Q.

What will be the situation in the automobile market if automobile manufacturers are
producing more cars in the current price than what people want to buy?

A. there will be an excess supply and price can be expected to decrease.

B. there will be an excess supply and price can be expected to increase.
C. there will be an excess demand and price can be expected to decrease.
D. there will be an excess demand and price can be expected to increase
E. None of the above
Answer: Option A
 Q.2

When the income of the consumer increases, the _________ curve will shift ______ .

A. Demand, rightwards
B. Supply, rightwards
C. Demand, leftwards
D. Supply, leftwards
E. None of the above
Answer: Option A

Change in Factors other than Price Leads to Shift in Demand Curve

Answer: Option A
 Q.3

Net National product at factor cost + net Indirect taxes + depreciation - net factor income
from abroad represents the __________ of the country.

A. GNP at MP
B. NNP at MP
C. GDP at MP
D. GDP at FC
E. GNP at FC
Answer: Option C

National = Domestic + Net Factor Income From Abroad

Gross = Net + Depreciation

Market Price = Factor Cost + Indirect Taxes - Subsidies

Domestic = National – Net Factor Income From Abroad

Net = Gross – Depreciation

Factor Cost = Market Price – Indirect Taxes + Subsidies

 Q.4

Such vertical demand curves, where quantity demanded is not responsive to price
changes, are called

A. perfectly elastic demand curve

B. perfectly inelastic demand curve
C. Unitary elastic demand curve
D. Elastic demand curve
E. None of the above
Answer: Option B
Price Elasticity of Demand Price Elasticity of Supply
 Q.5

What will be the effect on the demand of Good Y if the price of Good X increases, in the
case of Substitute Goods?

A. No effect on the Demand of Good Y

B. Increase in the Demand of Good Y
C. Decrease in the Demand of Good Y
D. Can be Increase or Decrease in the Demand of Good X
E. None of the above
Answer: Option B
Answer: Option B

Cross Elasticity of Demand

 Q.6

Which of the following component is included while calculating National Income through
Expenditure Method?

A. Transfer Payments
B. Receipts from the sale of second-hand goods
C. Expenditure on Intermediate goods
D. Government Final Consumption Expenditure
E. All of the above
Answer: Option D
 Q.7

Which of the following is correct according to the Value-added method to calculate GVA at
MP?

A. Value of Output – Intermediate Consumption

B. Sales + Change in stocks – Intermediate Consumption
C. Sales + (Closing Stocks – Opening Stocks) – Intermediate Consumption
D. A and B only
E. All of the above
Answer: Option E
 Q.8

Calculate NNP at FC using the following information:

Compensation of Employees = 2500

Profits = 700 A. 11450
Rent = 400 B. 11500
Interest = 350 C. 11720
Dividends = 200 D. 11000
Mixed Income of Self Employed =7500 E. 11200
Net factor Income From Abroad = 50
Depreciation = 70
Answer: Option B

NNP at FC = 2500 +700 +400 +350 + 7500 + 50 = 11500

 Q.9

Under which of the following forms of market structure does a firm has no control over
the price of its product?

A. Monopoly
B. Oligopoly
C. Monopolistic Competition
D. Perfect Competition
E. None of the above
What Is Perfect Competition?
Number of Nature of Degree of
Ease of Entry
Pure or perfect competition
Fims is a theoreticalProduct
market structure in which the followingPrice
criteria
control over are met:

1. All firms sell an identical product (the product is a "commodity" or "homogeneous").

2. AllPerfect
firms are price takers (they cannot influence
Large number Homogeneousthe market price of their product).
of firms Free Entry None
3. Market
Competitionshare has no influence on prices.Products

4. Buyers have complete or "perfect" information—in the past, present and future—about the product being sold and the
prices charged by each firm.
Differentiated
5. Resources for such aLarge
labor are perfectlyproducts
number mobile. close Free Entry Some
of firms
6. Firms can enter or exit the market without cost. perfect" information—in the past, present and future—about the
substitutes

product being sold and the prices charged by each firm. 5. Resources for such a labor are perfectly mobile. 6. Firms can
enter or exit the market without cost.
 Q.10

Which of the following statement is correct regarding perfect competition and

monopolistic competition?

A. Perfect competition has a large number of small firms while monopolistic competition
does not have large number of firms.
B. In perfect competition, firms produce identical goods, while in monopolistic
competition, firms produce differentiated goods.
C. Perfect competition has no barriers to entry, while monopolistic competition does.
D. The goods in Perfect and monopolistic competition are close substitutes of each other.
E. Both Option B and D
 Form of Number of Nature of Degree of
Market Ease of Entry control over
Firms Product
Structure Price

Large number Homogeneous

Perfect
of firms Products Free Entry None
Competition

Differentiated
Monopolistic Large number products close Free Entry Some
Competition of firms substitutes

Homogeneous\ Limited by
Oligopoly Few Firms Differentiated Limited Entry mutual
Product interdependence

Unique
Strong
Product
Monopoly One Barriers to Very Large
without Close
entry
Substitutes
 Q.11

The market demand curve for a perfectly competitive industry is QD = 12 - 2P. The market supply
curve is QS = 3 + P. The market will be in equilibrium if

A. P = 6 and Q = 9
B. P = 5 and Q = 2.
C. P = 3 and Q = 6
D. P = 4 and Q = 4
E. None of the above
Answer: Option C

QD = QS
12-2P = 3+P
P=3

QD = 12-2P
QD = 12 – 2*3
QD = 6

QS = 3+3
QS = 6
 Q.12

A consumer purchased 10 units of a commodity when its price was Rs. 5 per unit. He
purchased 12 units when price fall down to Rs. 4 per unit. What will be the price elasticity
of demand?

A. Unitary Elastic
B. Perfectly inelastic
C. Less Elastic
D. Perfectly Elastic
E. More Elastic
Answer: Option A

Price Elasticity of Demand =

2\10
= (-) -------------------
(-)1\5

2 5
= = ------ X ----- = 1
1 10
 Q.13

Under which market structure, the firm’s demand curve shows the highest elasticity?

A. Perfect Competition
B. Oligopoly
C. Monopoly
D. Monopolistic
E. None of the above
Answer: Option A
In a perfectly competitive market, the market demand curve is a downward sloping line, reflecting the fact that as the
price of an ordinary good increases, the quantity demanded of that good decreases. Price is determined by the
intersection of market demand and market supply; individual firms do not have any influence on the market price in
perfect competition. Once the market price has been determined by market supply and demand forces, individual firms
become price takers. Individual firms are forced to charge the equilibrium price of the market or consumers will purchase
the product from the numerous other firms in the market charging a lower price (keep in mind the key conditions of
perfect competition). The demand curve for an individual firm is thus equal to the equilibrium price of the market.

The horizontal demand curve of the firm indicates

that the elasticity of demand for the good is perfectly
elastic. This means that if any individual firm charged
a price slightly above market price, it would not sell
any products.
 Q.14

Which of the following statements is\are incorrect regarding perfect competition?

A. Earn zero economic profits or normal profits in the long run

B. Marginal Revenue = Average Revenue = Price
C. Demand Curve of a firm is downward sloping
D. The firm should produce where Marginal Cost = Marginal Revenue and MC cuts MR from below
E. None of the above
Answer: Option C
Demand Curve of a firm in the perfect competition is horizontal that is perfectly elastic.

Firms in a perfectly competitive market can make supernormal profits but only in the short run. Supernormal profit is
made where average revenue exceeds average cost.

Perfectly competitive markets have no barriers to entry and there is perfect knowledge in the market. If non-incumbent
firms can see that there are supernormal profits being made in the market, they will be incentivized to join. The absence
of barriers to entry means that they can do so with ease. However, when new firms join the market, industry supply
increases which pushes the market price down and reduces the amount of supernormal profit being made as average
revenue will decrease also. Firms will keep entering the market until there is no more incentive to do so, i.e. when only
normal profit is being made.

In the long run, the equilibrium will settle where only normal profit is made and thus competitive pressures ensure that
supernormal profit for a firm in a perfectly competitive market is only a short run phenomenon.
Answer: Option C
Conditions for Profit Maximising Equilibrium of a Firm:-

First order condition (necessary condition) – Marginal Revenue = Marginal cost

Second Order Condition (sufficient condition) – MC cuts MR from below that is MC will be
rising
 Q.15

Which of the following is LEAST likely to be a monopoly?

A. the sole owner of an occupational license

B. a pharmaceutical company with a patent on a drug
C. a clothing store in a large shopping mall
D. a firm having control over key natural resource
E. All of the above are likely to be a monopoly
Answer: Option C

Characteristics of Monopoly
• Profit maximizer: a monopoly maximizes profits. Due to the lack of competition a firm can charge a set
price above what would be charged in a competitive market, thereby maximizing its revenue.

• Price maker: the monopoly decides the price of the good or product being sold. The price is set by
determining the quantity in order to demand the price desired by the firm (maximizes revenue).

• High barriers to entry: other sellers are unable to enter the market of the monopoly.

• Single seller: in a monopoly one seller produces all of the output for a good or service. The entire market
is served by a single firm. For practical purposes the firm is the same as the industry.

• Price discrimination: in a monopoly the firm can change the price and quantity of the good or service. In
an elastic market the firm will sell a high quantity of the good if the price is less. If the price is high, the
firm will sell a reduced quantity in an elastic market.
Answer: Option C

Sources of Monopoly Power

In a monopoly, specific sources generate the individual control of the market. Sources of power include:

• Economies of scale
• Capital requirements
• Technological superiority
• No substitute goods
• Control of natural resources
• Network externalities
• Legal barriers
• Deliberate actions
 Q.16

Which of the following statement is inconsistent with Say’s Law??

A. The economy has flexible wages and prices.

B. The economy’s level of investment and saving solely depends on the level of income
C. The economy will produce at full employment level of output.
D. The economy has an environment of “laissez faire”
E. None of the above statements are inconsistent with Say’s Law
Answer: Option B
“From the time of Say and Ricardo the classical economists have taught that supply creates its own
demand...”
Eight Implications of say’s law of market are:

1. Rate of interest is a strategic variable — an equilibrating force in the classical model. Savings-
investments equality is brought about by the flexibility of interest rates.
2. Automatic attainment of full employment
3. Self-adjusting mechanism: Increase in supply will meet its own demand in the process of functioning
of a free capitalist economy. Hence, there is no need for the government to intervene.
4. There can be no deficiency of aggregate demand: Since supply automatically creates its own demand,
there is no possibility of any general overproduction. Thus, Say’s Law is a denial of the possibility of
deficiency in aggregate demand.
5. No problem of general unemployment: When there is no general overproduction, then there can be
problem of general unemployment in the long run.
Answer: Option B
6. Automatic resource adjustment and utilisation in an expanding capitalist economy: In an expanding free
enterprise economy, when new workers and new firms are productively absorbed, they do not take place
of the output, income and employment of the existing ones and as they release additional output and
income, the community becomes automatically rich with the increasing size of national income.
7. Money has only a passive role: Supply creates its own demand in real terms. Thus, money is just a veil.
Behind the flow of money, there is real flow of goods and services which is important. Thus, changes in the
supply of money have no impact on the real economy’s process of equilibrium at full employment level.
8. Built-inflexibility and automatic optimization: A capitalist economy under the laissez-faire policy has
built-in flexibility
 Q.17

Which of the following does not get included in the national Income?

A. Sale and purchase of second-hand goods

B. Value of services of housewives
C. Value of intermediate goods
D. Transfer Payments
E. All of the above are not included in National Income
Answer: Option E
Precautions taken while measuring national income of a country-

• Transfer Payments are not included in estimating national income.

• Illegal money such as hawala money, money earned through smuggling etc. are not included.
• Windfall gains such as prizes, lotteries are also not included.
• Corporate Profit tax (tax on income of the companies) should not be separately included as it is a
part of profits.
• Death duties, gift tax, wealth tax, tax on lotteries etc. are paid from past savings. That’s they should
not be treated as part of national income.
• Receipts from sale of second hardgoods should not be included.
• Expenditure on purchase of shares and bonds from other people and from business enterprises
should not be included while estimating National Income.
• Expenditure on Intermediate goods should not be included.
 Q.18

Which of the following shows the savings + consumption of the households?

A. Private Income
B. Personal Disposable Income
C. Personal Income
D. National Income
E. None of the above
Answer: Option B
Personal Disposable Income is the amount of money available with the households after accounting for
income taxes, either to spend or save the same.

Personal Disposable Income formula = Personal Income – Personal Income Taxes

Personal Disposable Income = Consumption + Save

Private income is the total of factor incomes and transfer incomes received from all sources by private
sector (private enterprise and households) within and outside the country

Private Income = Personal income + corporate tax + Undistributed profit

Private Income = National Income – Income from property and entrepreneurship (domestic product)
accruing to govt. (public) sector + Transfer incomes

Personal income is the sum of earned income and transfer income received by persons (households)
from all sources within and outside the country
 Q.19

Which of the following does not include undistributed profits?

A. Private Income
B. National Income
C. Personal Income
D. NDP at FC
E. None of the above
Answer: Option C
Personal income is the sum of earned income and transfer income received by persons (households) from
all sources within and outside the country. The point to be noted here is that personal income includes
not only factor incomes which are earned from productive services but also transfer incomes (or
payments) which are received without rendering any productive service. Thus, personal income is the sum
of earned incomes and current transfer incomes. In other words, it is a receipt concept as compared to
national income which is an earning concept.

Personal income = National income – Income from property and entrepreneurship (domestic product)
accruing to govt. (public) sector – Corporate tax – Undistributed profit + All types of transfer incomes
 Q.20

Which of the following is not the characteristic or feature of the Oligopoly market
Structure?

A. Formation of Cartels
B. Large number of Big Sellers
C. When the firm faces both elastic and inelastic demand
D. Firms tend to be interdependent
E. All of the above are characteristic of oligopoly
Answer: Option B

Characteristics of oligopoly
• A Few Firms with Large Market Share- A market may have thousands of sellers, but if the top 5 firms
have a combined market share of over 50 percent, it can be classified as an oligopolistic market. This is
because the power is concentrated between a few sellers who are able to exercise power over the market.
• Interdependence- Any action a firm takes in an oligopolistic market will strongly affect the actions of its
competitors.
• High Barriers to Entry- Oligopolistic firms maintain their position through a number of barriers to entry.
For instance, brand loyalty, patents, and high start-up costs are but to name a few. These make it difficult
for new entrants to build a presence in the market and attract customers. Leading on from
interdependence; each firm has little market power, because other firms are quick to take advantage. One
oligopolistic firm cannot dictate prices or supply because competitors are equally as ‘powerful’. On an
individual basis, this keeps the firm in check. Yet it equally incentivises collusion as one firm is unable to
get ahead.
• More efficient due to economies of scale
Answer: Option B
 Q.21

Which of the following Statement is correct?

A. Private income = Personal Income + Corporate Tax + Undistributed Profits

B. GDP at FC = NNP at FC + Depreciation – Net Factor income from Abroad
C. Personal Disposable Income = Personal Income – Personal Income Taxes
D. Factor Cost = Market Price – Net Indirect Taxes
E. All of the above statements are correct
Answer: Option E
 Q.22

Which one of the following is not among the three principal tenets in the Keynesian
description of how the economy works?

A. Aggregate demand is influenced by many economic decisions—public and private.

B. Prices, and especially wages, respond slowly to changes in supply and demand
C. Changes in aggregate demand have their greatest short-run effect on real output and
employment, not on prices
D. Government should never intervene in the market
E. All of the above statements are not among the three principal tenets in the Keynesian
description
Answer: Option D
There are three principal tenets in the Keynesian description of how the economy works:

• Aggregate demand is influenced by many economic decisions—public and private. Private sector
decisions can sometimes lead to adverse macroeconomic outcomes, such as reduction in consumer
spending during a recession. These market failures sometimes call for active policies by the government,
such as a fiscal stimulus package (explained below). Therefore, Keynesian economics supports a mixed
economy guided mainly by the private sector but partly operated by the government.
• Prices, and especially wages, respond slowly to changes in supply and demand, resulting in periodic
shortages and surpluses, especially of labor.
• Changes in aggregate demand, whether anticipated or unanticipated, have their greatest short-run
effect on real output and employment, not on prices. Keynesians believe that, because prices are
somewhat rigid, fluctuations in any component of spending—consumption, investment, or government
expenditures—cause output to change. If government spending increases, for example, and all other
spending components remain constant, then output will increase. Keynesian models of economic activity
also include a multiplier effect; that is, output changes by some multiple of the increase or decrease in
spending that caused the change.
 Q.23

The quantity theory of money is expressed by the identity equation:

A. (M * V) / (P * Y)
B. M*V=Y
C. M=P*Y*V
D. M*V=P*Y
E. None of the above
Answer: Option D

Quantity theory of Money

•Acc. to this theory, supply of money determines price level in an economy.
•It is generally expressed by Fisher’s equation of exchange:
MV = PY
Where, M = Quantity of Money
V = Velocity of Money
P = Price level of goods and service
Y = Level of aggregate output ( or real income)

Both sides of the quantity theory of money identity represent Nominal GDP
Nominal GDP in terms of buyers is represented by how much money there is and how
many times, it is spent, while Nominal GDP in terms of sellers is represented by all goods
and services and their prices
 Q.24

According to the classicals, what is the shape of the aggregate supply curve at the full
employment level ?

A. Perfectly Inelastic
B. Perfectly Elastic
C. Upward Sloping
D. Downward Sloping
E. S shaped
Answer: Option A
Classical Aggregate Supply curve​
•Aggregate supply curve describe the relationship between aggregate supply of output with price level.
•Classical theory regards aggregate supply curve to be perfectly inelastic.

Why in classical model, aggregate supply curve is perfectly inelastic ?

Because this model holds that the economy is at its full employment level. That means that even if demand
increases, firms can't hire new workers and expand because everyone is already working. So in case of
increase of demand, Price increases and output can not expand.
 Q.25

When only such disturbances as changes in technology/tastes or in public spending and

taxes can affect economic growth and employment, whereas changes in the money supply
would have no effect upon economic growth and employment, we have...

A. Keynesian Assumption
B. Monetarism Ideology
C. Classical Dichotomy
D. Sticky prices
E. None of the Above
Answer: Option C
The classical dichotomy refers to the idea that real variables, like output and employment, are independent
of monetary variables. In macroeconomics, the classical dichotomy is the idea, attributed to classical and
pre-Keynesian economics, that real and nominal variables can be analyzed separately. To be precise, an
economy exhibits the classical dichotomy if real variables such as output and real interest rates can be
completely analyzed without considering what is happening to their nominal counterparts, the money
value of output and the interest rate. In this view, the primary function of money is to act as a lubricant for
the efficient production and exchange of commodities.