Economics: CUET Mock Test - 1 - CUET MCQ

Exchange of Commodity for Commodity is known as Barter System of Exchange which was followed before the evolution of money.

The correct answer is John Hicks.

Important Points

1. The British economist John Hicks is known for four contributions. He gave four major contributions to the economic sciences.
2. The first is his introduction of the idea of the elasticity of substitution. His second major contribution is his invention of the IS-LM model, a graphical depiction of the argument John Maynard Keynes,
3. Hicks’s third major contribution is his 1939 book Value and Capital, in which he showed that most of what economists then understood and believed about value theory (the theory about why goods have value) can be derived without having to assume that utility is measurable.
4. His book was also one of the first works on general equilibrium theory, the theory about how all markets fit together and reach equilibrium.
5. Hicks’s fourth contribution is the idea of the compensation test.
6. In 1972 John Hicks and Kenneth arrow jointly received the Nobel Prize for economics “for their pioneering contributions to general economic equilibrium theory and welfare theory.

Additional Information

• RJD Allen is famous for his contributions to the Partial elasticity of substitution.
• ThePareto gave the Pareto principle which states that for many outcomes, roughly 80% of consequences come from 20% of causes.
• Irving Fischer: gave the Fisher Effect which describes the relationship between inflation and both real and nominal interest rates. The Fisher Effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate.

Hence, The correct answer is John Hicks.

• The concept of “sustainable development” came into general usage after the Brundtland Commission Report (1987).
• The concept of sustainable development was emphasised by the United Nations Conference on Environment and Development (UNCED).​

Key Points

Sustainable Development (SD):

• Brundtland stated that "sustainable development is the development that meets the needs of the present generation, without compromising the ability of future generations to meet their own needs”.
• SD enables the present generation to use natural resources judiciously so that their availability is ensured for future generations too.
• The United Nations 2005 World Summit outcome document refers to three "interdependent and mutually reinforcing pillars" of sustainable development.​

Important Points

Three Pillars of Sustainability:

• The three pillars of sustainability are a powerful tool for defining the Sustainable Development problem.
• This consists of three parameters: Economic, Social, and Environmental pillars.
• If anyone pillar is weak then the system as a whole is unsustainable.
• Two popular ways to visualize the three pillars are shown in the figure below:

Social Sustainability:

• Social Sustainability focuses on social systems, such as a country, family, or organization.
• It requires them to function at a defined level of social well-being and harmony indefinitely.
• Problems like war, endemic poverty, widespread injustice, gender disparity and diversity and low education rate are symptoms of a system that is socially unsustainable.

Environmental Sustainability:

• Environmental Sustainability is the ability of the environment to support a defined level of environmental quality and natural resource extraction rates indefinitely.
• This is the world's biggest actual problem.
• This problem receives too low a priority to be solved and is consequently delayed.
• Example: Carrying capacity.

Economic Sustainability:

• Economic Sustainability is the ability of an economy to support a defined level of economic production indefinitely.
• Since the Great Recession of 2008, this is the world's biggest apparent problem that endangers the progress of environmental sustainability.
• Example: Inter and Intra-generation equity.

Thus, none of the above is not included in the parameters of sustainable development.

The correct answer is 'Marginal propensity to consume'.

Key Points

• Marginal propensity to consume is the rate of increase in ex ante consumption due to a unit increment in income.
• The term and its formula are based on observations made by famed British economist John Maynard Keynes in the 1930s during the Great Depression.
• He noted that individuals have the propensity to consume more when their income increases. MPC is useful because it relates to how a government stimulus might affect the economy.
• The formula used to calculate marginal propensity to consume is the change in consumption divided by the change in income.
• MPC = ∆C / ∆Y.

Thus, the correct answer is Marginal propensity to consume

Additional InformationLet's have a look at other options:

• Consumption Function
  • The consumption function, or Keynesian consumption function, is an economic formula that represents the functional relationship between total consumption and gross national income.
• Aggregate income
  • Aggregate income is the total of all incomes in an economy without adjustments for inflation, taxation, or types of double counting.
• Average propensity to consume
  • ​Average propensity to consume (APC) measures the percentage of income that is spent rather than saved.

• All the above-given methods are used for calculating national income
• National income is the total money value of goods and services produced by a country in a period of time.
• Methods used for calculating national income are - Value-added method (also called net output method), Income method, (also known as factor income method) and, the Expenditure method (also known as final product method).

The correct option is 'Self-employment opportunities in urban areas'.

Key Points

• 'Swarn Jayanti Shahri Rozgar Yojana' was launched by the Indian government with a focus on providing self-employment opportunities to the urban unemployed and underemployed.
  • This statement is true.
  • The scheme was aimed at creating employment by encouraging the establishment of self-employment ventures and provision of wage employment. This initiative was targeted towards individuals living in urban areas, particularly the urban poor.
  • By providing access to credit and appropriate skills, the scheme sought to empower the urban poor to start their own businesses or get gainfully employed in existing businesses.
• The scheme primarily focuses on housing for the urban poor.
  • This statement is false.
  • While housing is a critical component of urban development, 'Swarn Jayanti Shahri Rozgar Yojana' specifically targets the provision of employment opportunities, rather than housing. The main thrust is on enabling the urban poor to become self-reliant through self-employment or skilled wage employment.
  • There are other schemes by the government that are dedicated to providing housing for the urban poor, such as the 'Pradhan Mantri Awas Yojana'.
  • Therefore, this statement does not accurately represent the objectives of the 'Swarn Jayanti Shahri Rozgar Yojana'.

Hence, the statement that 'Swarn Jayanti Shahri Rozgar Yojana' aims at creating self-employment opportunities in urban areas is correct.

The correct option is '1) (A) Only'.

Key Points

• In the alternate marketing channels, Farmers sell their products directly to consumers.
  • This statement is true.
  • Alternate marketing channels are designed to reduce the layers between producers and consumers, thereby allowing farmers to sell their products directly to the end users.
  • This direct selling approach benefits farmers by potentially increasing their profit margins and gives consumers access to fresher produce.
• In the alternate marketing channels, Farmers sell their products directly to the Central Government.
  • This statement is incorrect.
  • While there are government procurement schemes, they are not typically classified under alternate marketing channels focused on direct selling to consumers.
  • Alternate marketing channels aim to bypass traditional methods which involve multiple intermediaries, not specifically targeting sales to the government.
• In the alternate marketing channels, Farmers sell their products to the Middle men.
  • This statement is incorrect.
  • The primary goal of alternate marketing channels is to minimize or eliminate the role of middlemen, thereby enabling a direct connection between farmers and consumers.
  • By selling directly to consumers or through platforms that support direct sales, farmers can avoid the traditional supply chain that includes wholesalers, distributors, and retailers.
• In the alternate marketing channels, Farmer sell their products directly to the wholesale market.
  • This statement is incorrect.
  • Selling to the wholesale market does not typically represent an alternate marketing channel as it involves selling to intermediaries rather than direct to end consumers.
  • While wholesale markets are an important component of the agricultural supply chain, alternate marketing channels seek to create different pathways for farmers to reach their market.

Hence, Statement (A) is correct and represents the true essence of alternate marketing channels.

The correct answer is 'World Trade Organisation'

Key Points

• World Trade Organisation (WTO):
  • The WTO is an international organization that deals with the global rules of trade between nations. Its main goal is to ensure that trade flows as smoothly, predictably, and freely as possible.
  • Some scholars question the usefulness of India being a member because a significant portion of international trade is conducted among developed nations, potentially limiting the benefits to developing countries like India.
  • However, being part of the WTO provides India with a platform to negotiate trade agreements and address trade disputes on an equal footing with other countries.

Additional Information

• United Nations (UN):
  • The UN is an international organization founded in 1945. It is not primarily focused on trade but on international peace and security, social progress, better living standards, and human rights.
  • While the UN plays a crucial role in global governance, its focus is broader and not limited to trade issues.
• International Monetary Fund (IMF):
  • The IMF is an international organization that aims to promote global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty.
  • Its focus is more on financial stability and support for economies rather than direct trade negotiations or regulations.
• World Bank:
  • The World Bank is an international financial institution that provides loans and grants to the governments of poorer countries for the purpose of pursuing capital projects.
  • It aims to reduce poverty by providing financial and technical assistance for development projects but does not directly deal with trade regulations or negotiations like the WTO.

Fiscal deficit

Key Points

• Fiscal deficit:
  • A fiscal deficit occurs when a government's total expenditures exceed the revenue that it generates, excluding money from borrowings. It indicates the total borrowing requirement of the government from all sources.
  • It is a measure of government borrowing in a year and reflects the financial health of a government. A high fiscal deficit may indicate a government is spending beyond its means.
  • Fiscal deficit is covered through borrowings, which can be from domestic or international sources, including issuing government securities, bonds, and taking loans from international financial institutions.

Additional Information

• Money deficit:
  • Not a standard economic term used to describe government borrowing or financial health. It might be confused with terms like "budget deficit" or "fiscal deficit," but it does not specifically refer to a recognized economic indicator.
• Macro deficit:
  • This term is not commonly used in economics to specifically describe government borrowing or fiscal policy. Economic discussions typically focus on specific types of deficits, such as fiscal deficits or trade deficits, rather than a "macro deficit."
• Micro deficit:
  • Similar to "macro deficit," "micro deficit" is not a standard term in economic discussions. Economics often distinguishes between microeconomics (the study of individual and business decisions) and macroeconomics (the study of the economy as a whole), but "micro deficit" does not refer to a common economic concept.

An increase in Bank rate can be termed as 'Contractionary monetary policy'

Key Points

• Contractionary monetary policy:
  • This policy involves raising interest rates to reduce inflation and slow down the growth of the money supply.
  • An increase in the Bank rate, which is the rate at which the central bank lends to commercial banks, makes borrowing more expensive. This discourages borrowing by both banks and individuals, leading to decreased money supply in the economy.
  • It is used to control inflation by reducing spending and investment.

Additional Information

• Expansionary monetary policy:
  • This policy involves lowering interest rates to increase the money supply, stimulate economic growth, and reduce unemployment.
  • It is the opposite of contractionary monetary policy and is used in times of economic recession or downturn.
• Contractionary fiscal policy:
  • This involves reducing government spending and/or increasing taxes to decrease the budget deficit.
  • It is not directly related to the central bank's policies but can also influence the economy by reducing inflation and slowing economic growth.
• Expansionary fiscal policy:
  • This involves increasing government spending and/or decreasing taxes to stimulate the economy.
  • Like expansionary monetary policy, it aims to reduce unemployment and kickstart economic growth but through fiscal measures rather than monetary ones.

Fiat money refers to the government- authorised money not backed by any equivalent assets.

In credit money, the money value is more than the commodity value.

Two individuals involved in the exchange under barter system must possess the good that each other wanted is known as double coincidence of wants.

Fiduciary money refers to the money which is backed by the trust between payer and payee and not by any government.

Increase/release of money in the economy will lead to increase in demand leading to increase in employment to deal with the above situation.

Central Bank of the country i.e., RBI functions as the advisor to the central government.

Loans offered leads to increase in the ability of commercial banks to create more currency in the economy.

Money supply at a given point of time is equal to the sum total of currency held by public and demand deposits with commercial banks.

Not all financial institutions are banks, there are non-banking financial institutions also like LIC.

The main aim of monetary policy of the country is to bring price stability in the country.

M₁ is the most liquid form of money measure which is comprised of CC+ DD + OD

Value of money multiplier and CRR are inversely proportional

Time deposits are less liquid in nature, so they are not a part of M , measure of money supply.

Central bank uses different measures of money supply which are arranged based upon the liquidity. M₁ is the most liquid among all, so known as Narrow Money and M₃ is less liquid and the monetary base.

Money or credit multiplier = 1/LRR So, 1/0.25 = 4

Money multiplier is inversely related to the Legal Reserve Ratio which is the sum total of CRR and SLR.

Money Created
= Primary Deposits x Money Multiplier
= 1,000 x (1/0.20)
= 1,000 x 5
= ₹ 5,000

Money Multiplier = (1/LRR)
10 = 1 / LRR
LRR = 1 / 10 = 0.10 or 10 %

There is no such assumption as of not having any savings in the economy in the process credit creation.