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1. Select the items which India shows in its current account, using the code given below:
1. inflows due to exports and outflows due to imports
2. inflows and outflows due to income repatriation
3. inflows and outflows due to foreign portfolio investment
4. external lending and borrowings
Code:
(a) 1 and 2
(b) 2 and 3
(c) 3 and 4
(d) 2 and 4
2. Select the statement which correctly defines the difference between ‘factor cost’ and ‘factory price’:
(a) ‘Factor cost’ is the manufacturing price of any product, while the ‘factory price’ includes the burden of indirect taxes on the product, too.
(b) While ‘factory price’ of a product includes the current rate of inflation, the ‘factor cost’ does not.
(c) When the weight of the state taxes are added to the ‘factor cost’ it becomes ‘factory price’.
(d) None of the above
3. What is correct about the concept ‘transfer earnings’?
(a) The return that an asset must earn to prevent its transfer to the next best alternative use.
(b) The private remittances’ earnings of an economy with the help of the transferred part of income to it by its nationals living abroad.
(c) The earnings companies get on their exports by drawing back the full amount of indirect taxes on the exported items popularly known as ‘duty drawback scheme’.
(d) The transfer of the earnings by one arm of a company from one economy to its other arm in another economy under the agreement of ‘double taxation’.
4. Select the correct statement about the popular stock market term ‘reverse yield gap’ from the options given below:
(a) A situation when the returns of government securities is in excess over
the equities.
(b) A situation when the capital gains compensate the negative impact of inflation on the equities’ returns.
(c) The instance of comparatively higher inflation which depletes the returns earned by investors on the government bonds.
(d) The situation when due to low long-term capital gains tax, returns on the government securities become higher.
5. Consider the following statements.
1. ‘Liquidity trap’ is a situation when people prefer to hold money rather than investing it.
2. ‘Liquidity preference’ is the situation when people prefer to invest money rather than hold it.
3. ‘Liquidity crunch’ is a situation of short-supply of money in the Money Market.
4. ‘Credit crunch’ is a situation of short-supply of money in the loan market.
Select the corrent statements using the code given below:
(a) 1, 2 and 3
(b) 2, 3 and 4
(c) 1, 2 and 4
(d) 1, 3 and 4
6. Consider the following statements. about the ‘Lorenz curve’.
1. A straight line on it represents complete equality of income.
2. With greater curvature in it, inequality of income rises proportionally
—this inequality is measured by the ‘Gini Coefficient’.
Select the incorrect statement/statements using the code given below:
(a) Only 1
(b) Only 2
(c) Both 1 and 2
(d) Neither 1 nor 2
7. What does the term ‘Ninja’ mean which became a common word in the financial world after the US sub-prime crisis?
(a) A loan given on false claims of credit-worthiness by the banks.
(b) Borrower with no assets, no income or no job
(c) Highly competitive form of lending, compromising the financial fundamentals.
(d) A loan given to someone who is on the brink of bankruptcy.
8. Select the correct effect of fall in the rate of inflation—
(a) Government’s interest payment liabilities increases.
(b) Interest income on saving bank accounts goes down.
(c) Lending and bank business grows.
(d) Bondholders’ incomes decrease.
9. Consider the following statements about ‘Pareto Optimality’.
1. It deals with distribution in an economy at the optimum level of taxation prevailing in the economy.
2. It suggests that in an economy somebody may be made better off by making somebody else worse off.
3. The idea works as a guide to finance managers in deciding how to spend limited funds.
Select the correct statements using the code given below:
Code:
(a) 1 and 2
(b) 2 and 3
(c) 1 and 3
(d) 1, 2 and 3
10. Consider the following statements about the ‘penny stocks’.
1. The shares listed on a stock exchange which show high market capitalisation with relatively low volume of shares.
2. The shares which are issued at a par value of rupee one.
3. Their trading price shows high volatility.
Select the incorrect statements using the code given below:
(a) 1 and 2
(b) 2 and 3
(c) 1 and 3
(d) 1, 2 and 3
11. Consider the following statements about a ‘preference share’ in India.
1. These shares bear a stated dividend
2. They get priority over equity shares
3. Such shares can be issued for a period of less than 1 year.
Select the correct statements using the code given below:
(a) 1 and 2
(b) 2 and 3
(c) 1 and 3
(d) 1, 2 and 3
12. Recently, India shifted to a new method for measuring its national income. The new method classifies taxes into ‘product’ and ‘production’. Select the statements given below which are correct about these taxes. Use the code for your answer—
1. both of the taxes are imposed on the producers.
2. while product taxes are variable, the production taxes are fixed.
3. land revenue, profession tax, stamps and registration fees are some of the examples of production taxes in India.
4. sales tax, excise duty, service tax, export and import taxes are the examples of product taxes in India.
Code:
(a) 1 and 2
(b) 1, 2 and 3
(c) 2, 3 and 4
(d) 1, 2, 3 and 4
13. Select the correct statement regarding the process of ‘disinflation’—
(a) prices fall towards the upper limit of the healthy range of the headline inflation
(b) price levels fall below the lower limit of the healthy range of inflation
(c) retail inflation index falls down to single digit
(d) it is similar to deflation
14. Which one of the following decisions follow the idea of ‘prisoner’s dilemma’?
1. Companies fixing prices of their products at the levels less than they could in the trust that other companies do not fix lower prices.
2. The dilemma, ultimately, hampers the companies which fixes the higher prices.
Select the answer using the code given below:
Code:
(a) Only 1
(b) Only 2
(c) 1 and 2
(d) Neither 1 nor 2
15. Which of the following defines an economy in the situation of a ‘population trap’?
(a) When the population control policies of the economy almost fail and it goes for a situation of population boom.
(b) When the population of an economy starts increasing after achieving the stage of ‘replacement level’.
(c) When the ‘natural rate of increase’ in an economy starts falling drastically below the ‘replacement level’.
(d) None of the above
16. Select the correct situation which defines ‘poverty trap’—
(a) When the population in an economy continues to remain poor even after increase in its ‘nominal income’.
(b) When the rise in income of the poor people is equitably neutralised by inflation.
(c) When unemployment rate starts increasing together with the inflation.
(d) When unemployed population getting unemployment allowance does not feel encouraged to become employed.
17. Consider the following statements about ‘predatory pricing’.
1. Fixing of exceptionally high prices by the companies for their goods
2. Such pricing policy has an express purpose of harming rivals or exploiting the consumer.
Select the correct statement/statements using the code given below:
Code:
(a) Only 1
(b) Only 2
(c) 1 and 2
(d) Neither 1 nor 2
18. Which of the following is correct about ‘high street banking’?
(a) When banks emphasise retail lending.
(b) When banks emphasise corporate lending.
(c) When banks emphasise long-term but risk-free lending.
(d) When banks emphasise short-term, low interest and risk-free lending.
19. Consider the following statements.
1. The paid-up capital of a company is never more than its authorised capital
2. The issued capital of a company can be maximum upto its authorised capital
3. The subscribed capital of a company can never be higher than its issued capital
Select the correct statements using the code given below:
(a) 1 and 2
(b) 2 and 3
(c) 1 and 3
(d) 1, 2 and 3
20. Consider the following statements.
1. A situation when people think that they are getting richer during the times of inflation is known as ‘money illusion’.
2. It is believed that lower levels of ‘money illusion’ are beneficial to ‘grease the wheels’ of the economy.
Select the correct statement/statements using the code given below:
Code:
(a) Only 1
(b) Only 2
(c) Both 1 and 2
(d) Neither 1 nor 2
21. ‘Bad’ money forces ‘good’ money out of circulation—proposes the Gresham’s Law.
1. it analyses the circulation of ‘black’ money in the Indian economy— usually getting deposited in the tax havens through hawala route.
2. the Chinese currency Yuan headed to replace the dominance of the US dollar in the world foreign exchange market.
In light of the law select the incorrect statement/statements given above using the code below.
(a) Only 1
(b) Only 2
(c) Both 1 and 2
(d) Neither 1 nor 2
22. What does a ‘J-curve effect’ mean in the area of foreign exchange management?
(a) A deficit in BoP is followed after devaluation before posting surplus.
(b) Though foreign exchange earnings of an economy in primary anticles are lower, they are consistent.
(c) All transactions outside a stock exchange get accounted once the stock exchange opens the next day follows a J-curve.
(d) None of the world economies are as expert at managing their foreign exchange as one preceding successful economy.
23. Consider the following statements about ‘earth trilemma’.
1. For economic development world needs increased energy expenditure but this raises the environmental issues
2. The ‘EEE’ trilemma is synonymous to it
3. Without limiting the levels of consumption, earth as a system, can not sustain
4. Three issues need attention to sustain the earth—low consumption, high saving and an attitude of conservation
Select the correct statements using the code given below:
(a) 1 and 2
(b) 3 and 4
(c) 1 and 4
(d) 1 and 3
24. Which of the following is correct about the ‘impossible trinity’?
(a) A country can not maintain all three policy goals—stable financial market, global integration and stable exchange rate.
(b) A country can not maintain all three policy goals—free capital flows, a fixed exchange rate and an independent monetary policy.
(c) A country can not maintain all three policy goals—stable exchange
rate, global integration and continuous economic growth.
(d) A country can not maintain all three policy goals—small fiscal deficits, social welfare and high economic growth.
25. Select the correct statements regarding the central sector and centrally sponsored schemes run by the Government of India, using the code given below:
1. presently, there are 950 such schemes
2. budgetary allocation on them are today around 5 per cent of country’s GDP
3. in case the country goes for the ‘universal basic income’, it is advisable to prune them
Code:
(a) Only 1
(b) Only 2
(c) 1 and 3
(d) 1, 2 and 3
1. (a) Foreign portfolio investments and loans are part of the capital account.
2. (d) ‘Factor Cost’ and ‘Factory Price’ mean same thing—the cost of all inputs which are needed to produce a product (such as raw material, labour, power, interest, rent, maintenance, etc).
3. (a) Any earning above the ‘transfer earning’ is known as its ‘economic cost’.
4. (b) Such a situation arises during the periods of high inflation—because equities provide capital gains which compensate the negative impact of inflation on them while government securities do not get this advantage. This is why during higher inflation it is suggested to invest in equities rather than government bonds (provided the security market in healthy mode).
5. (c) ‘Liquidity trap’ and ‘liquidity preference’ are used synonymously. Liquidity crunch is short-supply of money in the money as well as capital market.
6. (d) The ‘Lorenz Curve’ is a graphical representation of wealth distribution (US economist Max Lorenz, 1905) in which a straight diagonal line represents perfect equality of wealth distribution—the Lorenz curve lies beneath it, showing the reality of wealth distribution. The difference between the straight line and the curved line is the amount of inequality of wealth distribution, a figure described by the Gini coefficient. The curve is used to show what percentage of a nation’s residents possess what percentage of that nation’s wealth.
‘Gini Coefficient’ (developed by the Italian Statistian and Sociologist, 1912) measures the inequality in income in an economy (also known as the Gini index or Gini ratio). This is a measure of statistical dispersion intended to represent the income distribution of a nation’s residents. This measures the inequality among values of a frequency distribution (for example levels of income)—a Gini coefficient of zero expresses perfect equality, where all values are the same (for example, where everyone has the same income) while a Gini coefficient of one (i.e., 100 per cent) expresses maximal inequality among values (for example, where only one person has all the income). However, a value greater than one may occur if some persons represent negative contribution to the total (e.g., have negative income or wealth). For larger groups, values close to or above 1 are very unlikely in practice. This is commonly used as a measure of inequality of income or wealth.
7. (b) Banks require the borrower to show a stable income source or sufficient collateral, a ‘ninja loan’ ignores the verification process. A ninja loan is often found in the mortgage market. In such loans, generally, interest rate initially remain lower and is increased later. Such borrowers hope to pay their loan once their property appreciate. But in case if the property doesn’t appreciate, many borrowers default repayments. This why such loans are very risky for lenders.
8. (a) Due to fall in inflation ‘real cost of borrowing’ increases which makes Government’s loan payment costly. Other statements are written just
their opposite.
9. (b) The concept is not connected to taxation. This idea of the Italian economist Vilfredo Pareto (1843–1923) suggests that ‘nobody can be made better off without making someone else worse off’.
10. (d) They are low-priced shares of small companies with very low market capitalisation. They were in news recently as some of such shares did show high rise in their trading prices on the security bourses.
11. (a) Such shares may get dividend even if the company has gone in loss and they are issued for a period upto 10 yrs.
12. (d) All of the statements are correct. While the product taxes are imposed on the producers they are ultimately paid by the consumers of the goods and services—these taxes are linked to the production volumes of the producers (so they are variable). Production taxes are paid by producers are not linked to the volume of their productions that is why they are ‘fixed cost’ of production.
13. (a) For example, in case of India, retail price index falling towards 6 per cent (that is the upper limit of India’s healthy range of inflation) from above 6 per cent levels (such as 7 or 8).
14. (a) This is a famous example in the ‘game theory’ which concludes that why co-operation is difficult to achieve even if it is mutually beneficial, ultimately making things worse for the parties involved.
15. (d) This is a situation of population growth rate (i.e., natural rate of increase) greater than the achievable growth rate in the economy.
16. (d) Such situations occur since the after tax income (i.e., disposable income) turns out to be less than the benefit of the unemployment allowance.
17. (b) Exceptionally low prices are fixed by the firms under such pricing policy which has the objective of harming and finally eliminating rivals from the market—when they have monopolistic presence in
the market they start exploiting the consumers.
18. (a) This is another term for ‘retail lending’—in such lending, banks forward a large number of loans to individual borrowers rather than putting the same money to a few corporate (non-individual i.e. group)
borrowers—though the former is more risky and cumbersone, too.
19. (d) The limit upto which shares can be issued by a company is upto its authorised capital (the capital which is written in its Article of Association).
20. (c) The phrase was coined by the economist J.M. Keynes.
21. (c) The Law proposed by Sir Thomas Gresham (an advisor to Queen Elizabeth—I of England) does not deal with ‘black’, ‘white’ or any weakening world currency, nor it is correct in the case of paper currencies. The law is correct once metallic currencies are in circulation which have proportional intrinsic value—such currencies are hoarded (as in the case of price rise).
22. (a) This theory states that a country’s trade deficit will worsen initially after the depreciation/devaluation of its currency because higher prices on foreign imports will be greater than the reduced volume of imports. The effects of the change in the price of exports compared to imports will eventually induce an expansion of exports and a cut in imports— which, in turn, will improve the balance of payment situation.
23. (a) The ‘EEE’ trilemma is also known as the ‘Earth Trilemma’ which says that for economic development, mankind needs to increase energy consumption but this accelerates environmental degradation. In a sense, energy model needs re-thinking.
24. (b) This remains the prima donna of all ‘trilemmas’ articulated by the economists. This is also known as ‘Mundell’s Impossible Trinity’ which has strong theoretical foundations in the Mundell-Fleming Model developed in 1960s.
25. (d) Several of the schemes are very old and fund allocation on them are also low. For example, one scheme (Livestock Health & Disease Control) is 96 years old! While suggesting the Government to think in the direction of the ‘universal basic income’ scheme, the Economic Survey 2016-17 has suggested to wind up these schemes in phased manner.