UGC NET/SET Economics Practice Test - 1

The practice test in Economics designed to be similar to the UGC NET/SET exam format. It covers a range of topics with multiple-choice questions and a brief case study.

UGC NET/SET Economics Practice Test - 1

Instructions:

This test contains 50 multiple-choice questions.

Each question is worth 2 marks.

There is no negative marking.

Choose the BEST answer for each question.

Time allotted: 1 hour 30 minutes

Multiple-Choice Questions (50 Questions)

Which of the following is NOT a characteristic of monopolistic competition?
(A) Differentiated products
(B) Free entry and exit
(C) Large number of sellers
(D) Homogeneous products

The Phillips curve illustrates the relationship between:
(A) Inflation and unemployment
(B) Interest rates and investment
(C) Government spending and economic growth
(D) Exchange rates and trade balance

In the IS-LM model, an increase in government spending will typically lead to:
(A) Higher interest rates and lower output
(B) Lower interest rates and higher output
(C) Higher interest rates and higher output
(D) Lower interest rates and lower output

The Ricardian Equivalence proposition suggests that:
(A) Government spending has no impact on aggregate demand.
(B) Tax cuts are always more effective than government spending increases.
(C) Consumers will save tax cuts in anticipation of future tax increases to repay government debt.
(D) Monetary policy is more effective than fiscal policy.

What does the Gini coefficient measure?
(A) The rate of economic growth
(B) The level of inflation
(C) Income inequality
(D) The unemployment rate

Which of the following is a limitation of using GDP as a measure of economic well-being?
(A) It doesn't account for non-market activities like household work.
(B) It doesn't include government spending.
(C) It doesn't measure the value of exports.
(D) It doesn't reflect changes in the price level.

The Heckscher-Ohlin theory of international trade suggests that countries will export goods that:
(A) Are capital-intensive
(B) Are labor-intensive
(C) Use relatively abundant factors of production
(D) Have high transportation costs

Which of the following is a characteristic of a public good?
(A) Rivalry and excludability
(B) Non-rivalry and excludability
(C) Rivalry and non-excludability
(D) Non-rivalry and non-excludability

The Laffer curve illustrates the relationship between:
(A) Tax rates and tax revenue
(B) Inflation and unemployment
(C) Interest rates and investment
(D) Government spending and economic growth

What is moral hazard?
(A) The risk that a borrower will default on a loan.
(B) The tendency for people to take more risks when they are insured.
(C) The difficulty in assessing the creditworthiness of borrowers.
(D) The problem of asymmetric information in financial markets.

Which of the following is the most liquid asset?
(A) Real estate
(B) Stocks
(C) Bonds
(D) Cash

What is Adverse Selection in the insurance market?
(A) The risk that the insured individual will act in bad faith.
(B) The difficulty of getting insurance because of a pre-existing condition.
(C) The tendency for those with higher risk to purchase insurance more often than those with lower risk.
(D) When an insurance company doesn't pay claims fairly.

Which of the following is a key characteristic of Behavioral Economics?
(A) It assumes individuals are always rational in their decision-making.
(B) It incorporates psychological insights into economic models.
(C) It relies solely on mathematical models without empirical testing.
(D) It emphasizes the efficiency of perfectly competitive markets.

What does the 'crowding out' effect refer to?
(A) Increased private investment as a result of government borrowing.
(B) Decreased private investment as a result of government borrowing.
(C) Increased government spending as a result of private investment.
(D) Decreased government spending as a result of private investment.

Which of the following is a key element of the Solow Growth Model?
(A) Constant returns to scale in production
(B) Increasing returns to scale in production
(C) Decreasing returns to scale in production
(D) Diminishing marginal product of capital

In Keynesian economics, what is the 'multiplier effect'?
(A) The proportional increase in government spending required to achieve full employment.
(B) The proportional decrease in taxes required to stimulate the economy.
(C) The proportional increase in aggregate demand resulting from an initial increase in spending.
(D) The proportional decrease in inflation as a result of monetary policy.

What is Purchasing Power Parity (PPP)?
(A) The theory that exchange rates should adjust to equalize the price of a basket of goods across countries.
(B) The theory that interest rates should be the same across all countries.
(C) A measure of a country's economic output adjusted for inflation.
(D) A government policy aimed at protecting domestic industries from foreign competition.

Which of the following is a consequence of inflation?
(A) Decreased purchasing power
(B) Increased real wages
(C) Decreased interest rates
(D) Increased savings

What is the main objective of monetary policy?
(A) To control government spending
(B) To manage the money supply and credit conditions to influence economic activity
(C) To regulate international trade
(D) To redistribute income

Which of the following is NOT a function of money?
(A) Medium of exchange
(B) Store of value
(C) Unit of account
(D) Barter system

What is the difference between nominal GDP and real GDP?
(A) Nominal GDP is adjusted for inflation, while real GDP is not.
(B) Real GDP is adjusted for inflation, while nominal GDP is not.
(C) Nominal GDP includes only the value of goods, while real GDP includes the value of services.
(D) There is no difference; the terms are interchangeable.

The Coase Theorem suggests that:
(A) Government intervention is always necessary to solve externalities.
(B) Private bargaining can efficiently resolve externalities if property rights are well-defined and transaction costs are low.
(C) Externalities always lead to market failure.
(D) Environmental regulations are always economically harmful.

If the marginal propensity to consume (MPC) is 0.8, what is the value of the Keynesian multiplier?
(A) 0.2
(B) 1.25
(C) 4
(D) 5

What is meant by "Pareto efficiency"?
(A) A situation where everyone is equally well off.
(B) A situation where it is impossible to make someone better off without making someone else worse off.
(C) A situation where resources are allocated by the government.
(D) A situation where the economy is growing at its maximum potential.

What does the IS curve represent?
(A) All combinations of interest rates and output levels that equate savings and investment.
(B) All combinations of interest rates and money supply that equate money demand and money supply.
(C) The relationship between inflation and unemployment.
(D) The level of government spending required to achieve full employment.

What is the “Tragedy of the Commons”?
(A) A situation where individually rational decisions deplete a shared resource, even when individuals recognize that it is not in their collective interest.
(B) A situation where a good or service is not accessible to all members of society.
(C) When a single entity holds a monopoly on a necessary commodity.
(D) When government regulations unduly stifle economic growth.

Which of the following is a characteristic of perfect competition?
(A) Differentiated products
(B) Barriers to entry
(C) Price makers
(D) Many buyers and sellers

What is a "Giffen good"?
(A) A good for which demand decreases when income increases.
(B) A good for which demand increases when price increases (violating the law of demand).
(C) A good that is perfectly elastic.
(D) A good that is perfectly inelastic.

In the context of economic development, what is "human capital"?
(A) The machinery and equipment used in production.
(B) The financial resources available for investment.
(C) The skills, knowledge, and experience possessed by the labor force.
(D) The natural resources available to a country.

What is "Structural Unemployment"?
(A) Unemployment caused by fluctuations in the business cycle.
(B) Unemployment caused by people quitting their jobs to find better ones.
(C) Unemployment caused by a mismatch between the skills of workers and the requirements of available jobs.
(D) Unemployment due to seasonal variations in labor demand.

According to the Quantity Theory of Money, what is the primary determinant of the price level?
(A) Interest rates
(B) The money supply
(C) Government spending
(D) Aggregate demand

What is "Discount Rate" used by the Federal Reserve?
(A) The percentage of deposits banks are required to hold in reserve.
(B) The interest rate at which commercial banks can borrow money directly from the Fed.
(C) The target range for the federal funds rate.
(D) The rate at which the Fed buys and sells government securities.

What is ‘Contractionary Fiscal Policy’ intended to do?
(A) Increase government spending and decrease taxes to boost aggregate demand.
(B) Decrease government spending and increase taxes to reduce aggregate demand.
(C) Increase the money supply to lower interest rates.
(D) Decrease the money supply to raise interest rates.

What is 'Crowding In' effect?
(A) Increased private investment as a result of government spending or policies.
(B) Decreased private investment as a result of government spending or policies.
(C) When increased government debt makes it easier for businesses to borrow.
(D) When inflation increases at a greater rate than government spending.

What is the purpose of Stabilization Policy?
(A) To increase economic volatility
(B) To reduce fluctuations in the business cycle
(C) To redistribute income from the rich to the poor
(D) To minimize government intervention in the economy

What is 'Ricardian equivalence'?
(A) If the marginal propensity to consume (MPC) is 0.8, what is the value of the Keynesian multiplier?
(B) An economic theory stating that a reduction in taxes with no decrease in government spending financed by government borrowing would have no effect on aggregate demand.
(C) The theory that governments are most successful at managing economies when they act by the "Rule of Law."
(D) That economies will grow at predictable rates when left uninhibited.

If the exchange rate is INR 80 per USD, and a tablet costs USD 500 in the US, what would it cost in India?
(A) INR 4,000
(B) INR 40,000
(C) INR 400,000
(D) INR 4 million

The 'Law of Diminishing Marginal Returns' states that:
(A) As more units of a variable input are added to a fixed input, the marginal product of the variable input will eventually decline.
(B) As price increases, the quantity demanded will decrease.
(C) As the quantity supplied increases, the price will decrease.
(D) Total costs always increase with output.

What does the Lorenz Curve illustrate?
(A) Relationship between inflation and unemployment
(B) Distribution of income or wealth in a population
(C) The quantity of goods and services demanded at different price levels
(D) The relationship between tax rates and tax revenue

If a firm is operating in a perfectly competitive market, what price will it charge?
(A) A price determined by its cost structure
(B) The market price
(C) A price to maximize profit margins, regardless of other producers' prices
(D) A higher price than the other firms in the market

Which of the following best describes a 'progressive tax system'?
(A) Everyone pays the same absolute amount of tax.
(B) Everyone pays the same percentage of their income in taxes
(C) Higher earners pay a larger percentage of their income in taxes.
(D) Lower earners pay a larger percentage of their income in taxes.

What is 'Opportunity cost'?
(A) The monetary cost of a decision
(B) The value of the next best alternative forgone as the result of making a decision.
(C) The cost of the resources used to produce a good or service
(D) The total expenses incurred by a business

What is 'externality'?
(A) A market where there is only one buyer.
(B) A good that is non-excludable and non-rivalrous in consumption.
(C) A cost or benefit that affects a party who did not choose to incur that cost or benefit
(D) The amount a consumer is willing to pay for a good or service.

What is "stagflation"?
(A) High economic growth and low inflation.
(B) Low economic growth and low inflation.
(C) High unemployment and high inflation.
(D) Low unemployment and low inflation.

A tariff is best defined as:
(A) A limit on the quantity of a good that can be imported.
(B) A tax on imported goods.
(C) A subsidy given to domestic producers.
(D) A complete ban on trade.

If a country's exports are greater than its imports, it has a:
(A) Trade deficit
(B) Trade surplus
(C) Balanced budget
(D) Current account deficit

What is the "Balance of Payments"?
(A) A record of all economic transactions between a country and the rest of the world.
(B) A statement of a country's government debt.
(C) A measure of the value of a country's exports.
(D) A statement of a country's budget deficit.

What is the goal of 'Inflation Targeting' by a central bank?
(A) To maximize economic growth
(B) To maintain a stable price level (low and stable inflation)
(C) To reduce unemployment
(D) To balance the government budget

What is 'Quantitative easing' by the central bank?
(A) Lowering the discount rate
(B) Raising the reserve requirement
(C) Increasing government spending
(D) Purchasing government bonds or other assets to increase the money supply.

Which of the following is NOT typically considered a macroeconomic policy goal?
(A) Stable prices
(B) High employment
(C) Equity and fairness
(D) Maximizing individual firm profits

Case Study:

The Economy of Zandia

Zandia is a small, open economy that relies heavily on agriculture. In recent years, Zandia has experienced rapid economic growth, fueled by high global demand for its agricultural exports. However, this growth has been accompanied by rising inflation. The government of Zandia is concerned about the potential negative consequences of inflation, including decreased purchasing power and reduced competitiveness in international markets. The Central Bank of Zandia has been considering various policy options to address the inflationary pressures. Additionally, climate change poses a long-term threat to Zandia’s agricultural sector.

Based on the case study, answer the following questions:

Which of the following policy options would be MOST appropriate for the Central Bank of Zandia to combat inflation in the short run?
(A) Lowering interest rates
(B) Increasing the money supply
(C) Raising interest rates
(D) Devaluing the Zandian currency

What is the most likely long-term economic challenge facing Zandia, given its reliance on agriculture and the threat of climate change?
(A) Increased unemployment
(B) Decreased economic growth
(C) Reduced international trade
(D) Increased income inequality

Answer Key:

This practice test covers a broad range of topics and includes a case study, making it a good resource for preparing for the UGC NET/SET Economics exam. Remember to review the concepts you find challenging and practice with additional questions. Good luck!

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