Economics · Banking Financial Awareness

Macroeconomics and Policy

2,833 Questions

Macroeconomics and policy questions assess the understanding of broad economic indicators, government fiscal strategies, and banking regulations. Topics include inflation causes, currency exchange rates, monetary policy tools, and historical economic systems. These are highly tested in banking and civil services examinations.

Inflation FactorsMonetary PolicyExchange RatesFiscal PolicyEconomic IndicatorsBretton Woods System

Macroeconomics and Policy Questions

Multiple choice

Which of the following fiscal policies does not help in containing inflation?

  1. Increase in tax rates

  2. Borrowing debt from public

  3. Decrease in transfer payments

  4. Increase in non-developmental expenses
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

It does not help in containing inflation. The non-developmental expenses such as on luxury of ministers, frequent foreign visits of ministers etc, do not produce anything, but increase the money supply without any increase in the productivity of goods and services. Hence, the prices will rise, as people have more purchasing power.

Multiple choice

Which of the following methods does not help in price stability?

  1. Increase or decrease in taxes

  2. Following the policy of progressive taxation

  3. Increase in non-developmental expenses

  4. Adopting policy of deficit financing with increase in production
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

It does not help in price stability. When there is increase in non-developmental expenditure like increase in expenses on administration, payment of old age pension, expenses on ministers' security etc, it increases the supply of money. But these expenses do not help in increasing production; as such supply is less in comparison to demand and the prices move upward.

Multiple choice

Directions: Choose the correct word for blank (2).

The new RBI governor faces what economists call a central banker's ___ (1) __. He has to arrest the rupee's slide, cool inflation and create conditions that will boost-growth. Attempting all three simultaneously is a __ (2) ___ task. When growth ___ (3) ___ it is usually expected that the central bank will cut interest rates to ___ (4) ___ demand and spending. Higher demand and spending that is triggered by lower interest rates can also push prices up and ___ (5) ___ inflation, especially when the current inflation rate is very high.

  1. gigantic

  2. robust

  3. galling

  4. Herculean

  5. Hercynian
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Correct; the word means 'requiring great efforts'. In order to restore economy, the governor will have to make great efforts.

Multiple choice

Directions: Choose the correct word for blank (3).

The new RBI governor faces what economists call a central banker's ___ (1) __. He has to arrest the rupee's slide, cool inflation and create conditions that will boost-growth. Attempting all three simultaneously is a __ (2) ___ task. When growth ___ (3) ___ it is usually expected that the central bank will cut interest rates to ___ (4) ___ demand and spending. Higher demand and spending that is triggered by lower interest rates can also push prices up and ___ (5) ___ inflation, especially when the current inflation rate is very high.

  1. vacillates

  2. falters

  3. oscillates

  4. halts

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

Correct; the word means 'start to lose strength or momentum'. The growth is losing strength.

Multiple choice

Directions: Choose the correct word for blank (4).

The new RBI governor faces what economists call a central banker's ___ (1) __. He has to arrest the rupee's slide, cool inflation and create conditions that will boost-growth. Attempting all three simultaneously is a __ (2) ___ task. When growth ___ (3) ___ it is usually expected that the central bank will cut interest rates to ___ (4) ___ demand and spending. Higher demand and spending that is triggered by lower interest rates can also push prices up and ___ (5) ___ inflation, especially when the current inflation rate is very high.

  1. elevate

  2. amplify

  3. sustain

  4. boost

  5. magnify
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Correct; the word means 'to increase or improve'. The demand and spending have to be increased.

Multiple choice

Directions: Choose the option that corrects and improves the underlined part of the sentence.

Some analysts point out that because people are becoming accustomed to a steady inflation rate of four to five percent, businesses find that they could raise prices without strong reaction from the public.

  1. could raise prices without strong reaction

  2. might raise prices without strong reaction

  3. will raise prices without strong reaction

  4. can raise prices without strong reaction

  5. should raise prices without strong reaction
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Correct Answer: can raise prices without strong reaction

Multiple choice

An effective short term measure to check inflation is to

  1. keep budgetary deficit under check

  2. enhance production of essential goods

  3. streamline public distribution system

  4. enhance production of all consumer goods
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Keeping the budgetary deficit under control is a direct monetary policy tool that reduces government borrowing from the market, leaving more funds available for private sector and reducing demand-pull inflation. The other options are long-term structural measures.

Multiple choice

Which of the following types of inflation acts as an incentive for the industry and other sectors of the economy?

  1. Running Inflation

  2. Creeping Inflation

  3. Structural Inflation

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

Running Inflation - When the prices rise rapidly like the running of a horse at a rate of speed 10 to 20% per annum. The rate of the increase of price level gets further accelerated under running inflation. The price level under this type of inflation rises approximately by 10% every year. If government fails to curb running inflation in time, it may easily develop into galloping inflation. Creeping Inflation - Circumstance where the inflation of a nation increases gradually, but continually, over time. Although the increase is relatively small in the short-term as it continues over time, the effect will become greater and greater. It acts as an incentive for the industry and other sectors of the economy.  Structural Inflation - Inflation built into the economic system due to its government's monetary policy. In economics, stagflation is a situation in which the inflation rate is high and the economic growth rate slows down and unemployment remains steadily high. It raises a dilemma for economic policy since actions designed to lower inflation or reduce unemployment may actually worsen economic growth.

Multiple choice

Consider the following statements: The price of any currency in international markets is decided by the

  1. World Bank
  2. Demand for goods/services provided by the country concerned.
  3. Stability of the Government of the concerned country
  4. Economic potential of the country in question

Which of these statements are correct?

  1. 1, 2, 3, 4

  2. 2, 3

  3. 3, 4

  4. 1, 4
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Currency prices in international markets (exchange rates) are primarily determined by demand for the country's goods and services (exports) and government stability (which affects investor confidence and economic policy). The World Bank does not decide currency prices - it's a development institution, not a forex market regulator. Economic potential is a factor but is reflected in demand and stability rather than being a separate determinant.

Multiple choice

During recession,

  1. unemployment is likely to be low

  2. prices are likely to increase

  3. growth is negative

  4. growth is slow

  5. none of these happens
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

During recession, growth is negative.

Multiple choice

Countries that depend mainly on the export of primary products for their income, are prone to

  1. Inflation

  2. Economic instability

  3. Increasing unemployment

  4. Stable economic growth
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Countries dependent on primary product exports are economically vulnerable because their income fluctuates with global commodity prices. When prices drop or demand falls, these countries face severe economic instability. They lack diversified economies to buffer such shocks, making them prone to financial crises.

Multiple choice

What is the effect of deficit financing on economy?

  1. Inflation

  2. Deflation

  3. Depression

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

Deficit financing increases the money supply in the economy without corresponding production, leading to inflation. When the government spends more than its revenue by borrowing or printing money, it increases aggregate demand and pushes up prices across the economy.