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.

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.

The correct answer is option 1.

Key Points

• Taxes are the major source of revenue for the Government.
• The other sources of government receipts are divided into two:
  • Revenue receipts
  • Capital receipts
• Revenue receipts:
  • These receipts neither increase the liabilities nor decrease the assets. These receipts are further divided into two: Tax receipts and non tax receipts.
  • The main feature of revenue receipts is that amount received does not need to returned to anyone.
  • These are treated as source of revenue and income which are shown on credit side of profit and loss account.
• Capital receipts:
  • These are the amounts received in the form of additional capital introduced, loans received and sales proceeds of fixed assets.
  • They either increase the liabilities or reduce the assets.
• Hence, it can be concluded that both statements 1 is correct and 2 is incorrect because Capital receipts are the amount received in the form of taking loans and selling of any fixed asset and a capital receipt is one that either raises a liability or decreases an asset.

• 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.

Important Points

• While globalization has benefited well-off consumers and also producers with skill, education, and wealth, many small producers and workers have suffered as a result of the rising competition. Globalization has had differing effects on countries, though it has benefitted advanced industrialized countries this has come at the expense of low-income undeveloped countries.
• Fair globalization would create opportunities for all and also ensure that the benefits of globalization are shared better.

Key Points

• Introduction of railways: The introduction of railways in India marks a significant historical event, significantly impacting the country's socio-economic development. The first railway line was introduced in 1853, connecting Bombay (now Mumbai) to Thane.
• British India first census: The first census in British India was conducted in 1872. This was a non-synchronous and partial enumeration that laid the groundwork for future censuses. The first complete and synchronous census on a pan-India scale was conducted in 1881.
• Incorporation of Tata Iron and Steel company: Tata Iron and Steel Company (now Tata Steel Limited) was incorporated in 1907. This event marked a crucial step in India's industrialization, setting the foundation for the development of the steel industry in the country
• The second stage of demographic transition began: The demographic transition model describes the transition from high birth and death rates to lower birth and death rates as a country develops from a pre-industrial to an industrialized economic system.
• The second stage of this transition in India began in the mid-20th century, characterized by rapid population growth as death rates declined while birth rates remained high.

Incorrect Options Analysis:

• Option 1((A), (C), (B), (D)) incorrectly orders the events, suggesting the second stage of demographic transition began before the British India first census and the incorporation of Tata Iron and Steel Company, which is historically inaccurate.
• Option 2((D), (B), (A), (C)) also misplaces the events, positioning the demographic transition and the incorporation of Tata Iron and Steel Company before the first British India census.
• Option 3((C), (B), (D), (A)) inaccurately suggests the British India first census occurred before the introduction of railways and places the demographic transition last.
• Option 4 correctly places the introduction of railways as the earliest event, followed by the first British India census, the incorporation of Tata Iron and Steel Company, and finally the beginning of the second stage of demographic transition, reflecting the accurate historical sequence of these developments in India.

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.

Morbidity

Key Points

• Morbidity:
  • The term morbidity refers to the condition of being diseased or the incidence of illness in a population.
  • It is often used in public health and epidemiology to describe how often a disease occurs in a specific area or is a measure of the health outcome within a population.
  • Morbidity rates can provide insight into the health status of a community, including the prevalence of waterborne diseases, which are transmitted through contaminated water sources.

Additional Information

• Mobility:
  • Mobility refers to the ability to move or be moved freely and easily. It does not specifically relate to health or disease conditions.
• Maternity:
  • Maternity is related to motherhood, including the period during pregnancy and shortly after childbirth. It is not directly related to the susceptibility to waterborne diseases.
• Malariality:
  • This term would specifically relate to the condition of being affected by malaria, a specific type of water-related disease transmitted by mosquitoes, not a general proneness to all waterborne diseases.

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.

The correct option is 'A - II, B - I, C - IV, D - III'.

Key Points

• Human Capital - Education and Health (A - II).
  • Human Capital refers to the economic value of a worker's experience and skills, which includes factors like education and health.
  • Education and health are crucial for improving an individual's productivity and efficiency, thus are directly related to human capital.
• Physical Capital - Technical Progress (B - I).
  • Physical capital includes the machinery, tools, and buildings that are used for production.
  • Technical progress often involves improvements in physical capital, making production processes more efficient.
• Human Capital Formation - Growth enhancing (C - IV).
  • Human Capital Formation involves the process of acquiring and increasing the number of individuals who have the skills, education, and experience that are critical for the economic and political development of a country.
  • It is growth-enhancing as it leads to higher productivity and innovation, contributing to the overall economic growth of a country.
• Human Development - Human well-being (D - III).
  • Human Development is a broad concept that involves improving people's well-being, not just economically, but also in terms of health, education, and political freedom.
  • Human well-being is at the core of human development, aiming for an expansive approach to prosperous living.

Therefore, the correct pairing is:
A - II: Human Capital - Education and Health
B - I: Physical Capital - Technical Progress
C - IV: Human Capital Formation - Growth enhancing
D - III: Human Development - Human well-being

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

When the value of foreign goods increases, this indicates decrease in the value of domestic currency. As this situation is planned by the government so, it will be referred to as devaluation.

Foreign exchange rate and supply of foreign exchange are directly related; thus, the supply curve slopes upward.

Demand for foreign exchange is inversely related to the price of foreign exchange.

Both devaluation and depreciation means decrease in the value of domestic currency however, devaluation is a component of fixed exchange rate system while depreciation is component of floating exchange rate system.

Foreign exchange market is the place where foreign currencies are traded for each other based upon the demand and supply.

Due to increase in investment from foreign country, supply of foreign exchange will increase. So, supply curve will shift to the right,

Appreciation of domestic currency will have no impact on the supply curve of foreign exchange. Though it will lead to increase in imports.

Flexible or floating exchange rate system is a market-based system where, price of foreign currency is determined at the foreign exchange market.

Appreciation of foreign currency is tied with depreciation of domestic currency. Depreciation makes domestic goods cheaper in international market leading to rise in exports from domestic market.

Intervention of central bank to keep the exchange rate in a band is known as managed floating or dirty floating exchange rate.

Both devaluation and depreciation of domestic currency makes domestic goods cheaper in international market, leading to increase in exports from domestic country.

In spot market, exchange of currency happens on the spot i.e., buying of currency and delivery happens on the same day.

Make in India Campaign leads to inflow of foreign currency. With inflow of foreign currency, supply of foreign exchange increases which further leads to fall in exchange rate.

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.

Fixed exchange rate system is the one in which, price of foreign exchange or currency is fixed by the government authority, RBI in India.

Balance of trade is the difference between value of export of goods and import of goods only. As it is not clear from given case study that whether export of goods is increasing or decreasing, thus, the actual impact can’t be predicted.

It was due to the collapse of Bretton woods system and decline in the trade with Britain, India opted out of Pound sterling to fix its currency.

Till 1975, India continued pegging its currency against pound sterling, post that Indian currency was pegged against US dollar.