UGC NET Paper 2 Economics Mock Test - 4 - UGC NET MCQ

C and E only.

Key Points

•  Euler's theorem states that in a production function which is homogenous of degree one, the sum of each input (labor and capital) multiplied by its marginal product equals the total output.
• The marginal product of labor (MPL) and capital (MPK) represent the additional output produced from an additional unit of labor or capital, respectively.
• When both MPL and MPK are decreasing, it indicates diminishing returns to both labor and capital.
• This means that any additional unit of labor or capital results in less additional output than the previous unit did.
• However, this does not necessarily mandate a decrease or increase in labor and capital. Instead, the firm needs to balance inputs of labor and capital by observing the rate at which MPL and MPK are decreasing.
• For instance, if the MPL is decreasing at a slower rate than MPK, the firm could shift more to labor and less to capital to maximize total output.
• Therefore, C and E both are true as per Euler's theorem.

Key Points

Therefore, it is clear from the above explanation that option 2) is the correct answer.

The correct answer is Paul A. Samuelson.

Key Points

1. The growth-oriented definition of economics was given by Prof. Samuelson.
2. He stated, “Economics is a study of how people and society choose, with or without the use of money to employ scarce productive resources which could have alternative uses, to produce various commodities over time and distribute them for consumption now and in the future among various persons and groups of society.”
3. He focused on the growth of the nation through efficiency in the satisfaction of wants through the use of scarce resources.

Hence, The correct answer is Paul A. Samuelson.

The Correct Answer is Capital Structure.

Key Points

• The Modigliani-Miller theorem states that a company’s capital structure is not a factor in its value
• Market value is determined by the present value of future earnings, the theorem states.
• MM Theory on Capital Structure:
  • The MM Theory explains the effects a firm's capital structure may have on the value of the company for investment purposes. The definition states that ''the market value of a company is calculated using its earning power and the risk of its underlying assets and that its value is independent of the way it finances investments or distributes dividends.'' A simple way to arrive at the market value mentioned in the theory is to multiply the firm's number of shares outstanding by the current stock price. The theory indicates that from an investor's point of view the value of a levered firm (with debt) and unlevered firm (without debt) is the same.
  • The MM Theory is based on a certain set of assumptions:
    • No taxes
    • No transaction costs
    • Equivalence in borrowing costs for both companies and investors
    • The symmetry of market information
• Modigliani and Miller Approach:
  • This approach was devised by Modigliani and Miller during the 1950s. The fundamentals of the Modigliani and Miller Approach resemble that of the Net Operating Income Approach. Modigliani and Miller advocate capital structure irrelevancy theory, which suggests that the valuation of a firm is irrelevant to the capital structure of a company. Whether a firm is highly leveraged or has a lower debt component in the financing mix has no bearing on the value of a firm.
  • Modigliani and Miller's (MM) ApproachThe Modigliani and Miller Approach further states that the market value of a firm is affected by its operating income, apart from the risk involved in the investment. The theory stated that the value of the firm is not dependent on the choice of capital structure or financing decisions of the firm.

The correct answer is '(A) - (4), (B) - (1), (C) - (3), (D) - (2)'.

Key Points

Hence, the correct matching is  '(A) - (4), (B) - (1), (C) - (3), (D) - (2)'.

Arrangement of concepts in terms of their development in Demand Theory :

(i) Cardinal utility 

(ii) Ordinal utility (in form of indifference curve) 

(iii) Revealed Preference 

(iv) Neumann and Morgenstern Utility Theory.

It is the correct formula for the measure of price elasticity of demand.
Price elasticity of demand = Change in quantity demanded/Change in price.

Statement I: Use of multivariate statistics in social research has increased due to the availability of statistical software.

• The widespread availability of statistical software has indeed made it easier for researchers to use more complex statistical methods, including multivariate analysis, which involves the analysis of more than two variables.
•  This is largely because statistical software has become more available and user-friendly.
• These software programs can perform complex calculations and analyses more quickly and accurately than manual computations, making it possible to handle multivariate statistics more effectively.
• They can also manage large data sets and provide graphical representations of the data, which can aid in interpretation.

Hence, this statement is true.

Statement II: Multivariate statistics are easier to comprehend as compared to the bi‐variate statistics.

• Multivariate statistics involve dealing with more than two variables at once, which inherently brings more complexity than dealing with only two variables, as in bivariate analysis.
• This added complexity can make multivariate statistics harder to understand and interpret.
• For instance, visualizing the relationship between variables can be straightforward in bivariate analysis (e.g., using a scatterplot), but it becomes more challenging when dealing with multiple variables in multivariate analysis.

Hence, this statement is false.

Hence, statement I is true, but statement II is false. 

The correct answer is option 2, i.e Increase in the banking habit of the population.

• The money multiplier is the amount of money created by commercial banks for a given fixed amount of base money and reserve ratio.
• An increase in a cash reserve ratio prevents the banks from lending more money and reduces the money multiplier.
• An increase in the banking habit of the population will increase the lending, thereby will lead to more deposits in the banking system, hence increasing the money multiplier.
• Even if there is an increase in the population of the country, the money multiplier in an economy does not necessarily increase.  

The correct answer is option 4

Key Points

Important Points Harrod Model:

The Harrod model is based on three growth rates. 

• One, there is the actual growth rate denoted by G. It is determined by the saving ratio and the capital-output ratio. It shows short-run cyclical variation in the rate of growth.
• Two, there is the warranted growth rate, denoted by Gw. It is the full capacity growth rate of income in an economy.
• Three, there is the natural growth rate denoted by Gn. This is regarded as 'the welfare optimum'. It may also be called the potential or the full employment rate of growth. 

Mahalanobis Model:

• Mahalanobis associates the rate of growth of investment in the economy with the rate of growth of output in the capital goods sector, rather than the rate of growth of savings, as most economists do.
• The proportions of total investment given to the capital goods sector, as well as the output-capital ratio in the capital goods sector, determine the sector's growth.

Robert Solow Model:

• Economic growth is the dynamic process between inputs (capital, labour, and technology) and output, but, the consumption and population behaviours are changed in this dynamic result, this model explains these different conditions how to effect to the output.
• The model assumes that GDP is produced according to an aggregate production function technology.
• It is worth flagging that most of the key results for Solow’s model can be obtained using any of the standard production functions that you see in microeconomic production theory

Kaldor Model:

• According to Kaldor, "The purpose of a theory of economic growth is to show the nature of non-economic variables which ultimately determine the rate at which the general level of production of the economy is growing, and thereby contribute to an understanding of the question of why some societies grow so much faster than others." 
• In his growth model, Kaldor attempts "to provide a framework for relating the genesis of technical progress to capital accumulation",

The correct answer is Goods on which consumers spend a small proportion of their income.

Key Points

•  Yes, goods on which consumers spend a small proportion of their income tend to have a relatively less elastic price elasticity of demand. In other words, the demand for these goods is less responsive to changes in price. This is because even a significant percentage change in the price of such goods leads to only a minor change in the proportion of total income required to purchase them.
• For example, consider a small item like a toothbrush. Even if its price doubles or halves, it's unlikely to significantly affect the quantity demanded, because the proportion of income spent on toothbrushes is quite small to being with. This makes the price elasticity of demand for toothbrushes relatively inelastic.
• Of course, other factors also influence the elasticity, such as the availability of substitutes, the degree to which a good is considered a necessity versus a luxury, and how broadly or narrowly defined the market is. But all else being equal, products which take up a smaller proportion of the consumer's income tend to have less elastic demand.

Important Points The Price Elasticity of Demand (PED) measures how responsive the quantity demanded of a good or service is to a change in its price. When PED is less than one (in absolute value), we say that demand is inelastic, meaning that changes in price have a relatively small effect on the quantity demanded.

When the expenditure on a good form a small proportion of an individual’s income, they are likely to be less concerned about changes in its price. Such goods usually have an inelastic demand because consumers can, and generally will, absorb increases in prices to a certain extent.

Here are some additional points:

• Necessity: In addition to the proportion of income spent, goods and services that are considered necessities (like basic food items or utilities) often have less elastic demand. Price changes will not significantly affect demand as consumers still need these goods, regardless of price increases.
• Lack of Substitutes: Products with fewer substitutes or alternatives usually have less elastic demand, as even if the price increases, consumers have fewer options to switch to.
• Addictive or Habitual Products: Goods that are addictive (like cigarettes) or habitual in nature tend to have relatively less elastic demand, as consumers prefer to maintain their consumption habits despite price increases.
• Short-Run vs. Long-Run: For any good, the demand tends to be less elastic in the short run as consumers need time to adjust their consumption habits, but it can become more elastic in the long run as consumers have more time to adjust.
• Income Elasticity: This is another important aspect that affects demand elasticity. If a person's income rises and they still consume the same quantity of a good, then that good is considered to be income-inelastic – often these goods take up a small proportion of the consumer's total income.
• Other Factors: Other factors can also affect elasticity including consumer preferences, brand loyalty, and urgency of requirement.

Ultimately, it's important to understand that price elasticity can vary widely among different goods and services, populations, and market conditions. Each of these factors combined will determine the overall elasticity of a product in a given market.

Additional Information The Price Elasticity of Demand (PED) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. The formula for calculating PED is:

PED = % Change in Quantity Demanded / % Change in Price
Here's a deeper look at the concept:

1. Elastic Demand (PED > 1): Demand is considered elastic when the elasticity is greater than 1, which indicates that the quantity demanded is highly responsive to changes in price. Elastic goods and services tend to be luxury items, goods with many substitutes, or goods that are not a necessity.
2. Inelastic Demand (PED < 1): Demand is considered inelastic when the elasticity is less than 1. This means that the quantity demanded is not very responsive to changes in price. These tend to be goods and services that are necessities, have fewer substitutes, or for which a price change doesn't significantly impact the consumer's budget.
3. Unit Elastic Demand (PED = 1): Demand is said to be unit elastic when the elasticity is exactly 1. Here, a change in price leads to a proportional change in quantity demanded.
4. Perfectly Inelastic Demand (PED = 0): In this case, demand does not change no matter how much the price changes. This is often seen in very essential goods (insulin for diabetics, for example).
5. Perfectly Elastic Demand (PED = ∞): This refers to a situation in which consumers will only buy at one price and no other. In reality, perfectly elastic demand rarely, if ever, exists.

• John Maynard Keynes, a well-known economist, asserted that the amount of aggregate demand in an economy has a key role in determining the level of unemployment. Keynesian economics places a strong emphasis on how aggregate demand affects economic activity, especially in the short run.
• Keynes contended that there might be instances of unemployment even when the economy has the labor and capital resources required for output.

Hence, According to Keynes, the level of unemployment is determined by the level of aggregate demand for goods and services.

World Trade Organisation (WTO) Plus

Developed countries tried to introduce issues like labour and environmental standards, sweet labour etc. on the pretext that they affect the world trade. Hence statement 1 is correct.

• India's stand: these issues must be kept out of the WTO’s purview and instead should be dealt by the global bodies such as the ILO and UNFCCC. Hence statement 2 is incorrect.
• As developing nations are facing a double disadvantage at Dispute Settlement Body (DSB) due to lack of sufficient trade law experts to represent them effectively and the attempts to bring these new issues and the costly litigation process.

• Poor availability and reliability of data is one of the major issues plaguing the successful usage of EIA as a mainstream process. Hence Statement 3 is incorrect.

The correct answer is Esther Duflo, Abhijit Banerji, and Michael Kremer.

• In 1968, Sveriges Riksbank (Sweden’s central bank) established the Prize in Economic Sciences in Memory of Alfred Nobel, founder of the Nobel Prize. 
• The first prize in economic sciences was awarded to Ragnar Frisch and Jan Tinbergen in 1969.

Important Points

•  Nobel Prize Economics 2019:

1. The 2019 Nobel Memorial Prize in Economics Sciences was awarded to Abhijit Banerjee, Esther Duflo, and Michael Kremer “for their experimental approach to alleviating global poverty.” Their experimental work has changed the culture of economics, especially development economics.
2. They adapted the method of randomized control trials (RCTs) to the field of development
3. Randomized controlled trials are experiments that apply an intervention to only a randomly selected portion of the target population so that you can compare the effects of the intervention against a group that didn’t receive it. 

Additional Information

1.  Michael Spence and Joseph E. Stiglitz, won the Nobel Prize for Economics in 2001 for laying the foundation for the theory of markets with asymmetric information.
2.  Robert J. Aumann and Thomas C. Schelling on the Nobel Prize for Economics in 2005“for having enhanced our understanding of conflict and cooperation through game-theory analysis”
3.  Paul Krugman on the Nobel Prize for Economics in 2008 “for his analysis of trade patterns and location of economic activity”

Hence, The Noble Prize of Economics in 2019 is given to Esther Duflo, Abhijit Banerji, and Michael Kremer.

The correct Answer is The per capita income growth of the bottom 20% of the population

 Key Points

•  The per capita income growth of the bottom 20% of the population. The passage suggests evaluating economic success based on the progress of the poorest segment of the population, specifically the per capita income growth of the bottom 20% (the bottom quintile). This approach focuses on inclusive growth by ensuring that the benefits of growth reach the poorest sections of society.

Keynes’ consumption function has come to be known as the ‘absolute income hypothesis’ or theory. His statement of the relationship be­tween income and consumption was based on the ‘fundamental psychological law’.

He said that consumption is a stable function of cur­rent income (to be more specific, current dis­posable income—income after tax payment).

Because of the operation of the ‘psychological law’, his consumption function is such that 0 < MPC < 1 and MPC < APC. Thus, a non- proportional relationship (i.e., APC > MPC) between consumption and income exists in the Keynesian absolute income hypothesis. His consumption function may be rewritten here with the form.

The effect of increased CRR will be reduced or nullified if bank rate is reduced because both are inverse functions. If CRR will increase it contracts credit and if bank rate reduced it expands credit.

In education, measurement error refers to the discrepancy between a test result and a student's real knowledge and abilities and inaccuracies introduced during the collection and calculation of data-based reports, figures, and statistics about schools and students.

Key Points

• Although some degree of measurement error is unavoidable in testing and test developers frequently publicly admit that performance data, such as high school graduation rates or college enrollment rates, are not always accurate.
• The True score represents the person's true ability, whereas the Observed score is the exam's actual score.
• The disparity between observed and true scores is known as error.
• Measurement inaccuracies in testing can be caused by a range of reasons, including a student's mental and emotional state during the test time or the test's administration conditions.
• Due to error, these observed scores won’t necessarily be equal; some scores will be high and others low.
• If you count the number of times each of the student’s observed scores occurs and graph those counts, you’ll get a bell-shaped curve of observed scores for the student.

Therefore, the True score the student would get if the measurements were completely accurate and error-free. 

Additional Information

• When a student just takes the algebra test once, the result is referred to as an observed score.
• When the stakes for test performance climb, measurement inaccuracy becomes a more serious issue.
• Many test makers and testing specialists advise against utilising a single test result to make crucial educational decisions due to measurement inaccuracy.

The correct answer is option 2 i.e. Wassily Leontief.

• Wassily Leontief developed the Input-output model for which he won the Nobel Prize in Economics.
• It is a type of macroeconomic analysis supported the interdependencies between economic sectors or industries.
• It is used for estimating the impacts of positive or negative economic shocks and analyzing the ripple effects throughout an economy.
• The model states that there are three types of economic impact: direct, indirect, and induced. 

1. A direct impact is an initial change in expenditures. For eg. building a bridge.
2. The indirect, or secondary, impact would be due to the suppliers of the inputs hiring workers to meet demand.
3. The induced, or tertiary, the impact would result from the workers of suppliers purchasing more goods and services.

• It is one of the major conceptual models for a socialist planned economy.
• It is linear in nature and lends itself to rapid computation similarly as flexibility in computing the consequences of changes in demand.

The correct answer is option (2) i.e. Exports < Imports.

The difference between a country's imports of goods and services and its exports is called Balance of Trade. There are three possibilities of Balance of Trade(BoT) and they are:

1. Balance, Balance of Trade i.e. Exports = Imports.
2. Adverse, Balance of Trade i.e. Exports < Imports.
3. Favourable Balance of Trade i.e. Exports > Imports.

• Piyush Goyal announced on a social platform on 15th July 2020 that India had recorded a trade surplus in June for the first time in last 18 years.
• Piyush Goyal is the incharge Ministry of Commerce and Industry. (July 2020)

An indifference curve is the curve at every point of which the utility would remain same. The indifference curve of perfect complementary goods is 'L' shaped.'Left shoe' and 'Right shoe' can be considered as perfect complimentary goods.

The mean, median, and mode of a normal distribution are equal. The area under the normal curve is equal to 1.0. Normal distributions are denser in the center and less dense in the tails. Normal distributions are defined by two parameters, the mean (μ) and the standard deviation (σ).

Please don’t get confused between deflation and disinflation. In disinflation, inflation is still there though its rate is decreasing. However, in deflation, the real prices of goods decline so there is no inflation.