Consider the following statements : Other things remaining unchanged, market demand for a good might increase if 1. price of its substitute increases 2. price of its complement increases 3. the good is an inferior good and income of the consumers increases 4. its price falls Which of the above statements are correct?
- A.1 and 4 only
- B.2, 3 and 4
- C.1, 3 and 4
- D.1, 2 and 3
Correct answer
Explanation
The correct answer is A, 1 and 4 only. A dearer substitute pushes buyers towards this good, and a fall in its own price leads them to buy more of it.
Statement 1 is correct: if tea becomes costlier, people buy more coffee, so demand for coffee rises. Statement 4 is correct: by the law of demand, a lower price raises the quantity buyers want. Statement 2 is wrong: if the price of a complement rises (petrol for cars), demand for the good falls. Statement 3 is wrong: for an inferior good, demand falls when income rises, because consumers shift to better goods.
B is wrong because it includes statements 2 and 3, both of which reduce demand.
C is wrong because statement 3 describes a fall, not a rise, in demand for an inferior good.
D is wrong because it includes 2 and 3 and leaves out 4, the plainest case of the law of demand.
Exam tip: substitute price up, demand up; complement price up, demand down; inferior good, income up, demand down.
Practice Questions
View allThe Global Competitiveness Report is published by the
- A.International Monetary Fund
- B.United Nations Conference on Trade and Development
- C.World Economic Forum
- D.World Bank
Show answer
Explanation
The correct answer is C, World Economic Forum. The Global Competitiveness Report is the World Economic Forum's assessment of how well countries' institutions, policies and markets support productivity and growth.
The World Economic Forum is a Geneva-based not-for-profit foundation, set up by Klaus Schwab in 1971 and known for its annual meeting at Davos, Switzerland. Its Global Competitiveness Report, first brought out in 1979, ranks economies on a Global Competitiveness Index built on pillars such as institutions, infrastructure, macroeconomic stability, health, skills, markets and innovation. The WEF also publishes the Global Gender Gap Report and the Global Risks Report.
A is wrong: the IMF publishes the World Economic Outlook and the Global Financial Stability Report.
B is wrong: UNCTAD publishes the World Investment Report and the Trade and Development Report.
D is wrong: the World Bank published the Doing Business Report and publishes the World Development Report.
Exam tip: WEF = Global Competitiveness, Global Gender Gap and Global Risks reports; IMF = World Economic Outlook.
Indian Government Bond Yields are influenced by which of the following?
1. Actions of the United States Federal Reserve
2. Actions of the Reserve Bank of India
3. Inflation and short-term interest rates
Select the correct answer using the code given below.
- A.1 and 2 only
- B.2 only
- C.3 only
- D.1, 2 and 3
Show answer
Explanation
The correct answer is D, 1, 2 and 3. Indian bond yields respond to the RBI's policy, to domestic inflation and short-term rates, and also to the US Federal Reserve through global capital flows.
A bond's yield is the return an investor earns on it, and it moves opposite to the bond's price. When the RBI cuts the repo rate or buys government securities through open market operations, yields tend to fall; tightening pushes them up. Higher inflation makes investors demand a higher return, and short-term rates set the base from which longer yields are priced. When the US Federal Reserve raises rates, foreign investors may pull money out of Indian bonds for safer US assets, which lowers bond prices in India and lifts yields.
A is wrong because inflation and short-term rates also matter.
B is wrong because the RBI is only one of several influences.
C is wrong because both central banks also move yields.
Exam tip: bond price and yield move in opposite directions; inflation up, yields up.
With reference to the "G20 Common Framework", consider the following statements:
1. It is an initiative endorsed by the G20 together with the Paris Club.
2. It is an initiative to support Low Income Countries with unsustainable debt.
Which of the statements given above is/are correct ?
- A.1 only
- B.2 only
- C.Both 1 and 2
- D.Neither 1 nor 2
Show answer
Explanation
The correct answer is C, Both 1 and 2. The Common Framework for Debt Treatments was agreed by the G20 and the Paris Club in November 2020 to help low-income countries with unsustainable debt.
During the COVID-19 crisis many poor countries could not service their loans. The G20 first offered the Debt Service Suspension Initiative (DSSI), which only postponed payments. The Common Framework went further: it lets eligible countries (those eligible for the DSSI) seek a full restructuring of their official bilateral debt, with all G20 creditors, including newer lenders outside the Paris Club such as China and India, negotiating together on comparable terms. The Paris Club is an informal group of major creditor countries that coordinates solutions for debtor nations.
A is wrong because statement 2, its purpose, is also correct.
B is wrong because the framework was indeed endorsed by the G20 together with the Paris Club.
D is wrong because both statements describe the framework correctly.
Exam tip: DSSI postponed debt payments; the Common Framework (2020) restructures debt of low-income countries.
Along with the Budget, the Finance Minister also places other documents before the Parliament which include 'The Macro Economic Framework Statement'. The aforesaid document is presented because this is mandated by
- A.Long standing parliamentary convention
- B.Article 112 and Article 110(1) of the Constitution of India
- C.Article 113 of the Constitution of India
- D.Provisions of the Fiscal Responsibility and Budget Management Act, 2003
Show answer
Explanation
The correct answer is D, Provisions of the Fiscal Responsibility and Budget Management Act, 2003. The FRBM Act requires the government to lay this statement before Parliament along with the Budget.
Section 3 of the FRBM Act, 2003 lists the fiscal policy statements that must accompany the annual financial statement: the Macro-economic Framework Statement and the Medium-term Fiscal Policy cum Fiscal Policy Strategy Statement. The Macro-economic Framework Statement assesses the growth prospects of the economy, with GDP growth, the fiscal balance and the external sector balance. The Act aims to bring discipline to government borrowing and deficits.
A is wrong because the document rests on a statute, not on convention.
B is wrong because Article 112 deals with the annual financial statement and Article 110 defines Money Bills; neither requires this statement.
C is wrong because Article 113 covers the procedure for estimates and demands for grants.
Exam tip: Article 112 = Budget; the FRBM Act, 2003 = the fiscal policy statements laid with it.
With reference to the Indian economy, consider the following statements :
1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee.
2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness.
3. An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER.
Which of the above statements are correct ?
- A.1 and 2 only
- B.2 and 3 only
- C.1 and 3 only
- D.1, 2 and 3
Show answer
Explanation
The correct answer is C, 1 and 3 only. A rise in NEER means the rupee has gained against a basket of currencies, and higher domestic inflation makes REER drift away from NEER.
NEER is a weighted average of the rupee's exchange rate against the currencies of India's trading partners; in the RBI's indices a rise means the rupee has appreciated, so statement 1 is correct. REER is NEER adjusted for the gap between Indian prices and partner-country prices. A rising REER means Indian goods are becoming dearer abroad, which hurts trade competitiveness, so statement 2 is wrong. Because REER includes relative prices and NEER does not, faster inflation in India than abroad widens the gap between the two, so statement 3 is correct.
A is wrong because statement 2 is false.
B is wrong because it drops statement 1 and keeps the false statement 2.
D is wrong because statement 2 reverses the effect of a rising REER.
Exam tip: REER = NEER adjusted for relative inflation; REER up means exports lose competitiveness.