximized. This period is known as
______________
Ans Boom
Q.35 Demand comes down from peak. Supply exceeds demand stocks start piling up.
Producers give up plan to expand. This situation is called
__________(Recession/Depression)
Ans Recession
Q.36 Rise of Unemployment, Fall in general demand and Cost is not covered by the price.
This situation is called _______________ (Recession/Depression)
Ans Depression
Q.37 Workers come forward to work at lower wages, Consumption starts, banks are
prepared to sanction easy loans and demand starts increasing. This is the situation of
___________(Recovery/Inflation)
Ans Recovery
Q.38 State of Rising Prices is called__________.
Ans Inflation
Q.39 Classify the Industrial Sector in 4 categories.
Ans 1. Manufacturing 2. Mining
2. Electric generation 3. Gas and water supply
Q.40 Business Cycle is also known as __________Cycle.
Ans Economic Cycle
Q.41 Growth rate of GDP in India.
Ans 1950-80-------------3.5%
2010-11-------------8.4%
2011-12-------------6.5%
2012-13-------------4.9%
2013-14-------------4.7%
2014-15-------------5.4% (Projected)
Q.42 Agriculture is basically Primary Sector, Industry is Secondary Sector and Services are
classified under ___________sector.
Ans Tertiary sector.
Q.43 What is growth of GDP (Sector wise) in the year 2011-12
Ans Agriculture--------2.8%
Industry -----------3.4%
Services-----------8.9%
Aggregate--------6.5%
( In 2012-13, GDP growth is 4.9% and in 2013-14, it is 4.7%)
Q.44 What is share of GDP sector wise in the year 2011-12
Ans Agriculture and allied activities---------14%
Industry -------------------------------------20%
Service-------------------------------------- 66%
Q.45 What is domestic Saving Rate in the year 2011-12 and 2012-13
Ans 34% of GDP(2011-12) & 30.1% (2012-13)
Q.46 There is complete transformation of India’s economy. The share of Agriculture in the
GDP of the country has come down from 38% in 1980-81 to 14% in 2011-12. What is
position of share of service sector.
Ans It has increased from
34% in 1950-51 to
45% in 1980-81 and
64% in 2010-11 and
66% in 2011-12 and 67% in 2012-13
Q.47 Liberalization process started and Economic Reforms ushered in the year-----------
Ans 1991
Q.48 Narsimham Committee submitted report in 1988 and the same was implemented in the
year 1991. Which two major reforms were introduced in Financial sector?
Ans 1. Capital adequacy
2. Asset Classification and Provisioning norms.
Q.49 What is full form of BCSBI?
Ans Banking Code and Standard Board of India. It has introduced “Code of Conduct” in the
banks.
Q.50 What reforms have been brought in the money market?
Ans 1. CD and CP
2. LAF (Repo and Reverse Repo transactions)
3. MSF (Marginal Standing Facility)
4. CBLO (Collateralized Borrowing and Lending Obligations)
5. IRS (Interest Rate Swaps) and FRA (Forward Rate Agreement)
Q.51 What reforms have been brought in G-Sec market?
Ans 1. Ways and Means Finance i.e. loan to govt. by RBI to contain Fiscal deficit.
2. Yield on G-sec i.e. Treasury bills etc. provide benchmark for interest rates.
3. RBI does not participate in the Primary segment of G-sec market. It has become
more market oriented.
Q.52 What reforms have been brought in Forex Market?
Ans 1. Exchange rate flexibility
2. EEFC, RFC and RFCD accounts
3. Liberalized Remittance Scheme (Up to USD 75000/-) per financial year.
4. Introduction of Derivatives to control risk.
5. 100% convertibility in Current account transactions and Partial convertibility in
Capital account transactions.
6. Liberalization in Imports and Exports
Q.53 What reforms have been brought in Capital Market?
Ans 1. Primary and Secondary market under direct control of SEBI
2. Corporatization of Exchanges
3. Book Building system and Free pricing of shares in primary market
4. Options and Futures as derivatives introduced.
5. Indian Depository Receipt introduced.
6. Rolling settlement replaced 14 days settlement.
7. All Securities are applied on ASBA and issued in Demat form.
Q.54 What reforms have been brought in Payment and Settlement System?
Ans 1. RTGS and NEFT through INFINET
2. Mobile Banking through IMPS (Internet Mobile Payment System)
3. CTS (Cheque Truncation System)
4. ECS (Electronic Clearing Service)
Q.55 How many industries are covered with 100% FDI under automatic route?
Ans 34 industries
Q.56 What do you know about External Commercial Borrowings?
Ans External Commercial Borrowings are medium and long term loans as permitted by RBI
for the purpose of :
 Fresh investments
 Expansion of existing facilities
 Trade Credit (Buyers’ Credit and Sellers’ Credit) for 3 years or more.

Automatic Rout
 ECB for investment in Real Estate sector , Industrial sector and Infrastructure do
not require RBI approval
 It can be availed by Companies registered under Indian Company Act.
 Funds to be raised from internationally recognized sources such as banks,
Capital markets etc.
 Maximum amount is USD 20 million with minimum average maturity of 3 years
and USD 750 million with average maturity of 5 years.
All in cost ceiling is 6M LIBOR+350 bps for ECB up to 5 years and 6M LIBOR+500 bps
for ECBs above 5 years.
Approval Route
Under this route, funds are borrowed after seeking approval from RBI.
 The ECBs not falling under Automatic route are covered under Approval Route.
 Under this route, Issuance of guarantees and Standby LC are not allowed.
Funds are to be raised from recognized lenders with similar caps of all-in-cost ceiling.
Q.57 What is Fiscal Policy?
Ans It is policy of Govt. spending and Govt revenues which influences the country’s
economy.
Q.58 RBI’s Monetary Policy is issued __________in a year.
Ans Once. However Bi-monthly reviews are issued by RBI.
Q.59 In order to curb inflation, what tools are adopted by RBI
Ans Contraction of money supply by increase in Repo and Sale of Govt Securities in Open
Market Operations
Q.60 What is MSF (Marginal Standing Facility).
Ans Overnight lending by RBI @ 9% (1% above Repo) against purchase of Govt. Securities
to the extent of 2% of DTL.
Q.61 What are the provisions of FRMB (Fiscal Responsibility and Budget Management) Act.
Ans  Act requires to place before Parliament 3 statements viz. Budget, Fiscal Policy
Strategy and Macroeconomics framework.
 Centre will reduce Fiscal Deficit up to 3%
 Govt. will not borrow from RBI for deficit financing except under exceptional
circumstances.
 Ceiling on Govt. Guarantee @0.5% of GDP.
 Sterilization Operations under Market Stabilization scheme.
Q.62 How will you calculate GDP?
Ans Market Value of goods and services produced in a country in a financial year?
Q.63 GDP +Net factor Income from abroad = ?
Ans GNP
Q.64 GNP- Depreciation = ?
Ans NNP at market prices
Q.65 NNP at market price + Subsidy – Indirect Taxes = ?
Ans NNP at factor cost. It is also called National Income.
Q.66 What is real National Income?
Ans NNP at factor cost
Q.67 What is Personal Income (PI)
Ans NI – Corporate taxes – payment for social security norms + Govt. Transfer Payments
Q.68 What is DI (Disposable Income)
Ans PI – Personal Taxes
Q.69 How will you calculate GDP through Expenditure method?
Ans C+I+G+(X-M)
Consumption + Expenditure + Govt spending + Net factor income from abroad
Q.70 How will you calculate GDP through Income method?
Ans Interest + Wages (Compensation to employees) + Rent (Property Income) + Profit
Q.71 How will you calculate Per Capita Income?
Ans National Income / Population
Q.72 What is per capita Income of India in 2013?
Ans $1504
Q.73 Which type of receipts are these?
1. Income tax, Service tax, Excise tax, Corporation Tax
2. Interest, Dividend, Profit and non-tax receipts
Ans Revenue Receipts
Q.74 Which type of Receipts are these?
1. Debt Receipts such as Loans, borrowings, External Assistance, Small savings
2. Non- debt receipts such as Recovery of loans etc.
Ans Capital Receipts
Q.75 Which type of Payments are these?
1. Expenditure on interest, defense, subsidies and expenses on general and
social services
2. Expenditure on Salary, Pension and other economic services
Ans Revenue Payments
Q.76 Which type of Payments are these?
Purchase of Tanks for defense, Loans to Private Enterprises, States, UTs and Foreign
Govt. , Payments for creating infrastructure – roads, dams, bridges etc.
Ans Capital Payments
Q.77 What is Revenue deficit?
Ans Revenue Payments - Revenue Receipts
Q.78 What is Budgetary Deficit?
Ans Total Payments - Total Receipts
Q.79 How Fiscal Deficit is calculated?
Ans Total Expenditure (Revenue + Capital) - (Revenue Receipts + Non- Debt Receipts)
Q.80 What is Net Fiscal Deficit?
Ans Gross Fiscal Deficit – Net Lending
Q.81 What is Gross Primary Deficit?
Ans Gross Deficit – Interest Payments
Q.82 What is Net Primary Deficit?
Ans Net Fiscal Deficit – Net Interest Payments
Q.83 What is %age of Fiscal Deficit in the year 2011-12 and 2013-14
Ans 5.9% of GDP in 2011-12
4.5% in 2013-14 ( Road map to bring it further down up to 3.6% in 2015-16)
Q.84 What are Highlights of Union Budget 2013-2014
Ans  Time bound FI Mission launched on 15th August
  Banks permitted to raise long term funds for lending to Infrastructure.
 Requirement to infuse 240000 crore as equity in our banks by 2018 as per
BASEL-III
 6 new DRTs to be set up
 Rs. 10000 crore fund for Venture Capital in MSME sector
 Gross Receipts ---------1364524 crore
 Gross Payments--------1794892 crore
 Fiscal Deficit-------------4.7% of GDP (4.1 %expected 2014-2015)
 Revenue Deficit---------3.3% of GDP
 Target for Agriculture Credit--------800000 crore.
 Saving Rate ----------30.1%
 Investment Rate-----34.8%
Interest Tax exempted up to -------10000 per financial year on SB accounts
Income Tax Exemption limit raised to------------------Rs. 2.50 lac
For Senior citizens -----------------------------------------Rs. 3.00 lac
Investment limit U/S 80C rose to 1.5 lac (Prev. 1.00 lac).
Deduction of Interest on HL raised from 1.50 lac to 2.00 lac
Income Tax slab on taxable Income @ 10% up to 5.00 lac, 20% up to 10 lac and 30%
above 10 lac + Education tax on Income tax @ 3% (2+1).
Q.85 What are conditions of Perfect Competition Market?
1. Large nos. of Buyers and Sellers
2. Homogeneous commodity
3. Same Price
4. Free entry and Exit of Firms
5. Average Revenue = Marginal Revenue
Q.86 What is the position of Cost Curves in Perfect Competition Market?
Ans  Both AC and MC fall, but MC is below AC
 After a certain point, AC becomes constant and MC is equal to AC
 When AC starts rising, MC is above AC
 MC cuts AC at the lowest ebb.
 Normal Profits are earned under the situation of Perfect Competition Market.
Q.87 What are the features of Monopoly
Ans Under monopoly, there is a single seller, who is Price taker. He adopts Price
discrimination to boost sales. Therefore AR and MR are falling curves. In long run,
Monopolist earns Super normal profits.
Q.88 When a firm achieves Equilibrium i.e. position of Optimum utilization.
Ans When Average Revenue = Marginal Revenue i.e. AR = MR
Q.89 What is Monopolistic Competition?
Ans When large number of firms selling differentiated models of same product i.e.
commodity is not homogeneous and price is also not the same. Firm achieves
equilibrium when AR = MR
Q.90 What is Consumer Equilibrium
Ans Difference between what Consumer is Willing to pay and what the consumer Actually
pays.
Q.91 What is Utility?
Ans Utility is the satisfaction derived from consumption of particular product.
Q.92 What is Marginal Utility.
Ans Extra satisfaction derived from consumption of one additional unit.
Q93 What do you know about Elasticity of Demand?
Ans It is responsiveness of change in demand due to change in price, income or price of
other commodity. It is of 3 types: Price Elasticity, Income Elasticity and Cross Elasticity.
Q.94 What are kinds of Elasticity of Demand?
Ans  Highly Elastic Demand is when proportionate change in demand is higher than
proportionate change in price. (ED>1)
 Less Elastic Demand is when proportionate change in demand is lesser than
proportionate change in price.(ED<1)
 Unitary Elastic Demand is when proportionate change in demand is equal to
proportionate change in price.(ED=1)
 Perfect Elastic Demand is the situation when small change in price results into
unusual large variations in Demand. (Ed=Infinite).
 Perfect Inelastic Demand is the situation when there is no variation in Demand
due to rise or fall in price. Demand Curve is parallel to Y axis. (Ed=0)
Q.95 Name four factors of Production.
Ans Land, Labour, Capital Organization or Entrepreneur
Q.96 What is meant by Marginal cost?
Ans Cost of Producing one additional unit
Q.97 Name the direct taxes. Whether these are progressive or regressive?
Ans Direct Taxes are Income tax, Wealth Tax, Gift Tax and Estate Duty etc.. The rate of tax
increases as Income rises. This is why it is called Progressive tax system.
Q.98 Why Indirect taxes like Vat, Service Tax, Excise Duty are called Regressive?
Ans Because Rate of tax is uniform and poor people have to pay equal amount as is paid by
rich people having more income.
Q.99 What is Balance of Trade?
Ans Difference between Value of Exports and Imports Merchandise. It is unfavorable if
value of Imports is more than the Value of exports.
Q.10 What is Balance of Payment?
0
It has two sides Receipts and Payments. It is neither favorable nor un-favorable but
always Balanced.
Receipts side includes Current Items and Capital Items. Similarly Payment side
includes Current and Capital Items.
Current Receipts
Export of goods (visible), Services to rest of world such as Air, Banking and Insurance,
Transfers and Income from Rest of world.
Capital Receipts
Foreign private loans, Inflow of banking capital, Loans by Govt, International Sale of
Gold etc.
Current Payments
Import of goods, Services from rest of world, Transfers to rest of world, Incomes to rest
of world.
Capital Payments
Repayment of Pvt. Loans, Outflow of banking capital, Repayment of Govt loans and
loans to other countries, Purchase of Gold in international market.

Rating of India
BBB-

CAD (Current Account Deficit)

It is difference between Current Receipts and Current Payments. CAD increased to 4.7% in
2012-13. It was serious concern for India and Government took remedial steps which resulted in
decrease in CAD from 4.7% to 1.7% in 2013-14.

Consumer Price Index (IW)

 It is applicable in determining Dearness Allowance in banks.

 Labour Bureau Shimla calculates and keeps record of it.

 It includes 24 consumer items.

 Base Year is 2001=100

 Periodicity -Monthly

 At present CPI is 252 (July 2014)

Wholesale Price Index

 Office of Economic Affairs (Ministry of Commerce and Industry) calculates and circulates

 It is used to measure inflation and formulation of Govt. policies.

 Periodicity is monthly

 Base Year is 2004-2005 = 100

 At present it is 184.6 (July 2014)

RBI has recently adopted new CPI as a measure of inflation

Key Policy Rates at present:

CRR ----------------------4%
SLR-----------------------22%
Repo----------------------8%
Reverse Repo----------7%
Bank Rate -------------- 9 %
MSF --------------------- 9 %

-----------Compiled by Kanwal Kumar, Senior Faculty, ZTC, Ludhiana