UGC NET Paper 2 Economics Mock Test - 5 - UGC NET MCQ

The term was coined by J. M. Keynes who called this confidence a ‘naïve optimism’ by which an entrepreneur puts aside the fact of loss as a healthy person puts aside the expectations of death. The debate regarding the origin of this ‘animal spirit’ still continues – nobody knows whether this can be created artificially from outside or whether it is an innate thing some are born with.

Key Points

•  Animal spirits is a term coined by the famous British economist, John Maynard Keynes, to describe how people arrive at financial decisions, including buying and selling securities, in times of economic stress or uncertainty.
• In Keynes’s 1936 publication, The General Theory of Employment, Interest, and Money , he speaks of animal spirits as the human emotions that affect consumer confidence.

If people expect that inflation is going to be 5% this year, they will try to get an increase in wages of 5% in anticipation of the higher prices. Seeking higher wages in fact will cause the inflation, this phenomenon is Rational Expectations.

Key Points

•  Rational expectations is an economic theory that states that individuals make decisions based on the best available information in the market and learn from past trends.
• Rational expectations suggest that people will be wrong sometimes, but that, on average, they will be correct.

Additional Information

•  The idea of rational expectations was first developed by American economist John F. Muth in 1961.
• However, it was popularized by economists Robert Lucas and T. Sargent in the 1970s and was widely used in microeconomics as part of the new classical revolution.
• The theory states the following assumptions:

1. With rational expectations, people always learn from past mistakes.
2. Forecasts are unbiased, and people use all the available information and economic theories to make decisions.
3. People understand how the economy works and how government policies alter macroeconomic variables such as price level, level of unemployment, and aggregate output.

Key Points Philips curve: 

• The concept of the Phillips curve was given by A.W. Phillips during 1951-68.
• The Phillips curve explains an inverse relationship between the rate of inflation and the rate of unemployment.
• That is, when the rate of inflation increases, the rate of unemployment falls and vice-versa.
• The short-run Phillips curve( rectangular hyperbola shape) exhibits the inflation-unemployment trade-off.
• The long-run Phillips curve is vertical in shape which explains NAIRU and NRU( natural rate of unemployment).

Adaptive expectation: 

• Philips curve analysis holds good in the case of adaptive expectations.
• Adaptive expectations are outlined by Milton Friedman.
• According to adaptive expectations, Individuals formed their inflation expectations by considering past inflation rates.

Additional Information Rational expectations:

• The concept of rational expectation was highlighted by Dusenberry.
• According to rational expectations theory, individuals form their expected inflation rate by considering present and past inflation rates.

Bracket Creep refers to a situation where Increasing incomes due to inflation pushes individuals into higher tax slabs and leaves them worse off.

Key Points

•  We saw this situation in India between 2009 and 2013 when the rates of inflation being on the higher side, peoples’ income were increasing, but average Indian were complaining of higher burden of expenditure.
• Bracket creep occurs when inflation pushes taxpayers into higher income tax brackets or reduces the value of credits, deductions, and exemptions. Bracket creep results in an increase in income taxes without an increase in real income.
• Its a recent phenomenon experienced in economy.

D and E only

Key Points

•  The principle of non-satiation or the "more is better" assumption posits that, all else being equal, more of a good is preferred to less.
• It means a consumer's utility will increase, or at least not decrease, as they consume more of a good or service.
• This is a basic assumption made about consumer preferences in the economic analysis of consumer behavior. Options (A), (B), and (C) do not accurately represent the principle of non-satiation.
• While in certain circumstances, such as over-consumption leading to a negative effect, the 'more is better' principle might not always hold, in a basic economic context of utility theory
•  (D) correctly explains the principle of non-satiation.
• (E) is just another name for non-satiation.

Forecasting is a technique that uses historical data as inputs to make informed estimates that are predictive in determining the direction of future trends.

Key-Points

Problems in forecasting:

I. Cyclical variation:

• Cyclical variations are long-term movements that represent consistently recurring rises and declines in the activity.
• These can be due to change in the business cycle as every organization passes from all the phases of the business cycle some time or the other.
• Prosperity, recession, depression, and recovery are the four phases of the business cycle.
• It is useful in formulating policies and forecasting activities.

II. Specification error:

• Specification error means that at least one of the key features or assumptions of the models is incorrect.
• As a consequence of the specification error, estimation of the model may give incorrect or misleading results.
• While forecasting, specification error can lead to problems as inaccurate estimates will be predicted. 

Therefore, Statements B and C only include problems in forecasting.

Additional Information

I. Forecasting frequency:

• The length of a forecast and its frequency is interrelated.
• It is estimated that forecasts into the future are less reliable.
• Forecasts need to be updated on a regular periodic basis depending upon the change in the demand for the product.

II. Stationarity in data serires:

• Stationarity in data series refers to a process that has a property that the mean, variance, and autocorrelation structure do not change over time.
• A stationaries series is usually easy to predict as it is simply predicted that its statistical properties will be the same in the future.

III. Consistency in data series:

• Consistency refers to the quality or fact of remaining the same at different times.
• If there is consistency in a series of data, then the forecasting techniques adopted will be the same as it was earlier following the same pattern.

The correct answer is  Both 1 and 2Key PointsCapex Multiplier:

• Apart from housing, construction activity, in general, has significantly risen in FY23 as the much-enlarged capital budget (Capex) of the central government and its public sector enterprises is rapidly being deployed.
• Going by the Capex multiplier estimated for the country, the economic output of the country is set to increase by at least four times the amount of Capex.
• States, in the aggregate, are also performing well with their Capex plans. Hence statement 1 is correct
• Like the central government, states also have a larger capital budget supported by the centre’s grant-in-aid for capital works and an interest-free loan repayable over 50 years. 
• A capex thrust in the last two budgets of the Government of India was not an isolated initiative meant only to address the infrastructure gaps in the country.
• It was part of a strategic package aimed at crowding-in private investment into an economic landscape broadened by the vacation of non-strategic PSEs (disinvestment) and idling public sector assets.
• The multiplier effect is the proportional amount of increase or decrease in final income that results from an injection or withdrawal of spending.  Hence statement 2 is correct
• The most basic multiplier used in gauging the multiplier effect is calculated as the change in income divided by the change in spending and is used by companies to assess investment efficiency.

Key PointsConsumer behaviour:

It is the study of consumers' actions and reactions in the marketplace and the reason behind their actions.

For example, a consumer has Rs. 2000  and has different options to spend the money, like on movies, clothes and food, there are different ways in which he can spend the money. The way in which the consumer uses his money will show his behaviour or consumer behaviour. 

Important Points

There are different theories of consumer behaviour such as the law of demand, Indifference curve analysis, Revealed preference theory, and National income theory.

Chronological order of Consumer behaviour theory:

1. Marshall- Law of demand- 1890
2. J.R. Hicks- Indifference curve- 1932
3. R.G.D. Allen- Indifference curve- 1934
4. P. Samuelson- Revealed Preference theory-1938
5. R. Stone- National income accounting- 1982.

Kinked demand curve is given by Sweezy. Full cost pricing theory is given by Hall And Hitch. Sales maximisation theory is given by Baumol. Limit pricing model is given by Bains.

Concept:

Linear Programming Problem (LPP):

• Identify the ‘n’ number of decision variables that govern the behavior of the objective function (which needs to be optimized).
• Identify the set of constraints on the decision variables and express them in the form of linear equations /inequations. This will set up our region in the n-dimensional space within which the objective function needs to be optimized.
• Don’t forget to impose the condition of non-negativity on the decision variables i.e. all of them must be positive since the problem might represent a physical scenario, and such variables can’t be negative.
• Express the objective function in the form of a linear equation in the decision variables.
• Optimize the objective function either graphically (corner method) or mathematically.

Calculation:

Objective function is profit Z = 3x + 4y.

Constraints:

2x + y ≤ 4 ...... (1)

x + 2y ≥ 12...... (2)

x, y ≥ 0... ... (3)

Graph:

Solving the lines in equation (1) and (2) simultaneously:

Multiplying equation (2) by 2 we get, 2x + 4y ≥ 24 ..... (4)

Subtracting equation 4 from equation 1

-3y = -20

⇒ y = 20/3

Substituting this in equation (1), we get:

x = −4/3

∴ The lines intersect at x = (-4/3), y = 20/3.

All the points are shown in the graph below:

As you can see that there is no common feasible reason, so the given equation will have no feasible solution.

The Correct Answer is Option 2 i.e 2 only.

• Capital infusion into public sector banks by the Government of India has not steadily increased in the last decade, there has been a fall in between. Hence, statement 1 is not correct.
• To put the public sector banks in order, the merger of associate banks with the parent State Bank of India has been affected.
• Merging of banks would help in strengthening the bargaining power of the banks, reduce operational expenditure, enhance capital efficiency, streamline banking operations and reduce their NPA burden. Hence, statement 2 is correct.

The thirds paragraph clearly states that ‘the quantitative significance of this move depends upon the extent to which unaccounted, or ‘black’, wealth is held in the form of high-value currency notes of the specified denomination’.

The first paragraph clearly indicates that demonetization of Rs. 500 and Rs.1000 notes will bring the hoards into the taxman’s radar.

The correct answer is b only.

• Since independence, the Central government has imposed certain taxes on wealth, the inheritance of wealth, and gifts.
• The objective was to reduce inequality and wealth in the country.
• However, they never became significant because of ineffective implementation and extensive evasion.
• Wealth tax:
  • Levied on accumulated wealth or property of every individual.
  • The tax was abolished in the 2016 budget.
• Estate duty:
  • It was imposed on the estate of a person which was inherited by him.
  • The rate ranged from 4 to 40% of the value of the estate.
  • It was imposed and collected by the central government but proceeds passed on to states.
  • It was abolished in March 1985 as the yield was too low.
• Gift tax :
  • Imposed in April 1958.
  • Charged and collected every financial year on gifts received during the previous year.
  • Again abolished in 1998 due to low yield.

Call Money Market:

• Deals in One-Day loans or Call Loans and Loans can be renewed up to 14 days and such loans come under Notice Money market. Interbank term money goes beyond 14 days of maturity and up to 3 months is referred to as the term money market.
• No collateral security is required to cover these transactions as good will + reputation is the basis apart from the documents like promissory notes.
• Banks are the main participants and the market is sensitive to day-to-day cash position of the banks. [Hence, option A is correct]
• Its Interest rate (Call Money Rate) is the best indicator of liquidity position in a money market. EX. LIBOR (London interbank offered rate), MIBOR (Mumbai interbank offered rate) etc.
• Call Money Rate is market determined in India. So that, it can show the volatility of the economy. Ex. If there is large liquidation (withdrawal of cash), it may denotes the impending crisis.

1. Taxation Enquiry Commission (Mathur Commission) - 1953
2. Direct Tax Enquiry Committee (Wanchoo Committee) - 1970
3. Indirect Tax Enquiry Committee (Jha Committee) - 1972
4. Tax Reforms Committee (Chelliah Committee) - 1992

Human Development Index (HDI) is a static composite indicator that is used to rank the levels of development among countries. It is classified into three components, namely, life expectancy (years at birth), life expectancy(expected years of schooling), and Standard of living (GDP/GNI per capita). When a country scores a high HDI, it means that the life expectancy and education levels are high, along with the Gross National Income per capita that becomes high as well.

The indifference curves must slope down from left to right. This means that an indifference curve is negatively sloped. It slopes downward because as the consumer increases the consumption of X commodity, he has to give up certain units of Y commodity in order to maintain the same level of satisfaction.

Indifference curves are convex to the origin. As the consumer substitutes commodity X for commodity Y, the marginal rate of substitution diminishes as X for Y along an indifference curve. Thus indifference curve is steeper towards the Y axis and gradual towards the X axis.

The indifference curves cannot intersect each other. It is because at the point of tangency, the higher curve will give as much as of the two commodities as is given by the lower indifference curve. This is absurd and impossible.

Concept Used:-

An expected value is the “average” value of a random variable. The expected value of a random variable is denoted by E(x) and known as its mean.

The expected value or expectation of a random variable is given as,

Here, n is the total number of sample.

Explanation:

Given table for the values of variable x and its function is,

Here, total number of sample is 4. So the value of n is 4.

So, the mean of a random variable x for these values with the above formula can be given as,

Put the values,

Thus, the mean of a random variable is 1.5.
So, the correct option is 3.

The correct answer is None of the above.

Key Points

• Economic growth is measured in terms of the increase in the aggregate market value of additional goods and services produced, using economic concepts such as GDP and GNP. Hence, Statement 1 is incorrect. 
• Economic development is a qualitative improvement in the life of citizens of a country and is most appropriately determined by the Human Development Index (HDI). Hence, Statement 2 is incorrect. 
• Economic development refers to the overall development of the quality of life in a nation which includes economic growth and is a broader concept than Economic Growth. Hence, Statement 3 is incorrect. 

Additional Information

• India dropped two ranks in the United Nations’ Human Development Index this year, standing at 131 out of 189 countries.
• Human Development Index (HDI):
  • HDI is a statistical tool used to measure a country’s overall achievement in its social and economic dimensions.
  • It is one of the best tools to keep track of the level of development of a country, as it combines all major social and economic indicators that are responsible for economic development.
  • Pakistani economist Mahbub-ul-Haq created HDI in 1990 which was further used to measure the country’s development by the United Nations Development Program (UNDP).
  • Every year UNDP ranks countries based on the HDI report released in their annual report.
• Various indicators under HDI:
  • Calculation of the index combines four major indicators:
    • Life expectancy for health,
    • Expected years of schooling,
    • Mean of years of schooling for education, and
    • GNI per capita for the standard of living.

Explanation:

• The report is published by United Nations Educational, Scientific and Cultural Organization (UNESCO), on behalf of UN-Water and its production is coordinated by the UNESCO World Water Assessment Programme.
• The groundwater potential can be used sustainably by investments in infrastructure, institutions, trained professionals and knowledge of the resource.
• Five countries account for about 70 per cent of the unsustainable water footprint: China, India, Iran, Pakistan and US.

India’s Industrial Policy 1991

• liberalisation: Hence, Statement 1 is correct.

• Mechanism of controlling the economy, before reforms:
  • Industrial licence
  • Some goods could be produced only by small sectors
  • Price fixation
• Industrial licensing was abolished for almost all except certain product categories:-
  • Cigarettes.
  • Industrial explosives.
  • Alcohol
  • Hazardous chemicals.
  • Electronics.
  • Aerospace
  • Drugs and pharmaceuticals.

• De-reservation: Many goods produced by small scale industries have now been de reserved and in many industries, the market has been allowed to determine the prices. Hence, Statement 2 is correct.
• Financial Sector Reforms: RBI from a regulator to facilitator of financial sector. This means that the financial sector may be allowed to take decisions on many matters without consulting the RBI. Foreign and Indian pvt. Banks were allowed to set up and diversify without much obligation to RBI but RBI still had regulation on them to safeguard the interest of account holders and the nation. Foreign Institutional Investors (FII) such as merchant bankers, mutual funds and pension funds are allowed to invest in Indian financial markets. Hence, Statement 3 is correct.
• Tax Reforms: Reduced tax rates to avoid tax evasions. The tax procedures have also been simplified. Hence, Statement 4 is correct.

Thus, D is the correct answer.

The shape of an indifference curve is convex to the origin and this is based on the principle of diminishing marginal rate of substitution. If two goods X and Y are perfect substitutes, the indifference curve is a straight line with negative slope.

1. Type II error- Probability of not rejecting H0 when it was not true
2. Mean > Mode- Positively skewed distribution
3. Population is homogenous- Simple random sampling
4. Time Reversal Test- P₀₁ x P₁₀ = 1

This vicious circle of poverty shows that income in underdeveloped countries is low. According to Nurkse “The inducement to invest may be low because of the small buying power of the people, which is due to their small real income, which again is due to low productivity.