NTA UGC NET/JRF Exam, December-2022 Economics (Shift-II)

Total Questions: 100

81. Arrange the following policy rate (as on 31-12- 2022) of the RBI in the descending order of their magnitude.

A. Repo rate
B. Bank rate
C. CRR
D. SLR
E. Reserve Repo Rate
Choose the correct answer from the options given below.

Correct Answer: (d) D, B, A, C, E
Solution:

Policy rate (as on 31-12-2022) of the RBI in the descending order of their magnitude.
(1) SLR
(2) Bank rate
(3) Repo Rate
(4) CRR
(5) Reserve Repo Rate.

82. Arrange the following chronologically in order in their year of first occurrence starting from oldest.

A. Liquidity Preference Theory
B. Multiplier by R.F. Kahn
C. Division of Labour, Adam Smith
D. Quantity theory of Money, Fisher
E. Great Depression
Choose the correct answer from the options given below.

Correct Answer: (e) (*)
Solution:

Theories & their year of first occurrence.
(1) Division of Labour by Adam Smith in year 1776 in his book "The Wealth of Nations".
(2) Quantity theory of money by Fisher in year 1911 in his book, "The Purchasing Power of Money.'
(3) Great Depression in 1929-1941 the longest and deepest downturn in the history of the United states and the modern industrial economy lasted more than a decade, beginning in 1929 and ending during World War II in 1941.
(4) Multiplier by R.F. Kahn in year 1931 as ratio between the total increase in employment and primary employment.
(5) Liquidity Preference Theory was introduced in 1936 by John Maynard Keynes.

83. Arrange the following organizations as per their years of establishment starting from the oldest.

A. WTO
B. ADB
C. UNCTAD
D. World Bank
E. WIPО
Choose the correct answer from the options given below.

Correct Answer: (a) D, C, B, E, A
Solution:

Organizations as per their years of establishment.
(1) World Bank established in July 1944, Bretton Woods New Hampshire United States.
(2) UNCTAD - UN Trade And Development established in the year 1964.
(3) ADB - The Asian Development Bank established in year 1996, 19 December.
(4) WIPO - World Intellectual property Organization established in 14 July 1967.
(5) WTO established in 1 January 1995.

84. Given below are two statements: One is labelled as Assertion A and the other is labelled as Reason R.

Assertion A: A form market failure results when products of different qualities are sold at a single price.

Reason R: A buyer and a seller possess different information about the product transacted.
In the light of the above statements, choose the most appropriate answer from the options given below.

Correct Answer: (a) Both A and R are true and Ris the correct explanation of A.
Solution:

A market failure can occur when products of different qualities are sold at the same price due to imperfect competition, such as monopoly or oligopoly.

Monopolies: When a single seller controls the market, they can set prices and produce poor quality goods or services.
Oligopolies:
When a few producers have market power, they can collude to raise and limit competition. Other causes of market failure include :
Asymmetric information: When one party in a transaction has more information than the other.

Public goods : when the cost of a public good doesn't increase with more users.
Externalities: When an action impacts a third party that wasn't involved in the decision. For example, a factory that pollutes the air is a negative externality.

Unstable Market: When supply and demand condition are constantly changing. Governments can intervene in markets to correct market failure through laws, regulations, taxes, and subsidies.
Important point -
"Asymmetric information" is a term that refers to when one party in a transaction is in possession of more information than the other, in certain transactions, sellers can take advantage of buyers because asymmetric information exists whereby the seller has more knowledge of the good being sold than the buyer.

85. Given below are two statements.

Statement I: When the level of investment is itself determined within the system then the effectiveness of monetary policy is enhanced by an elastic investment and inelastic liquidity preference schedule, whereas the opposite holds for the effectiveness of fiscal policy.

Statement II : Monetary policy, by accommodating fiscal policy may forestall the crowding out effect.
In the light of the above statements, choose the correct answer from the options given below.

Correct Answer: (a) Both Statement I and Statement II are true.
Solution:

Yes, when the level of investment is determined within the system, the effectiveness of monetary policy is enhanced by an elastic investment and inelastic liquidity preference schedule:
Explanation :
• Monetary Policy: Monetary Policy is a set of actions taken by a country's monetary authority to influence financial conditions to achieve goals like price stability and high employment.

• Liquidity Preference is the demand for money as an asset. John Maynard Keynes developed the concept in his book "The General Theory of Employment, Interest and Money".

• Investment decreases when the cost of capital to finance projects increases.

• Fiscal policy: Fiscal explanation paid for by increased borrowing can lead to higher interest rates, which reduces investment.

• Excess liquidity can weaken the monetary policy transmission mechanism, making it harder for monetary authorities to influence demand conditions.

• Liquidity trap is an economic situation where consumers and investors hoard cash instead of spending or investing it, even when interest rates are low.

• Expansionary fiscal policy: Some economists argue that expansionary fiscal policies are ineffective because government spending can crowd out private sector investment.

Important point: Monetary policy can effect the crowding out effect increasing interest rates, which can lead to a reduction in private investment spending.

86. Given below two statements.

Statement I: Capital deepening is the process by which capital grows at a faster rate than labour and the capital labour ratio rises.

Statement II: The growth of output worker is result of technological change which decreases output per workers for a given capital/labour ratio.

In the light of the above statements, choose the most appropriate answer from the options given below.

Correct Answer: (c) Statement I is correct but Statement II is incorrect.
Solution:

(1) Capital deepening refers to an increase in the capital-labor ratio. The capital-labor ratio can go their either due to an increase in the capital stock or through a decrease in the number of workers. Hence, statement-I is true.

(2) Technology change can result in increased output per worker, even with the same amount of capital per worker. This is because technological change shifts the production function upward, allowing for more output with the same amount of capital.
Hence, statement II is false.

87. Given below are two statements.

Statement I: Countries always want to have foreign markets open for their exporters. But if a country limits access to its own market, foreign countries may take action to limit access to their own market.

Statement II: Trade agreement can help lower barrier to international commerce, but countries still have to believe that other countries are "playing fair."
In the light of the above statements, choose the correct answer from the options given below.

Correct Answer: (a) Both Statement I and Statement II are true.
Solution:

Countries always want to have foreign markets open for their exporters. But if a country limit access to its own market, foreign country may take action to limit access to their own market.

Countries that are open to international trade tend to grow faster, innovate, improve productivity and provide higher income and more opportunities to their people.

Yes, trade agreements can help lower barriers to international commerce, but countries still have to believe that other countries are 'playing fair'.

88. Given below are two statements.

Statement I: The IS curve is negatively sloped because an increase in the interest rate reduces planned investment spending and therefore reduces the equilibrium level of income.

Statement II: The smaller the multiplier and the less sensitive investment spending is to changes in the interest rate, the steeper is the IS curve.

In the light of the above statements, choose the correct answer from the options given below.

Correct Answer: (a) Both Statement I and Statement II are correct.
Solution:

Yes, the IS curve is negatively sloped because an increase in interest rate reduces investment spending, which in turn decreases the equilibrium level of income.
Explanation : When interest rates increase. It becomes more expensive to finance projects, which reduces investment. This leads to a decrease in goods market equilibrium output, which is larger in absolute value than the decrease in investment due to the multiplier effect.

IS Curve
The IS Curve, or Investment - savings curve, shows the relationship between interest rates and national income. It's derived from goods market equilibrium, where total output equals total spending. Other factors that shifts the IS Curve: include:
• Changes in governments spending
• Changes in taxes.
• Changes in consumer confidence.
• The smaller the multiplier ag and the less sensitive investment spending (1) is to changes in the interest rate, the steeper is the IS Curve.

89. The Nobel Prize in Economic in 2022 has been awarded to Ben S. Bernanke, Douglas, W. Diamond and Philip H Dybvig "for research on banks and financial crises." One of the important findings in their research is why avoiding bank collapses is vita.

Saving must be channelled to investments for the functioning and growth of any economy. But there arises a conflict while the savers want instant access to their money for unexpected outlays, the borrowers need to know they will not be forced to repay their loans prematurely.

Diamond and Dybvig, show how banks offer an optimal solution to this problem. Banks may act as intermediaries, who accept deposits from savers and allow access to their money, when they wish and also offer long term loans to borrowers.

But the analysis of these authors also shows banks are vulnerable to rumours and they may lead to their imminent collapse, when a large number of savers simultaneously, run to a bank to withdraw their money - a bank ran occurs and the bank collapses, such dangerous dynamics can be prevented through the government by providing deposit insurance and acting as a leader of last resort to banks.

Diamond demonstrated another societally important function by a bank. Banks as intermediaries between savers and borrowers, are in a better position to assess a borrower's creditworthiness and ensure that loans are used for good investments. "The laureates insights have improved our ability to avoid both serious crises and expensive bailouts."

What conflict do the bankers face while channelizing saving into investment?

Correct Answer: (b) While the savers want instant access to their money, the borrowers want to repay their loans, only when it matures.
Solution:

While the savers want instant access to their money, the borrowers want to repay their loans, only when it matures.

90. What solution does the Diamond and Dybvig's theory offer to the conflict faced by the bankers while channelizing savings into investment?

Correct Answer: (c) Banks act as intermediaries that accept deposits from savers and allow them access to their money when they wish, while also offering long term loans to borrowers.
Solution:

Banks act as intermediaries that accept deposits from savers and allow them access to their money when they wish, while also offering long term loans to borrowers.