UGC NET Paper 2 Economics Mock Test - 6 - UGC NET MCQ

The correct answer is crowding out.

Key PointsCrowding Out Effect

• This refers to a phenomenon where increased borrowing by the government to meet its spending needs causes a decrease in the number of funds that are available to meet the investment needs of the private sector.
• In other words, when the government is increasing its expenditure, private expenditure comes down. Hence, Option 1 is correct.
• Sometimes, the government adopts an expansionary fiscal policy stance and increases its spending to boost economic activity.
• This leads to an increase in interest rates. Increased interest rates affect private investment decisions.
• A high magnitude of the crowding-out effect may even lead to lesser income in the economy.
• With higher interest rates, the cost for funds to be invested increases and affects their accessibility to debt financing mechanisms.
• This leads to lesser investment ultimately and crowds out the impact of the initial rise in the total investment spending.

Important Points

• Pump priming
  • It is the action taken to stimulate an economy, usually during a recessionary period, through government spending, and interest rate and tax reductions.
  • The term pump priming is derived from the operation of older pumps; a suction valve had to be primed with water so that the pump would function properly.

• Dumping:

  • Dumping in the financial world occurs when a company or a country exports its products at a price lower than its domestic price.
  • Exporters dump to compete with the producers and sellers in the importing country.
  • Dumping enables consumers in the importing country to obtain access to goods at an affordable price.
  • However, it can also destroy the local market of the importing country, which can result in layoffs and the closure of businesses.
  • The World Trade Organization (WTO) and European Union(EU) regulate dumping by putting tariffs and taxes on trading partners.

Concept:

If a group of n₁ observations has mean x̅₁ and S.D σ₁ and another group of n₂ observations has mean x̅₂ and S.D σ₂, then the mean x̅ and S.D of the combined group of  (n₁ + n₂) observations are given by

Calculation:

Given:

Aditya - L1 First Indian mission to study the Sun

• The Aditya-1 mission was conceived as a 400kg class satellite carrying one payload, the Visible Emission Line Coronagraph (VELC) and was planned to launch in a 800 km low earth orbit.  A Satellite placed in the halo orbit around the Lagrangian point 1 (L1) of the Sun-Earth system has the major advantage of continuously viewing the Sun without any occultation/ eclipses. 
• Therefore, the Aditya-1 mission has now been revised to “Aditya-L1 mission” and will be inserted in a halo orbit around the L1, which is 1.5 million km from the Earth.  The satellite carries additional six payloads with enhanced science scope and objectives.
• The project is approved and the satellite will be launched during 2019 – 2020 timeframe by PSLV-XL from Sriharikota.

The correct answer is Only 2 and 3. 

Key Points

Union Budget 2023–24:

• The government proposes to spend Rs 45,03,097 crore in 2023-24, which is an increase of 7.5% over the revised estimate of 2022-23.
• The government has estimated a nominal GDP growth rate of 10.5% in 2023-24
• Receipts (excluding borrowings) in 2023-24 are estimated to be Rs 27,16,281 crore, an increase of 11.7% over the revised estimates of 2022-23.
• Gross tax revenue is budgeted to increase by 10.4% over the revised estimates of 2022-23, which is about the same as the estimated nominal GDP growth of 10.5% in 2023-24.
• Gross tax revenue is budgeted to increase by 10.4% over the revised estimates of 2022-23, which is about the same as the estimated nominal GDP growth of 10.5% in 2023-24.
• The  highest receipt is from GST, then Corporation Tax, Taxes on Income and Union Excise Duties.
• Breakup of central government receipts in 2023-24 (Rs crore):
• 

Additional Information

 Union Budget 2023–24:

• Seven priorities(Pillars) of the budget ‘Saptarishi’ are inclusive development, reaching the last mile, infrastructure and investment, unleashing the potential, green growth, youth power and financial sector.
• The government proposes to spend Rs 45,03,097 crore in 2023-24, which is an increase of 7.5% over the revised estimate of 2022-23.
• The government has estimated a nominal GDP growth rate of 10.5% in 2023-24

UNION BUDGET:

• As per Article 112 of the Constitution, the Union Budget is the statement of estimated receipts and expenditures of the government.
• It is also known as the Annual Financial Statement of the Government.
• The Department of Economic Affairs, Ministry of Finance (MoF), is the nodal body responsible for preparing the budget.
• Aside from the Finance Minister's Budget Speech, the main budget documents that are given to Parliament are the Finance Bill (Article 110), the Annual Financial Statement (Article 112), the Demands for Grants (Article 113), and the Fiscal Policy Statements required by the FRBM Act

The Correct Answer is Option 4 i.e All of the above.

• Basel Convention:
  • It is an international treaty signed in 1989 and came into effect from 1992.
  • it was designed to protect human health and the environment against the adverse effects of hazardous wastes.
  • it regulated the movements of hazardous waste between nations, and specifically to prevent the transfer of hazardous waste from developed to less developed countries.
• Rotterdam Convention:
  • It was signed in the year 1998 and came into effect from 2004.
  • It is a multilateral environmental agreement to promote shared responsibilities in relation to the importation of hazardous chemicals.
• Stockholm Convention:
  • It was signed in the year 2001 and came into effect from 2004.
  • It is a multilateral environmental agreement to protect human health and the environment from persistent organic pollutants (POPs).

The correct answer is 1, 2 and 3.

Key Points

• Minimum Support Price:
  • The Commission for Agricultural Costs & Prices (CACP) in the Ministry of Agriculture recommends MSPs.
  • The CACP submits its recommendations to the government in the form of Price Policy Reports.
  • Cabinet Committee on Economic Affairs (CCEA) of the Union government takes a final decision on the MSPs and other recommendations made by the CACP. Hence, Statement 1 is incorrect. 
  • The Farmers Produce Trade and Commerce (Promotion and Facilitation) Act, 2020 aims to facilitate lucrative prices for farmers through competitive alternative trading channels to promote barrier-free inter-state and intra-state trade of agriculture goods.
  • It does not abolish the MSP regime. Hence, Statement 2 is incorrect. 
  • The current MSP regime is based on 1.5 times the A2+FL costs. Hence, Statement 3 is incorrect. 
  • A2+FL includes A2 plus an imputed value of unpaid family labour.
  • Swaminathan Committee recommended a ‘C2’ cost that is a more comprehensive cost that factors in rentals and interest forgone on owned land and fixed capital assets, on top of A2+FL.

Important Point 

• CACP:
  • The CACP is an attached office of the Ministry of Agriculture and Farmers Welfare, formed in 1965.
  • It is a statutory body that submits separate reports recommending prices for Kharif and Rabi seasons.

The correct answer is Macroeconomic Framework Statement.

Key Points

• In accordance with Section 3(5) of the Fiscal Responsibility and Budget Management Act of 2003, the Macroeconomic Framework Statement is delivered to Parliament.
• Along with a description of certain underlying assumptions, it offers an evaluation of the economy's growth prospects.
• It also includes an evaluation of the GDP growth rate, the domestic economy, the external sector's stability, the central government's fiscal balance, and the external sector's balance of payments.

Additional Information

•  The Fiscal Responsibility and Budget Management Act of 2003 requires the Central Government to present the following fiscal policy statements to both Houses of Parliament each fiscal year, with the exception of the Medium-Term Expenditure Framework Statement:
  (a) the Medium-Term Fiscal Policy Statement
  (b) the Fiscal Policy Strategy Statement
  (c) the Macro-economic Framework Statement; and
  (d) the Medium-Term Expenditure Framework Statement.
• An assessment of the fiscal balance of the Central Government, price-related variations, GDP growth rate, and the external sector balance of the economy are all included in the Macroeconomic Framework Statement, which gives a broad overview of the economy.

Its marginal products' functions (mpl and mpk) are of degree 3.

The correct answer is 1 and 3 only.

Key Points

• When the RBI wants to increase the money supply in the economy, it purchases government securities from the market which led to the flow of more money in the market. Hence statement 1 is correct.
• Deposit of currency in commercial banks by the public does not increase instead decreases the supply of money in the market. Hence statement 2 is not correct.
• Borrowing by the government from the Central Bank led to the release of money to the Central Bank which eventually releases money in the market via loans etc. Hence statement 3 is correct.
• The sale of government securities to the public by the Central Bank leads to reduce the money supply in the market. Hence statement 4 is not correct.

The correct answer is dollars and other hard currencies.

• The concept of international liquidity is associated with international payments that arise out of international trade in goods and services.
• International liquidity consists of all the resources that are available to the monetary authorities of countries for the purpose of meeting balance of payments deficits.
• Such liquidity ranges from assets readily available to resources that become available only after extensive negotiation.
• The primary medium of international liquidity are gold and those foreign currencies which are universally acceptable in the settlement of international transactions.
• The problem of international liquidity exists essentially for developing countries.

The correct answer is Both 1 and 2.

• Total-factor productivity (TFP) is also called multi-factor productivity.
  • It is usually measured as the ratio of aggregate output (e.g., GDP) to aggregate inputs.
  • Total factor productivity is a measure of economic efficiency and accounts for part of the differences in cross-country per-capita income.
  • The rate of TFP growth is calculated by subtracting growth rates of labor and capital inputs from the growth rate of output. Hence, Statement 1 is correct.
• Technology growth and efficiency are regarded as two of the biggest sub-sections of Total Factor Productivity, the former possessing "special" inherent features such as positive externalities and non-rivals which enhance its position as a driver of economic growth.
• Total Factor Productivity (TFP) is often considered the primary contributor to GDP Growth Rate.
• While other contributing factors include labor inputs, human capital, and physical capital. Total factor productivity is affected by a huge variety of technological, economic, and cultural factors. Innovation, investment in more productive sectors, and economic policies aimed at liberalization and competition all boost TFP.
• Conversely, underdeveloped financial markets that fail to allocate capital efficiently, restrictive labor practices, environmental regulations, or anything else that affects the aggregate productivity of the economy, reduce it.

The correct answer is Individuals voluntarily contribute to funding public goods according to their personal valuation.
Key Points 

• The Lindahl equilibrium is a theoretical construct that occurs when individuals voluntarily contribute to the funding of a public good in a manner that directly reflects their personal valuation of it. In other words, each individual would pay a price for the public good based on how much they value or benefit from it.
• This concept mirrors principles of fairness by ensuring that each person pays in accordance with their benefit derived from the public good.
• Notably, it converges towards an efficient equilibrium where everyone's aggregate willingness to pay for the public good equals its cost of provision.
• However, it's worth noting that Lindahl equilibrium can be challenging to achieve in reality.
• Reaching this state would require perfect information about each individual's valuation of the public good, which is rarely available, and faces difficulties like strategic behaviour or the free-rider problem among individuals.
• In spite of these challenges, Lindahl's theory provides a conceptual framework that highlights the intricacies of public goods provision and paves the path for equitable cost sharing among the beneficiaries

The third paragraph clearly states that Stressed Assets Lending Fund (SALF) will provide last mile funding or working capital funding to assets in trouble because of funding constraints.

The correct answer is ​1 and 2 only.

Key Points

• Cost-Push Inflation:
  • Cost-push inflation occurs when overall prices increase (inflation) due to increases in the cost of wages and raw materials.
  • Cost-push inflation can occur when higher costs of production decrease the aggregate supply (the amount of total production) in the economy. Hence, statement 1 is correct.
  • Since the demand for goods hasn’t changed, the price increases from production are passed onto consumers creating cost-push inflation.
  • Increased labour costs can create cost-push inflation such as when mandatory wage increases for production employees due to an increase in minimum wage per worker. Hence, statement 2 is correct.
  • Rising prices caused by consumers are called demand-pull inflation. Hence, statement 3 is incorrect.
  • Demand-pull inflation includes times when an increase in demand is so great that production can’t keep up, which typically results in higher prices.
  • In short, cost-push inflation is driven by supply costs while demand-pull inflation is driven by consumer demand—while both leads to higher prices passed onto consumers.

• Monetary and fiscal policies are commonly employed by policymakers to address exogenous shocks and stabilize the economy in a closed system. While these tools can indeed help to manage short-term economic fluctuations, they are unable to independently generate sustainable long-term growth.
• Monetary policy, implemented by central banks, involves actions such as adjustments to interest rates, open market operations, and reserve requirements to manage the money supply within the economy.
• These actions may help stabilize financial conditions and control inflation but cannot drive long-term growth by themselves.
• Fiscal policy, which is driven by the government, encompasses measures such as changes in taxation, spending, and public investment to influence aggregate demand and economic activity.
• While these policies can provide a short-term boost or stabilize the economy during downturns, they alone are not sufficient to ensure sustainable long-term growth.
• Sustainable growth largely depends on factors such as:
  • Structural Reforms: Implementing reforms to improve the efficiency and competitiveness of markets, policies, and institutions.
  • Technological Advancements: Encouraging innovation and the adoption of advanced technologies to increase productivity and enhance economic output.
  • Productivity Improvements: Developing measures that improve the overall productivity of the labour force and capital resources.
  • Education and Skills Development: Investing in the education and skills training of the labour force to match the evolving demands of the economy.
  • Infrastructure Investment: Ensuring continued investment in infrastructure to support the growth and development of various industries.
• In summary, while monetary and fiscal policies play vital roles in addressing the short-term effects of exogenous shocks and stabilizing closed economies, they cannot generate sustainable growth on their own. Long-term growth requires a multifaceted approach that addresses structural reforms, technological advancements, productivity improvements, and investment in key areas such as education and infrastructure.

Treasury Bills:

• Treasury bills are short-term money market instruments, which are issued by the RBI on behalf of the Government of India (GoI).
• The GOI uses these funds to meet its short-term financial requirements.

Comparative advantage is a principle of economics which states that trade between two countries will be mutually beneficial as long as their domestic opportunity costs of production differ.

Comparative advantage occurs when one country can produce a good or service at a lower opportunity cost than another. This means a country can produce a good relatively cheaper than other countries. The theory of comparative advantage states that if countries specialise in producing goods where they have a lower opportunity cost – then there will be an increase in economic welfare.

Public enterprise, a business organization wholly or partly owned by the state and controlled through a public authority. Some public enterprises are placed under public ownership because, for social reasons, it is thought the service or product should be provided by a state monopoly.

If two goods are perfect substitutes then the indifference curves will have a constant slope since the consumer would be willing to switch between at a fixed ratio. The marginal rate of substitution between perfect substitutes is likewise constant.

If an increase in consumer income leads to a decrease in demand for camping equipment, then camping equipment is an inferior good.

Intrinsic value is a measure of what an asset is worth. This measure is arrived at by means of an objective calculation or complex financial model, rather than using the currently trading market price of that asset. In financial analysis this term is used in conjunction with the work of identifying, as nearly as possible, the underlying value of a company and its cash flow. In options pricing it refers to the difference between the strike price of the option and the current price of the underlying asset.

The correct answer is Input- output Isoquant.Key Points

• Input-Output Isoquant (L-shaped isoquant)
  • An isoquant can be L-shaped when the given factor inputs are perfect complements.
  • The factors are said to be perfect complements when these are employed in fixed proportions.
  • For example, if 2 units of labour and 3 units of capital are employed to produce 50 units of X commodity, and, 4 units of labour and 6 units of capital are employed to produce 100 units of commodity X, this shows that the two factors are being used in a fixed proportion at different levels of output and hence these are perfect complements.

Important Points

• Diagrammatic presentation of an input-output isoquant

• In the figure, Q₁ and Q₂ are input-output isoquants which are L-shaped.

Thus, if the isoquant is L-shaped, it is known as an input-output isoquant.

Thus devaluation helps to improve BOP deficit of a country by increasing its exports and reducing its imports. But the extent to which it will succeed depends on the country's price elasticities of domestic demand for imports and foreign demand for exports.

Unanticipated inflation occurs when people do not know inflation is going to occur until after the general price level increases. When this happens, many individuals are left unprotected, such as lenders who get paid back with a money that has a reduced purchasing power.

National Agricultural Cooperative Marketing Federation of India Ltd (NAFED) is an apex organization of marketing cooperatives for agricultural produce in India, under Ministry of Agriculture, Government of India.

The main difference between the Harrod-Domar (HD) model and the Solow model is that HD assumes constant marginal returns to capital, while Solow assumes decreasing marginal returns to capital.