Economics: CUET Mock Test - 3 - CUET MCQ

Foreign exchange refers to the stock of foreign currencies required to trade between countries.

The correct answer is Option 2.

Key Points

• Railways were first introduced to India in 1853. By 1947, the year of India's independence, there were forty-two rail systems.
  • In 1951 the systems were nationalised as one unit, becoming one of the largest networks in the world. Indian Railways operates both long distance and suburban rail systems.
• The Suez Canal was opened in 1869, greatly reducing the distance between Britain and India by some 4,500 miles as ships no longer needed to travel round southern Africa.
  • The Suez Canal together with the reliable service of steam-powered liners led to an increase in merchant and passenger shipping.
• The First Official Census in India was done in 1881 under Lord Rippon. It was called the First synchronised census.
  • Since 1901, it has been taking place every decade. Census 2011, is the 15th census and 7th after independence. The slogan of Census 2011 is “Our Census, Our Future”. India was the first country to adopt family planning in the world.
• Planning Commission, agency of the government of India established in 1950 to oversee the country’s economic and social development, chiefly through the formulation of five-year plans.
  • The commission’s original mandate was to raise the standard of living of ordinary Indians by efficiently exploiting the country’s material and human resources, boosting production, and creating employment opportunities for all.
• The Green Revolution was a period that began in the 1965 during which agriculture in India was converted into a modern industrial system by the adoption of technology, such as the use of high yielding variety (HYV) seeds, mechanised farm tools, irrigation facilities, pesticides and fertilizers.

The correct answer is Option 2.

Key Points

• Autonomous Investment means an investment that remains unaffected by the changes in the level of income, rate of interest, and rate of profit. On the contrary, induced investment is one that is positively related to the level of income, output, and profit.
• The establishment of public health centres and governments' investment in saving Sunder-ban forests are investments done without a profit motive.
• Autonomous Investments can include government investments, funds allocated to public goods or infrastructure, and any other type of investment that is not dependent on changes in GDP.
• Suppose the total capacity of the firm is that it can produce 500 units of output from 100 machines. Now, if the firm makes an investment to change the existing machinery, with more advanced machinery that can produce 500 units of output from 10 machines. It is said to be autonomous investment, as there is no increase in capacity.
• The government has set up public health centres in rural areas without any rate of interest and any rate of profit under the social schemes. Hence, Public Health Centres are autonomous investments.

The correct answer is 1 and 2.

Key Points

• Human Development Index (HDI):
  • ​It is a part of the Human Development Report (HDR) released by the United Nations Development Program (UNDP).
  • HDI emphasizes that people and their capabilities should be the ultimate criteria for assessing the development of a country, not economic growth alone.
  • Based on three Basic Dimensions of Human Development:
    1. A long and healthy life,
    2. Access to knowledge, and
    3. A decent standard of living.
  • These 3 dimensions are measured with the help of 4 indicators:
    • A long and healthy life: Life expectancy at Birth.
    • Access to knowledge: Expected years of schooling and mean year of schooling.
    • A decent standard of living: Gross national income per capita.
      • Hence, statements 1 and 2 are correct and 3 and 4 are incorrect.

• New Economic Policy involves economic liberalization, including the lowering of import tariffs, the deregulation of markets or the opening of those sectors to private and international competitors, and the decrease of taxes.
• The primary goal was to force the Indian economy into the "Globalization" sphere and to give it a fresh focus on market orientation.
• By abolishing all forms of unnecessary regulations, it hoped to achieve economic stabilization and transform the economy into a market economy.

Hence, the correct answer is Conservation is not included in the new industrial policy 1990-91.

The inter-relationship between economic growth and human capital formation can be explained as follows:

i. Increases the productivity of physical capital:

Physical capital refers to the stock of produced means of production. It consists of production plants, machines, tools and equipment. The skilled workers handle the productive assets in such a manner that these not only enhance their productivity but also lead to an efficient utilization of the physical capital. When the productivity increases, the pace of growth is automatically accelerated.

ii. Innovation of skills:

An educative person is more productive and skillful. He has the potential to develop new skills and innovate new techniques that can be more efficient and productive. Greater the number of skilled and trained personnel, greater will be probabilities of innovations.

iii. High participation rate and equality:

Human capital endowed with higher technical skills and innovating power is more productive and efficient. This increases the participation of more people in the process of economic growth and development. Higher the participation rate, higher is the degree of social and economic equality.

The correct option is '(B) and (C) Only'.

Key Points

• Gifts, Remittances (A) are not considered part of trade in services within the Current Account.
  • This is incorrect.
  • Gifts and remittances are part of the Current Account, but they are categorized under current transfers, not under trade in services.
  • Trade in services includes transactions in services such as financial services, tourism, and consulting, among others.
• Net Non-Factor Income (B) and Net Investment Income (C) are components of trade in services.
  • This statement is partially correct.
  • Net Non-Factor Income (B) typically refers to the net income from abroad due to interest, dividends, and other income on foreign investments minus payments made to foreign investors. However, it is more accurately categorized under the primary income of the Current Account, not strictly under trade in services.
  • Net Investment Income (C) is indeed a part of the Current Account but like Net Non-Factor Income, it falls under primary income which includes profits, dividends, and interest from foreign investments.
  • While these components are crucial parts of the Current Account, categorizing them strictly under trade in services might not be entirely accurate as they encompass broader financial transactions beyond services.
• Grants (D) are not part of trade in services within the Current Account.
  • This is correct.
  • Grants are considered transfers, not trade in services. They are typically recorded in the Current Account but under a different category of current transfers, not under services trade.
  • These are usually one-way transfers without a quid pro quo and do not constitute trade in goods or services.

Hence, the correct answer is option 2, (B) and (C) Only, which accurately reflects components associated with the Current Account but with a clarification needed regarding their precise categorization within the account. Therefore, the initial categorization of (B) and (C) directly as parts of trade in services is not entirely accurate without further context.

Repo-Rate is the rate at which RBI lends money to commercial Banks for a short period.

Key Points

• Short period:
  • The Repo Rate, or Repurchase Rate, is a key monetary policy tool used by the Reserve Bank of India (RBI) to control liquidity and inflation in the economy.
  • It is the rate at which the RBI lends money to commercial banks in the event of any shortfall of funds. This is done by purchasing government bonds from commercial banks with an agreement to sell them back at a predetermined rate.
  • This tool is primarily used for short-term purposes, making it a critical component in managing the country's monetary policy.

Additional Information

• Long period:
  • The term "long period" typically refers to the lending or borrowing of funds over an extended duration. The Repo Rate, however, is not used for such long-term transactions.
  • Long-term interest rates, such as the Marginal Standing Facility Rate or the Bank Rate, are different tools that the RBI uses for managing liquidity over longer durations.
• Very long period:
  • Similar to the "long period" option, a "very long period" is not applicable to the Repo Rate since it is specifically designed for short-term financial management.
• Market period:
  • While the Repo Rate does influence market periods by affecting the cost of borrowing for banks, the term "market period" itself does not directly describe the duration for which the RBI lends money to commercial banks through the Repo Rate mechanism.

The correct answer is 'Product Method'

Key Points

• Product Method:
  • The Product Method, also known as the Value Added Method, is a technique for calculating the aggregate value of goods and services produced within an economy over a specific period.
  • This method sums up the value added at each stage of production to avoid double counting, providing a clear measure of the economy's total output.
  • It focuses on the final products and services generated, making it a direct approach to calculate the Gross Domestic Product (GDP).

Additional Information

• Income Method:
  • This method calculates GDP by summing up all incomes earned in the economy, including wages, profits, rent, and taxes, minus subsidies.
  • It reflects the income side of the economy's performance but does not directly measure the output of goods and services.
• Expenditure Method:
  • It sums up total spending on the nation's final goods and services over a specific period.
  • The formula includes consumption, investment, government spending, and net exports (exports minus imports).
  • This approach reflects the demand side of the economy.
• Cost and Revenue Method:
  • This is not a standard approach for calculating the aggregate value of goods and services in macroeconomics.
  • Typically, the focus is on product, income, and expenditure methods for GDP calculation.

Import tariff directly raises the price of the commodity in the domestic economy.

Key Points

• Import tariff:
  • An import tariff is a tax imposed by a government on goods imported into the country.
  • The primary effect of an import tariff is to increase the cost of the imported goods in the domestic market, making them less competitive compared to locally produced goods.
  • This increase in price can reduce the quantity of imports, protect domestic industries from foreign competition, and generate revenue for the government.

Additional Information

• Import substitution:
  • Import substitution is a strategy aimed at reducing dependency on imported goods by encouraging the production of these goods domestically.
  • While it focuses on boosting local industries, it does not directly raise the price of commodities in the domestic economy.
• Export subsidy:
  • Export subsidies are financial support from the government to firms or industries to boost their exports.
  • These subsidies make domestic goods more competitive in foreign markets but do not directly affect the price of commodities in the domestic economy.
• Import liberalisation:
  • Import liberalisation involves reducing or eliminating trade barriers, such as tariffs and quotas, to allow for a freer flow of goods into a country.
  • Rather than increasing prices, it tends to lower them by increasing competition and availability of foreign goods.

Autonomous Investment increase

Key Points

• Autonomous Investment:
  • Autonomous investment refers to expenditures on capital goods that are not influenced by the current level of national income or production. This type of investment is determined by factors such as technological changes and policy decisions.
  • An increase in autonomous investment boosts overall demand in the economy, as it represents an external injection of spending that does not depend on income levels. This leads to a multiplier effect, further increasing income and output.
  • When autonomous investments increase, it directly elevates aggregate demand, as businesses are spending more on capital goods, leading to a parallel upward shift in the aggregate demand curve.

Additional Information

• Autonomous Investment decreases:
  • A decrease in autonomous investment would have the opposite effect, reducing aggregate demand and potentially leading to a decrease in national income and output. This is not what causes the aggregate demand line to shift upwards.
• Investment is Zero:
  • If investment were zero, it would imply no spending on capital goods, leading to stagnation in economic growth and no shift in the aggregate demand curve. This condition does not result in an upward shift of aggregate demand.
• Investment is Negative:
  • Negative investment would suggest disinvestment, where assets are being sold off or not replaced. This would likely decrease aggregate demand, contrary to an upward shift.

Gold standard start to loose its importance during 1920s, post the world war and rising prices of gold around the globe.

There are very few countries in the world which still follows fixed exchange rate system including Fiji, Kuwait, Morocco, and Libya,

Foreign exchange rate is the rate at which one unit of foreign currency is exchanged for some units of domestic currency.

Devaluation refers to the decrease in the value of domestic currency as planned by the government under fixed exchange rate.

ise in exchange rate leads to depreciation of domestic currency. Depreciation of currency encourages exports and inflow of foreign exchange. This process is likely to have a positive impact on the national income of the country.

Before the Bretton Woods standard, gold standard was followed. Under that system of exchange, rates were fixed or tied against US Dollar.

This is a deliberate step taken by the government to rise the value of domestic currency. This is known a revaluation of domestic currency against foreign currency.

The fixed exchange rate is determined by the government of the country.

When the value of domestic commodity increases, it indicates increase in the value of domestic currency. This situation could either be appreciation or revaluation depending upon the type of exchange rate.

Demand for foreign exchange and foreign exchange rate is indirect or inverse i.e., when foreign exchange rate increase, its demand falls.

A downward movement along demand curve is caused by fall in exchange rate, which represents appreciation of domestic currency.

Price of US Dollar rose from ₹ 63 per unit to ₹ 75 per unit, this shows that the value of domestic currency has fallen over the time period due to market forces. This is known as depreciation of domestic currency.

Rising in the value of domestic currency in the foreign exchange market is known as currency appreciation,

Under managed floating exchange rate system, market forces determine the exchange rate and excessive fluctuation is checked by the central bank.

As less units of domestic currency are required to exchange one unit of foreign currency, this situation refers to appreciation of domestic currency.

Floating exchange rate is determined by the market forces of demand and supply. Like a general price determination, exchange rate is determined at a point where demand and supply are equal.

There are many reasons that can be accounted for depreciation of Indian currency against UD Dollar, few of such reasons are listed in options.

Demand for foreign exchange and exchange rate are inversely proportional, i.e., with increase in one other fall and vice-versa.

Under managed floating exchange rate, price is determined by the market forces however, excessive fluctuation is checked by the central bank. Thus, this system has components of both fixed and floating exchange rate system and known as dirty floating exchange rate.