English Quiz for Dena Bank PGDBF 2017 – Set 2


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Read the
following passage carefully and answer the questions that follow

Smith did not invent economics. Joseph Schumpeter
observed that “The Wealth of the Nations” did not contain “a single analytic
idea, principle or method that was entirely new”. Smith’s achievement was to
combine an encyclopedic variety of insight, information and anecdote, and to
distill from it a revolutionary doctrine. The resulting masterpiece is the most
influential book about economics ever published. Remarkably, much of it speaks
directly to questions that are still of pressing concern. The pity is that
Smith’s great book, like most classics (of 900 pages), is more quoted than
read. All sides in today’s debates about economic policy have conspired to
peddle a conveniently distorted version of its idea. If his spirit is still
monitoring events, it will undoubtedly have celebrated the collapse of
communism. But it must also long to meet the politicians who have taken charge
of a fine reputation and not so fine profile. And put them right on one or two
points. Today Smith is widely seen as intellectual champion of self-interest.
This is a misconception. Smith saw no moral virtue in selfishness ; on the
contrary he saw its dangers. Still less was he a defender of capital over
Labour (he talked of the capitalist’s “mean rapacity”), of the rising
bourgeoisie over the common folk. His suspicion of self – interest and his
regard for the people as a whole come through clearly in one of his best-known
remarks: “People of the same trade often meet together, even have merriment and diversion, but the
conversation ends in a conspiracy against the public, or in some contrivance to
raise prices.” Far from praising self-interest as a virtue, Smith merely
observed it to be a driving economic force. In “The Wealth of Nations” he
explained how this potentially destructive impulse is harnessed to the social
good. What is to prevent greedy producers raising their prices until their
customers can afford to pay no more? The answer is competition. If producers
raise their prices too high, they create an opportunity for one or more among
them to profit by charging less and thus selling more. In this way competition
tames selfishness and regulates prices and quality. At the same time it
regulates quantities. If buyers want more bread and less cheese, their demand
enables bakers to charge more and obliges cheese-mongers to charge less.
Profits in bread-making would rise and profits in
cheese-making would fall; effort and capital would move from one task to the
other. Through Smith’s eyes, it is possible to marvel afresh at this fabulously
powerful mechanism and to relish, as he did, the paradox of private gain
yielding social good. Only more so, for the transactions that deliver a modern
manufactured good to its customer are infinitely more complicated than those
described by Smith. In his day, remember, the factory was still a novel idea:
manufacturing meant pins and coats. A modern car is made of raw materials that
have been gathered from all over the world, combined into thousands of
intermediate products, sub-assembled by scores of separate enterprises. The
consumer need know nothing of all this, any more than the worker who tapped the
rubber for the tyres knows or cares what its final use will be. Every
transaction is voluntary. Self-interest and competition silently process
staggering quantities of information and direct the flow of good. Services,
capital and Labour – just as in Smith’s much simpler world. Far-sighted as he
was, he would surely have been impressed. Mind you, modern man has also
discovered something else. With great effort and ingenuity, and the systematic
denial of personal liberty, governments can supplant self-interest and competition,
and replace the invisible hand of market forces with collective endeavor and a
visible input- output table. The result is a five-year waiting list for
Trabants. Because Smith was convinced that the market would, literally, deliver
the goods, he wanted it, by and large, left alone. He said that governments
should confine themselves to three main tasks: defending the people from the
“violence and invasion of other independent societies”, protecting every member
of society from the “injustice or oppression of every other member of it”; and
providing “certain public works and certain public institutions, which it can
never be for the interest of any individual, or small number of individuals, to
erect and maintain.” Each of these jobs arises because the market in some ways
fails. In the first two cases-collective defence and the administration of
justice – the failure is the so-called free-rider problem. People disguise what
they are willing to pay for a service that must be provided to everybody or not
at all; they want to consume it and let others meet the cost. However the third
job the provision of “certain public works and certain public institutions”
goes much wider.
Indeed, to modern minds, it threatens to be all
encompassing. It recognizes not only the free-rider problem but also other
species of market failure notably, the effects of private transactions on third
parties, or “externalities”. Smith has in mind roads, public education, and
help for the destitute. As it turned out, millions of teachers, nurses,
firemen, postmen, rubbish collectors, bus drivers and 57,000 varieties of civil
servant have since marched through this opening. Smith’s thinking already seems
to permit a great deal of government intervention. Add some modern economics
and the floodgates open. For instance, theorists have shown that if just one
price in an economy is different from price under competition, efficiency may
require other every price to be somewhat distorted as well. Less government
intervention, it seems to follow, cannot be assumed to be better. Competition
itself has changed out of recognition. Modern economies, it is said, are driven
not by countless small producers, but by handful of giant enterprises and
monopolistic trade unions. And the rapid pace of industrial change has made the
externality of pollution for more obvious than before. Smith, admittedly, is a
bit thin on global warming.
Above all, many have forgotten something than
Smith saw clearly: that every advantage granted by government to one part of
the economy puts the rest at a disadvantage. Accordingly, he talked not of
“intervention” -a too-neutral word-but of “preference” and “restraint”. Modern
governments offer preference as though it costs nothing: the beneficiaries
demand it as of right. But Smith went further than revealing the penalty in
every preference. He also understood that ministers, like markets, fail. A
great virtue of unfettered competition, he said, was that “the sovereign is
completely discharged from a duty, in the attempting to perform which he must
always be exposed to innumerable delusions, and for the proper performance of
which no human wisdom or knowledge could ever be sufficient. “ Many of the
reasons why markets fail are also reasons why governments fail at the same
task. If the consumer refuses to reveal his preferences in a market setting,
how are governments to discover them? All too often, moreover, government
intervention is itself a cause of the market breaking down which becomes the
reason for further rounds of intervention, and so on. In Britain think of tax
preferences for housing, rent controls, planning, regulations; America think of
tax preferences for borrowing, deposit insurance, leverage buy-outs,
financial-market regulation. In one crucial respect, Smith’s arguments are even
more powerful now than in this day. Naturally, he favoured free trade to
prevent market failure: “By means of glasses, hotbeds, and hotwalls, very good
grapes can be raised in Scotland, and very good wine too can be made of them at
about thirty times the expense for which at least equally good can be brought
from foreign countries. Would it be a reasonable law to prohibit the
importation of all foreign wines, merely to encourage the making of claret and
burgundy in Scotland?” Two centuries later, free trade is not just a matter of
the cheapest supply; it is also the best way to force producers that might
otherwise be near-monopolies to compete. It is perfect folly to complain that
today’s big companies render the invisible hand powerless, and to conclude that
barriers to trade must go up: trade and competition need each other more than
ever before. Smith was a pragmatist.
The principles he expounded on the proper role of
government are flexible if anything, too flexible. They are a reminder that
imperfect markets are usually cleverer than imperfect governments, but they
cannot draw a line to separate good intervention from bad. If governments and
voters could be guided by two Smithian precepts, however, the market system
that has worked so well would work even better. First, the competitive clash of
self-interest against self-interest, however imperfect, has built-in
safeguards. Before governments exert their monopoly power to displace it, they
must justify themselves. Let the burden of proof always be on them, Second,
when preference or restraint are judged to be necessary, use market forces to
apply them. Tariffs are better than quotas; taxes are better than bans or
direct controls; allocating resources by price (e.g. in health or education) is
better than allocating them by fiat, even if the services are then provided
“free” (but never forget those inverted commas) to their consumers.
1.  Smith’s attitude to the
virtues of self-interest can be best described as
(A) pragmatic
(B) cynical
(C) skeptical
(D) supportive
(E) none of these
2. According to Adam Smith
selfishness is dangerous
(B) competition is the result of ‘mean rapacity’
(C) self-interest always leads to competition
(D) competition regulates quantities
(E) none of these
3. All of
the following are the reasons of market failure except
(A) the
effect of private transaction on third parties
(B) people would like to consume goods without paying for them
(C) unfettered and unbridled trade
(D) government intervention
(E) none of these
4. Adam
Smith is mostly like to agree with
(A) it is
necessary for capital to exploit labour if competition and low prices are to be
(B) businessmen would form cartels given the chance
(C) lesser government intervention is better
(D) collective endeavor could be the basis of economic growth
(E) none of these
5. Which
of the following situation is not an instance of market failure?
(A) a
government practicing apartheid
(B) a specialist doctor charging high fee
(C) poor development of roads and railway
(D) a murderer going scot-free
(E) none of these
6. The
‘free rider’ problems result in need for all of the following except
government laws to prevent crime
(B) a national defence budget
(C) a national R&D centre for an industry
(D) a United Nations peace keeping force
(E) none of these
7. Based
on the passage, competitions will directly affect all of the following except
quantity of goods produced
(B) quality of goods produced
(C) direction of flow of goods
(D) price of goods sold
(E) none of these
8. We can
conclude from the passage that
government control is always self-propagating
(B) rulers are prone to delusions
(C) governments always fail because markets also fail
(D) governments actions rarely have justifications
(E) none of these
9. Based
on the passage, we would say that Adam Smith would not support
government intervention
(B) corporation
(C) taxes
(D) import licenses
(E) none of these
10. All
the following characteristics of modern world are used as arguments for
government intervention except
advance and costly research in basic science
(B) the far greater complexity of the modern manufacturing process
(C) increased pollution and environmental hazards
(D) the pre-eminence of large corporations
(E) none of these
11. Based
on the passage, the following can be inferred, except which of the following
governments must act only when necessary
(B) high customs duty are an acceptable way to restrict a change
(C) high taxation is better than bans
(D) the role of governments must be more flexible
(E) none of these
12. The
most serious problem of modern government is that they
(A) hire
too many people
(B) offer advantages to groups as if it costs them nothing
(C) are often unwise in their decisions
(D) tax the citizens too much
(E) none of these
13. Which
of the following is farthest in meaning to ‘merriment’ ?
(B) verve
(C) revelry
(D) levity
(E) mope

1. A
2. D
3. C
4. B
5. D
6. C
7. B
8. A
9. D
10. B
11. D
12. B

13. E


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