Economics Mock Test - 4

The correct answer is the Market / Price mechanism.

Key Points

• Adam Smith recognized the 'invisible hand' to the Market mechanism.
• The phrase invisible hand was introduced by Adam Smith in his book 'The Wealth of Nations.
• He assumed that an economy can work well in a free market scenario where everyone will work for his/her own interest.
• He suggested that if people were allowed to trade freely, self-interested traders present in the market would compete with each other, leading markets towards positive output with the help of an invisible hand.
• In a free market scenario where there are no regulations or restrictions imposed by the government, if someone charges less, the customer will buy from him.
• Therefore, we have to lower your price or offer something better than your competitor.

• The Great Depression was the worst economic downturn in USA history. It began in 1929 and did not end until the end of the 1930s.
• John Maynard Keynes suggested ‘strong state intervention’ after the Great Depression of 1929.

The correct answer is Adam Smith

Key Points

• An Inquiry into the Nature and Causes of the Wealth of Nations, or commonly abbreviated as "The Wealth of Nations" is a famous book by Adam Smith that contains economic ideas now known as classical economics.

• Scottish philosopher Adam Smith (1776) defined what was then called political economy as "an inquiry into the nature and causes of the wealth of nations", in particular as:

  • "a branch of the science of a statesman or legislator [with the twofold objectives of providing] a plentiful revenue or subsistence for the people to supply the state or commonwealth with a revenue for the public services."

Laissez-faire is the belief that economies and businesses function best when there is no interference by the government. 

• It comes from the French, meaning to leave alone or to allow to do.
• It is the guiding principle of capitalism and a free market economy.
• The underlying beliefs that make up the fundamentals of laissez-faire economics include the idea that economic competition constitutes a "natural order" that rules the world.
• Because this natural self-regulation is the best type of regulation, laissez-faire economists argue that there is no need for business and industrial affairs to be complicated by government intervention.
• As a result, they oppose any sort of federal involvement in the economy, which includes any type of legislation or oversight; they are against minimum wages, duties, trade restrictions, and corporate taxes.
• In fact, laissez-faire economists see such taxes as a penalty for production

The correct answer is Gross value added.

 

• Gross Value Added (GVA) Vs. GDP
• Gross value added (GVA) is defined as the value of output less than the value of intermediate consumption. Value-added represents the contribution of labor and capital to the production process. When the value of taxes on products (fewer subsidies on products) is added, the sum of value added for all resident units gives the value of the gross domestic product (GDP). Thus, the Gross Domestic Product (GDP) of any nation represents the total of gross value added (GVA) (i.e, without discounting for capital consumption or depreciation) in all the sectors of that economy during the said year after adjusting for taxes and subsidies.
• GVA at factor cost + (Production taxes fewer production subsidies) = GVA at basic prices
• GDP at market prices = GVA at basic prices+ product taxes - product subsidies
• GVA = Value added + Depreciation.

In economics, Gresham's law is a monetary principle stating that "bad money drives out good". Gresham’s law states that if two coins are in circulation whose relative face values differ from their relative bullion content, the ‘dearer’ coin will be extracted from circulation for melting down.

The correct answer is to Raise the cost of money by raising rates.

• When an economy is facing inflation, the central bank of the country will Raise the cost of money by raising rates.​

Key Points

• Inflation refers to a progressive increase in the goods and services of an economy.
  • ​An increase in the demand and Reduce in supply are two reasons that can be attributed to price rise.
  • When the general price level increases each unit of currency buys fewer goods and services.
  • Inflation corresponds to a reduction in the purchasing power of money.
  • Note: It is not high prices but rising price levels constitute inflation.

Important Points

• Reserve Bank of India is the central bank of India.
  • It was originally set up as a private entity in 1935 under RBI Act and it was nationalized in the year 1949.
  • RBI conducts consolidated supervision of the financial sector of India which constitutes commercial banks, financial institutions, and nonbanking finance firms.
  • Its headquarters is located in Mumbai.

The correct answer is Open Market Operations

1. Open Market Operations

• Open market operations (OMO) refers to a central bank buying or selling short-term Treasurys and other securities in the open market in order to influence the money supply, thus influencing short-term interest rates.
• Buying securities adds money to the system, making loans easier to obtain and interest rates decline.
• Selling securities from the central bank's balance sheet removes money from the system, making loans more expensive and increasing rates.
• These open market operations are a method the Fed uses to manipulate interest rates.

2. Cash Reserve Ratio (CRR)

• Banks are required to maintain a percentage of their deposits as reserves with RBI. This reserve is stored as cash or equivalents in the vaults of the bank or sent to RBI.
• We can say that CRR is a tool used by a central bank to control liquidity in the banking system.
• The aim is to ensure that banks do not run out of cash to meet the payment demands of their depositors. Thus, maintenance of this reserve is essential to ensure that banks do not run out of money when customers come demanding their deposits.
• The rate of CRR is decided by RBI and reviewed in the quarterly review.

3. Statutory Liquidity Ratio (SLR)

• Statutory liquidity ratio (SLR) is the Government term for the reserve requirement that commercial banks are required to maintain in the form of cash, gold reserves, PSU, Bonds and Reserve Bank of India (RBI) approved securities before providing credit to the customers.
• The SLR to be maintained by banks is determined by the RBI in order to control the expansion.

4. Liquidity Adjustment Facility (LAF)

• A liquidity adjustment facility (LAF) is a monetary policy tool used in India by the Reserve Bank of India or RBI.
• The RBI introduced the LAF as part of the outcome of the Narasimham Committee on Banking Sector Reforms of 1998. 
• LAF's help the RBI manage liquidity and provide economic stability by offering banks the opportunity to borrow money through repurchase agreements or Repos or to make loans to the RBI via reverse repo agreements.

​​

Credit control is done by RBI to maintain monetary stability in the economy. It is one of the main functions of RBI.

The main difference between the Qualitative and Quantitative method is that:

Quantitative Methods of monetary policy include those instruments which focus on the overall supply of money. It includes: 

A. Two Policy Rates: 

• Bank rate is the rate charged on the loans offered by the Central bank to the commercial banks without any collateral. It is increased at the time of inflation to reduce the money supply in the economy and vice versa. 
• Repo rate is the rate charged on the secured loans offered by the Central bank to the commercial banks that includes collateral. It is increased at the time of inflation to reduce the money supply in the economy and vice versa. 

B. Two Policy Ratio:

• Statutory Liquidity Ratio (SLR) refers to liquid assets that the commercial banks must hold on a daily basis as a percentage of their total deposits. SLR is determined by the central bank and is a legal requirement to be fulfilled by commercial banks.  It is increased at the time of inflation to reduce the money supply in the economy and vice versa. 
• Cash Reserves Ratio (CRR) refers to the proportion of total deposits of the commercial banks which they must have kept as cash reserves with the central bank. The ratio is fixed by the central bank and is varied from time to time to control the supply of money in the economy depending upon the prevailing situation of inflation or deflation.

C. Open Market Operations: 

• Open market operation (OMO) is a monetary policy by the central bank in which the bank deals in the sale and purchase of securities in the open market to control the supply of money in the economy. By selling the securities, the central bank soaks liquidity from the economy and by buying the securities, the central bank releases liquidity. 

2. Qualitative Methods of monetary policy includes those instruments which focus on the selected sectors of the economy. It includes: 

1. Margin Requirement
2. Rationing of Credit
3. Moral Suasion

Therefore, the Bank rate is Quantitative credit control weapon.

The correct answer is  Cash Reserve Ratio.

Key Points

• Cash Reserve Ratio(CRR) is the share of a bank's total deposit that is mandated by the Reserve Bank of India (RBI) to be maintained with the latter as reserves in the form of liquid cash. 

Additional Information

• Legal Reserve Ratio: 
  • The legal reserve ratio is the fraction of customer deposits banks hold in the form of assets that satisfy a legal definition of reserves.
• Statutory Liquidity Ratio:
  • ​It is popularly known as SLR, SLR is the minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold, and other securities.

Bank rate	The rate at which the Reserve Bank of India   lends money to other banks in general
Repo rate	The rate at which RBI lends short terms loans to   commercial banks against securities
Statutory Liquidity Ratio	It is the reserve that the commercial banks in   India are required to maintain in the form of   cash, gold reserves, government approved   securities before providing credit to the   customers.

The correct answer is Finance Ministry.

• Finance Ministry formulates the Fiscal Policy in India.

Additional Information 

• Fiscal policy is the use of government revenue collection (mainly taxes but also non-tax revenues such as divestment, loans) and expenditure (spending) to influence the economy.
  • Through fiscal policy, the government of a country controls the flow of tax revenues and public expenditure to navigate the economy.
• Receipts:
  • It indicates the money received by the government.
  • This includes the money earned by the government the money it receives in the form of borrowings or repayment of loans by states.
• Plan Expenditure:
  • All expenditures done in the name of planning (i.e. Five Year Plans) were called plan expenditures.
  • For example expenditure on electricity generation, irrigation and rural developments, construction of roads, bridges, canals, etc.
• Non-plan Expenditure:
  • All expenditures other than plan expenditure were known as non-plan expenditure.
  • For example interest payments, pensions, statutory transfers to States and Union Territories governments, etc.

The correct answer is David Ricardo, who first argued that in the face of high deficits, people save more.

Key Points

• The Ricardian equivalence theorem (RET)
  • It plays an important role in macroeconomic theory. Hence, Statement 1 is not correct.
  • The RET suggests that fiscal stimuli which are defined in terms of deficit-financed public spending hikes or tax cuts will lead to a crowding out of private consumption, thereby decreasing the effectiveness of fiscal policy in boosting economic activity.
  • It states that consumers are forward-looking and will base their spending not only on their current income but also on their expected future income. Hence, Statement 2 is not correct.
  • They will understand that borrowing today means higher taxes in the future. 
  • Further, the consumer will be concerned about future generations because they are the children and grandchildren of the present generation and the family which is the relevant decision-making unit, continues living. Hence, Statement 3 is not correct.
  • They would increase savings now, which will fully offset the increased government dissaving so that national savings do not change.
  • This view is called Ricardian equivalence after one of the greatest nineteenth-century economists, David Ricardo, who first argued that in the face of high deficits, people save more. Hence, Statement 4 is correct.
  • It is called ‘equivalence’ because it argues that taxation and borrowing are equivalent means of financing expenditure. When the government increases spending by borrowing today, which will be repaid by taxes in the future, it will have the same impact on the economy as an increase in government expenditure that is financed by a tax increase today.

The correct answer is 28%.

• The council meeting was held to 'reduce' the tax rates on certain items based on customer preferences.
• Hence, no additional items were added to the highest GST rates slab of 28%.
• The GST rates for various products are subject to change from time to time without prior information.

Additional Information

•  The GST council has fitted over 1300 goods and 500 services under four tax slabs of 5%, 12%, 18%, and 28% under GST.
  • This is aside from the tax on gold that is kept at 3% and rough precious and semi-precious stones that are placed at a special rate of 0.25% under GST.
  • Though there are five slab rates, consultancy services fall under 18% slab only. Other GST slabs are 0%, 5%, 12%, 18% and 28%.
  • Goods and Service Tax (GST) is levied on the supply of goods and services. Goods and Services Tax Law in India is a comprehensive, multi-stage, destination-based tax that is levied on every value addition.
  • GST is a single domestic indirect tax law for the entire country.

The correct answer is option 1, i.e. According to simple Keynesian theory, the slope of the aggregate consumption curve against income is positive.

• According to simple Keynesian theory, the aggregate consumption in an economy depends on the aggregate national income.
• This is because when people have money in their hand then only they will spend on buying goods and services.
• If the consumer will buy the goods and services then the consumption in the economy will increase and vice versa.
• When the aggregate consumption is potted against the national a straight line showing direct relation between the national income and consumption will be obtained.
• The slope of the line showing a direct relation always positive.
• The slope of this line gives the value of Marginal Propensity to Consume.

The correct answer is Crowding in​.

Key Points

• Crowding occurs when higher government spending leads to an increase in private sector investment.
• The crowding in effects occurs because higher government spending leads to an increase in economic growth and therefore encourages firms to invest because there are now more profitable investment opportunities

Additional Information

Difference between crowding out and crowding in:

• When the government pursues expansionary fiscal policy (higher spending financed by borrowing) there are two possible effects
  • Crowding out :
    • higher government spending financed by borrowing leads to a fall in private sector savings.
    • This is for two main reasons.
      • With expansionary fiscal policy, private sector savers buy government bonds and so have fewer savings to fund private sector investment.
      • Also, higher government borrowing tends to push up interest rates and these higher interest rates reduce investment.
  • Crowding in:
    • This relates to how higher government spending encourages firms to invest more. This is due to the income effect of higher government spending.
    • If the economy is in a recession or below full capacity, expansionary fiscal policy can increase the economic growth rate and create a positive multiplier effect, which leads to greater private sector investment.

The correct answer is Falls less sharply.

Key Points

• Disposable income is used by economists to measure and estimate various other related indicators like discretionary income, personal savings rates, marginal propensity to consume (MPC), and marginal propensity to save (MPS).
• When disposable income increases, households have more money to either save or spend, which naturally leads to a growth in consumption.
• In the case of recession, revenue falls while expenditures rise thereby creating a deficit. In order to balance the budget, the government must raise more revenue (by increasing taxes) and cut expenditures. Both of these actions will lower disposable income. As a result, consumption and aggregate demand will fall.

Important Points

• Types of Disposable Income:
• Personal Disposable Income (PDI) - 
  • Personal Disposable Income is the part of the aggregate income which belongs to the households. 
  • They may decide to consume a part of it and save the rest.
  • If we deduct the Personal Tax Payments (income tax, for example) and Non-tax Payments (such as fines) from Personal Income, we obtain what is known as the Personal Disposable Income. 
  • Thus Personal Disposable Income (PDI ) = PI – Personal tax payments – Non-tax payments.
• National Disposable Income -
  • It is the sum of the disposable incomes of all resident institutional units.
  • National Disposable Income = Net National Product at market prices + Other current transfers from the rest of the world.

The multiplier effect refers to the increase in final income arising from any new injection of spending. The size of the multiplier depends upon household's marginal decisions to spend, called the marginal propensity to consume.

The correct answer is Option 4.

Key Points

• Paradox of thrift was popularized by the renowned economist John Maynard Keynes.
• The Paradox of Thrift is the theory that increased savings in the short term can reduce savings, or rather the ability to save, in the long term. The Paradox of Thrift arises out of the Keynesian notion of an aggregate demand-driven economy.
• It states that individuals try to save more during an economic recession, which essentially leads to a fall in aggregate demand and hence in economic growth. Such a situation is harmful for everybody as investments give lower returns than normal.
• Keynes further said that such a mass increase in savings eventually hurts the economy as a whole.
• This theory was heavily criticized by non-Keynesian economists on the ground that an increase in savings allows banks to lend more. This will make interest rates go down and lead to an increase in lending and, therefore, spending.

 

The correct answer is Textile.

Key Points

• Foreign Exchange:
  • According to the Reserve Bank of India (RBI) data, the country’s foreign exchange (forex) reserves touched a lifetime high of USD 555.12 billion after it surged by USD 3.615 billion in the week ended 16th October 2020.
  • The rise in total reserves was due to a sharp rise in Foreign Currency Assets (FCAs), a major component of the overall reserves.
  • FCA jumped by USD 3.539 billion to USD 512.322 billion.
  • Foreign exchange reserves are assets held on reserve by a central bank in foreign currencies, which can include bonds, treasury bills, and other government securities.
  • It needs to be noted that most foreign exchange reserves are held in U.S. dollars.

Additional Information

• Iron export:
  • The value of iron ore exported from India amounted to nearly 186 billion rupees in the fiscal year 2020.
  • This export value was significantly higher than the previous financial year's value of about 92 billion rupees.
• Tea:
  • Indian tea exports value FY 2020, by the destination country.
  • India exported tea worth 13.98 billion Indian rupees to Iran in the financial year 2020.
  • Even though Iran imported the highest worth of Indian tea, Russia imported the highest volume of Indian tea that same year.
• Rubber:
  • Natural rubber (NR) exports from India registered a quantum leap during the last fiscal, with 20,030 tonnes leaving the country. 
  • By contrast, in 2015-16, exports were just 865 tonnes.
  • NR exports stood at 30,594 tonnes in 2012-13.
  • But thereafter, owing to the relatively low price of NR in the international market, exports showed a declining trend.

Foreign exchange reserve in India is maintained by the Reserve Bank of India.

The SDR consists of the five currencies: 

• U.S. Dollar       
• Euro       
• Renminbi         
• Japanese Yen     
• British Pound

The correct answer is Capital Account Balance

Key Points

• Balance of Payment records all monetary transactions between a country and the rest of the world during any given period.
• It consists of 3 components-
  • Current Account
  • Capital Account
  • Financial Account

• Current account
  • It monitors the inflow and outflow of goods and services between countries.
• Capital account
  • It includes all capital transactions between the countries (Assets).
  • There are 3 major elements-
    • Loans and borrowings - from both private and public sectors in foreign countries
    • Investments - Foreign Portfolio Investment
    • Forex Reserves - reserves held by the central bank of a country to control the exchange rates
• Financial account
  • The flow of funds between countries through investments.

Trade Balance:

• Balance of Payment of a country can be defined as a systematic statement of all economic transactions of a country with the rest of the world during a specific period usually one year.
• It indicates whether the country has a surplus or a deficit in trade.
• When exports exceed imports, there is a trade surplus and when imports exceed exports there is a trade deficit.

The correct answer is Balance of Trade(BOT).

Key Points

• ​Balance of trade is the difference between the value of a country's exports and the value of a country's imports for a given period.
• It is the largest component of a country's balance of payments (BOP).
• Sometimes the BOT between a country's goods and the BOT of its services are distinguished as two separate figures.
• The balance of trade is also referred to as the trade balance.
• The formula for calculating the BOT = (Total value of exports - The total value of its imports).

Additional Information

•  Net Invisibles
  • Net invisible trade is the total international transaction that does not include an exchange of tangible goods.
  • Global financial services and insurance companies, shipping services, and tourism all engage in invisible trade.
  • Medical tourism is one of the modern businesses that has emerged in invisible trade.
• The Balance of Payments (BOP)
  • The balance of payments is a statement of all transactions made between entities in one country and the rest of the world over a defined period, such as a quarter or a year.
  • It summarizes all transactions that a country's individuals, companies, and government bodies complete with individuals, companies, and government bodies outside the country.
  • The balance of Payments includes both the current account and capital account.
• The overall balance of payments deficit (surplus)
  • The account by which the money coming into a nation is more than the money going out in a particular time frame.
  • The decrease or increase in official reserves is known as the overall balance of payments deficit or surplus.

The correct answer is Option 2.

Key Points

• Tata Iron and Steel Company (TISCO) was founded by Jamsetji Nusserwanji Tata
• It was established by Sir Dorabji Tata on 26 August 1907.
• TISCO started production of pig iron in 1911 and began producing steel in 1912 as a branch of Jamsetji's Tata Group. The first steel products were manufactured on 16 February 1912.

The correct answer is maximum land that an individual can own

Key Points

• Land ceiling means fixing the maximum size of landholding that an individual/family can own.
• Land over and above the ceiling limit is called surplus land.
• If the individual/family owns more land than the ceiling limit, the surplus land is taken away (with or without paying compensation to the original owner)
• This surplus land is:

1. distributed among small farmers, tenants, landless labourers or
2. handed over to village panchayat or
3. Given to cooperative farming societies.

• The Ceiling legislation was initiated in many parts of the country in the late ’50s and early ’60s.

• Jammu and Kashmir was the first state in the country to pass this Act.

The portion of agricultural produce which is sold in the market by the farmers is called a marketed surplus.

Key Points

1. Marketed Surplus:
   • In agriculture, marketable surplus represents the surplus of a harvest that can be sold for profit after a farmer sells their crop to cover the costs of maintaining and operating their farm.
   • The farmer has set expenses, including maintenance on machinery, labor costs, fertilizer, and the mortgage payment on their land.
   • For any farmer, there are many expenses that they incur while producing the product like the cost of inputs, any technical facilities employed for production etc.
   • These costs need to recover by the farmers by selling off their inputs to the market.
   • Thus, the marketable surplus is just the portion of the surplus that is available for selling to the ultimate customers.
   • Most of the farmers do not have the inputs to produce in excess of the household use that can be sold in the market.
   • Hence, in such a case marketable surplus is almost nil for low-income earning areas. Since the agricultural industry can be wildly unpredictable and is most susceptible to weather upsets, this surplus can be quickly eaten up by the costs of unusual or unexpected damage to the farmland.
2. Household surplus-
   • This refers to the number of crops available for the purpose of self-consumption by the farmers. It is represented by the number of crops that are used by the framers and their families for consumption in their daily life.
3. National surplus- National surplus can be understood as, an agricultural production that exceeds the needs of the society for which it is being produced, and may be exported or stored for future times.
4. Agriculture surplus- An excess in the agricultural output can be known as the bumper harvest. In some years, due to factors like suitable weather conditions, advanced irrigational facilities etc helps in the production of excess agricultural produce, is known as agriculture surplus.

The correct answer is growth of small-scale Industries for rural development.

• Karve committee was set up in the year 1955 for the growth of small-scale industries for rural development.

Key Points

• Small Scale Industry
  • In 1955, the Karve Committee, also known as the village and small-scale industries committee witnessed the potential of utilizing small-scale industry for promoting rural development. Hence, Option 1 is correct.
  • It was named after Dattatreya Gopal Karve who was an Indian economist and professor who contributed to the fields of economics, public administration, and the cooperative movement in India. 
  • A small-scale industry is described as the highest investment permitted on the asset of a unit.
  • This industry is more labor-oriented, therefore, they generate more employment.
  • The small-scale industry could not compete with the large-scale industry, so to protect them a lot of products are only manufactured and preserved for small-scale industries.
  • For this purpose, the production of many products was reserved for the small-scale industry; the criterion of reservation being the ability of these units to manufacture the goods.
  • They were also given concessions such as lower excise duty and bank loans at lower interest rates.
  • They are provided with less excise duty and have a low rate of interest in bank loans.
  • In 1950 a small-scale industrial unit invested a maximum of rupees five lakh; at present, the maximum investment allowed is rupees one crore.

The correct answer is Competition act.

Key Points

• Competition Act, 2002 -
  • This act was passed with the aim of promoting healthy competition in India.
  • This act replaced the Monopoly and Restrictive Practices Act 1969.
  • Under this 'Competition Commission of India' was established.

Additional Information

• Monopolies and Restrictive Trade Practices Act, 1969 -
  • It was implemented during the Fourth Five Year Plan.
  • This Act (MRTP Act) was implemented in India under the Industrial Reforms.
  • Its purpose was to prevent the centralization of economic power and to control monopolies.
  • Apart from this, the other objective was to prevent restrictive and unfair trade.

The correct answer is option 2.

Key Point

• There are multiple ways to describe poverty-stricken people.
• Chronic poor: People who are leading constant lives of poverty and who are normally poor but may have a small amount of money with them (for example, casual workers) are classified collectively as the chronic poor.
• Churning poor: The churning poor are the people who go in and out of poverty (example, small farmers and seasonal workers). Hence option 2 is correct.
• Transient poor: The poor who are well off most of the time but may be subject to bad luck or difficult times at times. They are known as the transient poor.

Common characteristics

• Lack of basic amenities
• Starvation and hunger
• Malnutrition
• Larger family size
• Limited economic opportunities
• Debt trap

The correct answer is Dadabhai Naoroji.

Key Points

• Dadabhai Naoroji: 
  • He wrote the book 'Poverty and Un British Rule in India'. Hence, Option 4 is correct.
  • Dadabhai Naoroji was popularly known as the 'Grand Old Man of India'.
  • He is the first Indian to become a member of the British Parliament.
  • He helped found the London Indian Society and East India Association.
  • In 1885, Naoroji became a vice-president of the Bombay Presidency Association.
  • He was Congress president thrice, in 1886, 1893, and 1906.

Additional Information

• Major writings of Dada Bhai Naroji were as follows:
  • Poverty in India
  • The manners and customs of the Parsees
  • Condition of India
  • Admission of educated natives into the ICS
  • The wants and means of India 

Key Points All India Council for Technical Education (AICTE):

• It governs technical education in India.
• It was set up in 1945 as an advisory body and later on, in 1987, was given statutory status by an act of Parliament.
• AICTE grants approval for starting new technical institutions, for the introduction of new courses, and for variation in intake capacity in technical institutions.
• The AICTE is headquartered in New Delhi and has seven regional offices located at Kolkata, Chennai, Kanpur, Mumbai, Chandigarh, Bhopal and Bangalore.
• A new regional office at Hyderabad has been set up and is yet to be operational.
• The council discharges its functions through an executive committee.
• It is responsible for the maintenance of standards of technical education, which currently includes education research and training in the following fields:
  • Engineering
  • Technology including MCA
  • Architecture
  • Town planning
  • Management
  • Pharmacy
  • Hotel management and catering technology
  • Applied arts and crafts

Confusion Points

Distance education:

• The Distance Education Bureau (DEB) is a bureau of the University Grants Commission (UGC).
• It is based in New Delhi, India, in charge of regulating distance education in India.
• It was established in 2012, replacing the Distance Education Council (DEC), an organization responsible for open education and distance education since 1985.

Thus, allocation of grants for the planned and coordinated development of technical education is not the work of AICTE.

The correct answer is Kerala.

Key Points

• Kudumbashree is poverty elimination and women empowerment programme implemented by the State Poverty Eradication Mission (SPEM) by Government of Kerala.
• Kudumbashree was set up in 1997.
• Kudumbashree has a three-tier structure for its women community network, with Neighbourhood Groups (NHGs) at the lowest level, Area Development Societies (ADS) at the middle level, and Community Development Societies (CDS) at the local government level. 

The correct answer is the Agricultural Produce Market Committee Act enacted by States.

Key Points

Agricultural Produce Market Committee:

• Agricultural Produce Market Committee (APMC) under the State Government regulates the notified agricultural produce and livestock.
• Agriculture is a State subject under Schedule 7 of the Indian Constitution.
• The whole geographical area in the State is divided and declared as a market area (Yard Mandis) wherein the markets are managed by the Market Committees constituted by the State Governments.
• Once a particular area is declared a market area and falls under the jurisdiction of a Market Committee, no person or agency is allowed freely to carry on wholesale marketing activities.
• Buyers, too, need to obtain individual licenses from each APMC to transact.
• It is a part of government policy toward food security, remunerative prices to farmers, and fair prices to consumers.

Important Points

Essential Commodities Act (ECA), 1955

• The ECA has been used by the Government to regulate the production, supply, and distribution of a whole host of commodities it declares ‘essential to make them available to consumers at fair prices.

 

The correct answer is Option 1, i.e China.

• Sometimes, UPSC astonishes you with such easy question. As an aspirant, you should be ready to see such questions in the real exam.
• BRI consisting of the land-based belt, ‘Silk Road Economic Belt’, and ‘Maritime Silk Road’, aims to connect the East Asian economic region with the European economic circle and runs across the continents of Asia, Europe and Africa.
• BRI is China’s ambitious project announced in 2013.
• It covers about 65% of the world population, 60% of the world GDP and over 70 countries in six economic corridors.

The correct answer is Farakka.

Key Points

• The Farakka Barrage was created by India in 1975 to divert water from the Ganges River system.
• Farakka Barrage is 2245 meter long  across the river Ganga with rail-cum-road bridge, necessary river training works, and a Head Regulator on the right side bank
• The Ganges Water Treaty has a limited ability to meet the current needs of both India and Bangladesh. 

Important Points

• Farakka Barrage Project comes under the Ministry of Jal Sakti. 
• Farakka Barrage is located in Murshidabad and Malda districts of West Bengal at about 300 km north of Kolkata.

Additional Information

Name of the barrage/Dam	Name of the River built on	Location
Durgapur	Damodar	Bankura District, West Bengal
Tilaiya	Barakar	Koderma, Jharkhand
Massanjore	Mayurakshi	Dumka, Jharkhand

The correct answer is Beijing.

Key Points

• The headquarters of the Asian Infrastructure Investment Bank (AIIB) is in Beijing, China.
• The Asian Infrastructure Investment Bank (AIIB) provides finance for infrastructure development in the Asia-Pacific region.
• The bank was proposed in China in 2013 and is seen as Asia’s response to the World Bank (WB) and International Monetary Fund (IMF).

The correct answer is Myanmar.

• Myanmar is not a member of SAARC.

Key Points

• South Asian Association for Regional Cooperation (SAARC):
  • It was established with the signing of the SAARC Charter in Dhaka on 8 December 1985.
  • The Headquarters of the Association is in Kathmandu, Nepal.
  • Its member countries are 
    1. Afghanistan
    2. Bangladesh
    3. Bhutan
    4. India
    5. Maldives
    6. Nepal
    7. Pakistan
    8. Sri Lanka
  • Afghanistan became the newest member of SAARC at the 13th annual summit in 2005.
  • SAARC comprises 3% of the world's area, 21% of the world's population, and 3.8% of the total global economy.
  • Its objectives are to promote the welfare and accelerate the economic growth of the people of South Asia.
  • SAARC Charter Day is observed every year on 8th December.

The correct answer is Microeconomics.

Key Points

• Microeconomics is the study of individuals and business decisions, while macroeconomics looks at the decisions of countries and governments.
• The concepts of wages, rent, interest and profit are studied under Microeconomics.
• Microeconomics focuses on supply and demand, and other forces that determine price levels, making it a bottom-up approach.
• It studies the economics of the firm, individual, consumers, inflation.

Additional Information

• Macroeconomics is a branch of economics dealing with the performance, structure, behaviour, and decision-making of an economy as a whole.
  • This includes regional, national, and global economies.

The correct answer is All of the above.

Key Points

• Microeconomics is the branch of economics that studies the behavior of individual firms and organizations.
• The study of applied microeconomics includes -

1. Economic history
2. Health economic
3. Law and economics
4. Urban economics
5. Political economics.

Important Points

• Alfred Marshall is the father of microeconomics.
• He has also written the books "Principles of Economics".
• He is also the founder of neoclassical economics. 

The correct answer is Stock Market.

Key Points

• Pure Competition
  • Pure or perfect competition is a market structure defined by a large number of small firms competing against each other.
  • A single firm doesn’t have significant marketing power, and as a result, the industry produces an optimal level of output because firms don’t have the ability to influence market prices. Supply and demand determine the number of goods and services produced, along with the market prices set by the companies in the market.
  • Products are identical to competitors’ products, and there are no significant barriers to entering and exiting the market.
  • The pure competition market structure is rare in the real world.
  • This is a theoretical model that is helpful when looking at industries with similar characteristics. In other words, it’s a good reference point for other market structures.
  • The best examples of pure competition market structures are stock, agricultural, and craft markets. Hence, Option 1 is correct.

Additional Information

• Monopoly
  • Buyers are many but the seller is one.
  • Product has no substitute or no close substitute
  • Other competitors cant enter the market due to laws or patents.
  • Price discrimination is seen between the poor and rich. The seller is a Price maker.
  • Relative Price inelastic increase means demand decreases by less than X% for an X% increase in price.
  • A natural monopoly is when there is an extremely high fixed cost of distribution e.g. gas, water, electricity.
  • Public utilities are considered natural monopolies, therefore Railway is an example of a Monopoly.
• Monopolistic competition
  • Many buyers and sellers but each selling its differentiated version of good.
  • Marketing selling cost is high. Goods are of different brands where brand loyalty is seen to a limit but many substitutes are available.
  • Unrestricted and free entry.
  • Seller is Price maker to a level.
  • Price increases by x% but demand decreases by less than x% - relatively inelastic. But more elastic than monopoly.
  • Examples include fast-food restaurants, clothing stores, breakfast cereal companies, service and repair markets, tutoring companies, and beauty salons and spas. 
• Oligopoly
  • Buyers many but sellers few with intense competition.
  • Product has close substitutes and intense competition amongst sellers. If one seller introduces change others have to follow. High cost of marketing and selling.
  • Entry of new sellers is tough due to economies of scale.
  • The seller is a price maker.
  • Products may be homogenous or differentiated. Typically, there are three to five dominant firms, but this number can vary depending on the market.
    • For instance, video gaming consoles are an oligopoly with three companies, Microsoft, Sony and Nintendo dominating the market.
    • Other examples of oligopolies are the automobile and gasoline industries.

Option 2 is correct.

• A free good is a good with zero opportunity cost.
• This means it can be consumed in as much quantity as needed without reducing its availability to others.
• Example sunlight, ideas, music or air.
• Opportunity costs represent the benefits an individual, investor or business misses out on when choosing one alternative over another.
• It is the “cost” incurred by not enjoying the benefit associated with the best alternative choice.

• Opportunity Cost = FO−CO , where: FO=Return on best-foregone option, CO=Return on chosen option.

• Economic activities are basically defined as production, distribution and final consumption of the commodities by the consumer. Therefore, Market activities in Economy basicallyinvolve activities performed for Pay or Profit.

• Economic activities are basically of four types:
• Primary Sector (Raw Materials)
• Secondary Sector (Industry and Manufacturing)
• Tertiary Sector (Service Sector)
• Quaternary Sector (Knowledge Sector)

Key PointsThe determinants of demand except:

• Demand in terms of economics may be explained as the consumers’ willingness and ability to purchase or consume a given item/good.
• Furthermore, the determinants of demand go a long way in explaining the demand for a particular good.
• All of the following are determinants of demand except Quantity supplied.
• The Five Determinants of Demand Prices of related goods or services.
• A shift in the demand curve is an unusual circumstance when the opposite occurs.
• The price remains the same but at least one of the other five determinants change.
• Those determinants are: 
  • ​Income of the buyer.
  • Consumer trends and tastes.
  • Expectations of future price, supply, needs, etc.
  • The price of related goods.
  • The number of potential buyers.

Hence, all of the mentioned are determinants of demand except Quantity Supplied.

The correct answer is upward to the right.

Key Points

• Exceptional Demand Curves
  • There are certain exceptional cases when the demand curves instead of sloping downwards rise upwards.
  • The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity demanded for a given period of time. In a typical representation, the price will appear on the left vertical axis, the quantity demanded on the horizontal axis. 
  • This is the case when a serious shortage of a commodity is feared and there is a panic among the people or when the use of a commodity confers distinction or when the price of a necessity of life goes up.
  • The normal demand curve slopes downwards from left to right, thus showing an inverse relationship between price and the quantity demanded.
  • The exceptional demand curve, on the other hand, slopes down from right to left or in other words, which goes up from left to right, showing that more is demanded at a higher price than at a lower price.
  • The demand curve is a direct relationship between price and the quantity demanded.
  • The higher the price more goods are bought.
  • Such is the case with items of conspicuous consumption which are used by the rich as status symbols or for show off.
  • Diamonds are an example of one such good.
  • These are considered as a thing that lends prestige to the buyer.
  • Thus more expensive they are, the higher the prestige they confer on the purchaser, and therefore more is the demand for them by other hands, if diamonds become very cheap and confer no distinct status or prestige on the buyer, they will be just treated as mere stones or pebbles and hence people would not care much to buy and other goods of such conspicuous consumption, which make them an exception to the law of demand.
• 
• Hence, Option 2 is correct.

The correct answer is Option 3.

Key Points

• No changes in the tastes and preferences of consumers:
  • It considers that the taste, preference, habit, fashion, etc., of the consumer, should remain unchanged.
  • There should not come a change in the mood of a consumer to try different products.
  • It is assumed because it breaks the functionality or validity of the law of demand.
• The income of consumers remains constant:
  • It considers that the income of the consumer should not change i.e. neither rise nor fall.
  • It should remain constant because its rise may attract the consumer to buy more goods and raise demand despite an increase in the commodity prices.
• No changes in the price of substitute goods:
  • It considers that the price of substitute goods doesn't change and remains the same.
  • It is assumed so, since, a change in consumer's choice makes the law of demand stand invalid and inapplicable.

The correct option is \(\dfrac{MU_x}{MU_y}=\dfrac{P_x}{P_y}\)

Key Points

1. Consumer Equilibrium is the state at which a consumer derives maximum utility from the consumption of one or more goods given his level of income. 
2. Consider the simple case of a consumer who cares about consuming only two goods: Good A and good B. This consumer knows the prices of goods A and B and has a fixed income or budget that can be used to purchase quantities of goods A and B. The consumer will purchase quantities of goods A and B so as to completely exhaust the budget for such purchases. The actual quantities purchased of each good are determined by the condition for consumer equilibrium, which is 
3. Marginal Utility Of Good A/Price Of Good A= Marginal Utility Of Good B/Price Of Good B.
4. It can also be stated in the form, \(\dfrac{MU_x}{MU_y}=\dfrac{P_x}{P_y}\)
5. This condition states that the marginal utility per rupee spent on good A must equal the marginal utility per rupee spent on good B.
6. If, for example, the marginal utility per rupee spent on good A were higher than the marginal utility per rupee spent on good B, then it would make sense for the consumer to purchase more of good A rather than purchasing any more of good B.
7. After purchasing more and more of good A, the marginal utility of good A will eventually fall due to the law of diminishing marginal utility so that the marginal utility per rupee spent on good A will eventually equal that of good B.
8. Of course, the amount purchased of goods A and B cannot be limitless and will depend not only on the marginal utilities per rupee spent but also on the consumer's budget.

The correct answer is Option 2.

Key Points

Demand curve: 

• Law of Demand states that the quantity demanded and the price of a good is inversely related while other factors do not change. 
• So, the demand curve will generally be downward sloping, indicating the negative relationship between the price of a good or service and the quantity demanded.
• Demand curves may be linear or curved.
• A demand curve depicts the price and quantity combinations listed in the demand schedule.
• If the income of the consumer, prices of the goods and choices of the consumer remain the same, then the change in the quantity of good demanded by the consumer will be negatively related to the change in the price of the good.
  • This change in price will be reflected as a shift in the demand curve.
• Factors leading to a shift in the curve are the following:
  • Changes in income levels:
    • For a normal good, higher income levels lead to an outward shift while lower-income levels lead to an inward shift in the demand curve
  • Changes in the market’s size:
    • A growing market leads to an outward shift of the demand curve while a shrinking market results in an inward shift. 
  • Changes in the price of related goods and services:
    • If the price of complementary goods decreases, the demand curve will shift outwards. whereas if the price of complementary goods increases, the curve will shift inwards.

The correct answer is Revenue deficit minus the grants for the creation of capital assets.

Key Points

• Effective Revenue deficit
  • This term was introduced in the Union Budget 2011-12
  • While revenue deficit is the difference between revenue receipts and revenue expenditure, the earlier accounting system includes all grants from the Union Government to the state governments/Union territories/other bodies as revenue expenditure, even if they are used to create assets.
  • Such assets created by the sub-national governments/bodies are owned by them and not by the Union Government. Nevertheless, they do result in the creation of durable assets.
  • According to the Finance Ministry, such revenue expenditures contribute to the growth in the economy and therefore, should not be treated as unproductive in nature.
  • In the Union Budget (2011-12) a methodology has been introduced to capture the ‘effective revenue deficit’, which excludes those revenue expenditures (or transfers) in the form of grants for the creation of capital assets.
  • In short, Effective Revenue Deficit is the difference between revenue deficit and grants for the creation of capital assets. Hence, option 3 is the correct answer.
  • However, the 14th Finance Commission observed that the concept of effective revenue deficit is not recognized in the standard government accounting process. Under the Constitution, there are only two categories of expenditure- expenditure on the revenue account and other expenditures which are broadly expressed as capital expenditure.
  • Hence, according to the Commission, the artificial carving out of the revenue account deficit into an effective revenue deficit to bring out that portion of grants which is intended to create capital assets at the recipient level leads to an accounting problem and raises the moral hazard issue of creative budgeting.

The correct answer is Closed Economy

Key Points

• An economy is said to be closed when it has no trade with other economies.
• The consumer gets everything within the economic boundary of the country.
• There is neither import nor export.
• The government of that particular country acts as the facilitator.
• At present there is no particular country that has an entire closed economy, but Brazil has the closest to the closed economy, as Brazil imports the least amount goods in the world.

Additional Information

• Command Economy: The resources of production is entirely under the control of the government.
  • Due to very lack of competition the consumers are left with very little choice.
  • Example: Cuba, North Korea, Soviet Union.
• Capitalist Economy: The economy is based on Private ownership.
  • The production of goods and services is based upon the supply and demand in the market.
  • Example: New Zealand, Australia, Canada, Switzerland, United Kingdom.
• Traditional Economy: In this type of economy very less government involvement is seen.
  • The allocations and resource collection is mainly ritual based.
  • Example: Some Tribal areas of Australia, Amazon etc.