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 Both 1 and 2.

Key Points

• Creative destruction refers to the incessant product and process innovation mechanism by which new production units replace outdated ones. Hence, statement 1 is correct.
• It was coined by Joseph Schumpeter (1942), who considered it ‘the essential fact about capitalism.  Hence, statement 2 is correct.
• This restructuring process permeates major aspects of macroeconomic performance, not only long-run growth but also economic fluctuations, structural adjustment and the functioning of factor markets. Over the long run, the process of creative destruction accounts for over 50 per cent of productivity growth.
• At business cycle frequency, restructuring typically declines during recessions, and this adds a significant cost to downturns. Obstacles to the process of creative destruction can have severe short- and long-run macroeconomic consequences.  

Important Points

• Creative destruction:
  • Creative destruction is a process of industrial mutation that incessantly revolutionizes the economic structure from within, destroying the old one and creating a new one.
  • Viewed from the lens of the Stock market, creative destruction has increased significantly post-liberalization.
  • Liberalization led to a spike in the number of firms churned. Every five years, roughly one-third of the firms in the Sensex are replaced.
  • Before liberalization, a firm was expected to stay in the Sensex for 60 years, which decreased to only 12 years after liberalization.
  • The forces of creative destruction following liberalization in the Indian economy have led to the rise of new sectors such as financials and information technology. Nonetheless, the Herfindahl Index reveals an overall decline in concentration in both sectors.
  • However, it has only one prerequisite – a pro-business policy stance that fosters competitive, unfettered markets.
  • NOTE: Herfindahl Index measures the market concentration of an industry's 50 largest firms in order to determine if the industry is competitive or nearing monopoly.
• Benefits of Creative Destruction:
  • The rising share in market capitalization has been accomplished by a rise in the number of companies rather than a rise in the size of incumbents, suggesting greater competition within these sectors.
  • Sectors once considered mainstays of the Indian economy are being displaced by new sectors bringing with them new technologies and products.
  • The competitive advantage of entrenched firms is being rapidly challenged by new, smaller, and more agile firms.
  • The difference between the sizes of the largest and smallest firms is rapidly shrinking, and consequently, monopoly power in the economy is declining and making way for more competitive markets.
  • Consumers benefit from an increased variety of goods and services, lower prices, and incessant improvement in the quality of existing products.

Although the low HDI states are growing faster than the high HDI states, the cross-sectional dispersion of HDI is not decreasing over time. This statement is taken from the passage.

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.

The correct answer is 1 only.

• In news:
  • World Trade Organisation (WTO) Director-General Ngozi Okonjo-Iweala said that she was pushing for member-nations to reach some agreement by July and deliver a final outcome on the intellectual property (IP) waivers for COVID-19 vaccines at the next ministerial meeting in December.

Key Points

• The Uruguay Round, conducted from 1987 to 1994, culminated in the Marrakesh Agreement, which established the World Trade Organization (WTO). Hence, statement 1 is correct.
• WTO is not a UN specialized agency. Hence, statement 2 is incorrect.
• The topmost decision-making body of the WTO is the Ministerial Conference, which usually meets every two years. Hence, statement 3 is incorrect.

​Additional Information

Dispute Settlement Body (DSU):

• The General Council convenes as the Dispute Settlement Body (DSB) to deal with disputes between WTO members.
• Such disputes may arise with respect to any agreement contained in the Final Act of the Uruguay Round that is subject to the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU).
• The DSB has authority to:
  • establish dispute settlement panels,
  • refer matters to arbitration,
  • adopt panel, Appellate Body and arbitration reports,
  • maintain surveillance over the implementation of recommendations and rulings contained in such reports,
  • and authorize the suspension of concessions in the event of non-compliance with those recommendations and rulings.

Appellate Body:

• The Appellate Body was established in 1995 under Article 17 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU).
• The DSB shall appoint persons to serve on the Appellate Body for a four-year term.
• It is a standing body of seven persons that hears appeals from reports issued by panels in disputes brought by WTO Members.
• The Appellate Body can uphold, modify or reverse the legal findings and conclusions of a panel, and Appellate Body Reports, once adopted by the Dispute Settlement Body (DSB), it must be accepted by the parties to the dispute. The Appellate Body has its seat in Geneva, Switzerland.

•  A system's resources are optimized to the point of Pareto optimality when one dimension cannot be improved without causing another to deteriorate.
• The Pareto optimal aids in maintaining market equilibrium and guards against market failure. A Pareto inefficient allocation of resources would result from any market failure.
• It expresses no opinion regarding distribution equity or general welfare.

​Hence, the correct answer is Under pareto optimum it is not possible to make someone good without harming someone.

The correct answer is 2 and 3 only.

In news

• The Reserve Bank of India released its Currency and Finance (RCF) report for the year 2020-21.

Key Points

• The Reserve Bank of India proposed to retain the current numerical framework for the target and tolerance band for inflation — the target of 4 per cent with a plus or minus two per cent tolerance band — for the next five years. Hence, statement 1 is not correct.
• The report said that the "period of study in this report is from October 2016 to March 2020 commencing with the formal operationalisation of the flexible inflation targeting (FIT) framework in India but excluding the period of the COVID-19 pandemic in view of data distortions."
• This has been proposed in the wake of the repetitive incidence of supply shocks, still elevated inflation expectations, and projection errors.
• Inflation Targeting is the policy by RBI that revolves around adjusting monetary policy to achieve a specified annual rate of inflation. Hence statement 3 is correct.
• The Flexible Inflation Target Framework was adopted in 2016 with the primary objective of ensuring price stability while keeping in mind the objective of growth. Hence, statement 2 is correct.
• The Reserve Bank of India Act, 1934 was amended to provide a statutory basis for an FTI framework.
• Union Finance Minister Nirmala Sitharaman had recently said the government would review the inflation target band as the five-year term for the MPC nears an end.
• There was a proposal before the government to increase the band from the current level in the wake of the sluggish growth induced by the Covid pandemic.
• However, the RBI was against relaxing the band to boost the growth, arguing that the inflation targeting will then lose its meaning.
• Retail inflation had fallen to a 16-month low of 4.06 per cent in January 2021 due to the easing of food and vegetable prices.

Consider, 

The LHS and RHS are the same. Therefore, the correct answer is 0.0018

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. 

The correct answer is 2 only.

Key Points

• Green Rating for Integrated Habitat Assessment (GRIHA):
  • GRIHA is a Sanskrit word meaning – ‘Abode’.
  • GRIHA has been conceived by TERI and developed jointly with the Ministry of New and Renewable Energy, Government of India. Hence, statement 1 is not correct.
  • The primary objective of the rating system is to help design green buildings and, in turn, help evaluate the ‘greenness’ of the buildings. Hence, statement 2 is correct.
  • The green building rating system devised by TERI and the MNRE is a voluntary scheme. Hence, statement 3 is not correct.
• Aim:
  • The rating system aims to achieve efficient resource utilization, enhanced resource efficiency, and better quality of life in the buildings.
• Rating Tool
  • GRIHA is a rating tool that helps people assess the performance of their building against certain nationally acceptable benchmarks and is suitable for all kinds of buildings in different climatic zones of the country.
  • Going by the old adage ‘what gets measured, gets managed’, GRIHA attempts to quantify aspects such as energy consumption, waste generation, renewable energy adoption, etc. so as to manage, control, and reduce the same to the best possible extent.
  • It will evaluate the environmental performance of a building holistically over its entire life cycle, thereby providing a definitive standard for what constitutes a ‘green building’.

Big push concept was given by R. Rodan. Knife-edge concept was given by Sir Henry Roy Forbes Harrod. Golden age concept was given by Joan Robinson. Golden rule of accumulation concept was given by Michael E. Phelps.

Assertion A): U-shaped long-run average cost curve is based on the assumption that economies of scale prevail at small levels of production and diseconomies of scale prevails at larger levels of production.

Explanation:

1. The long-run cost curves are U-shaped due to economies of scale and diseconomies of scale.
2. If a firm has high fixed costs, the increasing output will lead to lower average costs.
3. This will result in economies of scale. However, after a certain output, a firm may experience diseconomies of scale.
4. This occurs where increased output leads to higher average costs.
5. For example, in a big firm, it is more difficult to communicate and coordinate workers. Thus, economies of scale prevail at small levels of production, and diseconomies of scale prevail at a larger level of production. In the long-run, three returns to scale operate i.e. Increasing Returns to Scale, Constant Returns to Scale, and Diminishing Returns to Scale which is also one of the reasons because of which the Long Run Average Curve is U-shaped.

Therefore, the Assertion (A) is correct.

Reason R): Decreasing returns to scale arises primarily because as the scale of operation increases, it becomes even more difficult to manage the firm effectively.

Explanation:

1. Diminishing returns to scale ensure that the size of the productive firms cannot be infinitely large.
2. Generally, after a limit when the quantity of the factors of the production is increased in such a way that the proportion of the factors remain unchanged, output increases in a smaller proportion as compared to increases in the amounts of the factors of production.
3. This might be because when the scale of operation increases, it becomes difficult to handle large units of labor and co-ordination is at stake which results in decreasing overall efficiency.

Therefore, Reason (R) is the correct statement but  R) is not the right explanation of A as the Long-Run Average Cost Curve is U-shaped not only because of Decreasing Returns but also because of Increasing and Constant Returns To Scale.

The correct answer is (A) - 2; (B) - 3; (C) - 4; (D) - 1. 
Key Points 

• Tatonnement: Tatonnement refers to the process of market adjustment where prices and quantities continuously change until equilibrium is reached.
  • It involves market participants responding to imbalances in supply and demand by adjusting their buying and selling decisions. Through this iterative process, prices move towards a level where the quantity demanded equals the quantity supplied, leading to market equilibrium.
• Monetary neutrality: Monetary neutrality is the concept that changes in the money supply only affect nominal variables, such as prices and wages, and do not have a real impact on the economy in the long run.
  • ​According to this concept, an increase or decrease in the money supply may lead to temporary changes in prices, but it does not affect real economic variables such as output, employment, or productivity.
• Balance of payment: The balance of payment is a systematic record of all economic transactions between residents of one country and the rest of the world over a given period.
  • It includes transactions related to goods, services, income, and financial flows. It provides information about the overall position of a country in terms of its exports, imports, and net financial flows, which is useful for analyzing its economic performance and external relationships.
• Pigouvian tax: A Pigouvian tax is a tax imposed on goods or activities that have negative externalities, such as pollution or harmful effects on public health.
  •      It is aimed at internalizing the costs associated with these externalities and encouraging socially optimal behaviour. By taxing the activities causing negative externalities, the tax incentivizes individuals or firms to reduce their harmful impacts and promotes more efficient resource allocation.

    Hence, the correct answer is ​(A) - 2; (B) - 3; (C) - 4; (D) - 1.   

The correct answer is 2 only.

Key Points

• The economic scenario in India has been pretty stable over the last 5 years.
• Despite the economic downturn two years back the Indian economy has managed to remain stable.
• The India GDP recorded for the period December 2010 stood at 8.20%. Hence, statement 1 is Not correct.
• However, according to the Centre for Monitoring Indian Economy (CMIE) India will record a GDP of 9.2% in the year 2011.
• India's GDP growth 2010 - 2011 has not been phenomenal but is certainly encouraging.
• The turnover of central public sector enterprises (CPSEs) for the last three years, 2010-11, 2011-12 and 2012-13 was Rs 14,98,018 crore, Rs 18,22,049 crore and Rs 19,45,777 crore respectively.
• The contribution of gross value addition of CPSEs in the gross domestic product (GDP) is 6.18%, 6.14%, and 5.85% respectively.
• A percentage-wise increase in GDP at current market prices also witnessed a downward trajectory. It was reported at 12.25% in 2012-13, down from 15.74% in 2011-12 and 20.17%  in 2010-11. Hence, statement 2 is correct.

A progressive tax is a tax in which the tax rate increases as the taxable amount increases. That means low tax imposed on low income earners compared to those with a higher income.

Excise duties, Octroi, House tax all are fixed but income tax is different for different earning people.

​Kuznets inverted-U curve:

• The hypothesis says that income Inequality rises in the initial stages of development, stabilizes for a time and then declines later. Hence, statement 1 is correct.
• This is because in the initial stages of development, all the benefits from growth (urbanization, industrialization) are appropriated by the highly skilled and educated workers only.

• The rural, unskilled and farm workers lag behind because they can’t get employment which would have raised their income. However, in the later stages of growth, the government uses the increased tax revenues from growth to redistribute income.
• This is used to skill workers, provide education and health services and push inclusive growth. Thus, the employment becomes widespread and everyone benefits from growth leading to a decline in inequality.

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.

Gilt-edged market

• The gilt-edged market is the market for the sale and purchase of government and semi-government securities (also termed gilt-edged securities).
• Gilt-edged securities are high-grade bonds issued by the government authority.
• In the gilt-edged market, the Reserve Bank of India executes the exchange of gilt-edged securities through open market operations.
• The gilt-edged market is also termed the government securities market.

Important Points

Major features of the gilt-edged market

• The investors in the gilt-edged market include institutions such as commercial banks, provident funds, Life Insurance Corporation of India, and General Insurance Corporation of India.

• As government securities are high-value risk-free investments, these are known as gilt-edged securities, i.e., the best-quality securities.

Thus, the gilt-edged market means the market of government securities.

Additional Information

• A bullion market is a market where buyers and sellers exchange gold, silver, and other derivatives.
• The market of commodities or commodity market is the market for the trade of raw materials and primary products such as agricultural products, coal, crude oil, etc.

The correct answer is Payments Vision 2025.Key Points

• Payment Vision 2025 document.
  • On July 17, 2022, the Reserve Bank of India published its vision for 'Architecture of Digital Finance' in a document for Payment Systems. 
  • This is known as the Payment Vision 2025 document. 
  • The core theme of the Payments Vision 2025 is 'E-Payments for Everyone, Everywhere, Everytime' (4Es).
  • It aims to provide every user with safe, secure, fast, convenient, accessible, and affordable e-payment options.
• Payments Vision 2025 has been prepared by considering the guidance from the Board for Regulation and Supervision of Payment and Settlement Systems of the RBI.
• It builds on the initiatives of Payments Vision 2019-21.
• The Payments Vision 2025 document is presented across the five anchor goalposts of Integrity, Inclusion, Innovation, Institutionalisation and Internationalisation.
• Promoting digital payments: The RBI is promoting the use of digital payments through a number of initiatives, such as the Unified Payments Interface (UPI) and the National Payments Corporation of India (NPCI).
• Regulating the payments ecosystem: The RBI is also working to regulate the payments ecosystem to ensure that it is safe and secure.
• Building capacity: The RBI is working to build capacity in the payments ecosystem by training financial institutions and businesses on how to use digital payments.

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.

 It has been clearly mentioned in the passage that the growth rate in the agriculture sector is quite distressing and negligible (0.2 per cent).

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.

The dominant theme in Domar's theoretical treatment of economic growth is that net investment raises productive capacity and thus causes the economy to grow. Given the capacity creating impact of the net investment, Domar attempts to determine the rate at which income must grow, if full employment is to be maintained.

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.