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Free CA Business Economics Practice Questions & Answers
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100% free · No login to startQuestion 181
If nominal GDP is Rs.600 crore and the GDP deflator is 120, real GDP is:
Select an option first.
Correct answer: C — Rs.500 crore
Explanation: Real GDP = nominal GDP divided by the deflator, multiplied by 100 = 600 x 100/120 = Rs.500 crore. Because prices have risen 20% above the base year, real output is LESS than the nominal figure - so any answer above Rs.600 crore, such as distractor A, is impossible.
Question 182
The product, income and expenditure methods of measuring national income:
Select an option first.
Correct answer: D — Must all yield the SAME total, since one person's expenditure is another's income
Explanation: The value of what is produced equals the incomes paid to produce it and equals what is spent to buy it, so the three are identities. In practice the estimates differ slightly because of data gaps, and the discrepancy is reported separately rather than concealed.
Question 183
A deflationary gap exists when aggregate demand is:
Select an option first.
Correct answer: D — Less than the amount required to secure full employment
Explanation: Deficient demand leaves output below capacity and workers unemployed, and prices tend to fall. The remedy is expansionary fiscal and monetary policy. The two gaps are mirror images, and identifying which one an economy faces determines the whole direction of policy.
Question 184
Depreciation in national income accounting means:
Select an option first.
Correct answer: B — The consumption of FIXED CAPITAL - wear, tear and obsolescence during the year
Explanation: It is the amount that must be set aside merely to maintain the capital stock intact. Distractor A describes currency DEPRECIATION and distractor C DEFLATION - three distinct meanings of similar words, and the distinction is regularly examined.
Question 185
Which of the following is a practical difficulty in measuring national income in India?
Select an option first.
Correct answer: C — The large non-monetised and unorganised sector
Explanation: Output consumed by the producer himself, unpaid household work and much of the informal economy never pass through the market, so no price attaches to them. Add unreliable data and the risk of double counting, and the measured figure understates true activity - a standard limitation question.
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Question 186
Gross national product equals gross domestic product plus:
Select an option first.
Correct answer: A — Net factor income from abroad
Explanation: DOMESTIC aggregates cover production within the geographical territory; NATIONAL aggregates cover production by normal residents wherever they are. The bridge between them is net factor income from abroad, which may be negative - as it typically is for India, making GNP slightly smaller than GDP.
Question 187
The salary earned by an Indian citizen working in a company in Dubai is included in India's:
Select an option first.
Correct answer: D — National income, through net factor income from abroad
Explanation: DOMESTIC aggregates cover production within the geographical territory, so income earned abroad is excluded from them. NATIONAL aggregates cover normal residents wherever they earn, so it enters through net factor income from abroad - the bridge between the two concepts.
Question 188
According to Keynes, the level of employment in an economy is determined by:
Select an option first.
Correct answer: B — Effective demand, where aggregate demand equals aggregate supply
Explanation: Employment is set at the point where the aggregate demand price equals the aggregate supply price. Because that point can occur well below full employment, Keynes concluded that an economy can settle in UNDEREMPLOYMENT equilibrium - the central break from classical theory.
Question 189
In a two-sector economy, equilibrium national income is established where:
Select an option first.
Correct answer: B — Intended saving equals intended investment
Explanation: Saving is the leakage from the circular flow and investment the injection, so income is stable only when the two are equal. If intended investment exceeds intended saving, income RISES until the extra income generates enough saving to match - and the process works in reverse when saving is the larger.
Question 190
Under the expenditure method, gross domestic product equals:
Select an option first.
Correct answer: A — C + I + G + (X - M)
Explanation: Private consumption, investment, government expenditure and NET exports together exhaust the ways output can be bought. Imports are deducted because they are produced abroad and are already included in C, I and G. Distractor C is the income method, which reaches the same total by a different route.
Question 191
The essential difference between factor income and transfer income is that factor income:
Select an option first.
Correct answer: A — Is received in return for a productive service rendered
Explanation: Rent, wages, interest and profit are payments for contributing to production and therefore enter national income. A transfer - a pension, a scholarship, a gift - is received without any corresponding service, so it redistributes income rather than creating it.
Question 192
Full employment output is the level of output at which:
Select an option first.
Correct answer: A — All those willing and able to work at the prevailing wage are employed
Explanation: Full employment allows for frictional and structural unemployment, so it does not mean zero unemployment - people between jobs are not evidence of failure. Demand beyond this level cannot raise output and produces the inflationary gap instead.
Question 193
GDP at constant prices means GDP valued at:
Select an option first.
Correct answer: B — The prices of a chosen BASE year
Explanation: Using base year prices holds the price factor still so that changes in the series reflect changes in real output alone. When the base year is revised, the whole series is recomputed - which is why growth figures on the old and new bases are not directly comparable.
Question 194
Gross domestic product at factor cost equals GDP at market price minus:
Select an option first.
Correct answer: D — Net indirect taxes, that is indirect taxes less subsidies
Explanation: Market price includes taxes that do not accrue to any factor and excludes subsidies that do, so removing the net figure gives the amount actually received by the factors of production. This is the market price to factor cost step, quite separate from the gross to net step.
Question 195
Green GNP is a measure that:
Select an option first.
Correct answer: B — Adjusts national income for environmental degradation and depletion of natural resources
Explanation: Conventional national income treats the exhaustion of forests, minerals and clean air as costless, so a country can appear to grow while destroying the base of its future output. Green GNP deducts that depletion, giving a measure closer to SUSTAINABLE income.
Question 196
Net investment equals gross investment minus:
Select an option first.
Correct answer: C — Depreciation
Explanation: Gross investment includes replacement of capital worn out during the year; deducting depreciation leaves the ADDITION to the capital stock. If net investment is negative the capital stock is shrinking, which is what happens in a severe depression.
Question 197
Gross value added at basic prices is obtained from the value of output by deducting:
Select an option first.
Correct answer: A — The value of INTERMEDIATE consumption
Explanation: Value added measures the contribution of each producing unit to output, so what it bought in from other units must be netted out. Summing gross value added across all units and adding product taxes net of subsidies gives GDP at market price.
Question 198
The rental value of an owner-occupied house is:
Select an option first.
Correct answer: C — INCLUDED at an imputed value, since a housing service is produced and consumed
Explanation: A service is being rendered whether or not money changes hands, and excluding it would make national income fall simply because more people owned their homes. Production for self-consumption on farms is imputed for the same reason.
Question 199
Under the income method, national income is the sum of:
Select an option first.
Correct answer: C — Rent, wages, interest and profit
Explanation: The income method aggregates the payments made to the factors of production - land, labour, capital and enterprise. Distractor B describes the VALUE ADDED or product method and distractor A the expenditure method. All three approaches must yield the same total, since one person's expenditure is another's income.
Question 200
An inflationary gap arises when:
Select an option first.
Correct answer: D — Aggregate demand EXCEEDS the level needed for full employment output
Explanation: Beyond full employment output cannot rise further, so the excess demand spends itself in higher prices rather than more goods. The remedy is to reduce demand - higher taxes, lower public spending, tighter credit. A DEFLATIONARY gap is the opposite case.
Question 201
Whether a good is intermediate or final depends on:
Select an option first.
Correct answer: D — The USE to which it is put by the buyer
Explanation: The same sugar is an intermediate good when bought by a bakery and a final good when bought by a household. The classification therefore attaches to the transaction rather than to the commodity - which is why the same item can be counted differently in two sales.
Question 202
A change in stocks held by firms during the year is treated in national income accounting as:
Select an option first.
Correct answer: D — A part of INVESTMENT, being addition to the capital stock
Explanation: Goods produced but unsold are still output of the year, so the change in inventories is counted as investment - positive when stocks build up, negative when they are drawn down. This is what keeps the expenditure method consistent with the product method when sales differ from production.
Question 203
In the circular flow of income, saving, taxation and imports are:
Select an option first.
Correct answer: D — LEAKAGES from the flow
Explanation: Leakages withdraw purchasing power from the domestic circular flow; investment, government expenditure and exports inject it back. Income is in equilibrium when total leakages equal total injections - the three-sector generalisation of the saving equals investment condition.
Question 204
If the marginal propensity to save is 0.25, the value of the investment multiplier is:
Select an option first.
Correct answer: A — 4
Explanation: The multiplier is the reciprocal of the marginal propensity to save: 1/0.25 = 4. Equivalently, since MPC = 0.75, it is 1/(1 - 0.75). A rupee of new investment therefore raises income by four rupees as it is respent round after round, each round smaller than the last.
Question 205
National disposable income is national income at market price plus:
Select an option first.
Correct answer: D — Net current transfers from the rest of the world
Explanation: It measures the total income available to the nation for spending and saving, so unrequited receipts from abroad - remittances, gifts and aid - are added. It answers what the country can DISPOSE of, as distinct from what it has produced.
Question 206
The work done by a homemaker in her own household is:
Select an option first.
Correct answer: A — EXCLUDED, since it is not exchanged for money
Explanation: Such work is genuinely productive but never passes through a market, so no price attaches to it and convention excludes it. The result is an understatement of true output, and a paradox: national income would rise if two households paid each other to keep house.
Question 207
A rise in national income does not necessarily mean a rise in economic welfare because:
Select an option first.
Correct answer: B — It ignores distribution, the composition of output, and non-monetary costs such as pollution
Explanation: The extra output may be armaments rather than food, may accrue entirely to the richest, or may come at the cost of longer hours and a damaged environment. Population growth matters too, since a rise in total income may still mean a fall per head. These qualifications are the standard answer on national income as a welfare index.
Question 208
National income is the same as:
Select an option first.
Correct answer: C — Net national product at FACTOR COST
Explanation: National income proper is NNP at factor cost - net of depreciation, national rather than domestic in coverage, and measured at factor cost so that indirect taxes and subsidies are removed. Each of the three qualifications matters, and the distractors each drop one of them.
Question 209
Gross domestic product at market price MINUS depreciation equals:
Select an option first.
Correct answer: B — Net domestic product at market price
Explanation: Deducting the consumption of fixed capital converts a GROSS measure into a NET one, while the market price basis is unchanged. To reach NATIONAL income one must further add net factor income from abroad and deduct net indirect taxes. Take the adjustments one at a time - gross to net, domestic to national, market price to factor cost.
Question 210
Net indirect taxes are:
Select an option first.
Correct answer: A — Indirect taxes MINUS subsidies
Explanation: Indirect taxes raise market price above factor cost while subsidies lower it, so the bridge between the two valuations is the net figure. Market price less net indirect taxes gives factor cost - the valuation that actually measures what the factors of production received.
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