Important Economic Terms and Concepts for Exams

The correct answer is C, marginal productivity of labour is zero. Disguised unemployment, also called hidden unemployment, exists where more persons are engaged in a job than are actually needed, so withdrawing one of them would not reduce output at all; that worker's marginal contribution is therefore zero. Indian agriculture is the classic illustration, where a whole family works on a holding that two members could manage. Option A is wrong because open unemployment, where people are visibly without work, is a different category altogether. Option B is wrong because the absence of alternative employment is a cause of the condition, not its definition. Option D is wrong because low productivity may arise from poor tools, poor soil or poor skills, which is a matter of degree, whereas disguised unemployment refers specifically to the zero marginal product of the surplus worker.

The correct answer is B, structural unemployment. It arises when the structure of the economy changes, so that the jobs being created need skills different from those the available workers possess; it lasts long and is cured by retraining and education rather than by a revival of demand. Option A, seasonal unemployment, is wrong because that is the idleness of workers in the months when their occupation offers no work, as in agriculture between sowing and harvest or in the sugar and ice industries. Option C, economical, is wrong because there is no recognised category of that name in economics. Option D, frictional unemployment, is wrong because it is the short-lived joblessness of people moving between one job and the next, which exists even in a healthy economy and is sometimes called search unemployment.

The correct answer is C. The repo rate is the rate at which the Reserve Bank of India lends short-term money to commercial banks against the collateral of government securities under a repurchase agreement, which is where the name repo comes from; it is the policy rate announced by the Monetary Policy Committee and the signal for interest rates across the economy. Option A is wrong because the rate a bank charges its own customers is its lending rate, now linked to external benchmarks. Option B is wrong because the government does not lend to banks; borrowing and lending to banks is central banking work. Option D is wrong because it describes the reverse repo rate, under which banks park their surplus funds with the Reserve Bank, and raising that rate absorbs liquidity from the system.

The correct answer is B, 15 and 59. Indian statistical practice treats persons aged fifteen to fifty-nine years as the working age population, and the labour force is made up of those among them who are either working or seeking and available for work. Children below fifteen are expected to be in school, and persons of sixty and above are counted as elderly dependants, so both groups are left out of the workforce. Option A is wrong because a range from ten to sixty-nine would count child workers and the elderly. Option C is wrong because fifty-five is a retirement age in some services but not the statistical boundary. Option D is wrong because eighteen is the age of majority and voting and sixty-five a retirement age, not the limits used for the workforce in Indian data.

The correct answer is A. Gross domestic product counts what is produced inside the domestic territory, whoever produces it, while gross national product counts what is produced by the normal residents of the country, wherever they are; the bridge between them is net factor income from abroad, which is the income Indians earn abroad minus the income foreigners earn in India. Option B is wrong because subtracting depreciation from gross domestic product gives net domestic product. Option C is wrong because the relation between factor cost and market price turns on indirect taxes minus subsidies, which is a different adjustment. Option D is wrong because dividing by the population gives per capita product or income, which measures the average rather than the total, and is the figure used to compare living standards between countries.

The correct answer is A, fiscal deficit minus interest payments. The fiscal deficit of a year contains the cost of servicing past borrowing as well as fresh spending, so taking out interest payments leaves the primary deficit, which shows how far the present year's expenditure exceeds its receipts on its own account. Option B is wrong because revenue expenditure minus revenue receipts is the revenue deficit, which indicates borrowing for routine running. Option C is wrong because including borrowings in receipts would make the account balance by definition, which is why the fiscal deficit is defined on receipts other than borrowings. Option D is wrong because that is the effective revenue deficit, introduced to recognise that grants given to states for capital assets create assets even though they appear as revenue spending.

The correct answer is C, stagflation, a word combining stagnation and inflation. It is the hardest condition for policy to handle, because the remedy for inflation is to squeeze demand while the remedy for unemployment is to expand it, so no single step cures both; the classic episode followed the oil price shocks of the nineteen seventies. Option A, deflation, is wrong because that is a sustained fall in the general price level, usually with falling output as well. Option B, disinflation, is wrong because that is merely a slowing of the rate of inflation while prices continue to rise, which is normally a policy success rather than a problem. Option D, reflation, is wrong because it is the deliberate stimulation of demand and prices in an economy that has fallen into deflation.

The correct answer is C, the Lorenz curve and the Gini coefficient. The Lorenz curve plots the cumulative share of income against the cumulative share of population, so a straight diagonal would mean perfect equality and the more the curve sags away from that line the greater the inequality. The Gini coefficient measures the area between the two, taking a value from zero for perfect equality to one for perfect inequality. Option A is wrong because the Phillips curve relates inflation to unemployment and the misery index simply adds the two rates. Option B is wrong because the Laffer curve shows that tax revenue falls when rates rise beyond a point. Option D is wrong because Engel's law and the Engel curve concern the falling share of food in household spending as income rises.

The correct answer is A. The cash reserve ratio is the proportion of a bank's net demand and time liabilities that it must keep as cash with the Reserve Bank of India, on which it earns no interest, and the statutory liquidity ratio is the proportion it must maintain in its own hands in the form of cash, gold or approved securities, chiefly government paper, on which it does earn a return. Option B is wrong because it reverses the two. Option C is wrong because only the cash reserve ratio is held with the central bank. Option D is wrong because the cash reserve ratio cannot be met with securities at all. Both are quantitative instruments of monetary policy, and raising either reduces the funds a bank has available to lend.

The correct answer is A. Engel's law, named after the nineteenth century statistician Ernst Engel, says that the share of a household's spending that goes on food falls as its income rises, even though the amount spent on food may well go up. It is one of the most firmly established regularities in applied economics and is used to compare the standard of living of households, regions and countries, since a high share of food in spending is a sign of poverty. Option B is wrong because it states the law in reverse. Option C is wrong because the law concerns the proportion, not the absolute amount, which usually rises and shifts towards better quality food. Option D is wrong because saving generally rises as a proportion of income, which is a separate proposition about the consumption function.