NISM Series XV · Chapter 5

NISM Series XV Chapter 5 MCQs with Answers: Economic Analysis

Practise 20 multiple-choice questions on national income, GDP, inflation, fiscal policy, monetary policy, foreign investment and India's economic indicators.

Preparing for the NISM Series XV Research Analyst Certification Examination? Strengthen your understanding of Chapter 5: Economic Analysis with these chapter-wise practice questions.

This article covers microeconomics, national income measurement, GDP, per capita income, inflation, FDI and FPI, fiscal deficit, fiscal policy, the Balance of Payments, RBI monetary policy and important economic information sources.

Each question contains four options and an expandable answer with an explanation. Attempt every question before revealing the answer to make your revision more effective.

20Practice MCQs

4 OptionsPer question

AnswersWith explanations

Study tip: Focus on the differences between CPI and WPI, repo and reverse repo rates, CRR and SLR, and expansionary and contractionary policies. These economic concepts are important for research analysts.

Table of Contents

1. Microeconomics and National Income
2. Inflation and Foreign Investment
3. Fiscal Policy and External Accounts
4. Monetary Policy and Banking
5. Economic Research Sources
6. Quick Revision Notes
7. Frequently Asked Questions

Part 1: Microeconomics and National Income

1. Which branch of economics studies the behaviour of individual households and firms, focusing on how prices and production levels are driven by consumer demand?

1. Macroeconomics
2. Microeconomics
3. Econometrics
4. Institutional Economics

Show answer and explanation

Correct answer: B) Microeconomics

Microeconomics studies individual economic units, including households, consumers and firms. It examines demand, supply, pricing decisions, production levels and the allocation of resources in particular markets.

Macroeconomics, in contrast, studies the economy as a whole, including aggregate output, inflation, unemployment and economic growth.

2. Which of the following is NOT one of the three primary methods used to measure the national income of an economy?

1. Product Method
2. Income Method
3. Expenditure Method
4. Cost Capitalization Method

Show answer and explanation

Correct answer: D) Cost Capitalization Method

The three broad approaches to measuring national income are the Product Method, Income Method and Expenditure Method.

The Product Method measures output, the Income Method considers income generated through production, and the Expenditure Method measures spending on final goods and services. In principle, these approaches are linked through the circular flow of income.

3. In the Product Method of measuring national income, which type of goods are included to calculate total economic output?

1. Intermediate goods
2. Raw capital goods only
3. Final goods and services
4. Imported raw materials

Show answer and explanation

Correct answer: C) Final goods and services

The Product Method measures the value of final goods and services produced during a specified period. Intermediate goods used in producing other goods are generally excluded from the final-output calculation to avoid double counting.

For example, if the value of bread is counted as final output, the flour used to make that bread should not be counted again as separate final output in the same calculation.

4. According to the supplied study-guide question, which sector contributes the highest share to India's GDP at factor cost?

1. Agriculture sector
2. Manufacturing sector
3. Service sector
4. Mining sector

Show answer and explanation

Correct answer: C) Service sector

The service sector includes activities such as banking, insurance, trade, transport, communication, education, healthcare and professional services. It is a major contributor to India's economic output.

Study note: The supplied question states a 57% share at factor cost. Treat that percentage as a study-guide figure rather than a current statistic; sector shares and national accounting conventions can change over time.

5. Which statistic is considered a better measure of the standard of living in a country than total national income?

1. Gross Capital Formation
2. Per Capita Income
3. Wholesale Price Index
4. Net Exports

Show answer and explanation

Correct answer: B) Per Capita Income

Per Capita Income is calculated by dividing national income by the total population. It provides an average income measure per person and allows comparisons between economies of different sizes.

However, it does not show how income is distributed among people, and it is not a complete measure of living standards on its own.

Part 2: Inflation and Foreign Investment

6. An increase in the prices of goods and services caused by higher input costs, such as raw materials or labour, is known as:

1. Demand-pull inflation
2. Cost-push inflation
3. Hyperinflation
4. Structural inflation

Show answer and explanation

Correct answer: B) Cost-push inflation

Cost-push inflation occurs when rising production costs, such as wages, energy or raw materials, put upward pressure on prices.

Demand-pull inflation occurs when aggregate demand grows faster than the economy's capacity to supply goods and services.

7. How is inflation in India commonly measured at the wholesale level and retail level, respectively?

1. Consumer Price Index (CPI) and Wholesale Price Index (WPI)
2. Wholesale Price Index (WPI) and Consumer Price Index (CPI)
3. GDP Deflator and Repo Index
4. Index of Industrial Production (IIP) and CPI

Show answer and explanation

Correct answer: B) Wholesale Price Index (WPI) and Consumer Price Index (CPI)

WPI tracks changes in prices at the wholesale level, while CPI measures changes in the prices of a basket of goods and services relevant to consumers.

CPI is particularly important for assessing retail inflation and India's monetary policy framework. The two indices differ in coverage and purpose.

8. Foreign Portfolio Investment (FPI/FII) is often characterised as "hot money" compared with Foreign Direct Investment (FDI) because:

1. FPI investors participate actively in day-to-day corporate management
2. FPI capital can be withdrawn by foreign investors, potentially creating financial-market volatility
3. FPI is strictly restricted to government debt
4. FPI cannot be converted back into foreign currency

Show answer and explanation

Correct answer: B) FPI capital can be withdrawn by foreign investors, potentially creating financial-market volatility

Portfolio investors generally buy financial assets such as listed shares and bonds without seeking the same level of managerial control associated with direct investment.

Portfolio flows can reverse quickly when global interest rates, risk appetite or market expectations change. These reversals may put pressure on asset prices and the domestic currency. FDI is often longer-term, although it also carries risk.

Part 3: Fiscal Policy and External Accounts

9. How does the government primarily finance a fiscal deficit in a given financial year?

1. By selling its gold reserves
2. Through market borrowings, including short-term and long-term borrowing
3. By shutting down public sector undertakings
4. Through direct loans from foreign central banks only

Show answer and explanation

Correct answer: B) Through market borrowings, including short-term and long-term borrowing

A fiscal deficit arises when the government's total expenditure exceeds its receipts, excluding borrowings. Governments commonly finance this gap through borrowing from the market and other permitted financing sources.

Government securities are an important instrument used to raise funds from investors and financial institutions.

10. A fiscal policy stance involving increased government spending or reduced taxes to support economic activity during a recession is categorised as:

1. Neutral fiscal policy
2. Contractionary fiscal policy
3. Expansionary fiscal policy
4. Restrictive fiscal policy

Show answer and explanation

Correct answer: C) Expansionary fiscal policy

Expansionary fiscal policy aims to stimulate aggregate demand. The government may increase spending, reduce taxes or use a combination of measures to support consumption, investment and employment.

A fiscal deficit can occur under this policy, but the definition of expansionary fiscal policy is based on the policy stance rather than simply whether expenditure exceeds revenue.

11. What is a possible impact of a high and persistent Current Account Deficit (CAD) on a nation's currency?

1. It necessarily causes the currency to strengthen significantly
2. It has no possible effect on the exchange rate
3. It can put downward pressure on the currency relative to other currencies
4. It automatically replaces the domestic currency with the US dollar

Show answer and explanation

Correct answer: C) It can put downward pressure on the currency relative to other currencies

A persistent current account deficit means that a country has a net outflow on current transactions with the rest of the world. If financing inflows are insufficient or investor confidence weakens, pressure may build on the domestic currency.

The effect is not automatic. Capital flows, foreign-exchange reserves, policy decisions and market expectations also influence exchange rates.

12. According to the supplied study-guide question, India's General Anti-Avoidance Rules (GAAR) do not apply if the tax benefit arising from a transaction is below:

1. Rs. 10 million
2. Rs. 30 million
3. Rs. 50 million
4. Rs. 100 million

Show answer and explanation

Correct answer: B) Rs. 30 million

The supplied study-guide question identifies Rs. 30 million (Rs. 3 crore) as the threshold for the stated GAAR exemption.

Important: Tax provisions can be amended, and their application depends on the relevant statutory conditions and assessment year. Verify the applicable Income-tax Act, rules and official guidance before relying on this threshold for current tax matters.

Part 4: Monetary Policy and Banking

13. Which interest-rate tool represents the rate at which the Reserve Bank of India lends money to commercial banks against eligible securities under its repo operations?

1. Reverse Repo Rate
2. Repo Rate
3. Statutory Liquidity Ratio
4. Marginal Standing Facility

Show answer and explanation

Correct answer: B) Repo Rate

The repo rate is a key monetary policy rate associated with the RBI's lending to banks through repurchase agreements against eligible collateral. Changes in policy rates can influence funding costs, lending rates, credit demand and broader economic activity.

14. The rate at which the Reserve Bank of India borrows money from commercial banks under a reverse repo transaction is called the:

1. Repo Rate
2. Reverse Repo Rate
3. Cash Reserve Ratio
4. Bank Rate

Show answer and explanation

Correct answer: B) Reverse Repo Rate

In a reverse repo transaction, the RBI absorbs funds from banks against securities under the applicable arrangement. The reverse repo rate is the rate associated with that operation.

Study note: The RBI's operating framework has evolved, including the use of the Standing Deposit Facility. Do not assume that the reverse repo rate is always the operative floor of the current policy corridor.

15. What does the Cash Reserve Ratio (CRR) specify for commercial banks?

1. The percentage of deposits banks must hold in gold and government securities
2. The minimum percentage of deposits banks must maintain as cash reserves with the RBI
3. The maximum lending rate charged to retail borrowers
4. The percentage of profits set aside for corporate social responsibility

Show answer and explanation

Correct answer: B) The minimum percentage of deposits banks must maintain as cash reserves with the RBI

CRR is the proportion of a bank's specified net demand and time liabilities that must be maintained as cash balances with the RBI in accordance with applicable rules.

CRR differs from SLR, which requires banks to maintain eligible liquid assets in the prescribed proportion.

16. Which monetary policy stance is used by a central bank to stimulate a stagnant economy by increasing monetary accommodation and lowering interest rates?

1. Contractionary monetary policy
2. Expansionary monetary policy
3. Neutral monetary policy
4. Restrictive monetary policy

Show answer and explanation

Correct answer: B) Expansionary monetary policy

Expansionary monetary policy aims to support economic activity through measures such as lowering policy rates or easing monetary conditions. These measures may reduce borrowing costs and encourage credit, investment and consumption.

The effectiveness of the policy depends on economic conditions, credit demand, inflation expectations and how banks transmit changes in monetary policy.

17. In a country's Balance of Payments (BOP), which account records transactions such as imports and exports of goods and services?

1. Capital Account
2. Current Account
3. Reserve Account
4. Suspense Account

Show answer and explanation

Correct answer: B) Current Account

The Current Account records trade in goods and services, primary income and secondary income between residents and non-residents.

The financial account records many cross-border investment and financing flows, including direct investment and portfolio investment. In India's study material, capital flows may sometimes be described more broadly, so follow the terminology used in the applicable workbook.

18. The minimum percentage of specified bank liabilities that commercial banks must maintain in eligible liquid assets such as cash, gold and Government of India securities is known as:

1. Cash Reserve Ratio (CRR)
2. Statutory Liquidity Ratio (SLR)
3. Repo Rate
4. Prime Lending Rate (PLR)

Show answer and explanation

Correct answer: B) Statutory Liquidity Ratio (SLR)

SLR is the prescribed proportion of a bank's specified liabilities that must be maintained in eligible liquid assets, such as cash, gold and approved securities.

Unlike CRR, which is maintained as cash reserves with the RBI, SLR is maintained in eligible liquid assets under the applicable banking regulations.

Part 5: Economic Research Sources

19. Which of the following is NOT a reliable primary source of information for economic analysis?

1. Government websites
2. Websites of regulators such as SEBI and RBI, and the Ministry of Finance
3. Published economic research reports and the Economic Survey
4. Anonymous tips on social media platforms

Show answer and explanation

Correct answer: D) Anonymous tips on social media platforms

Official government publications, regulator websites, economic surveys and credible research reports provide documented information that analysts can verify and cite.

Anonymous social media tips may be inaccurate, misleading or unverified. Research analysts should validate claims against authoritative data before using them in their analysis.

20. When an economy experiences high inflation, what is a conventional monetary policy response, and what is its intended effect on consumption?

1. Lower interest rates to encourage more borrowing and spending
2. Raise interest rates to encourage saving and moderate borrowing and consumption
3. Keep interest rates at zero to eliminate inflation
4. Fix interest rates permanently for ten years

Show answer and explanation

Correct answer: B) Raise interest rates to encourage saving and moderate borrowing and consumption

When inflation is persistently high, a central bank may tighten monetary policy by raising policy rates. Higher borrowing costs can moderate credit demand, consumption and investment, helping reduce inflationary pressure over time.

However, the appropriate response depends on the causes of inflation, the economic outlook and the central bank's policy framework. Interest-rate increases do not affect every price component equally.

Quick Revision Notes: Chapter 5

Concept	Key point to remember
Microeconomics	Studies individual consumers, households, firms and markets.
National Income Methods	Product, Income and Expenditure methods.
Product Method	Measures final goods and services while avoiding double counting.
Per Capita Income	National income divided by population.
Cost-push Inflation	Price increases caused by rising production costs.
Demand-pull Inflation	Price increases driven by demand exceeding supply capacity.
WPI	Tracks price changes at the wholesale level.
CPI	Tracks price changes in a consumer basket.
FDI	Direct investment associated with a lasting interest in an enterprise.
FPI	Investment in financial assets that can be more sensitive to market changes.
Fiscal Deficit	Government expenditure minus receipts excluding borrowings.
Expansionary Fiscal Policy	Uses increased spending or reduced taxes to support demand.
Current Account	Includes trade in goods and services, primary income and secondary income.
Repo Rate	Rate associated with RBI lending through repo operations.
Reverse Repo	Transaction through which the RBI absorbs funds from banks against securities.
CRR	Prescribed cash reserves maintained with the RBI.
SLR	Prescribed proportion maintained in eligible liquid assets.
Expansionary Monetary Policy	Supports economic activity through easier monetary conditions.
GAAR	Anti-avoidance provisions whose application depends on statutory conditions.
Economic Research Sources	Use official government, regulator and credible research publications.

Frequently Asked Questions

What does Chapter 5 of NISM Series XV cover?

Chapter 5, Economic Analysis, covers economic concepts, national income, GDP, inflation, fiscal and monetary policy, foreign investment, the Balance of Payments and sources of economic information.

How many MCQs are included in this Chapter 5 article?

This article contains 20 multiple-choice questions with four options each and expandable answers with explanations.

Are these official NISM examination questions?

These are practice questions based on the supplied question set. They should not be treated as official past examination questions unless their official status is independently verified.

What is the difference between CPI and WPI?

CPI measures changes in prices experienced by consumers, while WPI tracks price changes at the wholesale level. Their baskets and coverage differ.

What is the difference between CRR and SLR?

CRR is the prescribed cash reserve that banks maintain with the RBI. SLR is the prescribed proportion of specified liabilities maintained in eligible liquid assets.

What is the difference between fiscal and monetary policy?

Fiscal policy involves government taxation, spending and borrowing. Monetary policy is conducted by the central bank and uses policy rates and other monetary tools to influence financial conditions and inflation.

Conclusion

Economic analysis is an important foundation for equity research because economic growth, inflation, interest rates, government policy and international capital flows can influence corporate earnings and market valuations.

Revise the definitions, understand the differences between related concepts and practise these 20 MCQs before moving to the next chapter. Use this article alongside the official NISM Series XV study material for examination preparation.

Continue Your NISM Series XV Preparation

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Chapter 4: Fundamentals of Research

Chapter 3 MCQs

Chapter 2 MCQs

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Disclaimer: This article is intended for educational and examination-preparation purposes. It is not an official NISM publication. Economic statistics, monetary policy arrangements and tax provisions may change. Refer to the official NISM study material and current government and regulatory sources for authoritative information.