UPSC Prelims Mock Test – ECONOMY 2

The Economy UPSC Prelims Mock Test for plays a pivotal role in the preparation journey of candidates aspiring to excel in the Civil Services Examination conducted by the Union Public Service Commission (UPSC). Tailored to assess candidates’ understanding and application of economic concepts within the examination syllabus, this specialized mock test covers a diverse range of topics, including micro and macroeconomics, economic policies, and current affairs. By creating a simulated exam environment, the Economy Mock Test enables candidates to evaluate their knowledge, time management, and problem-solving skills. Specifically designed to highlight economic aspects crucial for UPSC Prelims, this mock test serves as a valuable resource for aspirants to identify their strengths and areas for improvement. Ultimately, it enhances their readiness for the challenging economic segment of the actual examination

Q1. Consider the following statements related to Gross Domestic Product (GDP) and Gross National Product (GNP):

1. GDP is essentially about where production takes place whereas GNP is about who produces it.
2. If it is an open economy then GNP will always be larger than GDP.
3. If it is a closed economy then GDP will always be equal to GNP.

Which of the above statements is/are true?
(a) 1 only

(b) 2 and 3 only

c) 1 and 3 only

(d) 1, 2 and 3

Answer – C

• Gross domestic product (GDP) is the value of a nation’s finished domestic goods and services during a specific time period. A related but different metric, the gross national product (GNP), is the value of all finished goods and services owned by a country’s residents over a period of time.
• Statement 1 is correct: GDP is essentially about where the production takes place whereas GNP is about who produces it.
• Statement 2 is incorrect: If it is an open economy then GNP may or may not be greater than GDP.
• Statement 3 is correct: If it is a closed economy then GDP will always be equal to GNP

Q2. Which of the following statements is/are correct about the Maternity Benefit (Amendment) Act 2016?

1. It also provides for maternity leave of 12 weeks to mothers adopting a child below the age of three months.
2. The law will apply only to establishments employing 100 or more people.
3. It also makes it mandatory for every establishment with more than 50 employees to provide creche facilities within a prescribed distance

Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 1 and 3 only
(c) 2 and 3 only
(d) 1, 2 and 3

Answer – B

• The Maternity Benefit (Amendment) Act 2016 is an amendment to the Maternity Benefit Act, of 1961, which protects the employment of women and entitles them to full-paid absence from work to take care of their child. Important features:
• Women working in the organized sector will now be entitled to paid maternity leave of 26 weeks, up from 12 weeks. Once the Bill is law, it will benefit about 1.8 million women.
• The Bill also provides for maternity leave of 12 weeks to mothers adopting a child below the age of three months as well as to commissioning mothers (defined as a biological mother) who use their eggs to have a surrogate child. In such cases, a 12-week period of maternity leave will be calculated from the date the child is handed over to the adoptive or commissioning mother.
• It also makes it mandatory for every establishment with more than 50 employees to provide creche facilities within a prescribed distance. The woman will be allowed four visits to the creche in a day. This will include her interval for rest.
• The new law will apply to all establishments employing 10 or more people and the entitlement will be for only up to the first two children. For the third child, the entitlement will be for only 12 weeks.

Q3. Which of the following best describes the labor force?

(a) Any person who is looking for a job.
(b) Any person who is currently employed or seeking employment.
(c) Working population in the age group of 16-64 in the economy currently employed or seeking employment.
(d) All adult population.

Answer – C

• Option (C) is correct: Labour Force Participation Rate (LFPR) is the section of the working population in the age group of 16-64 in the economy currently employed or seeking employment. People who are still undergoing studies, housewives and persons above the age of 64 are not factored in the labor force.

Q4. Which of the following statements best describes ‘Tax Expenditure’?

(a) Expenditures incurred by the Government in the collection of taxes.
(b) It refers to the opportunity cost of taxing at concessional rates.
(c) Saving taxes and spending the saved money on expanding the business.
(d) A tool of money laundering used by multinationals to shift profit.

Answer – B

• Option (B) is correct: Tax Expenditures, as the word might indicate, does not relate to the expenditures incurred by the Government in the collection of taxes. Rather it refers to the the opportunity cost of taxing at concessional rates, or the opportunity cost of giving exemptions, deductions, rebates, deferrals credits etc. to the tax payers. Tax expenditures indicate how much more revenue could have been collected by the Government if not for such measures. In other words, it shows the extent of indirect subsidy enjoyed by the taxpayers in the country. Tax expenditures or the revenue forgone are sanctioned in the tax laws.

Q5. Which of the following statements is correct regarding Phillips’s curve?

(a) It represents the relationship between tax rates and tax revenue collected by the government.
(b) It represents the inverse relationship between the rate of inflation and the rate of unemployment.
(c) It represents the direct relationship between the rate of inflation and the rate of employment.
(d) None of the above

Answer – B

• Option (b) is correct: The Phillips curve is an economic concept developed by A. W. Phillips stating that inflation and unemployment have a stable and inverse relationship. The theory claims that with economic growth comes inflation, which in turn, should lead to more jobs and less unemployment. According to the theory, some level of inflation could be considered desirable in order to minimize unemployment.

Q6. Which of the following price indexes and ministry related to it is/are correctly matched?

Price Indices Released by

1. CPI (IW): The Ministry ofLabour’s Employment
2. WPI: Ministry of Statistics and Programme Implementation
3. GDP Deflator: Ministry of Commerce and Industry.

Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 1 only
(c) 2 and 3 only
(d) 1, 2 and 3

Answer – B

• The Labour Bureau, an attached office of the M/ Labour Employment, has been compiling the Consumer Price Index for Industrial Workers every month on the basis of retail prices collected from 317 markets spread over 88 industrially important centres in the country. The WPI is published by the Economic Adviser in the Ministry of Commerce and Industry. Ministry of Statistics and Programme Implementation (MOSPI) comes out with GDP deflator in National Accounts Statistics as price indices. The base of the GDP deflator is revised when the base of GDP series is changed.

Q7. Which of the following statements is/are true regarding CPI and WPI Index?

1. The ratio between WPI and CPI (combined) are used by the RBI to target inflation.
2. WPI contains only goods whereas CPI contains both goods and services.
3. The base year for WPI is 2004 whereas the base year for CPI is prescribed as 2011-12.
4. Manufacturing goods have the highest weight in WPI whereas food articles have
   the highest weight in CPI.

Select the correct answer using the code given below:

(a) 1, 3 and 4 only
(b) 2, 3 and 4 only
(c) 3 only
(d) 2 and 4 only

Answer – D

• RBI uses CPI (Combined) as an index to target inflation under the monetary policy framework. WPI is calculated by the Economic Advisor under the Ministry of Commerce and Industry whereas CPI is calculated by CSO under the Ministry of Statistics and Programme Implementation.
• WPI contains only goods whereas CPI contains both goods and services. The base year for WPI is 2011-12 whereas the base year for CPI is 2012. Manufacturing goods have the highest weight in WPI whereas food articles have the highest weightage in CPI.

Q8. Which of the following are logical implications of high inflation in the economy?

1. People on a fixed income will be worse off in the real term.
2. Increase in exports.
3. Lenders face loss
4. Encourages saving.

Select the correct answer using the code given below:
(a) 2 and 3 only
(b) 1 and 4 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer – C

• If inflation is high in an economy, then: Low-income groups are particularly hurt. People on a fixed income will be worse off in the real term due to higher prices and equal income as before.
• Inflation discourages exports as domestic sales are attractive and BOP problems can be caused.
• Lenders are hurt by unanticipated inflation because the money they get paid back has less purchasing power than the money they loaned out. Borrowers benefit from unanticipated inflation because the money they pay back is worth less than the money they borrowed.
• Inflation may discourage saving and thus hit investment.

Q9. Which of the following statements correctly defines the term ‘Core Inflation’?

(a) The increase in the price level of the essential goods and services
(b) The increase in the price level of food.
(c) It is the change in the costs of goods and services but does not include those from the food and energy sectors.
(d) It is the measure of inflation in core sector industries.

Answer – C

• Option (C) is correct: Core inflation is the change in the costs of goods and services but does not include those from the food and energy sectors. This measure of inflation excludes these items because their prices are much more volatile.

Q10. Which of the following steps taken by the authorities will lead to easing inflation?

1. Accommodative monetary policy
2. Increasing income tax rate
3. Reducing import duty on inputs

Select the correct answer using the code given below:
(a) 2 and 3 only
(b) 1 and 3 only
(c) 1 and 2 only
(d) 2 only

Answer – A

• Statement 1 is incorrect: Accommodative monetary policy is when central banks expand the money supply to boost the economy. This will lead to an increase in inflation.
• Statement 2 is correct: Increasing income tax rate will lead to lesser money with the public and hence cooling of inflation.
• Statement 3 is correct: Reducing import duty on inputs will bring down cost of production and hence inflation.

Q11. Consider the following statements with reference to price elasticity of demand of a good:

1. It is the ratio of the percentage change in the demand of a good to the percentage change in its price.
2. For an inelastic good the price elasticity of demand is less than 1.

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

Answer – C

• Statement 1 is correct: Price elasticity of demand for a good is defined as the percentage change in demand for the good divided by the percentage change in its price. Elastic demand means there is a substantial change in quantity demanded when another economic factor changes (typically the price of the good or service), whereas inelastic demand means that there is only a slight (or no change) in quantity demanded of the good or service when another economic factor is changed.
• Statement 2 is correct: For an inelastic good the Price Elasticity of Demand is less than 1.

Q12. What is meant by Price Discrimination?

(a) Increase in price of a commodity over time
(b) A situation where the same product is sold to different consumers for different prices
(c) Subsidization of a product by the Government to sell it at a lower price
(d) General decrease in price of a commodity over time

Answer – B

• Price discrimination is a pricing strategy that charges customers different prices for the same product or service.
• In pure price discrimination, the seller charges each customer the maximum price that he is willing to pay

Q13. Which of the following measures will increase inflation rather than taming it?

1. Taking measures to curb hoarding of essential items
2. Tight monetary policy
3. Import of goods that are in short-supply
4. Loose fiscal policy

Select the correct answer using the codes below.
(a) 1, 3 and 4 only
(b) 1, 2 and 3 only
(c) 4 only.
(d) 2 and 3 only

Answer – C

• Statement 1 and 3 is incorrect: It is common in the case of onion, pulses etc where government often cracks down on illegal hoarding to increase market supply, and at times imports pulses to increase their domestic supply so that prices can be reduced.
• Statement 2 is incorrect: Tight monetary policy is basically intended to cut down the money supply in the economy by siphoning out the extra money from the economy so that effective demand is reduced. This is a short-term measure. In the longrun, the best way is to increase production with the help of the best production practices.
• Statement 4 is correct: Loose fiscal policy only increases the liquidity and pushes demand thereby raising inflation.

Q14. Which of the following comes under the category of direct taxes in India?

1. Corporation tax
2. Excise Duty
3. Inheritance tax
4. Import Duty

Select the correct answer using the code given below:
(a) 1, 2 and 3 only
(b) 2, 3 and 4 only
(c) 1 and 3 only
(d) 1, 3 and 4 only

Answer – C

• Option c is correct: Direct tax is charged on income, salary or profits of an individual or corporation. In the case of direct tax, the burden can’t be shifted by the taxpayer to someone else. These are largely taxes on income or wealth. Income-tax, corporation tax, property tax, inheritance tax and gift tax are examples of direct tax. Indirect tax is a levy where the incidence and impact of taxation do not fall on the same entity. The burden of tax can be shifted by the taxpayer to someone else. Indirect tax has the effect of raising prices of products on which they are imposed. Customs duty, import duty, central excise, service tax and value added tax are examples of indirect tax.

Q15. With reference to the National Strategy for Financial Inclusion (NSFI), consider the following statements.

1. NSFI has been prepared and released by the Reserve Bank of India.

2. The percentage of adults with an insurance or pension policy is one of the measures of financial inclusion.

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

Answer – C

• Statement 1 is correct- The Reserve Bank of India (RBI) released the National Strategy for Financial Inclusion 2019-2024 on January 10, 2020. It sets forth the vision and objectives of financial inclusion policies in India.
• Statement 2 is correct- RBI recommended that financial inclusion should be measured through parameters across three key indicators. These include parameters to: (i) measure access, such as a number of bank branches or ATMs for a specified population, (ii) measure usage, such as the percentage of adults with a saving account, insurance or pension policy, and (iii) measure quality of services, such as grievance redressal (through number of complaints received and addressed).

Q16. Consider the following statements with regard to Dividend Distribution Tax (DDT) regime in India:

1. It is a tax levied on dividends that a company pays to its shareholders out of its profits.

2. The DDT is paid by the domestic company sharing the dividend and not by the recipient shareholder.

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

Answer – A

• Statement 1 is correct: The Dividend Distribution Tax is a tax levied on dividends that a company pays to its shareholders out of its profits. The Dividend Distribution Tax, or DDT, is taxable at source and is deducted at the time of the company distributing dividends. The dividend is the part of profits that the company shares with its shareholders.
• Statement 2 is incorrect: W.e.f., Assessment Year 2021-22, the domestic company isn’t required to pay dividend distribution tax on any amount declared, distributed or paid by such company by way of dividend. Dividends received from domestic companies is taxable in the hands of shareholders.

Q17. The Human Development Index (HDI) measures the average achievement of a country based on which of the following dimensions?

1. A long and healthy life.
2. Access to knowledge.
3. A decent standard of living.
4. Social Security

Select the correct answer using the code given below:
(a) 1, 2 and 4 only
(b) 2, 3 and 4 only
(c) 1,3 and 4 only
(d) 1, 2 and 3 only

Answer – D

• Option(d) is correct HDI measures average achievement of a country in three basic dimensions of human development:

1. A long and healthy life
2. Access to knowledge
3. A decent standard of living

Q18. Consider the following statements regarding Human Capital:

1. It is an intangible wealth.
2. The more the population, the more is the Human Capital.

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

Answer – A

• Statement 1 is correct: Human capital is an intangible asset or quality not listed on a company’s balance sheet. It can be classified as the economic value of a worker’s experience and skills.
• Statement 2 is incorrect: This includes assets like education, training, intelligence, skills, health, and other things employers value such as loyalty and punctuality. A country with a high population but lower level of education, skill and general health outcomes will have lower human capital. Hence, merely high size of population do not lead to high human capital.

Q19. Consider the following statements with regard to Input Tax Credit (ITC):

1. It is the subtraction of the taxes paid on inputs from taxes to be paid on output.
2. It reduces the cascading effect of taxation.
3. Dealer under composition scheme cannot claim ITC.

Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 1 and 3 only
(c) 2 and 3 only
(d) 1, 2 and 3

Answer – D

• Statement 1 is correct: Input tax credit (ITC) is the subtraction of the tax money you have paid on inputs on the final output bill.
• Statement 2 is correct: In the earlier Indirect tax regime, the credit of central taxes could not be set off against a state levy and vice versa. So, we can say that ITC was not available on interState purchases. This resulted in cascading effect, thereby increasing the price of goods and services. ITC is available to an entity only when it is covered under the GST Act. Any manufacturer, supplier, agent or e-commerce operator aggregator must be registered under the GST if it is to become eligible to claim the ITC on their purchases which are used in the course and furtherance of business
• Statement 3 is correct: Any dealer registered under Composition Scheme will not be eligible to take credit of Input Tax credit on purchases.

Q20. The GAFA Tax, which was recently in the news, is a/an?

(a) Surcharge on payment made in cash above a certain threshold limit
(b) Import duty on electronic goods
(c) Tax on exports of electronic items
(d) Digital tax on IT companies

Answer – D

• Option (d) is correct: GAFA is an acronym for Google, Apple, Facebook and Amazon. France first proposed tolevy digital tax called as GAFA tax on these digital giants.France, Britain, Italy and Spain have already sent a reply expressing their desire to agree on a fair digital tax at the level of the OECD as quickly as possible.In January, 137 countries agreed to negotiate a deal on how to tax tech multinationals by 2020-end, under the auspices of the OECD.

Q21. Consider the following statements regarding Primary deficit:

1. It refers to the difference between the current year’s fiscal deficit and interest payment on previous borrowings.
2. It indicates the amount of borrowing which the government needs excluding the interest component.

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

Answer – C

• Statements 1 and 2 are correct: Primary deficit refers to the difference between the current year’s fiscal deficit and interest payment on previous borrowings. It indicates the borrowing requirements of the government, excluding interest. It also shows how much of the government’s expenses, other than interest payments, can be met through borrowings. The primary deficit can be calculated by finding the difference between the current year’s fiscal deficit and interest payment on the borrowings for the previous year. Primary deficit indicates the amount of borrowing which the government needs excluding the interest component.

Q22. Consider the following statements regarding Wholesale Price Index (WPI):

1. WPI measures the changes in the prices of goods and services sold and traded in bulk by wholesale businesses to other businesses.
2. The base year of WPI is recently updated to 2018-19.

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

Answer – D

• Statement 1 is incorrect: The Wholesale Price Index, or WPI, measures the changes in the prices of goods sold and traded in bulk by wholesale businesses to other businesses. The wholesale price index basket has no representation of the services sector and all the constituents are only goods whose prices are captured at the wholesale/ producer level.
• Statement 2 is incorrect: With an aim to align the WPI index with the base year of other important economic indicators such as GDP and IIP, the base year was updated to 2011-12 from 2004-05 for the new series of Wholesale Price Index (WPI), effective from April 2017.

Q23. With reference to Deficit financing, consider the following statements:

1. It means generating funds to finance the deficit which results from an excess of expenditure over revenue
2. It may lead to a reduction in inflationary pressure in the economy.

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

Answer – A

• Statement 1 is correct: Deficit financing means generating funds to finance the deficit which results from excess of expenditure over revenue. The gap is covered by borrowing from the public through the sale of bonds or by printing new money.
• Statement 2 is incorrect: Printing new currency notes increases the flow of money in the economy. This leads to an increase in inflationary pressures which leads to a rise of the prices of goods and services in the country. Deficit financing is inherently inflationary. Since deficit financing raises aggregate expenditure and, hence, increases aggregate demand, the danger of inflation looms large

Q24. With reference to the Consumer Price Index (CPI), consider the following statements:

1. The CPI is based on retail prices.
2. CPI truly captures inflation across the economy as a whole.

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

Answer – A

• Statement 1 is correct: CPI is a comprehensive measure used for the estimation of price changes in a basket of goods and services representative of consumption expenditure in an economy. The CPI is based on retail prices.
• Statement 2 is incorrect: Since CPI is based only a basket of select goods and is calculated on prices included in it, it does not capture inflation across the economy as a whole.

Q25. Which of the following policy initiatives can be taken to reduce the revenue deficits?

1. Cutting down the burden of salaries, pensions
2. Reducing subsidies
3. Taking a loan from the domestic market

Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 2 and 3 only
(c) 3 only
(d) 1, 2 and 3

Answer – A

• Statements 1 and 2 are correct: Policy initiatives toward cutting revenue deficits:
• Cutting down the burden of salaries, pensions, and the PFs Cutting down the subsidies (Administered Price Mechanism in petroleum, fertilizers, sugar, drugs to be rationalized, it was done with mixed successes) Interest burden to be cut down Budgetary support to the loss-making PSUs to be an exception than a rule
• Statement 3 is incorrect: Taking a loan from the domestic market will be a form of capital receipt and in future, it may widen the revenue deficit since interest needs to be paid on the loan.

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