Economics: CUET Mock Test - 2 - CUET MCQ

The correct answer is Value of second-hand goods.

Key Points

• Value Added Method
  • In a circular flow, national income is calculated using the value-added method at various phases of the production process. In the production process, it indicates the value added for each unit produced.
  • Every business adds value to the goods it purchases as an intermediary good from other firms.
  • The value of national income is the sum total of value added by all organisations.
  • The following steps are used to calculate national income using the value-added method:
    • Step 1
    • The first step is to identify and classify all producing enterprises in the primary, secondary, and tertiary sectors.
    • Step 2
    • Next, the Gross Domestic Product at Market Prices (GDP_MP) is calculated.
    • Determine the Gross Value Added at Market Price (GVA_MP) of each sector for the purpose of calculating the GDP_MP; i.e. ∑GVA_MP = GDP_MP
    • Step 3
    • Next, determine domestic income (NDP_FC).
    • Value of depreciation and net indirect tax are deducted from the gross domestic product at market price (GDP_MP) to calculate domestic income; NDP_FC = GDP_MP – Depreciation – Net Indirect Taxes
    • Step 4
    • To determine national income (NNP_FC), the final step is to calculate Net Factor Income from Abroad (NFIA).
    • The NFIA is added along with the country's domestic income; National Income or NNP_FC = Domestic Income or NDP_FC + NFIA

Additional Information

• Value Added
  • Value-added describes the value that a company adds to a raw material or intermediate good during the production process.
  • The difference between the value of output and the value of intermediate products is used to calculate the national income using the value-added method.

Value Added = Value of Output – Intermediate Consumption

• The value-added method, prevents double counting, which is a major mistake while calculating national income, and therefore this method is most frequently used to estimate national income.
• Value of second-hand goods should not be considered in national income because they are already valued in the year they were manufactured. The current flow of goods and services will be disrupted if the value of these goods is added again.

Bank Rate

Key Points

• Bank Rate:
  • The Bank Rate is the rate at which the central bank of a country (Reserve Bank of India for India) lends money to commercial banks.
  • It is a monetary policy instrument which central banks use to manage the money supply and interest rates in the economy.
  • Changes in the Bank Rate can influence borrowing costs for banks and ultimately affect the rates that banks offer to their customers for loans and mortgages. It can also impact savings rates.

Additional Information

• Promissory Rate:
  • This term is not commonly used in the context of central banking or monetary policy, making it an incorrect option.
• Lending Rate:
  • While "Lending Rate" could broadly refer to any interest rate applied on loans, it is not a specific term used by central banks for their operations with commercial banks.
• Fixed Rate:
  • A fixed rate generally refers to an interest rate that does not change over the duration of a loan or deposit but is not specifically used to describe the rate at which central banks lend to commercial banks.

The correct answer is 'Equilibrium level'

Key Points

• Equilibrium level:
  • In economics, the equilibrium level occurs when the aggregate demand for final goods equals the aggregate supply of final goods in the product market.
  • This equilibrium signifies a state of balance where there is no inherent force within the economy that leads to a change in the level of output or employment in the short run.
  • At this point, the economy is stable, and unless external factors disrupt this balance, the quantity supplied will equal the quantity demanded.

Additional Information

• Ex-ante consumption:
  • Refers to the intended or planned consumption by households. While it relates to aggregate demand, it is not a direct indicator of the market reaching its equilibrium.
• Autonomous consumption:
  • Is the level of consumption that occurs when income is zero; it is consumption that does not depend on income. This concept is crucial for understanding consumption patterns but does not directly relate to market equilibrium.
• Investment multiplier:
  • Describes the effect of an increase in investment on the overall level of income and output in the economy. While important for understanding how investments affect the economy, it is not a term that directly describes the equilibrium in the product market.

(A) Capital Goods: These are goods used in production (e.g., machinery), not for direct consumption. Matches with (I).
(B) Consumer Goods: These are goods that directly satisfy human wants (e.g., food). Matches with (II).
(C) Public Goods: These are non-excludable (cannot prevent use) and non-rival (one’s use doesn’t reduce availability). Matches with (III).
(D) Private Goods: These are excludable (can prevent use) and rival (one’s use reduces availability). Matches with (IV).

(A) Total Utility (TU): This is the total satisfaction a consumer derives from consuming a certain quantity of goods. Matches with (III).
(B) Marginal Utility (MU): This refers to the additional satisfaction gained from consuming one more unit of a good. Matches with (I).
(C) Consumer Equilibrium: This occurs when a consumer maximizes utility, typically where the budget line is tangent to an indifference curve. Matches with (II).
(D) Law of Diminishing Marginal Utility: States that as more of a good is consumed, the additional satisfaction (MU) from each extra unit decreases. Matches with (IV).
The correct pairing is (A) - (III), (B) - (I), (C) - (II), (D) - (IV), which corresponds to option (b).

(A) Budget Line: Represents all combinations of two goods a consumer can afford given their income and prices. Matches with (I).
(B) Indifference Curve: Shows combinations of two goods that yield the same level of satisfaction. Matches with (IV).
(C) Marginal Rate of Substitution (MRS): The rate at which a consumer is willing to trade one good for another while keeping utility constant. Matches with (II).
(D) Optimal Consumption Bundle: The combination of goods that maximizes utility within the budget constraint. Matches with (III).

• The concept of opportunity cost explains the decision-making process when choosing between two alternatives, such as a teacher deciding between teaching more hours or spending time on personal development.
• The opportunity cost is the value of the next best alternative that is forgone in making a decision.

The Production Possibilities Curve (PPC) illustrates a two-good economy by plotting the production of one good on the x-axis and the other on the y-axis. The curve represents the various combinations of outputs that can be produced using the best available technology and all resources. Key points to note include:

• Points inside the PPC indicate inefficiency, meaning resources are not fully utilised.
• Points outside the PPC are unattainable with current resources.
• The curve shows the maximum production capacity for each good, highlighting the trade-offs between them.

For instance, if all resources are dedicated to producing corn, the maximum output is 4 units. Conversely, if all resources are used for cotton, up to 10 units can be produced. Various combinations, such as 1 unit of corn and 9 units of cotton, are also possible.

Ultimately, the PPC helps societies determine how to allocate their scarce resources among different goods and services, reflecting the trade-offs involved in production decisions.

PPFs are normally drawn as bulging upwards or outwards from the origin ("concave" when viewed from the origin), but they can be represented as bulging downward (inwards) or linear (straight), depending on a number of assumptions. A PPF illustrates several economic concepts, such as scarcity of resources, opportunity cost, productive efficiency, allocative efficiency, and economies of scale.

When the Marginal Product (MP) is greater than the Average Product (AP), the following occurs:

• The Average Product (AP) begins to increase.
• This is because MP contributes more to the overall output than the average of previous outputs.
• As long as MP remains above AP, AP will continue to rise.
• Once MP falls below AP, the AP will start to decrease.

Market Supply : The horizontal summation of all the individual firm supply curves. A market supply curve shows what quantity will be supplied by all firms at various prices. or service. The impact of a surplus in a market is to drive prices down and to increase the quantity traded.

Explanation:
The relationship between AVC (Average Variable Cost), AFC (Average Fixed Cost), and ATC (Average Total Cost) can be understood by breaking down each term:
1. AVC (Average Variable Cost):
- Represents the cost per unit of variable inputs (e.g., labor, raw materials) required to produce a given quantity of output.
- Calculated by dividing total variable cost by the quantity of output produced.
- AVC = Total Variable Cost / Quantity of Output
2. AFC (Average Fixed Cost):
- Represents the cost per unit of fixed inputs (e.g., rent, machinery) required to produce a given quantity of output.
- Calculated by dividing total fixed cost by the quantity of output produced.
- AFC = Total Fixed Cost / Quantity of Output
3. ATC (Average Total Cost):
- Represents the total cost per unit of output, including both fixed and variable costs.
- Calculated by dividing total cost by the quantity of output produced.
- ATC = Total Cost / Quantity of Output
Now, let's understand the relationship between these terms:
- AVC + AFC = ATC
- This means that the average variable cost (AVC) and average fixed cost (AFC) together make up the average total cost (ATC).
- The AVC represents the variable portion of the cost, while the AFC represents the fixed portion.
- When these costs are combined, we get the total cost per unit of output, which is the ATC.
Therefore, the correct option is B: AVC + AFC = ATC.

• Assertion (A) is true. Macroeconomics indeed studies aggregate economic measures such as total output and price levels.
• Reason (R) is also true, as it correctly describes the focus of microeconomics, which deals with individual markets.
• However, Reason (R) does not explain Assertion (A). Macroeconomics and microeconomics are distinct branches, and the focus of one does not serve as an explanation for the focus of the other.
• Therefore, the correct answer is Option B, as both statements are true but the Reason is not the correct explanation for the Assertion.

In short run ..time period for production is very short ..so for increasing production only variable factor can increase instead of fixed factor. for example... a company make 40units of good x by using 3 units of labour and 5 units of capital ...if They wants to increase production from 40 to 45 so they will use 4units of labour and 5units of capital.

Deficient demand is a situation when:
- Market demand is less than market supply
- This means that the quantity of goods or services demanded by consumers is lower than the quantity supplied by producers.
- Market demand refers to the total demand for a product or service in the entire market, considering all consumers.
- Market supply refers to the total supply of a product or service in the entire market, considering all producers.
Explanation:
- Deficient demand occurs when there is an imbalance between the quantity of goods or services that consumers want and the quantity that producers are willing to supply.
- In this situation, there is an excess supply in the market. This can lead to several consequences:
- Lower prices: When there is deficient demand, producers may need to lower their prices to encourage consumers to purchase their products or services.
- Inventory buildup: Producers may end up with excess inventory if they cannot sell all their products. This can lead to additional costs for storage and maintenance.
- Decreased production: Producers may reduce their production levels to align with the lower demand. This can result in layoffs or reduced working hours for employees.
- Economic downturn: Deficient demand can be a sign of a weak economy, as it indicates that consumers are not spending as much as producers are producing.
Example:
- Let's consider the market for smartphones. If the market demand for smartphones is lower than the market supply, we have a deficient demand situation.
- This means that consumers are not buying as many smartphones as producers are producing. As a result, there will be excess inventory of smartphones, and producers may need to lower prices or reduce production levels to address the deficient demand.
Overall, deficient demand is a situation where market demand is less than market supply, indicating an imbalance in the market.

In macroeconomics, the State plays a crucial role in enhancing the economy.

It takes various actions to address economic challenges, such as:

• Inflation: Implementing policies to control rising prices.
• Unemployment: Creating jobs and opportunities for the workforce.
• Economic Growth: Stimulating growth through investment and infrastructure development.

The State's involvement is essential for:

• Setting policies that guide economic activities.
• Ensuring resources are allocated for public needs, such as education and healthcare.
• Monitoring economic indicators to assess the overall health of the economy.

Through these measures, the State aims to improve the living standards of its citizens and promote a stable economic environment.

The correct answer is C: GNP at constant prices.

Real Gross National Product (GNP) is the value of the final goods and services produced within a country's borders in a given year, adjusted for changes in the prices of goods and services. It is calculated using constant prices, which means that the prices used to value the goods and services are from a base year, rather than the current year. This helps to eliminate the effect of inflation on the GNP calculation.

Nominal GNP, on the other hand, is the value of the final goods and services produced within a country's borders in a given year, valued at current market prices. It includes the effect of inflation.

GNP at current prices is the same as nominal GNP.

GNP less Net factor income from abroad is a measure of Gross National Income (GNI), which is similar to GNP but includes income earned by domestic residents from foreign sources, such as rent or dividends.

Well in an easy way to understand this, we can say that  the primary function of money as a store of value is that it can be used to transfer purchasing power from present to future.The main reason behind this is that it is most economical and convenient way to store money as its storage does not require much space. Basically, money as a store of value provides security to individuals.

 

APS stands for Average Propensity to Save, which is calculated as the ratio of total savings (S) to total income (Y). Therefore, the correct representation of APS is S/Y.

Foreign exchange is an institution or system for dealing with the currencies of other countries.

• The assertion is correct because, in a market economy, prices do indeed act as signals that inform both producers and consumers about the availability and demand for goods and services.
• The reason is also correct, but it describes a characteristic of a centrally planned economy, not a market economy.
• Since the reason explains a different economic system, it does not serve as a correct explanation for the assertion.

 

The Production Possibility Curve (PPC) is concave to the origin. This shape indicates that as we increase the production of one good, the opportunity cost of producing additional units of that good rises. This is due to the increasing marginal rate of transformation.

Key points about the PPC:

• The PPC illustrates the maximum combinations of two goods that can be produced with available resources.
• A point on the curve indicates efficient resource use, while a point below the curve shows underutilisation.
• As resources are shifted from one good to another, the cost of producing more of one good increases, demonstrating the concept of opportunity cost.

This understanding of the PPC is essential in economics, as it helps explain the trade-offs involved in production decisions.

Marginal physical product (MPP) is the change in the level of output due to a change in the level of variable input; restated, the MPP is the change in TPP for each unit of change in quantity of variable input.
Total physical product (TPP) -- Quantity of output that is produced from a firm's fixed inputs and a specified level of variable inputs.
So, by adding all the MPP, TPP can be derived.
 

The long-run equilibrium point for a perfectly competitive market occurs where the demand curve (price) intersects the marginal cost (MC) curve and the minimum point of the average cost (AC) curve.

Since they are the price takers and the price remains constant so does the AC of production.

Excess demand occurs when the quantity demanded exceeds the quantity supplied at the current market price. This situation arises when:

1. Price is below equilibrium:

   • When the market price is set lower than the equilibrium price, consumers want to buy more (high quantity demanded), but producers are unwilling to supply enough (low quantity supplied).

   • This creates a shortage (excess demand).

2. Graphical representation:

   • On a supply-demand graph, excess demand appears as a gap between the demand curve (above) and supply curve (below) at the artificially low price.

Why Not the Other Options?

• b) Higher than equilibrium: Leads to excess supply (surplus), not excess demand.

• c) Same as equilibrium: No excess demand or supply; markets clear perfectly.

• d) None of these: Incorrect, as option (a) is the definitive answer.

Key Insight: Excess demand always implies the price is below equilibrium, incentivizing price hikes until balance is restored.

Final Answer: a) Market price is lower than the equilibrium price

Macroeconomic analysis often simplifies its approach by focusing on a single imaginary commodity. This is effective because:

• The behaviour of one commodity can reflect general trends in the economy.
• It allows for easier analysis of complex relationships, such as those between production, prices, and employment.
• Changes in one commodity often mirror changes in others, particularly during significant economic shifts.

This simplification helps economists understand the overall economy without getting bogged down in the details of every individual commodity.

Real flow is the exchange of goods and services between household and firms whereas money flow is the monetary exchange between two sectors. In real flow household sector supplies raw material, land, labour, capital and enterprise to firms and in return firms sector provides finished goods and services to household sector. Whereas in money flow, firm sector gives remuneration in the form of money to household sector a wages and salaries, rent, interest etc.

Cash is a highly liquid asset followed by the banking accounts, checkable account, short-term promissory notes, treasury bills and other government bonds.

An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility. Each point on an indifference curve indicates that a consumer is indifferent between the two and all points give him the same utility.

The important factor influencing the propensity to consume in an economy is:
There are several factors that can influence the propensity to consume in an economy, but the most important one is the level of income (Y). This is because income determines the amount of money individuals and households have available to spend on goods and services. Here is a detailed explanation:
1. Propensity to consume: The propensity to consume refers to the proportion of income that is spent on consumption rather than saved. It is an important indicator of consumer behavior and economic growth.
2. Income: Income is the primary source of funds for individuals and households. The level of income directly affects the propensity to consume because people tend to spend more when they have higher incomes.
3. Disposable income: Disposable income is the income that is available for spending after deducting taxes. It is a key determinant of consumption as it represents the actual amount of money individuals have available to spend on goods and services.
4. Consumption function: The consumption function is an economic model that shows the relationship between disposable income and consumption. It suggests that as income increases, consumption also increases, but at a lower rate. This is known as the marginal propensity to consume (MPC), which indicates the change in consumption for every additional unit of income.
5. Savings: While savings can also influence the propensity to consume, it is not the most important factor. Savings represent the portion of income that is not spent on consumption. When income increases, individuals may choose to save a portion of it rather than spend it. However, the impact of savings on consumption is generally smaller compared to the impact of income.
In conclusion, the level of income (Y) is the most important factor influencing the propensity to consume in an economy. Higher income levels generally lead to higher consumption levels, as individuals and households have more money available to spend on goods and services.