Economics: CUET Mock Test - 4 - CUET MCQ

There are majorly two types of exchange rate systems. Fixed exchange rate system is governed by the central bank while flexible exchange rate system by the market forces.

• Statement i is incorrect as capital-intensive methods prioritize machinery over labor.
• Statement ii is correct because the choice of production techniques directly influences efficiency.
• Statement iii is incorrect since the distribution problem encompasses more than just personal income levels; it includes wealth distribution among different economic units.
• Statement iv is correct as it reflects the comprehensive nature of economic decision-making.

Thus, the correct statements are ii and iv and the correct answer is Option A. 

• Statement i is correct because scarcity forces us to make decisions about how to use our resources.
• Statement ii is incorrect since the main idea is about maximizing satisfaction for people, not just focusing on profit.
• Statement iii is correct because deciding between civil goods and war goods requires looking at what society needs and what resources are available.
• Statement iv is incorrect because making economic decisions is vital for fulfilling what consumers want.
• Therefore, the correct statements are i and iii and the correct answer is Option A. 

Answer: Option D

Solution:

• Opportunity Cost refers to the value of the next best alternative forgone (A-1).
• Scarcity indicates limited resources compared to unlimited wants (B-2).
• A Centrally Planned Economy is one where the government makes all decisions (C-3),
• while in a Market Economy, prices coordinate economic activities (D-4).

In a market economy, the central problems are solved by

In a market economy, central problems are addressed primarily through the market mechanism. This involves:

• Deciding what goods to produce based on consumer demand.
• Determining the quantities of goods to be produced.
• Selecting the methods of production that are most efficient.
• Distributing the output according to market forces.

The market operates on the principles of demand and supply, where:

• If demand for a product increases, its price typically rises.
• This price change signals producers to adjust their output accordingly.

Alternatively, some problems can be addressed through economic planning, where a central authority makes decisions regarding production and distribution. However, in a market economy, the emphasis is on the free interaction of individuals to solve these issues.

The statement is incorrect because an economy does not always produce on the Production Possibility Curve (PPC). It can produce inside the PPC when:

• Resources are underutilised.
• Resources are being used inefficiently.

In such cases, the economy is not maximising its potential output of goods and services.

A firm has to pay for the inputs it needs. Therefore, inputs, on the one hand, generate costs and, on the other hand, generate output. We first study the relationship between inputs and the output; that is "production function". Then we look at the relationship between the output and costs; that is cost function.

A rational consumer is considered to be that person who makes rational consumption decisions.

In other words, the consumer who makes his choices after considering all the other alternative goods (and services) available in the market is called a rational consumer.

During deficient demand, aggregate demand is less than aggregate supply at the full employment level. This leads to excess supply of goods and services in the market. As a result, competition among sellers starts because sellers compete to attract the limited number of buyers. This situation can lead to falling prices and production cutbacks. Therefore, option a) is correct

In case of excess demand, the demand of a commodity is more than its supply. SO in this case, there will be competition among consumers and every consumer tries to purchase more of a commodity by paying higher prices. This will tend price to rise.

Hence a) Market price rise

Deficient demand refers to the situation when aggregate demand (AD) is less than the aggregate supply (AS) corresponding to full employment level of output in the economy. The situation of deficient demand arises when planned aggregate expenditure falls short of aggregate supply at the full employment level.

Excess demand occurs when the market price falls below the equilibrium price. At this lower price, consumers are willing to purchase more of the good than producers are willing to supply, causing a shortage.

The equilibrium price is where the quantity demanded equals the quantity supplied. If the price is set below this point, the lower price makes the good more attractive to consumers, increasing the quantity demanded, while producers are less willing to supply the good at this lower price, decreasing the quantity supplied. This mismatch results in excess demand.

The Great Depression highlighted that the economy can experience prolonged unemployment and downturns. This led to a new understanding in macroeconomics, which focuses on the economy as a whole.

• The economy may suffer from long-lasting unemployment.
• A holistic approach is necessary to understand economic issues.
• Macroeconomics examines the interdependence of various sectors.
• This insight was crucial for developing economic policies to address downturns.

A capitalist economy is defined by several key features:

• Private ownership of the means of production, such as factories and machinery.
• Production is primarily aimed at selling goods in the market for profit.
• There is a system of wage labour, where individuals are paid for their work.
• Profits earned are often reinvested to expand production capabilities.

In summary, a capitalist economy operates on the principles of private ownership, market-driven production, and wage-based employment.

In a capitalist economy, the State or Government has a crucial role in various economic functions. These include:

• Framing laws that govern economic activities.
• Enforcing laws to ensure compliance and fairness.
• Engaging in production activities when necessary.
• Imposing taxes to generate revenue.
• Spending on public infrastructure such as roads, schools, and healthcare services.

These functions are essential for maintaining a stable and efficient economy, highlighting the importance of government involvement beyond mere regulation.

The correct answer is A: Inflation.Explanation:

• Macroeconomics is the branch of economics that deals with the performance, structure, and behavior of the entire economy, rather than individual markets or firms.
• Inflation is a macroeconomic concept that refers to a sustained increase in the general price level of goods and services in an economy over time.
• Inflation is an important macroeconomic indicator that affects the purchasing power of consumers, the profitability of firms, and the overall health of the economy.
• Consumer's equilibrium, price determination, and producer's equilibrium are microeconomic concepts that deal with individual markets or firms, rather than the entire economy
• Therefore, inflation is the only example of macroeconomics among the given options, making option A the correct answer.

The correct answer is D: Microeconomics deals with individual behavior.

Microeconomics is the study of how households and firms make decisions, and how they interact in markets. It focuses on the behavior of individual economic agents, such as consumers, firms, and industries. Microeconomics is concerned with the allocation of resources at the micro level, such as how households and firms decide what to produce, how much to produce, and at what price to sell their products.

Macroeconomics, on the other hand, is the study of the economy as a whole. It focuses on the behavior of aggregate variables, such as GDP, unemployment, and inflation, and how they are affected by economic policies. Macroeconomics is concerned with the overall performance of the economy and the interrelationships among the various sectors of the economy.

Microeconomics does not only deal with prices, and it is not only concerned with government decisions. While government policies can affect the behavior of individual economic agents, microeconomics also considers other factors that influence their decision-making, such as technology, tastes, and preferences.

The correct answer is C: Which are for resale.

Intermediate goods, also known as producer goods or semi-finished goods, are goods that are used as inputs in the production of other goods or services. They are typically not sold directly to households or final consumers, but rather are used as inputs in the production process by firms. Intermediate goods include raw materials, components, and partially finished goods that are used in the production of final goods.

Examples of intermediate goods include steel, cotton, and plastic, which are used to produce automobiles, clothing, and toys, respectively. Intermediate goods are typically not meant for long-term use, as they are consumed or incorporated into the production of final goods.

Capital goods, on the other hand, are goods that are used to produce other goods and services. They are durable goods, such as machinery, equipment, and buildings, that are used in the production process. Capital goods are typically meant for long-term use, as they are not consumed or used up in the production process but rather are used over a period of time to produce other goods and services.

The correct answer is CAPITAL RESERVE.

• Reserve is an amount set out of profits to meet future contingencies or to strengthen the financial position of the enterprise. The amount of reserve is invested inside the business. For example: General reserve, Reserve for expansion, Dividend equalisation reserve, etc. It is mainly categorised into two parts as follows:
  • Revenue reserves: They are created out of revenue profits/receipts which are available for distribution as dividend. The amount is not available to meet capital losses as it is created to strengthen the financial position and meeting the unforeseen contingencies or some specific purpose.
  • Capital reserves: They are created out of capital profits/receipts which are available for meeting capital losses or to be used for purpose specified by the Companies Act. The amount of it can not be used for distribution of profit until and unless the company satisfies certain conditions prescribed by the Companies Act.
• Reserve fund is the amount of reserve set aside out of profits or capital and is invested in outside securities (investments made outside the business premises) for a specific purpose. For example, amount set aside out of annual profit and made an investment outside of the business for the purpose of building another department to expand its business (say) branch, this reserve is termed as reserve fund.

• On July 12, 1982, NABARD was established by transferring the agricultural credit functions of the RBI and the refinancing functions of the former Agricultural Refinance and Development Corporation (ARDC).

Key Points

• The National Bank for Agriculture and Rural Development (NABARD) was created by an Act of Parliament on July 12, 1982. As a Development Bank, NABARD is responsible for providing and regulating credit and other facilities for the promotion and development of agriculture, small scale industries, cottage and village industries, handicrafts and other rural crafts, and other allied economic activities in rural areas in order to promote integrated rural development.
• The mission is to promote sustainable and equitable agriculture and rural development through participatory financial and non-financial interventions, innovations, technology, and institutional development.

The correct answer is Option 3.

Key Points

• Globalization is the process of rapid integration of countries.
• This is happening through more significant foreign trade and foreign investment.
• MNCs are playing a significant role in the globalization process. More and more MNCs are looking for locations around the world that are cheap for their production.
• As a result, production is organized in complex ways. Technology, particularly IT, has played a big role in organizing production across countries.
• In addition, the liberalization of trade and investment has facilitated globalization by removing barriers to trade and investment.
• There is the transfer of technology, up-gradation of technology, and sharing of benefits
• Competition has increased and the quality of goods and services has improved.

Explanation:
Globalization does not have a uniform impact on all countries. Its effects vary depending on factors like economic development, political systems, and societal structures in different countries. Some countries benefit more from globalization, while others may face negative consequences such as economic inequality or cultural erosion. Therefore, the statement that globalization has a uniform impact on all countries is incorrect

The correct option is ' ₹2000 crore'.

Key Points

• A trade deficit occurs when the total value of a country's imports exceeds the total value of its exports.
• In this scenario, the trade deficit is mentioned to be Rs. 2000 crores. This indicates that the country has spent Rs. 2000 crores more on its imports than it has earned from its exports.
• The value of imports is given as ₹4000 crore. This is the total amount that the country has spent on purchasing goods and services from other countries.
• To calculate the value of exports, one must understand that the trade deficit (the amount by which imports exceed exports) is the difference between the value of imports and the value of exports.
• Therefore, to find the value of exports, we subtract the trade deficit from the value of imports. Mathematically, it is represented as: Value of Exports = Value of Imports - Trade Deficit.
• Applying the given numbers: Value of Exports = ₹4000 crore - ₹2000 crore = ₹2000 crore.
• Thus, the value of exports in this situation is ₹2000 crore, which means the country has earned ₹2000 crore by selling goods and services to other countries.

Additional Information

• A trade deficit is not inherently bad; it can indicate that a country is importing capital goods that could be used to enhance productivity or consumer goods that are not produced domestically.
• However, a persistent trade deficit may lead to debt accumulation or affect the value of the country's currency on the global market.
• Understanding trade dynamics is crucial for policymakers to formulate strategies that enhance export competitiveness and manage import dependencies.

Key Points

Import substitution:

• Import substitution is an economic policy aimed at reducing dependency on imported goods by encouraging the production of these goods domestically.
• The goal is to support local industries in developing their capacity to produce goods that the country has been importing, thereby saving foreign exchange, creating jobs, and fostering industrial growth.
• This approach often involves protective tariffs and other forms of trade barriers to shield domestic industries from foreign competition.

Additional Information

Export promotion

• This is a strategy aimed at encouraging industries within a country to export their products, rather than focusing on replacing imports with domestic production.
• It involves various government measures to assist companies in entering foreign markets, such as subsidies, tax incentives, and support in meeting foreign regulatory requirements.
• Export promotion is not directly related to the concept of replacing imports with domestic production, making it an incorrect answer.

Domestic substitution:

• This term is not commonly used in economic policy discussions in the context provided. While it might imply focusing on the domestic production of goods, it lacks the specific connotation of replacing imported goods with domestic production that is central to import substitution.
• Therefore, it does not accurately describe the policy aimed at reducing imports in favor of domestic production.

Export substitution:

• This term could be confusing and is not standard in economic discussions. It might imply replacing one set of export goods with another but does not convey the specific goal of reducing imports through domestic production.
• The concept is unrelated to the policy of encouraging domestic industries to produce goods that would otherwise be imported, making it an incorrect choice.

(A) Total Product (TP): The total output produced by employing a variable factor (e.g., labor). Matches with (I).
(B) Average Product (AP): Output per unit of the variable factor (TP divided by units of input). Matches with (II).
(C) Marginal Product (MP): The additional output gained by adding one more unit of the variable factor. Matches with (III).
(D) Law of Diminishing Marginal Product: States that beyond a point, adding more of a variable factor reduces MP. Matches with (IV).
The correct pairing is (A) - (I), (B) - (II), (C) - (III), (D) - (IV), which corresponds to option (b).

(A) Average Fixed Cost (AFC): TFC divided by output; it declines as output increases due to spreading fixed costs. Matches with (I).
(B) Average Variable Cost (AVC): TVC divided by output; it falls initially (efficiency) then rises (diminishing returns). Matches with (II).
(C) Short Run Marginal Cost (SMC): Change in TC per unit of output; U-shaped due to the law of variable proportions. Matches with (III).
(D) Long Run Average Cost (LRAC): U-shaped due to economies and diseconomies of scale (returns to scale). Matches with (IV).
The correct pairing is (A) - (I), (B) - (II), (C) - (III), (D) - (IV), which corresponds to option (a).

Under fixed exchange rate, the most used currency for pegging was US Dollar.

Any outflow of foreign currency is recorded on the debit side of current account while any inflow of foreign currency is recorded on the credit side of current account.

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