Economics · General Awareness

Economics Concepts and Theories

1,710 Questions

Review fundamental and advanced economics concepts through this structured question bank. The topics include macroeconomics, fiscal policy, international trade theories, and economic regulation. These questions are ideal for candidates preparing for civil services and other administrative competitive examinations.

Macroeconomics fundamentalsInternational trade theoriesFiscal policy debatesEconomic regulationLabor theory of value

Economics Concepts and Theories Questions

Multiple choice business mathematics and statistics introduction to index number introduction to index numbers index numbers applied statistics

Consumer price index are obtained by:

  1. Paasche's formula

  2. Fisher's ideal formula

  3. Marshall Edgeworth formula

  4. Family budget method formula
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

$\Rightarrow$  Consumer price index are obtained by: $Family\,\,budget\,\,method\,\,formula.$

$\Rightarrow$  In this method, the family budgets of a large number of people are carefully studied and the aggregate expenditure of the average family for various items is estimated. 
$\Rightarrow$  These values are used as weights. The current year’s prices are converted into price relatives on the basis of the base year’s prices, and these price relatives are multiplied by the respective values of the commodities in the base year. The total of these products is divided by the sum of the weights and the resulting figure is the required index numbers.
$P _{0n}=\dfrac{\sum WI}{\sum W}$   Here, $I=\dfrac{P _n}{P _0}\times 100$  and $W=P _0q _0$

Multiple choice economics consumption and investment functions keynesian law of consumption and propensity to consume ex ante and ex post concept of consumption function, saving function and investment function

The Keynesian consumption function gives the relationship between consumption and _______________.

  1. level of investments.

  2. level of savings.

  3. level of income.

  4. level of capital formation.
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

The relationship between consumption and the level of income is called consumption function. Consumption function tells that consumption is a function of income, or in other words, consumption depends on the level of income.

Aggregate consumption of all depends on the total income generated in the economy. When the total income of the economy increases total consumption of the economy will also increase. In the same way, it can also be said that economy with higher level of national income consumes more than the economy which has lower level of national income.

Multiple choice economics consumption and investment functions keynesian law of consumption and propensity to consume ex ante and ex post concept of consumption function, saving function and investment function

Consumption depends on which of the following?

  1. Total Savings

  2. Needs

  3. Total Income

  4. Total Disposable Income
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Everybody needs income to purchase goods and services. Higher the level of income, higher will be the capacity to buy the goods and services. So for an individual, the total amount of goods and services to be purchased depends on the available disposable income.

Similarly, for an economy as a whole, it can be said that the aggregate consumption of all depends on the total income generated in the economy. When the total income of the economy increases total consumption of the economy will also increase. When we refer to income, we normally mean disposable income. Disposable income is that part of total income which is available for consumption and saving.

Disposable income is defined as the income remained after payment of taxes and fines. If tax payment in high, disposable income will be lower and vice versa. 

Multiple choice economics consumption and investment functions keynesian law of consumption and propensity to consume ex ante and ex post concept of consumption function, saving function and investment function

Which of the following factors don't affect the propensity to consume in an economy?

  1. Rate of interest

  2. Wealth

  3. Taxes

  4. Consumer credit
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

The factors that influence consumption and savings behaviour in the economy are as follows:

Rate of interest: Commercial bank offer a certain rate of interest on the deposits held by public and charges rate of interest on the loans given to public. When people do not want to purchase goods and services, they keep their money in the bank to earn the rate of interest. But when they want to buy goods and services, they withdraw money from the bank and lose interest in the process. In this way, the rate of interest plays an important role in influencing a persons decision to consume.

Wealth: Propensity to consume is influenced by a persons holding of wealth. People who have wealth in the form of gold, jewellery, ownership of land and building, shares and bonds etc enjoy a higher level of income generated from the wealth. Accordingly, their consumption level will be higher.

Consumer credit: Availability of consumer credit influences consumption behaviour to a large extent in the economy. There are many durable goods which consumers want to buy. But due to lack of credit facility, they are not able to buy them as they are costly items.

Multiple choice economics consumption and investment functions keynesian law of consumption and propensity to consume ex ante and ex post concept of consumption function, saving function and investment function

The Consumption Function shows the _____________ .

  1. relationship between consumption and income.

  2. relationship between investment and saving.

  3. relationship between consumption and saving.

  4. relationship between income and saving.
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

The Consumption Function describes the functional relationship between Consumption and Income. 

$C= f(Y)$
Here, C is the dependent variable and Y is the independent variable. It is mainly used to describe the relation between Total Consumption and National Income on the aggregate level.

Multiple choice economics consumption and investment functions keynesian law of consumption and propensity to consume ex ante and ex post concept of consumption function, saving function and investment function

In dealing with Propensity to consume, Keynes considered two attributes:

  1. APC and MPC

  2. APS AND MPS

  3. Demand and Supply

  4. Income and consumption
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

In dealing with Propensity to consume, Keynes considered two attributes: 

1. APC : APC refers to Average Propensity to Consume which defines the amount of consumption in every 1 rupee of income for all level of income. 
Average propensity to consume = C/Y where C is the consumption and Y is the income in the economy 

2. MPC: Marginal Propensity to consume refers to the percentage change in consumption for every one rupee of change in the income. It is the ratio between the change in income and corresponding change in consumption.
Marginal propensity to consume = ΔC/ΔY where ΔC is the Change in consumption and ΔY is the change in income in the economy.

Multiple choice economics consumption and investment functions keynesian law of consumption and propensity to consume ex ante and ex post concept of consumption function, saving function and investment function

A schedule of the propensity to consume is ________________.

  1. A statement showing the functional relationship between the level of aggregate consumption and aggregate income at each level of income.

  2. A statement showing the functional relationship between the level of consumption and savings at each level of income.

  3. A statement showing the functional relationship between the level of aggregate consumption and investment at each level of income.

  4. none of the above
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

A schedule of propensity to consume refers to a statement that shows the functional relationship between the level of aggregate consumption and aggregate income in the economy at each level of output produced. 

In dealing with Propensity to consume, Keynes considered two attributes: 
1. APC : APC refers to Average Propensity to Consume which defines the amount of consumption in every 1 rupee of income for all level of income. 

Average propensity to consume = C/Y where C is the consumption and Y is the income in the economy 

2. MPC : Marginal Propensity to consume refers to the percentage change in consumption for every one rupee of change in the income. It is the ratio between the change in income and corresponding change in consumption.
Marginal propensity to consume = ΔC/ΔY where ΔC is the Change in consumption and ΔY is the change in income in the economy.


Multiple choice economics consumption and investment functions keynesian law of consumption and propensity to consume ex ante and ex post concept of consumption function, saving function and investment function

Psychological law of consumption states that "as income goes on increasing, the consumption also increases but at a rate less than increase in income.

  1. True

  2. False
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

True. 

J.M Keynes explained the relationship between Consumption(C) and Income(Y) through the psychological law of consumption that stated, "as income goes on increasing, the consumption also increases but at a rate less than increase in income because there is always a part of income which is saved for future uncertainties". 

Multiple choice economics consumption and investment functions keynesian law of consumption and propensity to consume ex ante and ex post concept of consumption function, saving function and investment function

_______________ explains the relationship between Consumption (C) and Income (Y) in terms of the psychological law of consumption.

  1. Alfred Marshall

  2. J.M. Keynes

  3. Adam Smith

  4. Lionel Robbins
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

J.M Keynes explained the relationship between Consumption(C) and Income(Y) through the psychological law of consumption that stated, "as income goes on increasing, the consumption also increases but at a rate less than increase in income because there is always a part of income which is saved for future uncertainties". 

Multiple choice economics consumption and investment functions keynesian law of consumption and propensity to consume ex ante and ex post concept of consumption function, saving function and investment function

Marginal propensity to consume refers to the effect of additional income on consumption.

  1. True

  2. False
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

The Marginal Propensity to Consume (MPC) is defined as the change in consumption resulting from a change in income.

Multiple choice economics consumption and investment functions keynesian law of consumption and propensity to consume ex ante and ex post concept of consumption function, saving function and investment function

The formula for the MPC is ___________.

  1. the change in consumption divided by the change in income

  2. consumption divided by income

  3. consumption plus saving divided by income

  4. the change in income divided by the change in consumption.
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Consumption is dependent on income and thus, consumption changes with change in income. Marginal Propensity to Consume (MPC) refers to the change in consumption level that takes place due to an additional unit of income earned. 
Symbolically: $MPC=\dfrac{\text{Change in consumption}}{\text{Change in income}}$

Multiple choice civics haat (a weekly market) a weekly market role of market role of market/bazaar

Prudential reason of power sharing is based on careful calculation of _______________.

  1. Gains and losses

  2. Money and man power

  3. Profit and gains

  4. Total income and losses
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

There are two reasons for Power Sharing. One is prudential and another one is moral. The prudential reason is based on a careful calculation of gains and losses. The prudential reasons stress that power-sharing will bring out better outcomes.

The moral reasons emphasise the very act of power sharing as valuable.

Multiple choice civics haat (a weekly market) a weekly market role of market role of market/bazaar

Who among the following gains the most in the market?

  1. Foreign businessman

  2. Exporter

  3. Farmer

  4. Merchant
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

The foreign businesspersons run a chain of stores. These large stores do business strictly on their own terms. These businessmen also have money and own the factories, the large shops, large land holdings, etc. They demand the lowest prices from the supplier and sell the products by making huge profits. The poor also depends on them for various things. Thus, the foreign businessperson gains the most in the market.

Multiple choice business economics and quantitative methods consumer's behaviour consumer equilibrium laws in economics utility and law of diminishing marginal utility

A production possibility frontier explains ________ of Economics.

  1. law of diminishing marginal returns

  2. law of variable proportions

  3. law of marginal utility

  4. water vs. diamond paradox
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Production possibility frontier explain the law of diminishing marginal returns as with the consumption of every additional unit of one good ,the consumer is willing to sacrifice much less and less ,in two-commodity case.That is why the production possibility curve is concave to the origin.

Multiple choice business economics and quantitative methods consumer's behaviour consumer equilibrium laws in economics utility and law of diminishing marginal utility

Which of the following is an exception to the law of diminishing marginal utility?

  1. Reading

  2. Miser

  3. Hobbies

  4. All of the above
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Law of marginal does not hold true in case of readers, misers and hobbies as the consumption increases the marginal utility derived from the each successive units tends to rise. For example, if a person's hobby is to collect stamps, then the marginal utility derived by collecting one more unit of stamp will rise.