CUET PG Economics Mock Test - 3 - CUET PG MCQ

The correct answer is (D), (A), (C), (E), (B)

Key Points

• Economic integration includes bilateral agreements involving the removal of trade barriers and the alignment of monetary and fiscal policies, resulting in a more interconnected global economy.
• Economic integration is in accordance with market theory, which holds that the global economy benefits when markets can work together with little government involvement.

Important Points
Stages of Economic Integration:

• Preferential Trade Agreements
• Free Trade Area
• Custom Union
• Common Market
• Economic Union

The correct answer is (a)-(iv), (b)-(i), (c)-(ii), (d)-(iii).

Key Points

Hence, Gauss markov is related with blue, Coefficient of determination is R², H₀ : B₂ = 0, H₁ : B₂ = 70 is a one sided test and Heteroscedasticity is related with Gold Quadnt test.

Option 1 is correct.

The correct answer is 25.

Key Points

• Mean: It is the most commonly used measure of central tendency. It represents the average of given collection of data.
• Median: It represents the mid value of given set of data when arranged in particular order i,e. ascending or descending order.
• Mode: It is the most frequent number occurring in the data set.
• The relationship between mean, median and mode is,
• Mean − Mode = 3 × (Mean − Median)

Important Points
Rearranging the formula to solve for the mean:

Substituting the given values (Mode = 10, Median = 20):
Mean = (3 × 20 − 10) / 2 = (60 − 10) / 2 = 50 / 2 = 25
Thus, the mean is 25, corresponding to option C.

A, B and C only.

Key Points

The correct answer is Only two

Key Points
Demand-pull inflation

• It exists when aggregate demand for a good or service outstrips aggregate supply. Hence, Statement 1 is correct.
• If aggregate demand rises faster than productive capacity, then firms will respond by putting up prices, creating inflation. It is the most common cause of inflation. Hence, Statement 2 is correct.

Causes of Demand-Pull Inflation:
A growing economy

• ​when consumers feel confident, they spend more and take on more debt. This leads to a steady increase in demand, which means higher prices.

Lower interest rates

• ​A cut in interest rates causes a rise in consumer spending and higher investment. This boost to demand causes a rise in aggregate demand and inflationary pressures.

Devaluation in the exchange rate

• Increases domestic demand (exports cheaper, imports more expensive). Devaluation will also cause cost-push inflation (imports are more expensive).

Government spending

• When the government spends more freely, prices go up.

More money in the system

• An expansion of the money supply with too few goods to buy makes prices increase.

Cost-push inflation

• It is the decrease in the aggregate supply of goods and services stemming from an increase in the cost of production.
• Cost-push inflation occurs when overall prices increase (inflation) due to increases in the cost of wages and raw materials (inputs). Hence, Statement 3 is not correct.
• Demand-pull inflation is the increase in aggregate demand, categorized by the four sections of the macroeconomy: households, businesses, governments, and foreign buyers.
• An increase in the costs of raw materials or labor can contribute to cost-pull inflation.
• Demand-pull inflation can be caused by an expanding economy, increased government spending, or overseas growth.

The correct answer is 1, 2, 3, and 4.

In News

• Monetary authorities will need to take necessary policy actions to tame inflation as it remains above the target range even though it has eased slightly, Reserve Bank of India (RBI) officials wrote in an article on the ‘State of the Economy in the August edition of the RBI Bulletin. It wrote that Inflation has edged down, but its persistence at elevated levels warrants appropriate policy responses to anchor expectations going forward.​

Key Points
Inflation

• Inflation is the rate at which the price of goods and services in a given economy rises.
• Inflation occurs when prices rise as manufacturing expenses, such as raw materials and wages, rise.
• Inflation can result from an increase in demand for products and services, as people are ready to pay more for them.

Demand-Pull Inflation:- Various variables might cause an increase in aggregate demand. Some of them are

• Fiscal Stimulus
• Population Pressure
• Increase in Net Exports
• Monetary Stimulus
• Policy Decisions. Hence, option 3 is correct.

Cost-Push Inflation:- The fundamental cause of cost-push inflation is rising production costs. The following reasons can cause production costs to rise.

• Employees' salaries being raised
• Raw material prices increasing
• Firms profit margins
• Import prices
• Increase in indirect taxes

• The term "dualism" describes the social and economic divisions that exist within an economy, such as variations in technology, regional development, and social attitudes.
• Duality is frequently present in developing nations' early phases of development and can have a big impact on the future pattern and speed of growth.
• These differences could result in an unfair distribution of wealth and income, which would impede the process of economic growth. For developing nations to achieve balanced and sustained economic growth, dualism must be addressed.

Hence, Both Statement I and Statement II are true.

Concept:

Calculation:

y = x²

= 2x

The derivate of x² is 2x.

The correct answer is - Period during which aggregate output decreases

Key Points

• Recession
  • A recession is typically characterized by a significant decline in economic activity across the economy.
  • This decline is visible in various economic indicators such as GDP (Gross Domestic Product), employment, investment spending, capacity utilization, household incomes, and business profits.
  • During a recession, aggregate output, which is the total production of goods and services in an economy, decreases.
  • Recessions are often recognized after two consecutive quarters of negative GDP growth.

Additional Information

• Period of increasing prices
  • This typically refers to inflation, not recession.
  • Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.
• Period of declining unemployment
  • This is generally seen during economic expansion, not recession.
  • During economic expansion, businesses grow and hire more workers, reducing unemployment rates.
• Period of increased trade
  • This usually occurs during periods of economic growth, not recession.
  • Increased trade indicates a healthy and growing economy where there is higher demand for goods and services.

The correct answer is biased and inconsistent.

Key Points simultaneous equations

• Under simultaneous equations, independent variables can be both exogenous and endogenous.
• To solve an equation of the model, we have to consider other equations of system.
• Identification is required before solving the equations.
• OLS estimators are inconsistent.
• Techniques used in simultaneous equations are: ILS, 2SLS, 3SLS, Maximum likelihood estimation.
• In simultaneous equations, explanatory variables and error terms are dependent.
• In assumption of OLS, it states that there should be no covariance between explanatory variables and error terms is violated.
• If Simultaneous equations are applied to OLS method, then these estimators are biased and inconsistent.
• This is also known as simultaneous equation bias.
• Hence, option 4 is correct.

Correct answer is All (a), (b), (c)

Key Points

• Price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good. Or in other words it is the ratio of the proportionate change in the quantity demanded by the proportionate change in the price of the good.
• Price elasticity of demand or elasticity of demand are same as the price is the most changeable factor that affects the demand and is computed as the percentage or proportionate change in quantity demanded divided by the percentage or proportionate change in price. There are five degrees of elasticity of demand namely
  • Perfectly elastic demand when elasticity is equal to infinity
  • Perfectly inelastic demand when elasticity is equal to 0
  • Highly elastic demand when elasticity is equal to more than 1
  • Highly inelastic demand when elasticity is equal to less than 1
  • Unit elastic demand when elasticity is equal to 1
• Price elasticity of demand in the long run would be different from that of the short run. As in the long run the demand for the particular commodity will be more elastic as the consumers have more time to adjust their behavior and find substitutes whereas in the short run the price elasticity is inelastic because the consumers have limited time to react and find substitutes.

The following is the explanation of the right answer.

Therefore, option 2 is the correct answer

The correct answer is a - ii, b - iv, c - iii, d - i

Key Points

• MRS (Marginal Rate of Substitution) : It measures a consumer's propensity to purchase more of one good than another when both are equally satisfying.
  

Hence, the correct answer is a - ii, b - iv, c - iii, d - i

The correct answer is public debt.

Key Points

• Public debt
  • Public debt refers to borrowings made by the government from within the country or from abroad, from private individuals or associations of individuals, or from banking and non-banking financial institutions.
  • Public debt is also known as government debt or sovereign debt.

Important Points

• Types of public debt
  • Internal and external debt
    • The government’s borrowing from within the country is known as internal debt.
    • The government's borrowing from abroad or international bodies is known as external debt.
  • ​Productive and unproductive debt​
    • If the debt is financed for projects that generate revenue for the government, it is known as productive debt.
    • When the loans are a net burden on the community, they are known as unproductive debt.
  • Compulsory and voluntary debt​
    • Debt that is raised by the government from the general public by adopting coercive methods is known as compulsory debt.
    • Debt that is taken from the people by the government on a voluntary basis is known as voluntary debt, i.e., these loans are voluntarily and willingly subscribed for by the people.
  • Redeemable and irredeemable debt
    • ​​​The debt that the government repays after a fixed period of time is known as redeemable debt
    • The debt that the government is not obliged to repay is known as irredeemable debt.

Thus, when the government borrows from individuals, financial institutions, organizations, and foreign countries, it is known as public debt.

Additional Information

• Capital receipts
  • Capital receipts refer to those receipts of the government that either creates a liability or cause a reduction in assets of the government.

James Duesenberry's Demonstration Effect (also called the "Keeping up with the Joneses" effect) explains how individuals in less developed countries (LDCs) tend to imitate the consumption patterns of those in developed countries. This leads to increased imports of luxury and non-essential goods, worsening the balance of payments by creating a trade deficit.

Thus, the Demonstration Effect results in higher imports than exports, causing an adverse impact on the balance of payments in developing economies.
Therefore, Correct Answer - Option A

The correct answer is option 4.

Key PointsStagflation

• Stagflation refers to an economy that is experiencing a simultaneous increase in inflation and stagnation of economic output.
• It is a period of rising inflation and unemployment but falling output. Hence, statement 4 is correct.
• Stagflation is a combination of stagnant economic growth, high unemployment, and high inflation.
• Stagflation was first recognized during the 1970s, where many developed economies experienced rapid inflation and high unemployment as a result of an oil shock
• Generally, stagflation occurs when the money supply is expanding while supply is being constrained.
• Measures: There is no definitive cure for stagflation.
• The consensus among economists is that productivity has to be increased to the point where it would lead to higher growth without additional inflation.
• Policy support for a sustained and inclusive recovery may be needed for longer.

So, the correct statement is option 4.

Additional Information Inflation and Deflation

• Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc.
• Inflation measures the average price change in a basket of commodities and services over time.
• The opposite and rare fall in the price index of this basket of items is called ‘deflation’.
• Inflation is indicative of the decrease in the purchasing power of a unit of a country’s currency. This is measured in percentage

Disinflation

• Disinflation is a situation of a decrease in the rate of inflation over successive time periods.
• It is simply slowing of inflation.
• Here, the inflation rates for successive periods are taken and we find that the inflation rate decreases steadily over these different time periods.

Recession

• A recession is when a country faces a continuous decline for two consecutive quarters in the GDP.

The correct answer is Dadabhai Naoroji.

• Dadabhai Naoroji was the first to determine national income.
• He is also known as the grand old man of India.

Key Points

• He was also an unofficial ambassador of India.
• In the UK, he was a member of the house of Commons in 1892.
• He was the first Indian to become a member of the British parliament.
• He was born in Bombay.
• He was the co-founder of the Indian National Congress.
• He was an academician, politician, and trader.
• He propounded the theory of wealth drain from India.
• He was born in a Parsi family.
• Maharaja of Baroda, Sayajirao Gayakwad patronised him.
• The London society in 1865 was launched by him.

Net Domestic Product (NDP) is the GDP calculated after adjusting the weight of the value of ‘depreciation’.

NDP = GDP – Depreciation.

This way, NDP of an economy has to be always lower than its GDP for the same year, since

there is no way to cut the depreciation to zero. Hence Option A is the Correct Answer.

The Correct answer is 2 and 3.

Key Points

• Devaluating a currency is decided by the government issuing the currency, and unlike depreciation, is not a result of non-governmental activities.
• Increased Aggregate Demand (AD) - Exports become cheaper and more competitive to foreign buyers. Higher exports relative to imports can increase aggregate demand (AD) as increased consumer spending on domestic goods and services. Hence option 2 is correct.
• Inflation is more likely to occur because imports are more expensive causing cost-push inflation, AD is increasing causing demand-pull inflation and with exports becoming, cheaper manufacturers may have less incentive to cut costs and become more efficient. Therefore over time, costs may increase. Hence option 1 is incorrect.
• Improvement in the current account balance. With exports more competitive and imports more expensive, we may see higher exports and lower imports, which will reduce the current account deficit. Hence option 3 is correct.

The correct answer is Snob effect.

Key Points

• Bandwagon effect: The bandwagon effect is a positive network externality that occurs when a consumer's demand for a good increases as more people consume it. This is because the consumer wants to be part of the crowd and feel like they are fitting in.
• Tequila effect: This term is unrelated to consumer behavior or network externalities. It refers to financial contagion or crises spreading across economies, particularly in emerging markets.
• Pigou effect: The Pigou effect is a term used to describe the way in which businesses will overproduce goods and services when there are negative externalities associated with production. This is because businesses do not take the negative externalities they create into account when making their production decisions.

Important Points

The negative network externality in which a consumer wishes to own an exclusive or unique good such as a specially designed sports car is called the snob effect.

Here's why:

• Negative network externality: The value of the good to the consumer decreases as more people own it. In this case, the exclusivity and prestige associated with owning a unique sports car diminishes as more people own the same model.
• Exclusivity and uniqueness: Consumers who value the snob effect derive satisfaction from owning a good that few others possess. They want to stand out from the crowd and project an image of wealth, status, or individuality.
• Decreasing marginal utility: As more people acquire the good, its perceived exclusivity and social signaling power decline, making it less desirable for consumers who seek distinction.

Concept:

Externalities:

• It refers to the benefits (or harms) a firm or an individual causes to another for which they are not paid.
• Externalities do not have any market in which they can be bought and sold.
• Externalities are two types negative and positive.
• Positive externality increases the utility of the third parties at no cost to them during the production or consumption of a good or service.
• It may lead to better public health initiatives and better education, vaccinating the entire community or individual, or its choice can provide large health and welfare benefits.
• Negative externality causes a negative impact mainly on unrelated third parties which can arise during the production or consumption of a good or service.

Explanation:

Negative Production Externality:

• Air pollution by vehicles, burning of fossil fuels etc., causing damage to agricultural crops, health hazards and also to buildings.
• Water pollution by sewage and industrial effluents damaging aquatic flora and fauna, contaminating rivers and streams.
• Greenhouse effect leading to global changes like an increase in temperature by about 0.6°C, which in future may lead to a risk of flooding of low lying areas.
• Noise pollution disrupting mental and psychological health.
• Depletion in fish stock due to overfishing causing a negative impact on common property resources.

Examples of Negative Consumption Externality:

• Higher congestion cost and breathing risk problems like asthma, and bronchitis.
• People are unable to sleep due to loud music, loudspeakers etc.
• Declining health and vitality by smoke or alcohol abuse.
• Consumption by one consumer may cause the price to rise, making it unavailable for other consumers.
• Increased risk of accidents due to many vehicles.

Thus, noise pollution during a constructional activity is an example of a negative production externality.

Additional Information

Examples of Positive production Externalities

• A beekeeper in an orchard enables pollination and fertilisation of orchard shrubs and trees. The value generated by pollination is more than for honey.
• The development of an airport will benefit trade and business due to increased accessibility.
• Industrial companies provide health and medical benefits to their employees saving their lives and their families lives.

Examples of Positive Consumption Externalities:

• A good attractive house increases the market value of that area.
• Vaccination for a communicable disease reduces the chances of the spread of disease and infections in the community.
• Shifting to electrical vehicles will reduce emissions of greenhouse gases which are generated by the burning of fossil fuels.

• The normal distribution, also known as the Gaussian distribution, is a probability distribution that is symmetric about the mean. This means that the left and right sides of the distribution are mirror images of each other.
• It is characterized by its bell-shaped curve, with most of the data points clustering around the mean, and the probabilities for values further from the mean tapering off equally in both directions.
• The mean, median, and mode of a normal distribution are all equal, and it is defined by two parameters: the mean (μ) and the standard deviation (σ).
• The area under the curve of a normal distribution represents the total probability of all outcomes, which is always equal to 1.

• Rationale: The binomial distribution is used to model the number of successes in a fixed number of independent Bernoulli trials, each with the same probability of success. It is not necessarily symmetric and its shape depends on the probability of success and the number of trials.

• Rationale: The Poisson distribution represents the number of events occurring within a fixed interval of time or space. It is typically used for modeling the count of events that happen independently and at a constant average rate. The shape of the Poisson distribution is generally not symmetric and tends to be skewed.

• Rationale: The exponential distribution is used to model the time between events in a Poisson process. It is characterized by a constant hazard rate and is not symmetric; it is skewed to the right.

• Among the given options, the normal distribution is the one that is characterized by a symmetric bell-shaped curve. It is widely used in statistics and natural and social sciences to represent real-valued random variables whose distributions are not known.

The correct answer is A strategy that is the best response to every possible strategy of the other players.
Key Points

In game theory, a dominant strategy is a strategy that will always lead to the best possible outcome for a player, regardless of what the other players do. In other words, a player with a dominant strategy can always guarantee themselves the best possible outcome, even if the other players are playing randomly or are trying to harm them.

There are two types of dominant strategies:

• Strictly dominant strategy: A strategy that is always better than any other strategy, no matter what the other players do.
• Weakly dominant strategy: A strategy that is better than any other strategy for at least one possible outcome, and is no worse than any other strategy for all other possible outcomes.

• Philips curve states that inflation and unemployment have a stable and inverse relationship. It is named after William Philip.
• It claims that economic growth comes inflation, which in turn should lead to more jobs and less unemployment. But this is said to be true only in the short run.
• In the long run, rising inflation will not decrease unemployment. The long-run Phillips curve is seen as a vertical line at the natural rate of unemployment, where the rate of inflation has no effect on unemployment.
• The non-accelerating inflation rate of unemployment (NAIRU) is the specific unemployment rate at which the rate of inflation stabilizes and inflation will neither increase nor decrease.

The correct answer is (A), (C), and (E) only.

Key Points

• The current account includes merchandise export
  • In the current account, merchandise exports are shown as a positive item and are calculated free on board, i.e. the costs of transportation, insurance, etc. are excluded.
  • The difference between merchandise exports and imports is the balance of visible trade or merchandise trade.
• The current account includes invisible export
  • In the current account, invisible exports imply the export of services and are included as a positive or credit item.
  • The balance of exports and imports of services and transfer payments is called the balance of invisible trade.
• The current account includes both merchandise exports and imports and invisible exports and imports
  • Merchandise exports and imports imply the export and import of visible goods, and, invisible exports and imports imply the export and import of services.
  • In the current account, merchandise and invisible exports are entered as credits as they represent receipts from foreigners.
  • Merchandise and invisible imports are entered as debits because they represent payments to foreigners.

Important Points

• Components of the current account of B.O.P.
  • The current account of a country consists of all the transactions concerning trade in goods and services and unilateral transfers.
  • Service transactions include costs of travel and transportation, incomes and payments of foreign investments, etc.
  • Transfer payments relate to gifts, pensions, foreign aid, private remittances, charitable donations, etc. received from foreign individuals and governments to foreigners.

Thus, out of the given statements, (A), (C), and (E) are correct regarding the current account of B.O.P.

Key Points
For oil-importing countries, the increase in oil prices in the 1970s and mid-2000 contributes to:

• Improving terms of trade:
  • Terms of trade is a concept in which goods and services are exchanged between two countries.
  • If the prices of oil increase, it will reduce the demand for oil and importing countries will also reduce their demand for oil.
  • This will lead to deteriorating terms of trade. This option is not correct.
• Balance of trade deficits:
  • Trade is in deficit when its imports are not equal to its exports or exports are less than its imports or Imports> Exports. Increasing oil prices will lead to a balance of trade deficits. This option is correct.
• Price inflation:
  • Price inflation is the concept of an increase in prices.
  • When prices increase to more than desired level.
  • An increase in oil prices in the 1970s and mid-2000 will lead to price inflation. This statement is correct.
• Constrained economic growth:
  • Due to an increase in oil prices, the demand will reduce which will lead to fewer exports and fewer imports, and eventually, there will be a balance of trade deficit.
  • It will also harm the terms of trade between the two countries and lead to constrained economic growth. This option is correct.

Hence, for oil-importing countries, the increase in oil prices in 1970's and mid-2000 contributed to balance of trade deficits, price Inflation, constrained economic growth.

The correct answer is SARP states that if a consumer prefers bundle A over bundle B, and bundle B over bundle C, then the consumer must prefer bundle A over bundle C.
Key Points

• The Strong Axiom of Revealed Preference (SARP) is an extension of the Weak Axiom of Revealed Preference (WARP), and is a fundamental concept in revealed preference theory. While WARP addresses situations where a consumer is choosing between two bundles of goods, SARP addresses situations where a consumer is choosing among three or more bundles of goods.
• Specifically, SARP maintains that if a consumer prefers bundle A over bundle B, and bundle B over bundle C, then the consumer must prefer bundle A over bundle C. This is also known as the principle of transitivity in consumer choice theory, and it helps ensure the consistency of consumer preferences.
• Options A and B are incorrect as they don't accurately describe SARP. SARP doesn't state that a consumer's preference for one bundle over another will change with a decrease in price (option A), nor does it suggest that consumers always opt for the most expensive bundle they can afford (option B).
• Option D is incorrect as it more accurately describes the overall premise of revealed preference theory, which posits that consumers' preferences can be revealed by their purchasing habits, rather than SARP specifically.

The correct answer is 1 and 3 only.

Key Points
Liquidity Adjustment Facility:

• It is a monetary control tool used by the Reserve Bank of India (RBI).
• LAF is used to aid banks in resolving cash shortages during economic instability. Hence, statement 1 is correct.
• Changing the repo rate is one aspect of LAF but how it's adjusted (whether raised or lowered) depends on the specific economic situation. When RBI lowers the repo rate, the cost of borrowing for banks decreases, pumping more money into the system. Conversely, when the repo rate is increased, borrowing becomes more expensive, tightening the liquidity conditions.
• This facility is implemented on a day-to-day basis as banks & other financial institutions ensure they have enough capital.
• The RBI can use the liquidity adjustment facility to manage high levels of inflation. Hence, statement 3 is correct.
• It is performed by lowering the repo rate. Statement 2 is not entirely accurate. While adjusting the repo rate is a monetary policy action that influences liquidity and overall economic conditions, the LAF as a mechanism involves offering repos and reverse repos at existing policy rates to manage daily liquidity. Changes in the repo rate are a broader policy decision affecting interest rates and liquidity but do not constitute the LAF process itself.
• The LAF works through various instruments devised by the RBI to inject liquidity into the banking system or absorb excess money.
• The instruments are the following:
  • Repo rate, Reverse repo rate, Term repo etc.
• The RBI introduced the LAF as a result of the Narasimhan Committee on Banking Sector Reforms (1998).

A budget constraint represents all the combinations of goods and services that a consumer may purchase, given current prices within his or her given income. Consumer theory uses the concepts of a budget constraint and a preference map to analyze consumer choices. So if a consumer has to purchase x₁ units at p₁ price and x₂ units at p₂ price than he should have an income (M) more than p_1x1 + p_2x2.

The correct answer is 'L-shaped to the origin'.

Key PointsComplementary Goods

• Complementary goods are those which are used to fulfill a specific need such as cars and petrol, shoes and polishes, pencils and erasers, etc.
• There is a negative relationship between the prices of complementary goods and the quantity demanded of a given commodity. This implies that as the price of complementary goods rises, the quantity demanded of a given good decreases, other things remaining constant and vice versa.
• For example, as the price of pencils increases, the quantity of erasers in demand decreases because they will become expensive when used together. Therefore, the demand for a commodity is inversely affected by the price of complementary goods.
• If the two goods are perfect complements the indifference curve is right-angled or L-shaped, as shown in Figure.

• The vertical portion of the I1, curve reveals that no amount of reduction in good Y will lead even to a slight increase in good X. For example, point A, M and В are all on the curve It but point В involves the same amount of Y but more of X than point M.
• Thus MRSXY is zero. The two goods X and Y are consumed in the desired ratio, as indicated by the slope of the ray OR at point M.

Thus, the correct answer is L-shaped to the origin.