Economics · General Awareness

Economics Concepts and Theories

1,657 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

Induced investment is related to

  1. marginal propensity to consume

  2. marginal propensity to save

  3. marginal efficiency of capital

  4. government

  5. marginal utility
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Induced investment is investment expenditures by the business sector that are based on the level of income or production. The marginal propensity to save is the fraction of an increase in income that is not spent on an increase in consumption.

Multiple choice

The law of scarcity

  1. does not apply to developed countries

  2. applies only to the less developed countries

  3. implies that consumers wants will be satisfied in a socialistic system

  4. implies that consumers wants will never be completely satisfied
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Scarcity is the fundamental economic problem - limited resources cannot satisfy unlimited human wants. This applies universally regardless of economic system or development level. Option D correctly states that consumer wants can never be fully satisfied due to resource constraints. Options A and B are wrong because scarcity applies to ALL countries, developed or not. Option C is wrong because socialism doesn't eliminate scarcity - it's a different allocation system, still resource-constrained.

Multiple choice

An example of positive economic analysis would be

  1. an analysis of the relationship between the price of food and the quantity purchased

  2. determining how much income each person should be granted

  3. determining the fair price for food

  4. deciding how to distribute the output of the economy
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Correct Answer: an analysis of the relationship between the price of food and the quantity purchased

Multiple choice

Which of the following economies is without scarcity?

  1. The pre-independent Indian Economy, where most people were farmers.

  2. A mythical economy, where everybody is a billionaire.

  3. Any economy, where income is distributed equally among its people.

  4. None of these
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Scarcity is a fundamental problem in economics - it exists in ALL economies because resources are limited while wants are unlimited. No real or hypothetical economy can be without scarcity. Even if everyone were a billionaire or income were distributed equally, scarcity would still exist because time and resources remain finite.

Multiple choice

Which of the following statements is true?

  1. Accumulation of capital depends solely on income.

  2. Savings can also be affected by the state.

  3. External economies go with size and internal economics with location.

  4. Supply curve of labour is an upward slopping curve.
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Savings can be affected by the state through fiscal policy (tax rates, public spending), monetary policy (interest rates), and regulations. Option A is wrong because capital accumulation depends on both income AND the savings rate (propensity to save). Option C incorrectly pairs external/internal economies with size/location. Option D is wrong because the labour supply curve can be backward-bending at high wage levels.

Multiple choice

Which of the following statements is correct?

  1. Robbins has made economics as a form of welfare economics.

  2. The law of demand is always true.

  3. All capital is wealth, but all wealth is not capital.

  4. None of these
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Capital is a subset of wealth - all capital is wealth, but not all wealth is capital. Capital refers specifically to produced means of production (machinery, tools, buildings) used to produce other goods and services. Wealth includes anything that has value and can be exchanged - including consumer goods, money, and land - which are not necessarily used for production.

Multiple choice

Which of the following can be regarded as a law of economics?

  1. Ceteris Paribus, i.e. if the price of a commodity rises, the demanded of it will fall.

  2. Higher the income, greater is the expenditure.

  3. Taxes have no relation with the benefits which a person derives from the state.

  4. None of these
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Option A states a fundamental law of economics: the law of demand (ceteris paribus - price rises, demand falls). Laws in economics are observed regularities with causal explanations, not universal truths. Option B is not a law - expenditure doesn't always rise with income (savings exist). Option C is not a law - tax systems generally attempt to link taxes to benefits received.

Multiple choice

If the income of a household rises by 20 per cent, the demand for computer rises by 25 per cent. This means computer (in Economics) is a/an

  1. inferior good

  2. luxury good

  3. necessity

  4. none of these
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Income elasticity of demand = % change in demand / % change in income = 25% / 20% = 1.25. Since income elasticity > 1, computers are a luxury good (demand rises more than proportionally with income). Necessities have income elasticity between 0 and 1. Inferior goods have negative income elasticity.

Multiple choice

In economics, what a consumer is ready to pay minus what he actually pays, is termed as

  1. consumer's equilibrium

  2. consumer's surplus

  3. consumer's expenditure

  4. none of these
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Consumer's surplus is the difference between what a consumer is willing to pay (maximum price) and what they actually pay (market price). It represents the benefit or surplus value consumers receive from a transaction. Consumer's equilibrium is about maximizing utility, not surplus.

Multiple choice

Assertion (A) : According o Milton Friedman, the slope of the long-run Phillips curve is vertical. Reason (R) : The expectations about future inflation are the basic cause of the non-existence of the trade-off between inflation and unemployment in the long-run.

  1. Both (A) and (K) are true and (R) is not the correct reason of (A)

  2. Both (A) and (R) are true, but (R) is the correct reason of (A)

  3. Both (A) and (R) are false

  4. (A) is true, but (R) is false
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Milton Friedman argued that the long-run Phillips curve is vertical at the natural rate of unemployment. In the long run, inflation expectations fully adjust to actual inflation, eliminating any permanent trade-off between inflation and unemployment. The reason correctly explains that expectations cause this non-existence of trade-off.

Multiple choice

Arrange the option having the right chronological order. (i) Peacock - Wiseman Hypothesis (ii) Voluntary Exchange Approach (iii) Laffer Curve (iv) Cannos of Taxation

  1. (i) (ii) (iii) (iv)

  2. (iv) (ii) (i) (iii)

  3. (iv) (iii) (ii) (i)

  4. (ii) (iii) (iv) (i)
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The correct chronological order is: Adam Smith's Cannons of Taxation (1776), Voluntary Exchange Approach (late 19th century - Wicksell/Lindahl), Peacock-Wiseman Hypothesis (1961 - displacement effect in public spending), and Laffer Curve (1974 - tax rate vs revenue relationship). The sequence spans from classical political economy to modern public finance. Smith's principles came first, followed by voluntary exchange theory in the marginal revolution era, then mid-20th century empirical work on public expenditure growth, and finally supply-side economics in the 1970s.

Multiple choice

Match the followings.

 
List - I
List - II
1. Absolute income hypothesis
(i) N.Gregorv Mankiw
2. Rational expectation hypothesis
(ii) T.M. Keynes
3. Relative income hypothesis
(iii) Robert Lucas
4. The New Keynesian model
(iv) James Duesenberty

  1. 1 - (iv), 2 - (iii), 3 - (ii), 4 - (i)

  2. 1 - (ii), 2 - (i), 3 - (iv), 4 - (iii)

  3. 1 - (ii), 2 - (iii), 3 - (iv), 4 - (i)

  4. 1 - (iii), 2 - (ii), 3 - (i), 4 - (iv)
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

The matching pairs consumption hypotheses with their economists: Absolute income hypothesis is Keynes (consumption depends on current income), Rational expectations hypothesis is Robert Lucas (agents form expectations using all available information optimally), Relative income hypothesis is James Duesenberry (consumption depends on others' income and past habits), and New Keynesian model is N. Gregory Mankiw (menu costs, price stickiness incorporating rational expectations). This covers the evolution of consumption theory from Keynesian fundamentals through to New Keynesian synthesis.

Multiple choice

Arrange the option having the right chronological order. (I) Peacock-Wiseman hypothesis (ii) Buchanan's 'An Economic Theory of Clubs' (iii) Wagner hypothesis (iv) Findaly Shirras's canons of public expenditure

  1. (i) (iii) (ii) (iv)

  2. (iii) (i) (iv) (ii)

  3. (ii) (iv) (iii) (i)

  4. (iii) (iv) (i) (ii)
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

The correct chronological order is: Wagner hypothesis (1880s, Adolph Wagner), Findlay Shirras's canons of public expenditure (early 1900s), Peacock-Wiseman hypothesis (1961), and Buchanan's 'An Economic Theory of Clubs' (1965). This represents the historical development of public finance theories.

Multiple choice

Assertion (A) : Neo - classical models of growth predict steady state growth. Reason (R) Saving investment equality is assumed.

  1. Both (A) and (R) are true and (R) is the correct reason

  2. Both (A) and (R) are false

  3. Both (A) and (R) arc true, but (R) is not the correct reason

  4. (A) is true, but (R) is false
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Neo-classical growth models predict steady state growth because they assume the saving-investment equality holds in the long run. The steady state occurs when capital per worker becomes constant, and the economy grows at the rate of technological progress. The saving-investment equality is fundamental to this convergence mechanism.