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Free CA Business Economics Practice Questions & Answers
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100% free · No login to startQuestion 331
Near money refers to assets that are:
Select an option first.
Correct answer: D — Highly liquid and readily convertible into money, though not themselves a medium of exchange
Explanation: Time deposits, treasury bills and short-dated bonds can be turned into cash quickly with little loss, so they perform the store-of-value function without serving as a medium of exchange. Their existence is why several monetary aggregates are needed rather than one.
Question 332
A non-banking financial company differs from a commercial bank principally in that an NBFC:
Select an option first.
Correct answer: A — Cannot accept demand deposits or issue cheques, and is not part of the payment system
Explanation: NBFCs provide credit, leasing and investment services and often reach borrowers that banks do not, but they cannot offer chequable demand deposits. Because they are outside the payment system, their regulation differs from that of banks.
Question 333
The principal objectives of monetary policy are usually stated as:
Select an option first.
Correct answer: D — Price stability and adequate credit for productive activity, with regard to growth
Explanation: Price stability is generally the primary objective, since inflation erodes savings and distorts decisions, but it is pursued with an eye to output and employment. Exchange rate stability and financial stability are commonly added as further objectives.
Question 334
Open market operations refer to the central bank's:
Select an option first.
Correct answer: D — Purchase and sale of government securities in the open market
Explanation: SELLING securities absorbs money from the system and contracts credit; BUYING them injects money and expands it. It is a flexible quantitative instrument that can be used in small doses and reversed easily, which is why it is the workhorse of day-to-day liquidity management.
Question 335
Priority sector lending requires banks to direct a prescribed share of their credit towards:
Select an option first.
Correct answer: D — Agriculture, micro and small enterprises, education, housing and weaker sections
Explanation: The requirement is a selective credit control, ensuring that sectors important to employment and equity are not starved of funds by purely commercial allocation. Verify the current prescribed percentages and eligible categories against the ICAI study material for your attempt.
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Question 336
Fisher's equation of exchange states that:
Select an option first.
Correct answer: B — M x V = P x T
Explanation: Money supply multiplied by its velocity of circulation equals the price level multiplied by the volume of transactions. Assuming V and T are stable in the short run, the price level varies directly with the money supply - the classical proposition that inflation is essentially a monetary phenomenon.
Question 337
Under a REVERSE repo transaction, the central bank:
Select an option first.
Correct answer: B — ABSORBS liquidity by borrowing from commercial banks against securities
Explanation: Repo injects liquidity, the central bank lending to banks; reverse repo does the opposite, draining surplus funds. The two rates form a corridor within which the overnight money market rate moves, and it is the principal mechanism of day-to-day liquidity management.
Question 338
The principal economic function of the money market is to:
Select an option first.
Correct answer: C — Enable short-term surpluses and deficits of funds to be adjusted efficiently
Explanation: The money market lets banks, companies and governments lend idle balances and cover temporary shortfalls at market rates, which keeps funds productively employed. It is also the channel through which central bank policy is transmitted to the rest of the financial system.
Question 339
Selective or qualitative credit controls differ from quantitative controls in that they:
Select an option first.
Correct answer: A — Regulate the DIRECTION and purpose of credit rather than its total volume
Explanation: Quantitative instruments - bank rate, open market operations, reserve ratios - alter the total. Selective controls such as margin requirements and directives channel credit towards priority uses and away from speculation, and can therefore restrain one sector without contracting the whole economy.
Question 340
Stagflation is a situation in which:
Select an option first.
Correct answer: B — Inflation coexists with STAGNANT output and high unemployment
Explanation: Stagflation is typically caused by a supply shock such as a sharp rise in oil prices, which raises costs while depressing output. It is hard to treat because measures against inflation worsen unemployment and vice versa - the two problems call for opposite policies.
Question 341
Money functions as a standard of deferred payment, which means it:
Select an option first.
Correct answer: A — Serves as the unit in which future obligations, such as loans, are expressed and settled
Explanation: Credit transactions require a unit in which the future obligation can be stated, and money supplies it. Unexpected inflation redistributes between debtor and creditor precisely because the obligation is fixed in money terms while purchasing power changes.
Question 342
The statutory liquidity ratio requires banks to maintain a proportion of their demand and time liabilities in:
Select an option first.
Correct answer: A — Cash, gold or approved government securities held by the bank itself
Explanation: The SLR serves both to ensure bank solvency and to create a captive market for government paper. Unlike the CRR, the assets remain with the bank and earn a return. Verify the current prescribed percentages against the ICAI study material for your attempt, since both ratios are revised from time to time.
Question 343
The Cambridge or cash balance approach to the quantity theory emphasises:
Select an option first.
Correct answer: C — The proportion of their real INCOME that people choose to hold as money
Explanation: Fisher's version stresses money in MOTION; the Cambridge version stresses money at REST, as a demand for cash balances. This shift towards money as an asset people choose to hold prepared the ground for Keynes's liquidity preference theory.
Question 344
The credit multiplier is the reciprocal of the:
Select an option first.
Correct answer: C — Cash reserve ratio
Explanation: If banks must hold a fraction of deposits as reserves, each rupee of primary deposit can support deposits totalling 1 divided by that fraction - so a 10% reserve ratio gives a multiplier of 10. In practice the figure is lower, since cash leaks into circulation and banks hold excess reserves, so this is the theoretical maximum.
Question 345
Treasury bills are:
Select an option first.
Correct answer: A — Short-term instruments issued by the government at a discount
Explanation: Treasury bills carry no coupon; they are issued below face value and redeemed at par, the difference being the investor's return. Being government paper of short maturity they are virtually risk-free and highly liquid, which makes them the benchmark short-term instrument.
Question 346
The velocity of circulation of money is:
Select an option first.
Correct answer: D — The average number of times a unit of money changes hands in a period
Explanation: In Fisher's equation MV = PT, a rise in velocity has the same effect on prices as a rise in the money supply. Velocity depends on payment habits, the frequency of income receipt and confidence, and it typically FALLS in a depression as people hold money idle.
Question 347
Adam Smith regarded economics as the science of:
Select an option first.
Correct answer: C — Wealth
Explanation: Smith's 1776 work made the creation and accumulation of WEALTH the subject matter. The definition was criticised for being materialistic and for ignoring human welfare, which led Marshall to redefine economics as the study of mankind in the ordinary business of life.
Question 348
Business economics is described as largely NORMATIVE because it:
Select an option first.
Correct answer: A — Prescribes what a firm OUGHT to do to achieve its objectives
Explanation: The discipline exists to improve decisions, so it necessarily involves recommendations - which price to set, which project to accept. It draws on positive economic theory for its analysis but applies it to a stated objective, and that application is normative.
Question 349
Which of the following is a characteristic of human wants?
Select an option first.
Correct answer: B — They are unlimited, recur, and are satiable individually though not collectively
Explanation: A particular want can be satisfied - a meal ends hunger for a time - but wants as a whole are endless and multiply as income and civilisation advance. Individual satiability underlies diminishing marginal utility; collective insatiability underlies the economic problem itself.
Question 350
The statement 'The government ought to spend more on primary education' is:
Select an option first.
Correct answer: A — A NORMATIVE statement
Explanation: The word 'ought' signals a value judgement, which no amount of data can settle. 'Government spending on primary education rose by 8% last year' would be positive, since it can be checked. Spotting the prescriptive word is the reliable test.
Question 351
The question 'What determines the general price level in India?' belongs to:
Select an option first.
Correct answer: C — Macroeconomics
Explanation: The GENERAL price level is an economy-wide aggregate, so the question is macroeconomic. The price of a single commodity such as sugar would be a microeconomic question. The test is whether the variable concerns an individual unit or the economy as a whole.
Question 352
The wealth definition of economics was criticised chiefly on the ground that it:
Select an option first.
Correct answer: C — Made economics materialistic, treating wealth as an end rather than a means to human welfare
Explanation: Carlyle and Ruskin attacked it as the gospel of Mammon and called economics the dismal science. Marshall answered the criticism by making welfare the end and wealth merely the means - a reversal of emphasis rather than a change of subject matter.
Question 353
The DEDUCTIVE method in economics proceeds:
Select an option first.
Correct answer: A — From general assumptions and premises to particular conclusions
Explanation: Deduction begins with assumptions such as rational behaviour and reasons logically to conclusions - the abstract or analytical method. INDUCTION works the other way, generalising from observed data, and is described in distractor B. Sound economics uses both, each checking the other.
Question 354
The traditional divisions of the subject matter of economics are:
Select an option first.
Correct answer: A — Consumption, production, exchange and distribution
Explanation: Consumption studies wants and demand; production the creation of goods and the factors; exchange the determination of value and price; distribution the sharing of the product among the factors. Public finance is sometimes added as a fifth division.
Question 355
The principal weakness of a centrally planned economy is:
Select an option first.
Correct answer: B — The absence of price signals, leading to misallocation and weak incentives
Explanation: Without market prices, planners lack the information needed to know what is scarce and what consumers actually want, so shortages and surpluses coexist. The absence of profit also removes the incentive to cut costs or innovate. These defects, rather than any shortage of effort, explain the historical record of such economies.
Question 356
The essential difference between a good and a service is that a service is:
Select an option first.
Correct answer: B — INTANGIBLE and generally consumed at the moment it is produced
Explanation: A haircut, a lecture or a bus journey cannot be stored or resold, and production and consumption are simultaneous. Services are fully included in national income, and in India they now form the largest sector - so distractor C is doubly wrong.
Question 357
Economic growth means:
Select an option first.
Correct answer: B — A sustained increase in REAL national output over time
Explanation: Growth must be measured in REAL terms, at constant prices, since a rise in nominal output may reflect nothing but inflation. Growth is also distinguished from DEVELOPMENT, which adds structural and welfare change - literacy, health, distribution - to the bare increase in output.
Question 358
Economic laws are best described as:
Select an option first.
Correct answer: C — Statements of TENDENCY, holding only if other things remain equal
Explanation: Because human behaviour varies and controlled experiments are rarely possible, economic laws are hypothetical and conditional. Marshall compared them to the laws of the tides rather than of gravitation - reliable in the aggregate, not precise in every instance.
Question 359
Economic profit is lower than accounting profit because economic profit also deducts:
Select an option first.
Correct answer: A — Implicit costs, such as the owner's forgone salary and interest
Explanation: Accounting profit deducts only EXPLICIT money payments. Economic profit further deducts the opportunity cost of resources the owner supplies himself - his own labour, capital and premises. A business may therefore show an accounting profit and still be making an economic loss, meaning the resources would earn more elsewhere.
Question 360
Economics is regarded as both a science and an art because it:
Select an option first.
Correct answer: A — Studies causal relationships systematically, and also offers practical guidance for achieving given ends
Explanation: As a science it establishes relationships between economic variables; as an art it applies that knowledge to practical problems such as controlling inflation. Business economics is heavily on the ART side, since its purpose is to guide managerial action.
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