UGC NET Paper 2 Economics Mock Test - 1 - UGC NET MCQ

The correct answer is Both 1 and 2

Key PointsLiquidity Scenario:

• Surplus liquidity conditions that prevailed post-Covid-19 in response to the Reserve Bank’s conventional and unconventional monetary measures moderated during FY23 in consonance with the changed monetary policy stance that focused on the withdrawal of accommodation. Hence statement 1 is correct
• With the MSF rate retained at 25 bps above the policy repo rate, the LAF corridor became symmetric around the policy repo rate - the corridor width was thus restored to 50 bps, the position that prevailed before the pandemic. 
• The RBI’s move to hike the CRR by 50 bps resulted in a withdrawal of primary liquidity to the tune of ₹87,000 crore from the banking system. Hence statement 2 is correct

The correct answer is 1 and 2 only.
Key Points

Fiscal policy:

• It is the economic policy of the government that is concerned with
  • taxation
  • public expenditure and
  • public borrowing.
• The government uses fiscal policy to control the rising prices or deal with the situation of deflation.
• At the time of inflation, the government increases taxes for dropping private spending.
• If direct taxes on profits increase, the total disposable income would reduce. As a result, the total spending of individuals decreases, which, in turn, reduces the money supply in the market. Hence, statement 2 is correct. 
• Along with taxation policy, the government must reduce public expenditure and public borrowing to control excess demand.
• Reduction in public expenditure and public borrowing reduces the supply of money thereby reducing inflation. Hence, statement 1 is correct.
• Increasing interest rates in the economy to control inflation is a monetary policy tool and it is done by the Monetary Policy Committee of RBI. If rates rise, it becomes more costly to borrow money. It reduces money supply hence inflation is controlled. Hence, statement 3 is not correct.

The India Human Development Report (IHDR 2011) finds convergence in HDI across the country and with convergence in education index (EI) and divergence in health index (HI). 

1-b, 2-c, 3-d, 4-a 

Key Points

• The Classical Theory of Quantity of Money (b) is a theory suggesting that there is a direct relationship between money supply in an economy and the level of prices of goods and services sold.
• Friedman's Restatement of Quantity Theory of Money (c) proposes that the response of the velocity of money to changes in the quantity of money cannot be predicted. His restatement gives more emphasis on the demand for money rather than the velocity.
• Transactional Equation - Irving Fisher (d) presents an equation frequently represented as MV=PT, where M is money in circulation, V is the velocity of its circulation, P is the average price level, and T denotes transactions. Fisher emphasized that velocity and transactions were fairly stable and predictable, allowing changes in money supply to directly influence price levels.
• Cambridge Cash-Balance Approach (a) emphasizes how the amount of money demanded solely depends on national income and the rate of interest. It shifts the emphasis from transactions demand for money to holding money for the functionality of asset demand.

Cardinal utility analysis is the oldest theory of demand which provides an explanation of consumer’s demand for a product and derives the law of demand which establishes an inverse relationship between price and quantity demanded of a product.
Key Points

Assumptions of Cardinal Utility Analysis:

• Rationality: Consumer behaves normally i.e, if goods are available he will purchase that or if goods become cheaper he will go in for the same. He will not make impulsive purchases.
• Limited income: Limited income of a man will force him to make choice – i.e., to purchase one commodity another to be forgone.
• Constant marginal utility of money: If the marginal utility of money changes with a change in income, then it cannot be used as a measuring rod. So it is assumed constant.
• Measurability: The utility of each commodity is measurable. The quantity of money a consumer is ready to spend on buying any unit of a commodity is the utility of that unit to him.
• The hypothesis of independent utility : It means an independent unit has independent utility & it ignores complementarity between goods.

On the basis of these assumptions, Prof. Alfred Marshall has shown that the additional benefit which a person derives from a given increase of his stock of anything diminishes with the growth of the stock that he has, known as the Law of diminishing marginal utility. 

Important Point

Gossen's First Law:

• In other words, the law tells that the marginal utility of a good for a person diminishes with every increase in the stock that he already has. 
• Gossen's First Lawis the "law" of diminishing marginal utility: that marginal utilities are diminishing across the ranges relevant to decision-making.
• Therefore, the Utilities of different goods are interdependent is not an assumption of Cardinal utility analysis of consumer's behavior.

A - I, B - IV, C - III, D - II is the right answer. 

Key Points

• The Phillips curve is an economic theory that inflation and unemployment have a stable and inverse relationship. Developed by William Phillips, it claims that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment

• Taxable Capacity means the maximum capacity of the people of a country to bear the burden of taxation without much hardship. It is nothing but the maximum limit that a government can tax the people- Findlay Shirras

• The life-cycle hypothesis (LCH) is an economic theory that describes the spending and saving habits of people over the course of a lifetime. The theory states that individuals seek to smooth consumption throughout their lifetime by borrowing when their income is low and saving when their income is high.

• The concept was developed by economists Franco Modigliani and his student Richard Brumberg in the early 1950s.

• The concept of Money Illusion was given by Pigou.

The correct answer is 1, 2, and 3.

Key Points

Fiscal drag

• It is an economic term whereby inflation or income growth moves taxpayers into higher tax brackets. Hence, Statement 1 is correct.
• This in effect increases government tax revenue without actually increasing tax rates.
• The increase in taxes reduces aggregate demand and consumer spending from taxpayers as a larger share of their income now goes to taxes, which leads to deflationary policies, or drag, on the economy.
• Fiscal drag is essentially a slowing in the growth of the economy caused by a lack of spending as increased taxation slows the demand for goods and services. Hence, Statement 2 is correct.
• When an economy is rapidly expanding, inflation results in higher income and therefore individuals moving into higher tax brackets and paying more of their income in taxes.
• This is particularly the case in economies with progressive taxes, or tax brackets, which stipulate that the higher income an individual makes the higher the tax they pay and thus they move into a higher tax bracket.
• Moving into a higher tax bracket and paying a larger portion of income in taxes, as mentioned prior, results in an eventual slowing of the economy as there is now less income available for discretionary spending.
• It is common to view fiscal drag as a natural economic stabilizer as it tends to keep demand stable and the economy from overheating. This is generally viewed as a mild deflationary policy and a positive aspect of fiscal drag. Hence, Statement 3 is correct.

The correct answer is 2 and 3 only.

Key Points

• Treasury Bill:
  • A treasury bill is a promissory note issued by the RBI to meet the short-term requirement of funds. Hence, statement 1 is not correct.
  • Treasury bills are highly liquid instruments, which means, at any time the holder of treasury bills can transfer or get them discounted from RBI.
• ​Call Money:
  • Call money is mainly used by banks to meet their temporary requirement of cash. Hence, statement 2 is correct.
  • They borrow and lend money from each other normally on a daily basis.
  • It is repayable on demand and its maturity period varies between one day to a fortnight.
• Commercial Paper:
  • Commercial paper is an unsecured, short-period debt tool issued by a company, usually for finance and inventories and temporary liabilities. Hence, statement 3 is correct.
  • The CP is an unsecured instrument issued in the form of a promissory note. 

Concept use:

Rolle's Theorem is a special case of the Mean Value Theorem. Rolle's Theorem states that if a real-valued function f is continuous on a closed interval [a, b], differentiable on the open interval (a, b), and f(a) = f(b), then there exists at least one c in the open interval (a, b) such that the derivative of the function at that point is zero, i.e., f'(c) = 0.

Explanation:

Option 1:

f is differentiable on [a, b]. This statement is incorrect. The function needs to be differentiable on the open interval (a, b), not the closed interval [a, b].

Option 2:

f is not continuous on [a, b]. This statement is incorrect. For Rolle's Theorem to apply, the function must be continuous on the closed interval [a, b].

Option 3:

f is differentiable on (a, b). This statement is correct. For Rolle's Theorem to apply, the function must be differentiable on the open interval (a, b).

Option 4:

f is continuous on (a, b). This statement is incorrect. While it is true that the function must be continuous on (a, b), this is not the complete condition. The function must actually be continuous on the closed interval [a, b] for Rolle's Theorem to apply.

So, Rolle's Theorem requires two main conditions: the function must be continuous on the closed interval [a, b] and differentiable on the open interval (a, b). If these conditions are satisfied, and if the function takes the same value at the end points a and b, then Rolle's Theorem guarantees at least one c in the open interval (a, b) where the derivative f'(c) equals zero. It's important to note that these are necessary conditions for Rolle's Theorem, but not always sufficient as the theorem also requires f(a) = f(b).

Hence, Option 3 is Correct.

The correct answer is 1, 2, and 4 only.

Key Points

• Inflation is the rate of increase in prices over a given period of time.
• Inflation is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country. 
• Inflation measures how much more expensive a set of goods and services has become over a certain period, usually a year.
• There are mainly two types of inflation:-
  • Demand-pull inflation - This occurs due to an increase in aggregate demand in the economy.
  • Cost-push inflation - This occurs when there is a rise in the price of raw materials, higher taxes, e.t.c
• Demand-pull inflation is mainly caused due to:-
  • Depreciation of rupee.
  • Low unemployment rate.
  • Increased borrowing.
  • Due to fiscal stimulus - It includes increased government consumption or lowering of taxes. Hence 2 is correct.
  • When the government spends more freely, prices go up. Expansionary policies lead to more economic activity via low-interest rates, more money with the public etc. Hence 1 is correct.
  • Asset inflation or Increase in Forex reserves– A sudden rise in exports forces a depreciation of the currencies involved.
  • Higher purchasing Power - When consumers feel confident, they spend more and take on more debt. This leads to a steady increase in demand, which means higher prices. Hence 4 is correct.
  • The rising interest rate - It decreases the money supply in the economy. This may result in a credit crunch in the economy. It is costlier to borrow money in the economy and it leads to a decreased money supply. So, it can not cause demand-pull inflation in the economy Hence 5 is not correct.
  • Inflation-indexing wages - Inflation indexing wages, wages in the economy is linked to inflation which means wage moves as inflation changes in the economy. Such indexing is provided to reduce the effect of inflation on wages. For example - a worker is getting 100 rs as a wage and inflation in the economy increases to 5%, so the wage of the worker increases by 5% i.e. 105. So effective change in the wages is zero and it does not increase/decrease purchasing power. So, it can not lead to a demand to pull inflation in the economy. Hence 3 is not correct.

The correct answer is 1 only.

Key Points

Multidimentional Poverty Index

• It was first developed in 2010 by Oxford Poverty and Human Development Initiative and United Nations Development Programme.
• It uses three dimensions and ten indicators which are-
  • Education- Years of schooling and child enrollment
  • Health - Child Morality and Nutrition Standards
  • Standard of Living - Electricity, flooring, drinking water, sanitation, cooking fuel and assets.
  • Hence only statement 1 is correct.

Important Points

Global Multidimensional Poverty Index 2020-

• India lifted as many as 270 million people out of multidimensional poverty between 2005-06 and 2015-16.
•  The index showed that Covid19 is having serious impact on the development landscape.
• 67% of multidimensionally poor people are in middle-income countries.

The correct answer is Neither 1 nor 2.

Key Points

• Gross domestic product (GDP) is the standard measure of the value-added created through the production of goods and services in a country during a certain period.
• It is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products.
• The growth rate of GDP-
  • 2016- 8.26%
  • 2017- 7.04%
  • 2018- 6.12%
  • 2019- 4.18%
  • 2020- -10.29%
• As we can see, it has not been increasing for five years. Hence, statement 1 is not correct.
• GDP per capita is the gross domestic product divided by the midyear population of the country.
• The growth rate in per capita income-
  • 2016- 7.4%
  • 2017- 9.7%
  • 2018- 8.6%
  • 2019- 10.0%
  • 2020- 4%
• As we can see, it has not been increasing for five years. Hence, statement 2 is not correct.

A liquidity trap is when monetary policy becomes ineffective due to very low interest rates combined with consumers who prefer to save rather than invest in higher-yielding bonds or other investments.

1. M1-C + DD + OD
2. M2- C + DD + OD + SD
3. M3 - C + DD + OD + TD
4. M4- C + DD + OD + TD + TD of post office

When the income of the consumer increases the demand of the inferior good decreases and vice versa this is because inferior good is considered low in standard with respect to the consumption.

What is soft infrastructure?

• It covers a broad range of fiscal, monetary, financial policies and statistics. And it relates to the governance and financing of state-owned enterprises and local governments. Hence Statement 1 is correct.
• This is a key issue quoted by the IMF about the second largest economy of the world, China, given current concerns about debt buildup in the state enterprise sector, where many companies exist as “zombie” entities.
• In essence, it is the collection of institutional frameworks that support sustained economic and social progress.
• To understand the difference between hard and soft infrastructure, the following points are given:
• “Hard” infrastructure refers to the large physical networks necessary for the functioning of a modern industrial nation like roads, ports, bridges, railway lines and the likes.
• “Soft” infrastructure refers to all the institutions which are required to maintain the economic, health, and cultural and social standards of a country, such as the financial system, the education system, the health care, the system of government, and law enforcement, as well as emergency services. Hence Statement 2 is incorrect.

Given:

If A = {1, 2, 3, 4},

B = {1, 3, 5, 8}

C = {3, 4, 5}

Calculation:

B ∩ C = {3, 5}

⇒  A ∪ (B ∩ C) = {1, 2, 3, 4, 5}

It has been clearly mentioned in the second paragraph that demands for waiving of agricultural loans and increasing the procurement prices of food grains are bound to come from farmers due to damage in the crops.

Indifference curve shows different combinations of two goods which gives an equal level of satisfaction to a consumer at every point.

Properties of IC:

• Negative slope as it slopes left to the rightward gain of one commodity will lead to the loss of others.
• The indifference curves do not intersect nor are they tangent to one another.
• Upper indifference curves indicate a higher level of satisfaction.
• IC neither touches X-axis or Y-axis.
• IC is convex to the origin in the case of two imperfect substitutes.

Verdoorn's law is named after Dutch economist Petrus Johannes Verdoorn (1949). It states that in the long-run productivity generally grows proportionally to the square root of output. In economics, this law pertains to the relationship between the growth of output and the growth of productivity. According to the law, faster growth in output increases productivity due to increasing returns. Verdoorn (1949, p. 59) argued that "in the long run a change in the volume of production, say about 10 percent, tends to be associated with an average increase in labor productivity of 4.5 percent." The Verdoorn coefficient close to 0.5 (0.484) is also found in subsequent estimations of the law.

When it comes to studying the economy, growth and jobs are two primary factors economists must consider. There is a clear relationship between the two, and many economists have framed the discussion by trying to study the relationship between economic growth and unemployment levels. Economist Arthur Okun first started tackling the discussion in the 1960s, and his research on the subject has since become known as Okun’s law.

Walter's model on dividend policy.. Assumptions of Walter's Model Walter's model is based on the following assumptions: Internal Financing All the investments are financed by the firm through retained earnings. In other words, retained earnings are the only source of finance.

Restrictions on imports by a country will lead to decreased supply of imported products. Although quantitative restrictions may improve the terms of trade for importing countries, they exacerbate the terms of trade for exporting countries and reduce their economic welfare.