UGC NET Paper 2 Economics Mock Test - 8 - UGC NET MCQ

Given:

In a test, the probability of A passing the test is 3/17 and the probability of B passing the test is 9/14. 

Formula:

Probability = (Favourable case)/(Total)

Probability(getting a) = 1 – (Probability of not getting a)

Calculation:

The probability of A not passing the test is 14/17

The probability of B not passing the test is = 5/14

The probability of both of them failing the test = (14/17)(5/14) = 5/17

• The Lindahl equilibrium, proposed by Erik Lindahl, is a concept that identifies the optimal level of provision for public goods by valuing them according to each individual's willingness to pay.
  • In this equilibrium, each person contributes to the public good in accordance with their perceived benefit from it, highlighting principles of both efficiency and fairness in public goods provision.
• Further, the Swedish economist Knut Wicksell proposed that for public expenditure to be optimal, the marginal social cost (the total cost society pays for the production of an extra unit of the good) should be equal to the marginal social benefit (the total benefits society gains from consuming an extra unit).
  • This implies achieving a balance between societal cost and benefit in public good provision.
• Integrating these concepts is Paul Samuelson's theory of public expenditure, which posits that for optimal provision of a public good, the sum of each individual's marginal rate of substitution (or their willingness to pay) should be equal to the marginal cost of providing that good.
  • These theories are of significant importance in understanding the "free riders' problem," a widely recognised issue in economics that arises due to the non-excludable nature of public goods, allowing individuals to benefit without contributing to the cost, which can lead to under-provision in a free-market economy.
• In essence, Lindahl's equilibrium, Wicksell's proposal, and Samuelson's theory each provides intricate solutions addressing the complexities inherent in public goods provision, including navigating the free rider problem.
• Hence, the statement that accurately describes the relationship between Lindahl equilibrium, Wicksell's proposal, marginal social cost, Samuelson's theory of public expenditure, and the free riders' problem is the Lindahl equilibrium refers to the optimal allocation of public goods based on individuals' willingness to pay for these goods, while Knut Wicksell proposed the idea of equating marginal social cost with the optimal public expenditure, which is a key component of Samuelson's theory and is related to the free riders' problem.

The correct answer is Stationary time series have a constant mean and variance, while non-stationary time series do not.

Concept: 

• Stationary vs Non-Stationary time series: A time series is a sequence of data points collected at regular intervals.
• A stationary time series is one where the mean, variance, and autocovariance are constant over time.
• This means that the properties of the series do not change over time and patterns in the data are consistent.
• In contrast, a non-stationary time series has a mean or variance that changes over time, or exhibits a trend or seasonal pattern.
• The presence of non-stationarity can make it difficult to model and forecast the time series.

Explanation: 

• A stationary time series is one where the mean, variance, and autocovariance are constant over time. A non-stationary time series, on the other hand, has a mean or variance that changes over time, or exhibits a trend or seasonal pattern.

The correct answer is 2 only

In News

•  The Reserve Bank of India’s Monetary Policy Committee (MPC) has raised the policy repo rate by 50 basis points (bps) to 5.9%.

Key Points 
Expansionary monetary policy

• Expansionary monetary policy is when the Reserve Bank of India uses its monetary policy tools to stimulate the economy.
• It increases the money supply, lowers interest rates, and increases demand.  
• A reduction in SLR would mean higher liquidity for the banks, so they would have more funds to lend.
  • This would tend to reduce lending rates and increase demand in the economy.
  • The SLR is the reserve that commercial banks in India are required to maintain in the form of cash, gold reserves, and government-approved securities before providing credit to customers. Hence, statement 1 is incorrect. 
• Marginal Standing facility (MSF) is a special window for commercial banks to borrow from the RBI against approved government securities, in case of an emergency such as an acute cash shortage.
  • MSF rate is generally higher than the Repo rate.
  • An increase in the MSF rate leads to higher borrowing costs for the banks and thus, reduces the money supply in the economy.
  • It is a contractionary monetary policy. Hence, statement 2 is correct. 
• A cut in the repo rate means the cost of borrowing from the Reserve Bank will be lower for commercial banks.
  • The rate cut will further help banks to lower loan interest rates for borrowers.
  • Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. If there is cut in Repo Rate the banks will be able to borrow from RBI at lower rates. This will increase the liquidity in the market as customers will be getting money at lower rates. Hence, statement 3 is incorrect. 
  • In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank.
  • This ultimately reduces the money supply in the economy and thus helps in arresting inflation.

The correct answer is N. Kaldor

• The stock adjustment principle was given by The Kaldor.
• Before this The Accelerator Theory of Investment was proposed.

 Key Points

1. The acceleration principle held that the demand for capital goods is a derived demand and that changes in the demand for output lead to changes in the demand for capital stock and, hence, lead to investment.
2. The flexible accelerator theory removes one of the major weaknesses of the simple acceleration principle that the capital stock is optimally adjusted without any time lag.
3. In the flexible accelerator, there are lags in the adjustment process between the level of output and the level of capital stock.
4. This theory is also known as the capital stock adjustment model.

Additional Information

1. The flexible accelerator included both demand and supply allowing for lags in the adjustment of the actual capital stock towards the optimal level.
2. The theory of flexible accelerator has been developed in various forms by Chenery, Goodwin, Koyck and Junankar. But the most accepted approach is by Kock.

Hence, The correct answer is N. Kaldor.

Revenue receipts of a government are of two kinds—Tax Revenue Receipts and Non-tax Revenue Receipts.

Tax Revenue Receipts: This includes all money earned by the government via the different taxes the government collects, i.e., all direct and indirect tax collections.

Non-tax Revenue Receipts: This includes all money earned by the government from sources other then taxes. In India they are:

• Profits and dividends which the government gets from its public sector undertakings (PSUs).
• ​Interests received by the government out of all loans forwarded by it, be it inside the country (i.e., internal lending) or outside the country (i.e., external lending). It means this income might be in both domestic and foreign currencies.
• Fiscal services also generate incomes for the government, i.e., currency printing, stamp printing, coinage and medals minting, etc.
• General Services also earn money for the government as the power distribution, irrigation, banking, insurance, community services, etc.
• Fees, Penalties and fines received by the government. 
• Grants which the governments receive—it is always external in the case of the Central Government and internal in the case of state governments.

Hence, option C is correct.

The correct answer is Both A and R are true, and R is the correct explanation of A 

Key Points

•  Assertion A: It's accurate that payment banks would benefit from being integrated into the UPI ecosystem. This strategy would allow them to facilitate instant money transfers and a host of other advantages brought by the UPI framework, enhancing their competitiveness and the value offered to customers.
• Reason R: By having a form of fees on transactions or alternatively, while providing some valuable and unique benefits along with UPI, payment banks could increase the adoption of their wallets. Simultaneously, it could provide an attractive alternative for merchants and customers, and thus, it would give a compelling reason to use the UPI-enabled wallet, thereby driving adoption.

Given these points, the answer - "Both A and R are true and R is the correct explanation of A" - makes sense. The integration of payment banks with the UPI ecosystem (A) can, as a strategy, spur the adoption and wider utility of wallets (R).

Additional Information Let's explore additional nuances regarding statements A and R, which support the selected answer:

Assertion A:

Expanded Services: Payment banks, although not allowed to lend, can provide a range of services like money transfers, bill payments, and other transactional operations. Being part of the UPI ecosystem allows them to expand these services significantly.

• Financial Inclusion: Payment banks usually target underbanked and unbanked sections of society. UPI, with its usability and reach, can aid payment banks in this objective, promoting financial inclusion.
• Competitive Edge: Being part of the UPI ecosystem provides payment banks with a competitive edge, particularly against traditional banks. It allows them to offer quick, seamless digital transactions in competition with full-service banks.

Reason R:

• Incentives for Wallet Use: While the loading fees might be seen as a disadvantage initially, the overall convenience, speed, and ease of use can provide enough incentive for users to adopt the wallet despite the fees. This could result in wider adoption among users and merchants.
• Revenue Stream: The fees generated from UPI transactions can be a valuable revenue stream for payment banks, which don't have lending services.
• Unified Platform: With their integration into the UPI ecosystem, payment banks can offer a more unified and seamless platform for their customers, where they can manage their funds and perform transactions effortlessly.

In summary, the link between payment banks and the UPI ecosystem signifies an important shift in financial transactions – from traditional, often cumbersome methods to quicker, more flexible digital payments, which in part, drive adoption due to their convenience and ease of use.

• Compensation Criterion was given by Kaldor-Hicks.
• Impossibility Theorem was given by Kenneth Arrow.
• Managerial Discretion Model was given by Williamson.
• Uncertainty Theory of Profits was given by F. H. Knight.

The correct answer is 3 only.

• The ‘Digital India’ Programme was launched by the Prime Minister on 1st July 2015.
• Digital India aims to provide the much-needed thrust to the nine pillars of growth areas, namely Broadband Highways, Universal Access to Mobile Connectivity, Public Internet Access Programme, e-Governance: Reforming Government through Technology, e-Kranti - Electronic Delivery of Services, Information for All, Electronics Manufacturing, IT for Jobs and Early Harvest Programmes.
• The programme is centred around three key areas, namely, Digital Infrastructure to every citizen, Digital services & governance on demand and Digital empowerment of citizens.
• The Government’s ambitious “Digital India” plan aims to digitally connect all of India's villages and gram panchayats by broadband internet, promote e-governance and transform India into a connected knowledge economy. (Hence statement 3 is correct)

The correct answer is 1 and 3.

In News

• The Bihar government has decided to accord permission for exploration of the “country’s largest” gold reserve in Jamui district.

Key Points

• As per a Geological Survey of India (GSI) survey, around 88 million tonnes of gold reserve, including 37.6 tonnes of mineral-rich ore, are present in Jamui district. 
• The largest reserves of gold ores are located in Bihar (44 per cent), followed by Rajasthan (25 per cent), Karnataka (21 per cent), West Bengal (3 per cent), Andhra Pradesh (3 per cent), Jharkhand (2 per cent). 
• The remaining 2 per cent reserves are in Chhattisgarh, Madhya Pradesh, Kerala, Maharashtra and Tamil Nadu. 
• As per the available legislations in the country, all minerals have been classified into two categories namely. 
  • Major minerals: major minerals are minerals like agate, asbestos, barytes, bauxite, cadmium, calcite, china clay, coal. Copper lead, manganese, mica, nickel, rock phosphate, soapstone, tungsten, wollastonite, zinc, etc., as specified in second schedule appended with the mmdr act 1957. 
  • Minor minerals: the minor mineral are building stone, gravel, ordinary clay, ordinary sand and any other mineral which the central government may by notification in the official gazette declare as minor mineral.
• The MMDR Amendment Act of 2015 introduces Mineral Concessions Grant through auctions to bring transparency and remove discretion; The District Mineral Foundation (DMF) to address the longtime grievance of the people affected by mining; and the National Mineral Exploration Trust (NMET) for incentivizing regional and detailed exploration to fill the gaps in exploration in the country, and stringent measures to check illegal mining.
• The State Governments are the owners of minerals located within the boundary of the State concerned. 
• District Mineral Foundations are statutory bodies in India established by the State Governments by notification. They derive their legal status from Mines and Minerals (Development and Regulation) Act, 1957.
• The objective of District Mineral Foundation is to work for the interest of the benefit of the persons and areas affected mining related operations in such manner as may be prescribed by the State Government. 
• The Central Government is the owner of the minerals underlying the ocean within the territorial waters or the Exclusive Economic Zone of India.

• The criteria that a voting system must meet according to Arrow's Impossibility Theorem include all of the following except Perfect Information. 
• According to Arrow's Impossibility theorem, a voting system is required to fulfil three conditions:
  • Non-Dictatorship: Decisions cannot be decided by a single voter, meaning the voting process cannot allow for a single person to solely determine the outcome.
  • Pareto Efficiency: If all individuals prefer one alternative over another, then the group should rank that alternative higher. Essentially, the group choice must respect the individual rankings.
  • Independence of Irrelevant Alternatives: The group's relative ranking between two alternatives should not depend on their ranking of other alternatives.
• While 'perfect information' may be a concept used in various economic theories, it is not a specific condition set forth by Arrow's theorem.
• So, a voting system could potentially satisfy Arrow's conditions without all participants having perfect information.

• The Autoregressive Integrated Moving Average (ARIMA) model is a popular forecasting method for time series data. It includes three components: autoregression (AR), differencing (I), and moving average (MA). 
• The autoregressive part (AR) refers to the use of past values in the regression equation for the series. The moving average (MA) part involves the error term of the model, which is a linear combination of error terms occurring contemporaneously and at various times in the past. The integrated (I) part pertains to the differencing of raw observations to allow for the time series to become stationary, i.e., data values are replaced by the difference between the data and the previous period. 
• ARIMA models are a popular choice for time series forecasting, including terms for autoregression, differencing, and a moving average.
• The ARIMA model helps to understand a dependent relationship between an observation and a number of lagged observations.
• It requires the data series to be stationary. A series is said to be stationary if its properties do not depend on the time at which the series is observed.

Additional Information

•  ARIMA models are often used in financial and economic forecasting due to their ability to efficiently and relatively accurately predict time series data that show patterns or trends over time. Also, there are different variations of ARIMA models, such as Seasonal ARIMA (SARIMA), which is used when the time series exhibits seasonality.

Hence, the Autoregressive Integrated Moving Average (ARIMA) model it is a model that includes terms for autoregression, differencing, and a moving average component.

Concept:

Scalar Multiplication:

If any matrix is multiplied by a scalar k ∈ R, then each element of the matrix is multiplied by k i.e If A = [a_ij]_m × n then k × A = A = [k × a_ij]m × n

Multiplication of Matrices:

If A and B are two matrices such that the no. of columns of A is equal to the no. of rows of B. If A = [a_ij] is a m × n matrix and B = [bij] be a n × p matrix, then the product AB is the resultant matrix of order m × p and is defined as:

Calculation:

Given:  and f(x) = x² - 2x + 3

Here, we have to find the value of f(A)

∵ f(x) = x² - 2x + 3

⇒ f(A) = A² - 2 ⋅ A + 3 ⋅ I where I is an identity matrix of order 2.

The correct answer is the area represented by 'c'.

Key Points

• Revenue effect of tariff
  • The imposition of import tariff provides revenue to the government and the revenue receipts due to tariff signify the revenue effect.
  • When PP' per unit import tariff is imposed, the revenue receipts can be determined by calculating the product of per unit tariff and the quantity imported, i.e., PP' • Q₃Q₄ = Area represented by the region 'c'.

• In the figure, curves D and S represent the domestic demand and supply.
• In the figure, Q₃Q₄ represents the demand for foreign products or the quantity of imports after the imposition of per unit tariff PP'

Important Points

• The area represented by the region 'a' indicates the gain in the producer's surplus due to the imposition of tariffs.
• The area represented by the regions 'b' and 'd' indicate deadweight loss due to the imposition of tariff.

Thus, the region or area represented by 'c' indicates the revenue effect of the imposition of per unit tariff equal to PP'.

The answer is option 1 i.e. (1 and 2 only)

Key Points

Financial Market:

• Financial Market refers to a marketplace, where the creation and trading of financial assets, such as shares, debentures, bonds, derivatives, currencies, etc. take place. It plays a crucial role in allocating limited resources, in the country’s economy. It acts as an intermediary between the savers and investors by mobilizing funds between them.
• Some examples of financial markets and their roles include the stock market, the bond market, and the real estate market. Financial markets can also be broken down into capital markets, money markets.

Important Points

• The money market is a market for short-term funds, which deals in financial assets whose period of maturity ranges up to one year.
• Its instruments help the business units, other organizations, and the Government to borrow the funds to meet their short-term requirement.
• The Indian money market consists of the Reserve Bank of India, Commercial banks, Co-operative banks, and other specialized financial institutions. 
• Capital Market is an institutional arrangement for borrowing medium and long-term funds, and it also provides facilities for marketing and trading of securities.
• Capital Market is further divided into

1. Primary Market: A financial market, wherein the company listed on an exchange, for the first time, issues new security or already listed company brings the fresh issue.
2. Secondary Market: Alternately known as the Stock market, a secondary market is an organized marketplace, wherein already issued securities are traded between investors, such as individuals, merchant bankers, stockbrokers, and mutual funds.

According to Kaldor, “The key to the explanation of the trade cycle is to be found in the fact that each of these two positions is stable only in the short period—that as activity continues at either one of these levels, forces gradually accumulate which sooner or later will render that particular position unstable”.

Wholesale and Long-term finance (WLTF) banks:

• It will be a combination of term-lending institution and an investment bank. Promoters eligible to apply for banking licence can apply. However, minimum capital proposed is Rs 1,000 cr. Hence statement 1 is true.
• While they can’t accept savings deposits, they can raise money from current accounts, fixed accounts, equity and bonds. Hence statement 1 and 3 are true.
• The WLTF banks could also act like market makers in corporate bonds, credit derivatives, warehouse receipts, and take-out financing, etc. Hence statement 4 is true.
• WLTF is the third category of a differentiated bank licence after payments banks and small finance banks. In 2013 the Nachiket Mor committee recommended issuing differentiated bank licenses to work within a specific vertical.

Thus, D is the correct answer.

Key Points

Demographic Transition Theory

Demographic transition is the process by which some societies have moved from high birth and death rates to relatively low birth and death rates as a result of technological development.

Demographic transition is linked to four stages of economic development:

1. Stage 1: Preindustrial Societies—little population growth occurs, high birth rates are offset by high death rates.
2. Stage 2: Early Industrialization—significant population growth occurs, birth rates are relatively high, and death rates decline.
3. Stage 3: Advanced Industrialization and Urbanization—very little population growth occurs; both birth rates and death rates are low.
4. Stage 4:  Postindustrialization—birth rates continue to decline as more women are employed full-time and raising children becomes more costly; population growth occurs slowly, if at all, due to a decrease in the birth rate and a stable death rate.

Critics suggest that demographic transition theory may not accurately explain population growth in all societies; this theory may best explain the growth in Western societies.

Hence, the correct matching is a- 2, b- 3, c- 4, d - 1

The correct answer is Two.

Key Points

• As per the provisions of Union Budget 2021-22, 2 public sector banks have been lined up for disinvestment.
• In the budget speech, Finance Minister Nirmala Sitharaman said that two banks will be privatized along with one general insurance company.
• This is another attempt by the government to bring reforms in public sector banking.
• Privatization Highlights-
  • Foreign Direct Investment in the insurance sector will increase from 49 percent to 74 percent.
  • The initial public offering (IPO) of LIC will be brought in Financial Year 2022.
  • Plans to complete the divestments of BCL, CONCOR, and SCI in 2021-22.
  • NITI Aayog to work on strategic disinvestment for the next list of central public sector companies.
  • Further recapitalization of Rs 20,000 crore is proposed in 2021-22 for the banking sector.
  • The government expects to raise Rs 1 lakh crore from disinvestment in public sector banks and financial institutions in FY22.

Additional Information

• The Union Budget is presented by Union Finance Minister.
• The union budget comes under Article 112.
• The Budget has to be passed by the Lok Sabha before it can come into effect.
• The Union Budget is also known as the Annual Financial Statement.
• The Budget is presented on the 1st of February (until 2016, it was presented on the last working day of February).
• Union Finance Minister-Nirmala Sitharaman (as of Feb 2021).
• Constituency-Karnataka

In a two variable regression Y is the dependent variable and X is the independent variable. The correlation coefficient between Y and X is 0.6 which means 36% variations in Y are explained by X.

It is worth mention­ing that Tobin’s portfolio approach, according to which liquidity preference (i.e. demand for money) is determined by the individual’s attitude towards risk, can be extended to the problem of asset choice when there are several alternative assets, not just two, of money and bonds.

Kaldor’s Three Laws of Economic Growth (Inductive Approach)

(i) Close relationship between manufacturing and GDP growth (ornon-manufacturing growth).

(ii) Strong relationship between the growth of industrial productivity and industrial output (Verdoorn’s law) Increasing returns in other sectors

(iii) Close relationship between aggregate productivity growth and (a) the growth of manufacturing and (b) inversely with the growth non manufacturing employment (consequence of (i) and (ii))

The monetary approach to the balance of payments is associated with the names of R. Mundell and H. Johnson. The other writers who have made contribution to it include R. Dornbusch, M. Mussa, D. Kemp and J. Frankel. The basic premise of the approach is the recognition that the BOP disequilibrium is fundamentally a monetary phenomenon. It attempts to explain the BOP deficits or surpluses through demand for and supply of money.

The classical growth theory argues that economic growth will decrease or end because of an increasing population and limited resources. Classical growth theory economists believed that temporary increases in real GDP per person would cause a population explosion that would consequently decrease real GDP.