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Generate QuizEconomics – True/False – GK Questions
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The 'Unified Payments Interface' (UPI) requires users to enter their sensitive bank account numbers and IFSC codes for every single peer-to-peer transaction to ensure absolute security.
- True
- False
Answer: False
UPI's revolutionary design completely abstracts the underlying banking details from the user. Instead of sharing vulnerable account numbers and IFSC codes, users simply transact using a unique Virtual Payment Address (VPA, like name@bank) or by scanning a standardized QR code. This layer of abstraction, combined with two-factor authentication (MPIN), drastically reduces the risk of fraud while making digital payments as simple as sending a text message.
The 'Slutsky Equation' decomposes the total effect of a price change on the quantity demanded of a good into the 'Substitution Effect' and the 'Income Effect', proving that Giffen goods must necessarily be inferior goods with a massive negative income effect.
- True
- False
Answer: True
When the price of a good falls, the Substitution Effect always encourages the consumer to buy more of it. However, the price drop also increases the consumer's real purchasing power (Income Effect). For a normal good, both effects work together to increase demand. For a Giffen good (a severe inferior good like potatoes during a famine), the negative Income Effect is so overwhelmingly large that it completely swamps the Substitution Effect, causing demand to perversely fall when the price drops.
The 'Liquidity Preference Theory' proposed by John Maynard Keynes asserts that the interest rate is determined by the intersection of the demand for money (liquidity) and the exogenously fixed supply of money controlled by the central bank.
- True
- False
Answer: True
Keynes revolutionized monetary theory by arguing that interest is not a reward for saving (as classical economists believed), but rather a reward for parting with liquidity. People demand cash for transaction, precautionary, and speculative motives. The equilibrium interest rate is established where the public's desire to hold liquid cash perfectly matches the fixed money supply injected by the central bank.
In an oligopolistic market, the 'Cournot Model' assumes that firms compete by simultaneously choosing their output quantities, while taking the output levels of their rivals as fixed and given.
- True
- False
Answer: True
Augustin Cournot's foundational model of oligopoly assumes that each firm decides how much to produce based on the assumption that its competitors will not change their current production levels. The market price is then determined by the total aggregate output of all firms. This strategic interdependence leads to a Nash Equilibrium where total output and price fall somewhere between the extremes of perfect competition and pure monopoly.
The 'Prompt Corrective Action' (PCA) framework invoked by the RBI restricts a bank's ability to distribute dividends, expand its branch network, and increase management compensation, but it does not impose any restrictions on the bank's lending activities.
- True
- False
Answer: False
The PCA framework imposes both mandatory and non-mandatory restrictions depending on the severity of the bank's financial breach. Mandatory restrictions explicitly include capping or halting the expansion of the bank's risk-weighted assets (effectively restricting aggressive lending), stopping dividend payouts, and freezing branch expansion. The goal is to force the bank to conserve capital and focus entirely on recovering bad loans and improving asset quality.
The 'Infant Industry Argument' for protectionism suggests that new, emerging domestic industries should be temporarily shielded from established foreign competitors via tariffs or quotas until they achieve economies of scale and become globally competitive.
- True
- False
Answer: True
First articulated by Alexander Hamilton and Friedrich List, this argument posits that developing nations cannot compete with the entrenched, highly efficient industries of developed nations. Temporary protection allows domestic firms to learn by doing, adopt new technologies, and scale up production. However, economists warn that 'temporary' protection often becomes permanent due to corporate lobbying, leading to perpetual inefficiency.
The 'National Monetisation Pipeline' (NMP) involves the outright sale and privatization of loss-making Public Sector Undertakings (PSUs) to private corporations to reduce the fiscal deficit.
- True
- False
Answer: False
The NMP is strictly about monetizing *brownfield infrastructure assets* (like operational toll roads, power grids, and railway stations), not privatizing corporate PSUs. Under the NMP, the government retains ownership of the core asset but transfers the revenue rights and operational responsibilities to private players for a fixed concession period. The upfront capital raised is then recycled to build new, greenfield infrastructure projects.
A 'Current Account Deficit' (CAD) is always detrimental to an economy and must be eliminated immediately by imposing strict import bans and capital controls.
- True
- False
Answer: False
A CAD is not inherently bad; its impact depends on how the borrowed foreign capital is utilized. If a developing nation runs a CAD to import heavy machinery, technology, and capital goods that will boost future productive capacity and export earnings, the deficit is sustainable and beneficial. It only becomes a crisis if the CAD is driven by excessive consumption of imported luxuries or if it is financed by volatile, short-term 'hot money' rather than stable FDI.
If the price elasticity of demand for a life-saving drug is perfectly inelastic (equal to zero), a 50% increase in the drug's price will result in a 50% decrease in the quantity demanded by patients.
- True
- False
Answer: False
Perfectly inelastic demand (Ed = 0) means that consumers will purchase the exact same quantity of the good regardless of any price change, typically because the good is an absolute necessity with no substitutes (like insulin for a diabetic). Therefore, a 50% price hike will result in a 0% change in the quantity demanded, allowing the monopolistic pharmaceutical company to extract massive revenues at the expense of consumers.
The 'Demographic Dividend' is an automatic economic guarantee; as long as a country's working-age population exceeds its dependent population, the nation will inevitably experience rapid GDP growth and poverty reduction.
- True
- False
Answer: False
The demographic dividend is merely a 'window of opportunity,' not a guarantee. If the expanding working-age population lacks quality education, healthcare, and vocational skills, or if the economy fails to generate sufficient labor-intensive jobs, the dividend will turn into a 'demographic disaster.' This results in massive youth unemployment, social unrest, and wasted human capital, as seen in several struggling developing nations.
In the Indian financial market, 'Commercial Papers' (CPs) are unsecured, short-term debt instruments issued primarily by the Government of India to meet its temporary fiscal deficits.
- True
- False
Answer: False
Commercial Papers are issued by highly rated *corporate entities*, primary dealers, and financial institutions to meet their short-term working capital needs. The Government of India does not issue CPs; instead, it issues Treasury Bills (T-bills) for its short-term borrowing requirements. Because CPs are unsecured, only companies with pristine credit ratings can access this market.
The 'Lemon Market' theory, developed by George Akerlof, demonstrates how asymmetric information *after* a transaction is completed leads to moral hazard and the eventual collapse of the insurance market.
- True
- False
Answer: False
Akerlof's 'Market for Lemons' specifically addresses *adverse selection*, which occurs *before* a transaction takes place. Because the seller knows the true quality of the used car (whether it's a 'peach' or a 'lemon') and the buyer does not, the buyer will only offer an average, low price. This drives sellers of high-quality cars out of the market, leaving only lemons, and potentially causing the entire market to collapse. Moral hazard occurs *after* the transaction.
The 'Standing Deposit Facility' (SDF) introduced by the RBI allows banks to park surplus overnight funds with the central bank without pledging any collateral, and it serves as the floor of the Liquidity Adjustment Facility (LAF) corridor.
- True
- False
Answer: True
Prior to the SDF, the RBI had to use the Reverse Repo rate to absorb liquidity, which required banks to pledge government securities as collateral. When the system was flush with massive excess liquidity, banks ran out of collateral to pledge. The SDF was introduced as a collateral-free absorption tool, typically set 25 basis points below the Repo Rate, effectively establishing the absolute lower bound (floor) for short-term interbank interest rates.
The 'National Food Security Act (NFSA), 2013' legally entitles up to 75% of the rural population and 50% of the urban population to receive highly subsidized food grains, covering approximately 67% of India's total population.
- True
- False
Answer: True
The NFSA marked a paradigm shift from a welfare-based approach to a rights-based approach to food security. It mandates the government to provide 5 kg of food grains per person per month at highly subsidized prices (Rs. 1-3 per kg) through the Targeted Public Distribution System (TPDS). It also includes specific nutritional entitlements for pregnant women, lactating mothers, and children.
In a natural monopoly, the long-run average cost curve is continuously declining over the entire range of market demand, meaning that a single large firm can supply the entire market at a lower per-unit cost than multiple smaller competing firms.
- True
- False
Answer: True
Natural monopolies arise in industries with massive fixed infrastructure costs and very low marginal costs, such as municipal water supply, electricity transmission grids, or railway tracks. Duplicating these networks for multiple competitors would be wildly inefficient and socially wasteful. Consequently, these markets naturally consolidate into a single provider, which is why they are typically state-owned or heavily regulated to prevent price gouging.
Under the Basel III framework, the 'Liquidity Coverage Ratio' (LCR) requires banks to hold sufficient high-quality liquid assets to survive a severe 30-day stress scenario, while the 'Net Stable Funding Ratio' (NSFR) ensures banks maintain a stable funding profile over a one-year horizon.
- True
- False
Answer: True
These two ratios were introduced to prevent the liquidity crises that caused bank failures in 2008. The LCR is a short-term survival metric, ensuring banks have enough cash or easily sellable government bonds to withstand a sudden 30-day run on deposits. The NSFR is a long-term structural metric, forcing banks to fund long-term illiquid assets (like 20-year mortgages) with stable, long-term liabilities (like equity or long-term bonds), rather than relying on volatile short-term wholesale borrowing.
The 'Kuznets Curve' hypothesizes an inverted-U shaped relationship between a country's per capita income and its level of environmental degradation, suggesting that pollution initially rises with growth but eventually falls as the economy matures.
- True
- False
Answer: False
The description provided actually defines the *Environmental* Kuznets Curve (EKC). The original, standard Kuznets Curve (proposed by Simon Kuznets in 1955) hypothesizes an inverted-U shaped relationship between per capita income and *income inequality*. It suggests that as an economy develops from agrarian to industrial, inequality first increases, but as it matures and welfare states emerge, inequality eventually decreases.
The 'Tragedy of the Commons' occurs when a resource is both excludable and non-rivalrous, leading to its over-exploitation by private monopolies.
- True
- False
Answer: False
The Tragedy of the Commons specifically applies to 'Common-Pool Resources,' which are *non-excludable* (it is difficult to stop people from using them) but *rivalrous* (one person's use diminishes another's ability to use it). Examples include open-ocean fisheries, public grazing lands, and clean air. Because individuals act in their own self-interest to extract as much as possible before others do, the shared resource is inevitably depleted or destroyed.
An Indifference Curve is convex to the origin because of the assumption of the 'Diminishing Marginal Rate of Substitution', meaning consumers are willing to give up less and less of Good Y to acquire one more unit of Good X as they accumulate more of Good X.
- True
- False
Answer: True
As a consumer moves down an indifference curve, they possess an abundance of Good X and very little of Good Y. Consequently, Good Y becomes relatively more valuable to them, and they are less willing to sacrifice it for yet another unit of Good X. This diminishing willingness to trade (MRS) mathematically forces the curve to bow inward (convex) toward the origin.
A 'Sunk Cost' is a cost that has already been incurred and cannot be recovered, and according to rational economic theory, it should heavily influence future decision-making and marginal analysis.
- True
- False
Answer: False
Rational economic theory dictates that sunk costs are entirely irrelevant to future decisions because they cannot be changed regardless of what action is taken next. Decisions should be based solely on marginal costs and marginal benefits going forward. The 'Sunk Cost Fallacy' occurs when individuals or firms irrationally continue a failing project simply because they have already invested heavily in it.