SET- 4

1. The ‘Ducth disease’ has been recently in news in case of the Indian economy. Consider the following statements about the disease.

1. This is a situation of resource curse

2. Country’s domestic sector becomes uncompetitive

3. Exchange rate gets bloated due to low inflow of foreign capital

4. This may be caused by the foreign investments and high remittances

Select the corrent statements using the code given below:

(a) 1, 2 and 3

(b) 2, 3 and 4

(d) 1, 2, 3 and 4

2. Consider the following statements about the WTO-related groups.

1. G-33 is the group of agricultural importing countries of the world.

2. C-4 is the group of sub-Saharan countries lobbying for cotton trade reforms.

3. Crains Group is the lobby of agricultural exporting countries.

4. G-10 is the group of small countries most vulnerable to agricultural imports.

Select the correct statements using the code given below:

(a) 1, 2 and 3

(b) 2, 3 and 4

(d) 1, 2, 3 and 4

3. Consider the following statement related to the ‘developmental’ and ‘non- developmental’ expenditures in India.

1. Plan expenditure was the leading development expenditure of the government in India.

2. Maintenance expenses of the assets created by the plan expenditure of the previous years were also considered as developmental expenditures.

3. Planning Commission mainly dealt with plan expenditures though, in practice, it provisions funds for the non-plan expenditures also.

Select the incorrect statements using the code given below:

(a) 1 and 2

(b) 2 and 3

(d) 1, 2 and 3

4. Consider the following statements regarding depreciation.

1. Fixed assets losing monetary value over time.

2. Loss of value in a domestic currency in front of a foreign currency.

3. Fall in the monetary value of the equipments of a plant due to their use.

4. It does not happen in case of non-fixed assets.

Select the correct statements using the code given below:

Code:

(a) 1, 2 and 3

(b) 2, 3 and 4

(d) 1, 2, 3 and 4

5. Deficit financing leads to inflation in general, but it can be checked if—

(a) Government expenditure leads to increase in the aggregate supply in ratio of the aggregate demand.

(b) Only aggregate demand is increased.

(d) Fresh currencies are printed to fulfil its deficit financial needs.

6. Consider the following options if all banks in an economy are nationalised and converted into a monopoly bank.

1. Deposits will decrease in the new bank

2. Deposits will increase in the new bank

3. There will be no effect on either saving rate or lending

Select the correct option/options using the code given below:

(a) Only 1

(b) 1 and 2

(d) 1 and 3

7. Consider the following statements about the Gross Domestic Capital Formation (GDCF):

(a) Expenditure dedicated to increase or maintain the capital stock in the economy.

(b) Expenditure incurred on physical assets only, even in the case of deficit financing.

(d) Addition to the stock of the economy after adjusting the effects of depreciation.

8. Which of the following factors responsible for a surplus in the current account of an economy?

1. Its exports are compulsory imports for other economies.

2. It imports low-technology items and exports high-technology items.

3. It has huge domestic market.

4. Its imports are non-compulsive in nature.

Select the answer using the code given below:

(a) 1, 2 and 3

(b) 2, 3 and 4

(d) 1, 2 and 4

9. If RBI cuts down the cash reserve ratio it will have the following impact on the economy.

1. Banks will have higher leverage to liquidity

2. Economy may see increased investment

3. Supply of currency in the economy may broaden

4. Real interest rates may decline

Select the answer using the code given below:

(a) 1, 2 and 3

(b) 2, 3 and 4

(d) 1, 2, 3 and 4

10. Which of the following items appear in a company’s balance sheet?

1. Value of raw materials held by the company

2. Cash held in the banks in company’s current account

3. Sales revenue of the company

4. The issued capital of the company

Select the answer using the code given below:

(a) 1, 2 and 3

(b) 2, 3 and 4

(d) 1, 2, 3 and 4

11. The idea of ‘currency convertibility’ as it is used by the economies today originated in which of the following?

(a) Marshall Plan

(b) Washington Consensus

(d) None of these

12. Which of the following statement defines the term ‘insurance penetration’?

(a) The number of insured per one hundred population in an economy

(b) Insured people per one thousand of the population of an economy

(d) None of the above

13. The exchange rate of a currency in its forex market depends on

1. Its twin deficit

2. The currency regime economy follows for exchange determination

3. Inflation, printing of fresh currencies, levels of forex earnings

Select the answer using the code given below:

(a) 1 and 2

(b) 2 and 3

(d) 1, 2 and 3

14. Consider the following statements regarding the state of full convertibility of the rupee in the current account.

1. 100 per cent foreign currency is made available by the government at official rate of exchange for all visible and invisible imports.

2. Foreign investment in the Indian security market, though an issue of capital account, is considered as a matter of the current account for

convertibility purpose.

3. In case of foreign grants, rupee is partially convertible in India.

4. Rupee is fully convertible if someone needs foreign currency to go for medical treatment abroad.

Select the incorrect statement/statements using the code given below:

(a) 1, 2 and 3

(b) 2, 3 and 4

(d) 1, 3 and 4

15. The Reserve Bank of India calculates four components of money supply, viz., Ml, M2, M3 and M4. Select the incorrect pair out of the the following.

(a) Ml consists of the currency and coins with the public; demand deposits of the banks and other deposits with the RBI.

(b) M2 consists of Ml and demand deposits of the post offices.

(d) M4 includes the sum of M3 and demand as well as time deposits of post offices.

16. Consider the following statements in a situation when a currency goes for devaluation.

1. Fall in the value of currency vis-á-vis a foreign currency

2. Exports become less competitive

3. Trading partners see fall in their export

4. Imports become costlier

Select the correct statements using the code given below:

(a) 1, 2 and 3

(b) 2, 3 and 4

(d) 1, 3 and 4

17. Purchase tax was recently in news—select the correct statements about it, using the code given below:

1. The state tax is subsumed in the upcoming GST.

2. The tax is presently paid by traders and manufacturers on their purchases.

3. The tax is deductible while paying VAT to the states.

Code:

(a) Only 1

(b) 2 and 3

(d) 1, 2 and 3

18. A state of ‘equilibirium’for a consumer means—

(a) A state of saving rate equal to the growth rate of the economy for the consumer.

(b) A state of zero saving for the consumer and full expenditure.

(d) The consumer is able to fulfil needs with a given level of income.

19. Modern economics defines ‘tax’ as—

(a) A mode of income redistribution

(b) A method of effecting transfer pricing

(d) A tool of meeting the social obligations of modern governments

20. Consider the following statements about ‘Sensex’.

1. Sensex is the representative share index of Indian stock market.

2. Its rise means an overall rise in prices of shares of a group of companies registered with Bombay Stock Exchange.

3. The shares which are kept in it are of the high net-worth companies.

4. It is a previledge to be in this 30-shares index.

Select the incorrect statement/statements using the code given below:

(a) Only 1

(b) 1 and 2

(d) None of these

21. ‘Structural reform measures’ was one of the two categories of measures announed by the government to be taken under the process of economic reforms in India. These measures deal with—

1. Redefining the role of the state in the economy

2. Attempting higher participation of private capital—Indian and foreign

3. Increasing aggregate supply in the economy

4. Checking the excessive demand in the economy leading to inflation

Select the answer using the code given below:

(a) 1, 2 and 3

(b) 2, 3 and 4

(d) 1, 3 and 4

22. Which of the following is correct about the term ‘ex-factory price’?

(a) It is ‘factory price’ added with all indirect taxes of the Centre and the state.

(b) It is the ‘ex-showroom price’ after deducting the weight of indirect taxes from it.

(d) None of these above

23. Select the statement which correctly defines the concept of ‘debt trap’.

(a) A situation of an economy which borrows to repay its past borrowings.

(b) A situation when an economy is borrowing higher than what it is repaying for its past borrowings.

(d) A situation when the forex reserves growth rate of an economy starts lagging behind the growth rate of its external borrowings.

24. Which of the following policy steps a government usually takes to boost demand and support the economy in deflationary situations?

1. Lowering interest rates together with cutting direct taxes

2. Emphasising savings and enhancing salaries

3. Increasing government expenditure

4. Going for tapering of fiscal stimulus

Select the answer using the code given below:

(a) 1 and 2

(b) 3 and 4

(d) 1 and 4

25. Recently, the government allowed formation of a new type of ‘firm’ (business entity) in India—LLP. Select the correct statements related to it, using the code given below:

1. it is a partnership firm.

2. liability of partners does not extend to their personal assets.

3. it can enter into contracts and hold property in its own name.

4. this will enable smaller firms higher access to credit.

Code:

(a) 1 and 2

(b) 1, 2 and 4

(d) 1, 2, 3 and 4

Answer Key with Explanations

1. (c) This is a negative consequence of large increase in a country’s income. This disease is primarily associated with a natural resource discovery, but it can result from any large increase in foreign currency, including FDI, foreign aid or a substantial increase in natural resource prices.

Economists often describe resource-rich countries as suffering from the ‘Dutch Disease’ or ‘resource curse’. The expression comes from the experience of the Netherlands half a century back (in 1960s when the country discovered huge natural gas in the North Sea), which brought in foreign revenue, but reduced the competitiveness of the domestic economy (i.e., exports) on account of a rising exchange rate (bloating of exchange rate). There are many other examples of this phenomenon including countries as different as United Kingdom, Australia and Nigeria.

2. (b) These are groupings/lobbies of member countries of the WTO which keep lobbying to serve their interests and create pressure for trade reforms on the platforms of the multilateral trade body. G-33 is also called the ‘Friends of Special Product’ in agriculture and is a coalition of the developing countries pressing for limited access to their market for agricultural products.

3. (b) From 2017–18, India will only have ‘revenue’ and ‘capital’ classification of expenditure (as per the Union Budget 2017–18).

4. (d) This is ‘wear and tear’ in a fixed/immovable asset due to their use. For different assets the rates of depreciation are announced by the countries

—the rates may vary across countries. Depreciation is also used by countries as a toll of economic policy—for example, to boost the sales of heavy vehicles the Government of India has doubled the rate of depreciation of the vehicles (from 20 per cent to 40 per cent).

5. (a) The basic reason for price rises in the situatons of defecit financing is that governemnts fail to equalise the total demand of the economy by the total supply.

6. (a) Monopoly will discourage the depositors from putting money in the bank. The saving rate of the economy together with the lending activities of the bank will also get hampered.

7. (a) It means the ‘net’ addition to the national stock. Future growth of the

economy depends on the GDCF.

8. (d) Having a huge domestic market never supports current account positively; it may impact the account negatively if its consumers are demanding more of the items which are being imported by the economy. In case of India, the situation is: its imports are compulsive and most of its exports are non-complusive for its trade partners.

9. (d) The CRR provides more money in the hands of banks, which may be now lent out for investment and increase the supply of currency in the economy. As the supply of money increases to the banks, they may cut interest rates (cost of money remaining the same).

10. (c) The revenues a company gets out of its sale of the manufactured items are not shown in the balance sheet of a company.

11. (d) The idea of ‘currency convertibility’ originated at Bretton Woods, New Hampshire, USA where the twin international economic organisations, viz., the International Monetary Fund and World Bank came into being.

12. (d) ‘Insurance penetration’ is defined as the ratio of underwritten premium in a given year to the GDP of an economy.

13. (d) Exchange rate of a currency depends on so many variables as given in the question. If the economy follows the ‘floating currency regime’ for the exchange rate determination, the exchange rate is directly linked to all those factors which affects the availability of domestic and foreign currencies in the economy—higher the supply of foreign currency, higher the value domestic currency will have and vice versa.

14. (c) Foreign investments are of two types, viz., one is in the direct form and another in the indirect form (i.e., in security market), both are considered capital inflows. But in the case of convertibility the security investment part of the foreign investment is considered a matter of current account to make it liquid in which rupee is fully convertible (otherwise no foreign investor will come to invest in the share market). Going abroad is a matter of current account, thus rupee is fully convertible for this purpose.

15. (c) M3 stands for the sum of M1 and total deposits of the banks (i.e.,

demand and time deposits of banks). These components of money in India were defined by the 2nd Working Group on Money Stock set up by the RBI in 1972. The 3rd Working Group on the Money Stock submitted its report to the RBI in 1998—as per it the new components of money in India are—M0, M1, M2 and M3. Together with the new stock of money the Working Group has suggested liquidities formula for the stock, too, namely- L0, L1, L2 and L3.

16. (c) Though, devaluation in currencies are discouraged and negated with excessive pressure coming from the trading partners of the country, it ultimately makes goods of the country cheaper in the world market— the economy earns profit from exports. The increase in profit of export takes place due to increase in ‘volume’ of the exports (but in reality, exporters forego more goods to earn the same amount of foreign currency). As foreign currency becomes costlier the country sees decrease in its imports (provided its imports are non-compulsive in nature) due to import substitution.

17. (b) It is one among the eight state taxes which are to be merged into the new federal indirect tax, the GST.

18. (d) Though this ideal stage is reached only in hypothesis—with the changing times, consumers not only demand new goods and services, but new times come with the alternatives of it, too.

19. (a) Incomes of citizens get redistributed after tax—this happens at two levels: once after paying tax and once when the governments use this money to provide essential services to the population. The poorer population uses more of the government services than the richer. The option (c) is also correct but comes later in order.

20. (b) Being in this index does not bring any priviledge to a company. The shares put here are just for representation purpose of the industry.

21. (a) Government never did intend to check the demand—it basically went for the a set of reforms known as the ‘macro-economic stabilation measures’, which attempts to boost demand in the economy. The whole process of economic reforms in the economy is

all about demand and supply management.

22. (a) ‘Ex-factory Price’ and ‘Ex-showroom Price’ are the same. Factory

price is basically, the factor cost.

23. (c) Many of the highly indebted countires (HICs) in the sub-Saharan Africa fall under this category. India was very close to a similar situation in early 2000.

24. (c) Statement 2 will have contradictory/neutralising effects on the economy as savings cut demand and salary enhancement increases demand. All these measures were taken by the government during 1996– 99 in India when aggregate demand in the economy had fell down to a very low level and inflation was, at one time, just 0.5 per cent (the second fortnight of December, 1999). Tapering in the fiscal stimulus cuts demand in the economy as it syphons out liquidity from the market.

25. (d) All of the statements are correct. Such a business entity was allowed by the GoI through the Limited Liability Partnership (LLP) Act, 2008. By May 2016, over 36,000 such firms were operative in the country. This firm has certain legal qualities of the ‘limited liability’ firms with the ease of a ‘proprietorship partnership’ firms.