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Free CA Business Economics Practice Questions & Answers
501 exam-style Business Economics questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 451
Compared with perfect competition, a monopolist typically produces:
Select an option first.
Correct answer: D — Less output at a higher price
Explanation: By restricting output the monopolist raises price above marginal cost, transferring surplus from consumers to himself and leaving some mutually beneficial trades unmade - the deadweight loss. This is the standard efficiency case against monopoly and the justification for competition regulation.
Question 452
The fiscal deficit is a broader measure than the budget deficit because it:
Select an option first.
Correct answer: A — Treats borrowings as a FINANCING item rather than a receipt, thereby showing the full borrowing requirement
Explanation: By excluding borrowings from receipts, the fiscal deficit reveals how much the government must raise from the market, whereas a simple budget deficit could be made to disappear by counting loans as income. This is why the fiscal deficit is the headline indicator of fiscal health.
Question 453
Internal public debt is often said to impose little NET burden on future generations because:
Select an option first.
Correct answer: C — Both the taxpayers and the bondholders belong to the same future generation, so it is a transfer within the economy
Explanation: The real burden lies in the DISTRIBUTION - taxpayers pay bondholders - and in any disincentive effects of the taxes needed to service it. EXTERNAL debt is different: servicing it transfers real resources out of the country, which is a genuine burden.
Question 454
The canon of ECONOMY in public expenditure means that:
Select an option first.
Correct answer: C — Expenditure should be incurred without waste or extravagance, securing maximum benefit per rupee
Explanation: Economy is about value for money rather than parsimony - spending too little on a necessary purpose is as much a failure as spending wastefully. The companion canons are benefit, sanction and surplus, and together they set the standards for judging public spending.
Question 455
Adam Smith's four canons of taxation are:
Select an option first.
Correct answer: C — Equality, certainty, convenience and economy
Explanation: Equality means taxing according to ability to pay; certainty that the taxpayer knows what, when and how to pay; convenience that collection suits the payer; economy that collection costs little relative to yield. Later writers added productivity, elasticity, simplicity and diversity - which is what distractor A lists.
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Question 456
Which of the following is a cause of market failure?
Select an option first.
Correct answer: B — Externalities, public goods and information asymmetry
Explanation: Market failure means the price mechanism fails to allocate resources efficiently. The standard causes are externalities, public goods, imperfect competition, information asymmetry and factor immobility. The other options describe conditions under which markets work WELL - they are the absence of failure, not its cause.
Question 457
A public good is characterised by:
Select an option first.
Correct answer: A — Non-rivalry in consumption and non-excludability
Explanation: One person's use of national defence or a lighthouse does not reduce what is available to others, and no one can practicably be prevented from benefiting. Non-excludability creates the FREE RIDER problem, which is why the market under-supplies such goods and government must provide them. They are costly to produce; they are simply not chargeable person by person.
Question 458
The classification of public expenditure into REVENUE and CAPITAL expenditure rests on whether the spending:
Select an option first.
Correct answer: A — Creates a durable asset or reduces a liability
Explanation: Capital expenditure builds infrastructure or repays debt and adds to the nation's assets; revenue expenditure meets running costs and creates nothing durable. The distinction drives the revenue deficit, and a revenue deficit is regarded as more serious precisely because nothing is left behind.
Question 459
Under a PROPORTIONAL tax:
Select an option first.
Correct answer: C — The same RATE applies whatever the income
Explanation: A proportional tax takes a constant percentage, so the amount rises with income but the proportion does not. Progressive taxes take a rising proportion and regressive taxes a falling one. Distractor D describes a poll or lump-sum tax, which is a fourth and quite different structure.
Question 460
Crowding in occurs when government expenditure:
Select an option first.
Correct answer: A — STIMULATES private investment, for instance by building infrastructure that raises private returns
Explanation: Public spending on roads, power and ports raises the profitability of private projects, and in a depressed economy the resulting rise in demand encourages investment rather than displacing it. Crowding in and crowding out are opposite effects, and which dominates depends on how much spare capacity exists.
Question 461
The crowding out effect refers to the tendency of heavy government borrowing to:
Select an option first.
Correct answer: A — Reduce private investment by raising interest rates
Explanation: Large public borrowing competes for the available pool of savings, pushing interest rates up and making private projects unviable, so public spending displaces private investment rather than adding to total demand. The effect is weaker when the economy has substantial unused capacity.
Question 462
Deficit financing refers to meeting government expenditure by:
Select an option first.
Correct answer: B — Creating new money or borrowing from the central bank
Explanation: Deficit financing can mobilise idle resources when the economy is depressed, but beyond that point it raises the money supply faster than output and becomes inflationary. Its safe limit therefore depends on how much unused capacity the economy actually has.
Question 463
The essential difference between a direct and an indirect tax is that an indirect tax:
Select an option first.
Correct answer: A — Can be SHIFTED to another person, so impact and incidence fall on different people
Explanation: A direct tax such as income tax is borne by the person who pays it, so impact and incidence coincide. An indirect tax such as GST is paid by the seller but passed on in the price, so the burden ultimately rests elsewhere. Shiftability, not size or authority, is what classifies a tax.
Question 464
Public expenditure can influence the DISTRIBUTION of income chiefly through:
Select an option first.
Correct answer: C — Transfer payments and the provision of free or subsidised services to the poor
Explanation: Expenditure on subsidised food, health, education and social security raises the real income of poorer households more than proportionately, so the effect is progressive. Combined with progressive taxation on the revenue side, this is the state's principal instrument for reducing inequality.
Question 465
An externality arises when:
Select an option first.
Correct answer: B — The action of one party affects a third party who is neither compensated nor charged
Explanation: Pollution from a factory is a negative externality, imposing costs on others that the producer does not bear; education generates positive externalities benefiting society at large. Because these effects are outside the price mechanism, the market over-produces the first and under-produces the second - the standard justification for taxation, subsidy or regulation.
Question 466
The fiscal deficit is:
Select an option first.
Correct answer: A — Total expenditure minus total receipts EXCLUDING borrowings
Explanation: The fiscal deficit measures the total borrowing requirement of the government, so receipts from borrowing are deliberately left out of the receipts side. Distractor B defines the REVENUE deficit and distractor D the trade deficit. Verify the current definitions and any recent changes against the ICAI study material for your attempt.
Question 467
Fiscal federalism is concerned with:
Select an option first.
Correct answer: D — The division of financial powers and responsibilities between the centre and the states
Explanation: Because expenditure responsibilities tend to sit with the states while the more productive tax bases sit with the centre, transfers are needed to correct the resulting vertical imbalance, and further adjustment corrects the horizontal imbalance between richer and poorer states.
Question 468
The purpose of fiscal responsibility legislation such as the FRBM Act is to:
Select an option first.
Correct answer: C — Impose discipline by setting targets for reducing deficits and debt
Explanation: Such legislation commits the government to a path of deficit reduction with reporting to the legislature, the aim being to check the build-up of debt and the crowding out of private investment. Escape clauses generally allow relaxation in emergencies. Verify the current targets against the ICAI study material for your attempt.
Question 469
The three principal economic functions of government, as classified by Musgrave, are:
Select an option first.
Correct answer: C — Allocation, distribution and stabilisation
Explanation: The ALLOCATION function corrects market failure by providing public goods and taxing externalities; the DISTRIBUTION function adjusts the spread of income and wealth; the STABILISATION function manages aggregate demand to contain unemployment and inflation. Distractor B lists the instruments rather than the functions they serve.
Question 470
Grants-in-aid from the centre to the states are:
Select an option first.
Correct answer: A — Transfers that need not be repaid, made to supplement state resources
Explanation: Because states' expenditure responsibilities exceed their revenue powers, transfers correct the vertical imbalance, while their distribution addresses the horizontal imbalance between richer and poorer states. The Finance Commission recommends the basis on which they are made.
Question 471
The IMPACT of a tax falls on:
Select an option first.
Correct answer: A — The person on whom the tax is first levied
Explanation: Impact is the point of first contact - the person legally liable to pay. INCIDENCE is where the burden finally settles after shifting. With an indirect tax the two differ, and how far the burden is shifted depends on the relative elasticities of demand and supply: the more inelastic side bears more of it.
Question 472
When demand for a taxed good is highly ELASTIC and supply inelastic, the burden of an indirect tax falls mainly on the:
Select an option first.
Correct answer: B — Producer or seller
Explanation: If buyers can readily walk away, the seller cannot pass the tax on without losing sales, so he must absorb most of it. The general rule is that the burden settles on the side of the market that is LESS able to respond - the more inelastic side.
Question 473
Internal public debt differs from external debt in that internal debt:
Select an option first.
Correct answer: D — Is owed to residents of the country itself, so repayment transfers purchasing power within the economy
Explanation: Repaying internal debt moves resources from taxpayers to bondholders inside the same economy, so the nation's total resources are unchanged, though distribution shifts. External debt must be serviced in foreign exchange and represents a genuine transfer of resources abroad - a real burden on the country.
Question 474
Fiscal policy refers to the government's use of:
Select an option first.
Correct answer: D — Taxation and public expenditure
Explanation: Fiscal policy operates through the budget - what the government taxes and what it spends - to influence aggregate demand, employment and growth. Distractor A describes MONETARY policy, which is the central bank's domain. The two are separate instruments in different hands, and confusing them is a standard error.
Question 475
A merit good is one which:
Select an option first.
Correct answer: A — Society judges people should consume more of than they would choose on their own
Explanation: Education, vaccination and basic health care generate benefits that individuals under-value for themselves and that spill over to others, so government subsidises or provides them. Unlike a pure PUBLIC good, a merit good is both rival and excludable - the case for intervention rests on under-consumption, not on non-excludability.
Question 476
A recognised merit of direct taxes is that they are:
Select an option first.
Correct answer: D — EQUITABLE, being adjustable to ability to pay, and certain as to amount
Explanation: Direct taxes can be made progressive and their burden cannot be shifted, so they serve the redistribution objective directly. Their drawbacks are that they are inconvenient to pay, invite evasion, and may discourage effort and saving at high rates.
Question 477
A recognised merit of indirect taxes is that they are:
Select an option first.
Correct answer: A — CONVENIENT, being paid in small amounts with the price, and hard to evade on recorded transactions
Explanation: Indirect taxes also reach those outside the income tax net and can discourage consumption of harmful goods. Their principal defect is REGRESSIVENESS: they take a larger proportion of a poor household's income, which is why necessities are usually exempted or concessionally taxed.
Question 478
Which of the following is NON-TAX revenue of the government?
Select an option first.
Correct answer: C — Fees, fines, dividends from public undertakings and interest receipts
Explanation: Non-tax revenue arises from services rendered, from property owned or from penalties, rather than from the compulsory levy that defines a tax. A fee involves a QUID PRO QUO - something is received in return - whereas a tax does not.
Question 479
The primary deficit equals:
Select an option first.
Correct answer: C — Fiscal deficit MINUS interest payments
Explanation: Interest is the cost of PAST borrowing, so removing it shows how much the government is adding to its debt burden through CURRENT operations. A zero primary deficit means today's spending is fully financed and borrowing is servicing old debt alone - which is why the measure is watched as an indicator of fiscal correction.
Question 480
The principle of maximum social advantage requires the government to expand its activity up to the point where:
Select an option first.
Correct answer: B — The marginal social benefit of expenditure equals the marginal social sacrifice of taxation
Explanation: Taxation imposes a sacrifice that rises at the margin, while public spending yields a benefit that falls at the margin; social advantage is greatest where the two are equal. Dalton's formulation is the central normative principle of public finance.
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