UPSC Static Quiz – Economy : 21 May 2026

Solution: D

• Statement 1 is correct. Marginal productivity of labour is the additional output produced by employing one more unit of labour. In this scenario, the total output remained unchanged at 20 quintals even after three labourers (family members) were withdrawn. This implies that the contribution of these three individuals to the total output was zero. When the removal of a worker does not reduce the total output, their marginal productivity is said to be zero. This is the defining technical characteristic of disguised unemployment.
• Statement 2 is correct. Disguised unemployment, also known as hidden unemployment, is a situation where more people are engaged in an activity than are actually required, leading to zero or negligible marginal productivity. The scenario perfectly illustrates this. The eight-member family was seemingly ’employed’ on the farm, but since the work could be done by five people without any loss of output, the extra three members were disguisedly unemployed. Their employment was not productive. This is a very common feature of the agricultural sector in densely populated developing countries like India, where family labour is prevalent and alternative job opportunities are scarce.
• Statement 3 is incorrect. Official unemployment surveys, like the Periodic Labour Force Survey (PLFS) in India, define a person as ’employed’ if they are engaged in any economic activity for a specified period. The three family members, while being disguisedly unemployed, would have been counted as ’employed’ in agriculture before migrating. After migrating, they might find work in the city, or they might be actively searching for work, in which case they would be counted as ‘openly unemployed’. If they fail to find work and are actively searching, their migration could actually increase the measured open unemployment rate of the country or the urban area, even as it reduces disguised unemployment in the village. Therefore, it is not necessary that their migration will lead to a decrease in the overall official unemployment rate. The nature of their status changes from hidden to open unemployment, which can make the statistical picture more complex.

Solution: A

Frictional unemployment is a type of short-term, temporary unemployment that occurs when workers are voluntarily between jobs or are just entering the workforce for the first time. It’s considered a natural and healthy part of a dynamic economy.

1. A large-scale infrastructure program: This would likely decrease overall unemployment, including frictional unemployment. Such a program would create a large number of jobs, increasing the demand for labour. This would make it easier and quicker for job seekers to find new positions, thereby reducing the average duration of job search and, consequently, the level of frictional unemployment.
2. A new popular online job portal: This would decrease frictional unemployment. Frictional unemployment exists partly due to imperfect information in the labour market—job seekers don’t know about all available vacancies, and employers don’t know about all available candidates. An effective job portal improves the efficiency of the job search process by matching seekers with vacancies more quickly. This reduces the time spent between jobs and thus lowers the frictional unemployment rate.
3. The rise of the ‘gig economy’: This would likely increase frictional unemployment. The gig economy is characterized by short-term contracts and freelance work as opposed to permanent jobs. As more professionals opt for this model, the frequency of job transitions increases. A person might complete a six-month project and then spend a few weeks searching for the next one. This frequent movement between gigs increases the number of people who are ‘between jobs’ at any given point in time, which is the very definition of frictional unemployment. While it offers flexibility, it also institutionalizes more frequent periods of job search, thereby increasing the measured frictional unemployment rate.
4. A sharp increase in the repo rate: This is a contractionary monetary policy measure aimed at reducing aggregate demand to control inflation. A reduction in aggregate demand would lead to an economic slowdown or recession, causing businesses to lay off workers. This would cause an increase in cyclical unemployment, not frictional unemployment. Cyclical unemployment is involuntary and caused by a lack of demand in the economy, which is distinct from the voluntary job-switching nature of frictional unemployment.

Solution: C

The process of recapitalizing Public Sector Banks (PSBs) through recapitalization bonds is a unique fiscal operation designed to strengthen the banks’ capital base without an immediate cash outgo from the government. The mechanism works as follows:

1. The government issues special securities, i.e., recapitalization bonds, to the PSBs.
2. The PSBs subscribe to these bonds. The money paid by the PSBs for these bonds effectively comes from the government itself in a simultaneous transaction.
3. This money is then infused back into the PSBs as equity capital from the government.

In the budget, this is reflected as:

• Capital Expenditure: The government’s infusion of equity into the PSBs is an investment that creates a financial asset. Hence, it is recorded as Capital Expenditure.
• Capital Receipts: The money raised by the government through the issuance of these bonds is a form of borrowing. Therefore, it is recorded as a Capital Receipt (specifically, a debt-creating capital receipt).

Since the Capital Expenditure (infusion into banks) and the Capital Receipts (issuance of bonds) are of the same amount, they offset each other in the fiscal deficit calculation. Fiscal Deficit = Total Expenditure – (Revenue Receipts + Non-debt Capital Receipts). The transaction increases Total Expenditure (via Capital Expenditure) and also increases borrowings, which finance the deficit. Thus, the transaction is fiscally neutral in the year it is undertaken, meaning it does not increase the fiscal deficit for that year. However, the interest payments on these bonds in subsequent years become a part of the government’s Revenue Expenditure, impacting future deficits.

Solution: B

• Statement 1 is incorrect. While multilateral institutions like the World Bank, IMF, and ADB are significant sources of external debt, the Central Government also borrows from bilateral sources (directly from other countries) and from international capital markets through instruments like sovereign bonds.
• Statement 2 is correct. Dated government securities (G-Secs) are long-term financial instruments issued by the Central Government with a maturity period of more than one year. These securities, issued through auctions, constitute the single largest component of the internal debt portfolio of the Government of India, used to finance the fiscal deficit.
• Statement 3 is correct. The money collected through various small savings schemes (like Public Provident Fund, National Savings Certificate) is credited to the National Small Savings Fund (NSSF), which is part of the Public Account of India. The balances in the NSSF are invested in special government securities. These liabilities, though part of the Public Account, are considered part of the broader liabilities of the Central Government and are crucial for financing the fiscal deficit.

Solution: A

• Statement-I is correct. The composition of public expenditure is a critical determinant of its quality. A higher proportion of capital outlay (or capital expenditure) relative to revenue expenditure is seen as a positive sign. The RBI’s ‘Quality of Public Expenditure’ Index, for instance, uses the Capital Outlay to GDP ratio and the Revenue Expenditure to Capital Outlay ratio as key indicators. A rising share of capital spending indicates that the government is prioritizing long-term investments over short-term consumption.
• Statement-II is correct. This statement explains the fundamental economic difference between the two types of expenditure. Capital expenditure is used to create long-lasting assets like roads, ports, schools, and hospitals. These assets increase the productive capacity of the economy, facilitate private investment, and generate a stream of benefits over many years, thereby boosting future economic growth. In contrast, revenue expenditure, such as salaries, pensions, and subsidies, is largely for meeting current consumption needs and does not create durable assets.
• Statement-II provides the economic reasoning behind Statement-I.