Q1.Assertion (A): The concept of “Liquidity Trap” is associated with a situation where the LM curve becomes perfectly horizontal.
Reason (R): In a liquidity trap, speculative demand for money becomes infinitely elastic.
A) Both A and R are true and R is the correct explanation of A
B) Both A and R are true but R is not the correct explanation of A
C) A is true but R is false
D) A is false but R is true
Correct Answer: A
Explanation: In a liquidity trap, people expect bond prices to fall, so speculative demand for money becomes infinitely elastic, making the LM curve horizontal (IS–LM framework).
Q2.Which of the following is NOT a feature of a perfectly competitive market in the long run?
A) Firms earn only normal profits
B) Price equals minimum long-run average cost
C) There is free entry and exit
D) Each firm faces a kinked demand curve
Correct Answer: D
Explanation: Kinked demand curve is a feature of oligopoly (Sweezy model), not perfect competition.
Q3. Consider the following pairs:
- Permanent Income Hypothesis → Milton Friedman
- Relative Income Hypothesis → James Duesenberry
- Life Cycle Hypothesis → Franco Modigliani
- Absolute Income Hypothesis → Simon Kuznets
Which of the above are correctly matched?
A) 1, 2 and 3 only
B) 2 and 3 only
C) 1 and 4 only
D) 1, 2, 3 and 4
Correct Answer: A
Explanation:
- Absolute Income Hypothesis was given by Keynes, not Kuznets.
- Kuznets is associated with the Inverted-U Hypothesis on inequality.
Q4.The “Impossible Trinity” in international economics states that it is not possible to have simultaneously:
- Free capital mobility
- Fixed exchange rate
- Independent monetary policy
Choose the correct code:
A) 1 and 2 only
B) 2 and 3 only
C) 1 and 3 only
D) 1, 2 and 3
Correct Answer: D
Explanation: As per the Mundell–Fleming model, a country must sacrifice one of the three.
Q5.In the Harrod–Domar growth model, the warranted rate of growth (Gw) is equal to:
A) s / v
B) s × v
C) n + t
D) ΔK / Y
Correct Answer: A
Explanation:
- Gw = s / v, where s = savings rate and v = capital-output ratio.
- Many candidates wrongly mark it as actual growth rate.
