CA Foundation Economics Paper September 2025 Answer Key

CA Foundation Economics Paper September 2025 Answer Key

Question 1: Average Variable Cost (AVC)

Answer: (B) ₹ 8

Explanation:

• Total Cost = ₹ 1,000
• Fixed Cost = ₹ 200
• Therefore, Variable Cost = Total Cost – Fixed Cost = ₹ 1,000 – ₹ 200 = ₹ 800
• Quantity produced = 100 units
• Average Variable Cost (AVC) = Variable Cost ÷ Quantity = ₹ 800 ÷ 100 = ₹ 8

Question 2: Increase in Supply with Unchanged Demand

Answer: (A) The equilibrium price will go down and the quantity demanded will go up.

Explanation: When supply increases while demand remains constant:

• The supply curve shifts to the right
• This creates a new equilibrium at a lower price point
• At the lower price, consumers are willing to purchase more quantity
• Result: Price decreases, quantity demanded increases

Question 3: Effect on Demand Curve when Car Prices Expected to Increase

Answer: (A) Demand curve will shift to right.

Explanation: When consumers expect prices to increase in the future:

• They will try to purchase cars now before prices rise
• This increases current demand for cars
• The demand curve shifts to the right (outward)
• This represents an increase in demand at all price levels

Question 4: When a Competitive Firm Should Shut Down

Answer: (C) Its total revenues are less than the average variable cost.

Explanation: A competitive firm should shut down in the short run when:

• Price falls below Average Variable Cost (AVC)
• At this point, the firm cannot even cover its variable costs
• Continuing production would result in losses greater than just paying fixed costs
• The shutdown rule: Shut down if P < AVC, or equivalently, if TR < TVC

Question 5: Market Structure Where Firm Cannot Influence Product Price

Answer: (C) Perfect competition

Explanation: In perfect competition:

• There are many buyers and sellers
• Products are homogeneous (identical)
• No single firm has market power
• Firms are “price takers” – they must accept the market price
• Individual firms cannot influence the market price through their actions

Other market structures comparison:

• Monopoly: Single seller, complete price control
• Oligopoly: Few sellers, some price influence
• Monopolistic competition: Many sellers, some price influence due to product differentiation

Question 6: Kinked Demand Curve

Answer: (D) Oligopoly

Explanation: The kinked demand curve model is specifically associated with oligopoly market structures. It explains why prices tend to be rigid in oligopolistic markets, where firms face different demand elasticities above and below the current price due to competitors’ anticipated reactions.

Question 7: Price Discrimination Objectives

Answer: (D) To secure equity through pricing

Explanation: Price discrimination is NOT aimed at securing equity through pricing. The main objectives of price discrimination are to:

• (A) Earn maximum profit ✓
• (B) Enjoy economies of scale ✓
• (C) Hold excess stock ✓

Equity through pricing would actually contradict the purpose of price discrimination, which involves charging different prices to different consumers.

Question 8: Fundamental Cause of Monopoly Creation

Answer: (A) Barriers to entry

Explanation: Barriers to entry are the fundamental cause for monopoly creation. These prevent potential competitors from entering the market, allowing a single firm to maintain market control. The other options would actually prevent monopoly formation:

• (B) Low startup costs would encourage competition
• (C) High competition prevents monopoly
• (D) Equal resource distribution promotes competition

Question 9: Market Structure Scenario

Answer: (C) Monopolistic Competition

Explanation: This scenario describes monopolistic competition because:

• Many similar products exist in the market (many burger options)
• Product differentiation exists (unique sauce)
• Customers perceive the product as distinct
• Multiple competitors are present

This is not perfect competition (products aren’t identical), not monopoly (many competitors exist), and not oligopoly (no indication of few large firms).

Question 10: Marginal Revenue Formula

Answer: (A) MRₙ = TRₙ – TRₙ₋₁

Explanation: Marginal Revenue is the additional revenue generated from selling one more unit of output. It’s calculated as the change in total revenue divided by the change in quantity. When there’s a one-unit change in output, MR equals the difference between current total revenue and previous total revenue.

Question 11: Supply and Demand Decrease

Answer: (A) decreases, uncertain

Explanation: When both demand and supply decrease by the same magnitude:

• Equilibrium quantity definitely decreases (both curves shift left)
• Equilibrium price change is uncertain and depends on the relative magnitude of the shifts
• If demand decreases more than supply: price falls
• If supply decreases more than demand: price rises
• If they decrease equally: price remains constant

Question 12: Aluminum Industry Example

Answer: (A) Competitive oligopoly

Explanation: The aluminum industry is typically characterized as a competitive oligopoly because:

• Few large firms dominate the market
• Firms compete on price and other factors
• High barriers to entry exist (capital requirements, technology)
• Products are relatively standardized but firms still compete actively

This differs from collusive oligopoly where firms coordinate their actions to avoid competition.

Question 13: Implicit Cost Calculation

Answer: (A) ₹ 5,000

Explanation:

• Implicit cost = Opportunity cost of invested capital
• Investment = ₹ 50,000
• Normal rate of return = 10%
• Implicit cost = ₹ 50,000 × 10% = ₹ 5,000

The implicit cost represents the opportunity cost of the entrepreneur’s own capital – what they could have earned by investing the ₹ 50,000 elsewhere at the market rate of 10%.

Question 14: Demand Curve Shift

Answer: (C) It will shift to the left

Explanation: When income falls and demand decreases (assuming this is a normal good), the entire demand curve shifts leftward. This represents a decrease in demand at every price level, not a movement along the curve.

Question 15: Market Power and Pricing

Answer: (C) A monopoly firm

Explanation: Only a monopoly firm has sufficient market power to charge a price above marginal cost and earn positive economic profits. Perfect competition forces firms to price at marginal cost, while oligopolistic firms have limited pricing power due to competition.

Question 16: Nominal vs Real GDP

Answer: (C) FY 2020-21

Explanation: Nominal and real GDP are equal in the base year when the GDP deflator equals 100. From the data:

• FY 2020-21: GDP Deflator = 100 (base year)
• All other years have deflators ≠ 100

Question 17: Price Level Changes

Answer: (B) FY 2023-24

Explanation: Price level falls when GDP deflator decreases:

• FY 2020-21: 100
• FY 2021-22: 154.25 (increase)
• FY 2022-23: 168.40 (increase)
• FY 2023-24: 148.25 (decrease from 168.40)

Only in FY 2023-24 did the deflator fall from the previous year.

Question 18: Inflation Rate Calculation

Answer: (C) 9.17%

Explanation: Inflation rate = [(GDP Deflator₂ – GDP Deflator₁) / GDP Deflator₁] × 100

From FY 2021-22 to FY 2022-23:

• FY 2021-22: 154.25
• FY 2022-23: 168.40

Inflation rate = [(168.40 – 154.25) / 154.25] × 100 = [14.15 / 154.25] × 100 = 9.17%

Summary of Correct Answers:

• 13: (A) ₹ 5,000
• 14: (C) It will shift to the left
• 15: (C) A monopoly firm
• 16: (C) FY 2020-21
• 17: (B) FY 2023-24
• 18: (C) 9.17%

Economics Answer Key – Questions 19-22

Question 19

The maximum value of investment multiplier will be the infinity when the value of:

Answer: (B) MPC is -1

Explanation: The investment multiplier formula is: k = 1/(1-MPC)

• When MPC approaches 1, the denominator (1-MPC) approaches 0, making the multiplier approach infinity
• However, the question asks when the multiplier will be infinity, which theoretically occurs when MPC = 1
• Among the given options, MPC = -1 would give: k = 1/(1-(-1)) = 1/2 = 0.5
• The correct mathematical answer should be when MPC = 1, but this isn’t listed as an option
• There appears to be an error in the question or options provided

Question 20

Calculate the consumption of fixed capital (depreciation) from the following data:

Answer: (D) ₹ 2,600 crores

Calculation:

• GDP_MP = 8,000 crores
• NNP_MP = 5,600 crores
• Consumption of Fixed Capital (Depreciation) = GDP_MP – NDP_MP
• First, we need NDP_MP = NNP_MP + Indirect tax – Subsidy
• NDP_MP = 5,600 + 400 – 300 = 5,700 crores
• Depreciation = GDP_MP – NDP_MP = 8,000 – 5,700 = 2,300 crores

Note: The closest answer is (D) ₹ 2,600 crores, though the calculated value is ₹ 2,300 crores.

Question 21

There are three different interlinked phases in a circular flow of income, namely:

Answer: (A) Production, consumption and disposition

Explanation: The three phases of circular flow of income are:

1. Production – Firms produce goods and services
2. Income Generation – Factors of production earn income
3. Expenditure/Consumption – Income is spent on goods and services

The term “disposition” in option (A) refers to how income is disposed of or spent, making this the most accurate answer.

Question 22

If the consumption function C = 10 + 0.5Y and Investment is ₹ 200, then what will be the equilibrium level of Income?

Answer: (C) ₹ 420

Calculation: At equilibrium: Y = C + I

• Given: C = 10 + 0.5Y and I = 200
• Y = (10 + 0.5Y) + 200
• Y = 210 + 0.5Y
• Y – 0.5Y = 210
• 0.5Y = 210
• Y = 210/0.5 = 420

Therefore, the equilibrium level of income is ₹ 420.

Question 23: GDP Deflator

Answer: (C) Price levels are lower as compared to the base year.

Explanation: The GDP deflator formula is: (Nominal GDP / Real GDP) × 100

If GDP deflator > 100, this means:

• Nominal GDP > Real GDP
• Current prices are higher than base year prices
• There has been inflation since the base year

The question asks what it indicates when GDP deflator > 100. Let’s analyze each option:

• (A) Incorrect – Real GDP < Nominal GDP when deflator > 100
• (B) Correct relationship – Nominal GDP > Real GDP
• (C) Incorrect – Price levels are HIGHER than base year
• (D) Incorrect – They are not equal when deflator ≠ 100

Note: There appears to be an error in the question or options. Based on standard economics, when GDP deflator > 100, it indicates inflation (higher prices), but option (C) states the opposite.

Question 24: Multinational Company Profits

Answer: (C) They will be included in India’s GDP and South Korea’s GNP.

Explanation:

• GDP (Gross Domestic Product): Measures production within a country’s borders, regardless of ownership
• GNP (Gross National Product): Measures production by a country’s residents, regardless of location

Gamma Ltd. is a South Korean company operating in India:

• The profits are generated within India → Included in India’s GDP
• The profits belong to a South Korean company → Included in South Korea’s GNP
• The profits are NOT included in South Korea’s GDP (production not in South Korea)
• The profits are NOT included in India’s GNP (not owned by Indian residents)

Question 25: Marginal Propensity to Consume (MPC)

Answer: (A) 0.90

Explanation: Given information:

• National income increases from ₹500 crores to ₹2,500 crores
• Investment increases by ₹200 crores

Step 1: Calculate change in income Change in income = ₹2,500 – ₹500 = ₹2,000 crores

Step 2: Apply multiplier formula Multiplier (k) = Change in income / Change in investment k = ₹2,000 / ₹200 = 10

Step 3: Calculate MPC using multiplier relationship k = 1 / (1 – MPC) 10 = 1 / (1 – MPC) 1 – MPC = 1/10 = 0.1 MPC = 1 – 0.1 = 0.90

Question 26: Net Factor Income from Abroad

Answer: (B) ₹2,000 crores

Explanation: Net Factor Income from Abroad = NNPMP – NDPMP

Given data:

• NDPMP = ₹10,000 crores
• NNPMP = ₹12,000 crores
• Net indirect tax = ₹400 crores
• Depreciation = ₹200 crores

Calculation: Net Factor Income from Abroad = ₹12,000 – ₹10,000 = ₹2,000 crores

Note: The net indirect tax and depreciation figures are provided but not needed for this specific calculation, as we’re given both NNPMP and NDPMP directly.

Key Concepts Reviewed:

1. GDP Deflator and inflation measurement
2. Difference between GDP and GNP in international business
3. Multiplier effect and MPC calculation
4. National income accounting identities

Question 27

Who are the economists credited with pioneering National Income Accounting?

Answer: (B) Simon Kuznets and Richard Stone

Explanation: Simon Kuznets (Nobel Prize 1971) and Richard Stone (Nobel Prize 1984) are widely recognized as the pioneers of modern national income accounting systems. Kuznets developed the concept of GDP measurement, while Stone created the System of National Accounts (SNA).

Question 28

GDP at Factor Cost Calculation

Given:

• GDP_MP = ₹ 2,000 billion
• Indirect taxes = ₹ 250 billion
• Subsidies = ₹ 100 billion

Answer: (A) ₹ 1,850 billion

Formula: GDP at Factor Cost = GDP_MP – Indirect taxes + Subsidies Calculation: 2,000 – 250 + 100 = 1,850 billion

Question 29

Total Savings Calculation

Given:

• Average Propensity to Save (APS) = 0.4
• Total income = ₹ 25,000

Answer: (B) ₹ 10,000

Formula: Total Savings = APS × Total Income Calculation: 0.4 × 25,000 = 10,000

Question 30

Anti-inflationary Measure

Answer: (A) Reduction in government spending

Explanation: Anti-inflationary measures aim to reduce aggregate demand to control inflation. Reducing government spending decreases aggregate demand, putting downward pressure on prices and slowing economic growth. The other options (increased spending, decreased interest rates, decreased taxes) would all stimulate demand and be inflationary.

Question 31

Slope of Consumption Function

Answer: (B) Marginal Propensity to Consume (MPC)

Explanation: The consumption function shows the relationship between income and consumption. Its slope represents how much consumption changes for each unit change in income, which is precisely the definition of Marginal Propensity to Consume (MPC).

Question 32: Economic conditions during bad trade in a business cycle

Answer: (B) Falling prices and high unemployment rate

Explanation: During a recession or downturn in the business cycle, economic activity slows down, leading to reduced demand, falling prices (deflation), and increased unemployment as businesses cut costs and reduce their workforce.

Question 33: Phases of business cycles

Answer: (B) Expansion, peak, contraction, trough

Explanation: The standard business cycle consists of four phases:

• Expansion: Economic growth and increasing activity
• Peak: The highest point of economic activity
• Contraction: Economic decline and reduced activity
• Trough: The lowest point before recovery begins

Question 34: Duration and intensity of business cycles

Answer: (C) Business cycles varies in duration and intensity, but they share common features

Explanation: While business cycles follow a predictable pattern of phases, their duration and intensity can vary significantly depending on various economic factors, policies, and external shocks. However, they all share the common characteristic of having the four phases mentioned above.

Question 35: Article 275 of the Indian Constitution

Answer: (B) Statutory grants-in-aid from the union to certain states

Explanation: Article 275 of the Indian Constitution deals with grants from the Union to certain states. It empowers Parliament to make grants to states that are in need of assistance, particularly for promoting the welfare of Scheduled Tribes and for raising the level of administration in Scheduled Areas.

Question 36: External cause of business cycles – Mobile phone example

Answer: (B) Technology Shocks

Explanation: The advent of mobile phones represents a technology shock – a sudden technological innovation that disrupts existing markets and creates new economic opportunities. Technology shocks are external factors that can trigger significant changes in business cycles by creating new industries, altering consumer behavior, and shifting economic patterns.

Question 37: Fiscal Deficit Calculation

Answer: (A) ₹ 5,000 crore

Calculation:

• Total Receipts = Revenue receipts + Capital receipts (excluding borrowing)
• Total Receipts = ₹ 10,000 + ₹ 2,000 = ₹ 12,000 crore
• Total Expenditure = Revenue expenditure + Capital expenditure
• Total Expenditure = ₹ 12,000 + ₹ 5,000 = ₹ 17,000 crore
• Fiscal Deficit = Total Expenditure – Total Receipts (excluding borrowing)
• Fiscal Deficit = ₹ 17,000 – ₹ 12,000 = ₹ 5,000 crore

Question 38: Contractionary Fiscal Policy

Answer: (B) Reducing government spending and increasing taxes

Explanation: Contractionary fiscal policy aims to reduce aggregate demand and control inflation by:

• Reducing government spending (decreases aggregate demand directly)
• Increasing taxes (reduces disposable income, decreasing consumption) Both measures help cool down an overheated economy.

Question 39: Government Functions – Food Subsidies

Answer: (C) Redistribution Function

Explanation: Using progressive tax revenue to provide subsidized food grains to Below Poverty Line (BPL) households is a classic example of the redistribution function of government. It transfers resources from higher-income groups (through progressive taxation) to lower-income groups (through subsidies), reducing income inequality.

Question 40: Right to Education Act

Answer: (C) Government Intervention in the case of Public Goods

Explanation: Education, especially primary education, has characteristics of a public good:

• Non-excludable: Difficult to exclude children from benefiting
• Positive externalities: Educated population benefits society as a whole
• Under-provision by private markets due to these characteristics The RTE Act 2009 ensures universal provision of this quasi-public good.

Question 41: Concept of Public Goods

Answer: (C) Paul A. Samuelson

Explanation: Paul Samuelson introduced the modern economic concept of “collective consumption goods” in his 1954 paper, which later became known as public goods theory. He distinguished between private goods and public goods based on their characteristics of non-rivalry and non-excludability.

Question 42

Question: Under Article 266(1) of the Constitution of India, which of the following is used in relation to all fund flows where the government acts as a banker?

Answer: (B) Consolidated Fund

Explanation: Article 266(1) of the Indian Constitution establishes the Consolidated Fund of India, which is the primary account where all government revenues are credited and from which all government expenditures are made. When the government acts as a banker for various fund flows, they ultimately pass through or are managed via the Consolidated Fund.

Question 43

Question: _______ is defined as the excess of total estimated expenditure over total estimated revenue and is the difference between all receipts and expenditures, both revenue and capital.

Answer: (A) Fiscal Deficit

Explanation: Fiscal deficit represents the total borrowing requirements of the government and is calculated as total expenditure minus total receipts (both revenue and capital receipts, excluding borrowings). It shows the excess of government spending over its income from all sources except borrowing.

Question 44

Question: The situation when the market does not supply products at all despite the fact that such products and services are wanted by the people is known as:

Answer: (B) Complete Market Failure

Explanation: Complete market failure occurs when the market mechanism fails entirely to provide goods or services that are desired by consumers. This typically happens with public goods, merit goods, or in situations where private markets cannot function effectively due to various constraints.

Question 45

Question: For initial deposit of ₹ 6,00,000, the credit creation is calculated at ₹ 50,00,000. What is Required Reserved Ratio (RRR)?

Answer: (A) 12%

Calculation:

• Credit multiplier = Total credit creation ÷ Initial deposit
• Credit multiplier = ₹50,00,000 ÷ ₹6,00,000 = 8.33
• RRR = 1 ÷ Credit multiplier = 1 ÷ 8.33 = 0.12 = 12%

Explanation: The Required Reserve Ratio is the percentage of deposits that banks must hold as reserves. The credit multiplier formula is 1/RRR, so RRR = 1/Credit Multiplier.

Question 46

Question: Alex has comprehensive car insurance, which covers the cost of repairs if his car is damaged in an accident. As a result, he drives more recklessly, knowing that his insurance will cover any damages. Over time, he gets into more accidents and files more insurance claims due to his careless driving. This scenario illustrates which of the following concepts?

Answer: (A) Moral Hazard

Explanation: Moral hazard occurs when one party takes excessive risks because they know another party will bear the cost of those risks. In this case, Alex drives more recklessly because he knows his insurance company will pay for any damages, leading to more accidents and claims. This is a classic example of moral hazard in insurance markets.

Note: The marked answers visible in the image appear to show some selections, and this answer key provides the correct responses with detailed explanations for each question.

Question 47: Cryptocurrency Statements

Correct Answer: (D) Statement II and III

Analysis of Statements:

• Statement I: “These have achieved significant legislative recognition” – FALSE

• • Cryptocurrencies have not achieved significant legislative recognition globally or in India specifically.

• Statement II: “These are not legally recognized in India as currency” – TRUE

• • The Reserve Bank of India (RBI) has clarified that cryptocurrencies are not legal tender in India.

• Statement III: “These are not categorized as money” – TRUE

• • Cryptocurrencies do not meet the traditional definition of money in most regulatory frameworks, including India’s.

• Statement IV: “In India, it serves as a legitimate form of payment for goods and services in the same way as traditional money does” – FALSE

• • This is incorrect. Cryptocurrencies do not have the same legal status as traditional money in India.

Question 48: Money Multiplier Calculation

Correct Answer: (A) 5

Calculation:

• Formula: Money Multiplier (m) = Money Supply ÷ Monetary Base
• Given:
  • Money Supply = ₹1,000 billion
  • Monetary Base = ₹200 billion
• Calculation: m = 1,000 ÷ 200 = 5

Question 49: Primary Objective of Monetary Policy

Correct Answer: (B) To maintain a balance between price stability and economic growth

Explanation:

• Modern monetary policy frameworks, including India’s, typically aim to balance multiple objectives
• Price stability (controlling inflation) is crucial for economic stability
• Economic growth promotion ensures sustainable development
• This dual mandate approach is followed by most central banks including the RBI
• Other options are either too narrow (export-led growth) or not primary objectives (high government spending, controlling exchange rates at all costs)

Question 50: RBI Quantitative Tools

Correct Answer: (C) Selective Credit Control

Explanation:

Quantitative Tools (affect overall money supply):

• Open Market Operations ✓
• Statutory Liquidity Ratio ✓
• Cash Reserve Ratio ✓

Qualitative Tools (selective/targeted measures):

• Selective Credit Control ✗ – This is a qualitative tool that targets specific sectors or types of credit rather than controlling the overall money supply

Selective Credit Control includes measures like margin requirements, credit authorization schemes, and rationing of credit to specific sectors, making it a qualitative rather than quantitative monetary policy tool.

Question 51: Price Level and Nominal Demand for Money (Friedman)

Correct Answer: (C) A rise in the price level increases the demand for money and vice versa.

Explanation: According to Milton Friedman’s monetary theory, there is a positive relationship between the price level and the nominal demand for money. When prices rise (inflation), people need more money to purchase the same goods and services, thus increasing the nominal demand for money. Conversely, when prices fall, less money is needed for transactions, decreasing the nominal demand for money.

Question 52: Liquidity Trap

Correct Answer: (B) Liquidity trap

Explanation: A liquidity trap occurs when the speculative demand for money becomes perfectly elastic with respect to the interest rate. In this situation, the money demand curve becomes horizontal (parallel to the X-axis), meaning that changes in the money supply do not affect interest rates. This typically happens at very low interest rates when people expect rates to rise in the future, making them hold money rather than bonds.

Question 53: Marginal Standing Facility (MSF) Rate Calculation

Correct Answer: (C) Option (1) and (3)

Explanation: The Marginal Standing Facility (MSF) Rate is indeed a penal rate set above the Repo Rate. Looking at the options:

• Option (1): MSF Rate = Repo Rate + 1 ✓ (Correct – MSF is typically Repo Rate + 1%)
• Option (2): MSF Rate = Repo Rate – 1 ✗ (Incorrect – this would make MSF lower than Repo)
• Option (3): MSF Rate = Repo Rate + 1 ✓ (Correct – same as Option 1)
• Option (4): MSF Rate = Repo Rate – 1 ✗ (Incorrect – same issue as Option 2)

Note: There appears to be a formatting issue in the original question where Options (1) and (3) seem to have the same formula. The correct answer should be the options that show MSF Rate as higher than Repo Rate by 1 percentage point.

Key Concepts Summary:

1. Price Level & Money Demand: Positive relationship – higher prices require more nominal money for transactions
2. Liquidity Trap: Occurs when money demand becomes perfectly interest-elastic, making monetary policy ineffective
3. MSF Rate: A penalty rate set above the Repo Rate to discourage excessive borrowing by banks from the central bank

Question 54

Which monetary tool is used to check temporary liquidity mismatches in the market due to foreign capital flow?

Answer: (D) Marginal Standing Facility (MSF)

Explanation: The Marginal Standing Facility (MSF) is a monetary policy tool used by central banks to provide overnight lending to commercial banks against government securities. It serves as a safety valve against unanticipated liquidity shocks and helps manage temporary liquidity mismatches, especially those arising from volatile foreign capital flows.

Question 55

ABC Ltd., a company based in Country ‘A’, imports machinery from Country ‘B’. Recently, Country ‘A’ introduced a measure that requires all importers to pay 25% of the total value of goods three months in advance before the goods arrive. Which measure has been adopted by Country ‘A’?

Answer: (A) Financial Measures

Explanation: This is a capital control measure classified as a financial measure. The advance payment requirement of 25% serves as a financial control mechanism to regulate foreign exchange outflows and manage the balance of payments. It’s designed to slow down imports and reduce pressure on foreign exchange reserves.

Question 56

Calculate Broad Money (M3) from the following data:

Particulars	₹ in Crores
Currency with the public	2250
Demand Deposits with the banking system	630
Total post office deposits	478
Time deposits with banks	535
Savings deposits with Post office savings banks	312

Answer: (A) ₹ 3,415 crores

Calculation:

• M1 = Currency with public + Demand deposits with banking system + Other deposits with RBI
• M1 = 2250 + 630 = ₹ 2,880 crores
• M3 (Broad Money) = M1 + Time deposits with banks + Total post office deposits
• M3 = 2,880 + 535 = ₹ 3,415 crores

Note: Post office deposits are not typically included in M3 calculation in the Indian monetary system. The calculation follows the standard M3 formula.

Key Concepts:

• MSF: Emergency lending facility at a rate higher than repo rate
• Financial Measures: Capital controls affecting financial transactions and payments
• M3 (Broad Money): Includes M1 plus time deposits with banks

Question 57: Real Effective Exchange Rate (REER)

Answer: (C) Exports from Country ‘X’ will become less competitive

Explanation: When a country’s REER increases, its currency becomes stronger relative to its trading partners. This makes the country’s goods more expensive for foreign buyers (reducing export competitiveness) and makes foreign goods cheaper for domestic consumers. The statement that “imports from other countries are becoming cheaper” confirms this scenario.

Question 58: FDI in Indian Airport Projects

Answer: (A) Greenfield investment

Explanation: Under India’s FDI policy, 100% foreign investment through the automatic route is permitted for greenfield airport projects. Greenfield projects involve building new infrastructure from scratch, as opposed to brownfield projects which involve existing facilities.

Question 59: Theory of Absolute Advantage

Answer: (A) Adam Smith

Explanation: Adam Smith proposed the theory of absolute advantage in his seminal work “The Wealth of Nations” (1776). He argued that countries should export goods in which they have an absolute advantage (can produce more efficiently than other countries) and import goods where other countries have the absolute advantage.

Question 60: Free Trade Agreement Definition

Answer: (D) Trading Bloc

Explanation: A trading bloc is a group of countries that have agreed to reduce or eliminate trade barriers among themselves while potentially maintaining common external tariffs against non-member countries. This matches the description of having “free trade agreement among themselves” and “may apply a common external tariff to other countries.”

Additional Notes:

• Question 57: The other options are incorrect because when REER increases, exports become more expensive (not increasing), imports become cheaper (not more expensive), and imports typically increase rather than decrease.
• Question 58: Brownfield investment involves existing infrastructure, while joint ventures and subsidiary establishments don’t automatically qualify for 100% FDI under the automatic route for airport projects.
• Question 59: David Ricardo developed the theory of comparative advantage, while Heckscher-Ohlin developed factor endowment theory, and Keynes focused on macroeconomic theory.
• Question 60: Free-trade areas typically don’t have common external tariffs, while Economic and Monetary Unions involve much deeper integration including common currencies.

Question 61: Technical Barriers to Trade (TBT)

Answer: (C) Import quotas

Explanation: Technical Barriers to Trade (TBT) refer to regulations, standards, testing, and certification procedures that can create obstacles to trade. Examples include:

• Eco-labelling requirements
• Quality standards for products
• Organic certification requirements

Import quotas are quantitative restrictions on trade, not technical barriers. They limit the quantity of goods that can be imported, making them a different type of trade barrier.

Question 62: Type of Foreign Investment

Answer: (A) Horizontal direct investment

Explanation: When a U.S. cell phone service provider expands to India by offering the same telecommunication services, this is horizontal direct investment. This type of investment involves:

• Expanding the same business activity to a foreign market
• Replicating existing services in a new geographic location
• Maintaining the same industry and business model

Question 63: Tariff Structure

Answer: (A) Mixed Tariff

Explanation: The tariff structure “5% ad valorem or ₹800 per tonne, whichever is higher” is a mixed tariff because it combines:

• An ad valorem component (5% of value)
• A specific tariff component (₹800 per tonne)
• The higher of the two rates applies

This provides flexibility and ensures minimum revenue regardless of price fluctuations.

Question 64: Fixed Exchange Rate Regime

Answer: (A) An increase in speculation on exchange rate movements

Explanation: This is NOT an advantage of a fixed exchange rate regime. Fixed exchange rates actually:

• Reduce speculation by providing certainty
• Enhance international trade and investment (advantage)
• Avoid currency fluctuations and eliminate exchange rate risks (advantage)
• Enhance credibility of monetary policy (advantage)

Increased speculation would be a disadvantage, not an advantage.

Question 65: Anti-dumping Duty

Answer: (C) Fair market value

Explanation: Anti-dumping duty is imposed when imports are priced below fair market value. The complete definition is:

• Anti-dumping duty protects domestic industries from unfair competition
• It applies when foreign goods are sold below their fair market value
• Fair market value is typically the price in the exporter’s home market
• This prevents predatory pricing that could harm domestic producers

Question 66

What type of economy is described as prevalent in ancient and medieval India?

Answer: (A) A predominantly agricultural economy

Explanation: Ancient and medieval India was characterized by a primarily agricultural economy, with the majority of the population engaged in farming and related activities. Agriculture formed the backbone of the economic structure during these periods.

Question 67

Foreign Investment Promotion Board (FIPB) was abolished in May 2017 and which of the following replaced it?

Answer: (A) Foreign Investor Promotion Portal (FIPP)

Explanation: The FIPB was abolished in May 2017 as part of economic reforms to simplify foreign investment procedures. It was replaced by online portals and streamlined processes, with the Foreign Investor Promotion Portal being the primary replacement mechanism.

Question 68

The _______ includes a stable and transparent tax structure, better tax compliance, reduction of subsidies and encouragement of private sector participation.

Answer: (A) Fiscal Reforms

Explanation: Fiscal reforms specifically deal with government taxation, spending, and financial policies. The described elements – stable tax structure, better compliance, subsidy reduction, and private sector encouragement – are all key components of fiscal reform initiatives.

Question 69

Which of the following sectors has recently been included under the PLI Scheme?

Answer: (C) White goods (Air conditioners and LED lights)

Explanation: The Production Linked Incentive (PLI) scheme has been expanded to include white goods like air conditioners and LED lights as part of India’s manufacturing promotion strategy. This inclusion aims to boost domestic manufacturing and reduce imports in these sectors.

Question 70

Which of the following was NOT the focus of the monetary and financial sector reforms?

Answer: (B) Restricting foreign investment in banks

Explanation: Monetary and financial sector reforms in India have generally aimed at liberalization and opening up the sector. Restricting foreign investment would be contrary to the reform objectives, which typically include allowing more foreign participation to bring in capital, technology, and expertise.

Answer Key – Questions 71-75

Question 71

Which scheme aims to increase water use efficiency at the farm level?

Answer: (C) Per Drop More Crop (PDMC)

Explanation: Per Drop More Crop (PDMC) is a scheme specifically designed to enhance water use efficiency in agriculture through micro-irrigation systems like drip and sprinkler irrigation.

Question 72

What is the full form of PMI?

Answer: (B) Purchase Management Index

Explanation: PMI stands for Purchase Management Index, which is commonly used in business and economics contexts.

Question 73

Which of the following is the aim of the National Manufacturing Policy?

Answer: (A) To increase the share of manufacturing in GVA to 27% by 2027.

Explanation: The National Manufacturing Policy aims to increase the contribution of manufacturing sector to the Gross Value Added (GVA) to 27% by 2027.

Question 74

The reason for introduction of ‘Kisan Rail’ is:

Answer: (A) For taking initiative towards transportation of perishable goods to market.

Explanation: Kisan Rail was introduced specifically to facilitate the transportation of perishable agricultural products from production areas to markets, ensuring faster delivery and reduced wastage.

Question 75

Which facility was provided to industry groups to allow flexibility and rapid changes in their product mix without requiring a fresh license?

Answer: (A) Open General License (OGL)

Explanation: Open General License (OGL) provides industrial flexibility by allowing manufacturers to change their product mix without obtaining fresh licenses for each product variation.

Note: These answers are based on standard knowledge of Indian government policies and schemes. For official verification, please refer to the relevant government documents and policy papers.

Question 76

Answer: (B) Micro Economy

Explanation: The ice cream company is analyzing individual business factors like consumer preferences, pricing strategies, employee wages, and outlet locations. These are all microeconomic considerations that focus on individual firm behavior and decision-making rather than economy-wide aggregates.

Question 77

Answer: (A) Statement-II

Explanation: In a socialist economy, basic needs like food are typically guaranteed by the state, ensuring freedom from hunger. However, consumer sovereignty (the power of consumers to determine what gets produced through their purchasing decisions) is restricted because the government makes most production decisions rather than market forces.

• Statement-I is false – socialist economies typically aim for more equal income distribution
• Statement-III is false – central planning, not market forces, allocates resources in socialist economies
• Statement-IV is false – the government, not buyers, primarily determines production in socialist economies

Question 78

Answer: (C) Co-existence of both private and public sectors

Explanation: A mixed economy is characterized by the simultaneous presence of both private enterprise and government ownership/control. This combines elements of both market capitalism (private sector) and socialism (public sector).

Question 79

Answer: (D) Behaviour of Firms

Explanation: Macroeconomics deals with economy-wide aggregates and phenomena. The behavior of individual firms falls under microeconomics, which studies individual economic units. The other options are all macroeconomic topics:

• Balance of Payment: deals with a country’s international transactions
• Overall level of savings and investment: economy-wide financial flows
• Level of employment: aggregate employment across the entire economy

Economics Answer Key – Questions 80-84

Question 80

What will happen to demand when a larger proportion of people belong to older age groups relative to younger age groups?

Answer: (B) There will be increased demand for geriatric care services, spectacles and walking sticks etc.

Explanation: When the population ages (demographic shift toward older age groups), demand patterns change to reflect the needs and preferences of older consumers. This leads to increased demand for age-related products and services such as healthcare, medical equipment, mobility aids, and geriatric care services.

Question 81

Under _______ conditions, supply will be more than that under _______ conditions.

Answer: (A) Monopolized; Competitive

Explanation: This appears to be asking about supply levels under different market structures. However, the standard economic principle is that competitive markets typically produce higher output (supply) than monopolized markets. There may be an error in the question or it’s testing a specific context. Based on standard theory, competitive markets have higher supply than monopolized markets.

Question 82

Demand is said to be elastic, if:

Answer: (B) Elasticity is greater than one (Ep > 1)

Explanation: Demand is considered elastic when the price elasticity of demand is greater than 1 in absolute value. This means that a percentage change in price leads to a greater percentage change in quantity demanded. When |Ep| > 1, consumers are relatively responsive to price changes.

Question 83

The consumer is in equilibrium position at a point where the price line is:

Answer: (C) tangent to an indifference curve

Explanation: Consumer equilibrium occurs where the budget line (price line) is tangent to the highest possible indifference curve. At this point, the marginal rate of substitution equals the price ratio, maximizing utility subject to the budget constraint.

Question 84

Which one of the following is not the characteristic of a capitalist economy?

Answer: (D) Collective ownership

Explanation: Collective ownership is characteristic of socialist or communist economic systems, not capitalist economies. Capitalist economies are characterized by private ownership of the means of production, profit motive, competition, and freedom of enterprise. Collective ownership contradicts the fundamental principle of private property rights in capitalism.

Summary of Answers:

• 80: (B)
• 81: (A)
• 82: (B)
• 83: (C)
• 84: (D)

Question 85: Advertisement Elasticity of Demand

Answer: (D) Ea = 2

Explanation: Advertisement elasticity of demand = % change in quantity demanded / % change in advertisement expenditure

• Advertisement expenditure increases by 20%
• Quantity demanded increases by 40%
• Ea = 40% / 20% = 2

Question 86: Consumer Equilibrium Condition

Answer: (C) MUx/Px = MUy/Py

Explanation: Consumer equilibrium occurs when the marginal utility per dollar spent is equal across all goods. This is the fundamental condition for utility maximization subject to budget constraints.

Question 87: Giffen Goods

Answer: (A) All Giffen goods are inferior goods

Explanation: Giffen goods are a special subset of inferior goods where the income effect dominates the substitution effect so strongly that demand increases when price increases. While all Giffen goods are inferior goods, not all inferior goods are Giffen goods.

Question 88: Consumer Surplus

Answer: (B) Demand

Explanation: Consumer surplus is the difference between what consumers are willing to pay (shown by the demand curve) and what they actually pay (market price). It is measured as the area under the demand curve and above the price line.

Question 89: Budget Line Slope

Answer: (B) The price ratio of two goods

Explanation: The slope of the budget line equals -Px/Py (negative of the price ratio). It represents the rate at which one good must be given up to obtain one more unit of the other good, given the consumer’s income constraint.

Question 90: Income Effect on Normal Goods

Answer: (C) It increases the demand

Explanation: For normal goods, there is a positive relationship between income and demand. When consumers’ income increases, they demand more of normal goods, shifting the demand curve to the right.

Question 91

Which of the following curve is known as ‘plant curve’?

Answer: (D) Long run average cost curve

Explanation: The long run average cost curve is commonly referred to as the “plant curve” because it represents the planning curve that shows the lowest possible average cost for producing any given level of output when all inputs are variable (including plant size).

Question 92

When average product rises as a result of an increase in the quantity of variable input, marginal product is:

Answer: (D) more than the average product

Explanation: When average product is rising, marginal product must be greater than average product. This is because marginal product “pulls up” the average when it exceeds the average.

Questions 93-95: Based on Product Schedule Table

Question 93

What will be the total product when the quantity of labour is 5?

Answer: (C) 80

From the table, when quantity of labour = 5, Total Product (TP) = 80

Question 94

What will be the marginal product when the quantity of labour is 4?

Answer: (C) 10

From the table, when quantity of labour = 4, Marginal Product (MP) = 10

Question 95

What will be the average product when the quantity of labour is 3?

Answer: (A) 22

From the table, when quantity of labour = 3, Average Product (AP) = 22

Summary of Correct Answers:

• 91: (D) Long run average cost curve
• 92: (D) more than the average product
• 93: (C) 80
• 94: (C) 10
• 95: (A) 22

Question 96: Short-run vs Long-run Production Periods

Correct Answer: (A) Statement I and IV

Explanation:

• Statement I is CORRECT: A period is considered short-run if at least one input remains unchanged (fixed) during that period.
• Statement II is INCORRECT: The long run is when ALL factors of production are variable, not just some.
• Statement III is INCORRECT: In the short run, some inputs are fixed, but not all inputs are fixed.
• Statement IV is CORRECT: In the long run, all inputs are variable (none are fixed).

Question 97: Factors of Production

Correct Answer: (C) Land, Labour, Capital and Entrepreneurial ability

Explanation: The four traditional factors of production in economics are:

1. Land – Natural resources
2. Labour – Human effort and skills
3. Capital – Physical capital (machinery, equipment, buildings)
4. Entrepreneurial ability – The skill to organize and coordinate the other factors

Industrial policy and fiscal policy are government policies, not factors of production. Technology is sometimes considered a separate factor, but entrepreneurial ability is the more traditional fourth factor.

Question 98: Cobb-Douglas Production Function

Correct Answer: (B) Labour and capital

Explanation: The Cobb-Douglas production function is a specific mathematical representation of the production process that focuses on two primary inputs:

• Labour (L) – Human input
• Capital (K) – Physical capital input

The standard form is: Q = A × L^α × K^β

Where Q is output, A is total factor productivity, and α and β are the output elasticities of labour and capital respectively.

Question 99: Marketing Mix (4 P’s)

Correct Answer: (C) Product, Promotion, Price and Place

Explanation: The traditional marketing mix consists of the 4 P’s:

1. Product – What you’re selling
2. Price – How much you charge
3. Place – Where/how you distribute
4. Promotion – How you communicate/advertise

“Purchase,” “Profit,” and “Placement” are not part of the standard 4 P’s framework.

Question 100: Returns to Scale

Correct Answer: (B) Diminishing Marginal Returns

Explanation: When a firm adds more workers but total output increases at a decreasing rate, this indicates diminishing marginal returns. This occurs when:

• Each additional worker contributes less to total output than the previous worker
• Total output is still increasing, but at a slower rate
• This is different from returns to scale, which deals with proportional increases in ALL inputs

Key distinction:

• Diminishing marginal returns: Adding one variable input while others are fixed
• Returns to scale: Changing all inputs proportionally