GPSC Prelims Paper 2 Mock Test - 7 - GPSC (Gujarat) MCQ

• When the economy has both Current Account Deficit and Fiscal Deficit, it is said to be facing the twin deficit. Hence option (b) is the correct answer.

• Both deficits often reinforce each other.

• The current account measures the flow of goods, services and investments into and out of the country. There is a deficit in Current Account if the value of the goods and services imported exceeds the value of those exported.

  It comprises of following components:

  • Trade of goods,

  • Services, and

  • Net earnings on overseas investments and net transfer of payments over a period of time, such as remittances.

• Hence, Current Account = Trade gap + Net current transfers + Net income abroad.

• It can be reduced by boosting exports and curbing non-essential imports such as gold, mobiles, and electronics.

• A fiscal deficit is a shortfall in a government's income compared with its spending. It is usually measured as percentage of GDP.

The RBI's Revised Directions on Fraud Risk Management are aimed at enhancing the mechanisms for detecting and preventing fraud within financial entities. This initiative is crucial for safeguarding the interests of both consumers and institutions by ensuring robust fraud risk frameworks are in place.

The 'Nivahika' Data Management Portal was launched by NIT Calicut. This initiative reflects the institution's commitment to innovating and improving data management practices in various fields.

Comet A117uUD was ejected from the Solar System following its encounter with Saturn. Such events are fascinating in astronomy as they illustrate the dynamic interactions between celestial bodies.

India ranked 39th among 119 countries in the Travel and Tourism Development Index 2024. This ranking reflects improvements in key areas such as safety, health, and prioritization of travel and tourism.

Lt Col Kabilan Sai Ashok is honored as India’s youngest Olympic boxing referee at the Paris Olympics 2024. His selection highlights the emphasis on youth and talent in officiating at high-level sports events.

A record 7.28 crore income tax returns were filed for the 2024-25 fiscal year by July 31, marking a significant increase and indicating greater compliance among taxpayers.

The MHA launched the applications e-Sakshya, e-Summon, Nyaya Setu, and Nyaya Shruti to facilitate the implementation of various initiatives, enhancing efficiency in legal and administrative processes.

The conference focuses on sustainable agri-food systems, addressing challenges posed by climate change and resource scarcity, which are critical for future food security and agricultural development.

Pumped Storage Hydropower (PSH) is a form of renewable energy storage. It uses excess electricity to pump water to higher elevations, which can then be released to generate power when needed, making it an efficient way to balance supply and demand in energy systems.

Michael Phelps famously won 8 gold medals at the 2008 Beijing Olympics, setting a record for the most gold medals won in a single Olympic Games, which remains unmatched and highlights his extraordinary talent and dedication to the sport.

The installation of the Doppler Radar in Lahaul-Spiti is significant for improving weather forecasting and enhancing disaster management in the region, providing critical data that can help mitigate the impact of severe weather events.

The United States ranks first in the Travel and Tourism Development Index 2024. This ranking reflects its strong tourism infrastructure and global influence in the travel sector.

The Open Market Sale Scheme (OMSS) is designed to dispose of surplus stocks of wheat and rice held by the Food Corporation of India (FCI) and to help regulate market prices, thereby ensuring food availability and stability.

Mary Kom is the only woman to have won the World Amateur Boxing Championship six times, showcasing her exceptional talent and determination in the sport, making her a prominent figure in Indian boxing.

The Attorney General of India is the chief legal advisor to the government. Appointed by the President, this position involves providing legal advice and representing the government in legal matters across various courts.

The collaboration aims to promote sustainable road infrastructure through the Green National Highway Project, focusing on environmentally friendly practices and reducing the carbon footprint of road construction and maintenance.

The idiom "The proof of the pudding is in the eating" suggests that the true value or quality of something can only be judged by putting it to the test or experiencing it, emphasizing the importance of practical experience over mere claims.

Infrastructure Development is not listed as one of the areas where India improved its scores in the Travel and Tourism Development Index. The focus was primarily on safety, health, and tourism prioritization, which are crucial for enhancing the overall tourist experience.

Dr. Grinson George assumed charge as the Director of the ICAR-Central Marine Fisheries Research Institute (CMFRI). His leadership is expected to drive advancements in marine research and sustainability practices.

Aerosmith announced their early retirement from touring due to frontman Steven Tyler's vocal injury. This decision marks the conclusion of their long-standing career in music and reflects the challenges artists face with health issues.

• A proportional tax is a taxing mechanism in which the taxing authority charges the same rate of tax from each taxpayer, irrespective of income. This means that lower class, or middle class, or upper-class people pay at the same rate of tax. Hence statement 1 is correct.

• Since the tax is charged at a flat rate for everyone, whether earning higher income or lower income, it is also called a flat tax.

• A proportional tax is based on the theory that since everybody is equal, taxes should also be charged the same way.

• A progressive tax is a tax in which the tax rate increases as the taxable amount increases. This sort of system is meant to affect higher-income people more than low- or middle-class earners to reflect the presumption that they can afford to pay more.

• The redistribution objective is sought to be achieved through progressive income taxation (not proportional taxation), in which higher the income, higher is the tax rate. Hence, statement 2 is not correct.

• The balance of payments (BoP) records the transactions in goods, services and assets between residents of a country with the rest of the world. There are two main accounts in the BoP – the current account and the capital account. The current account records exports and imports in goods and services and transfer payments.

• Trade-in services are denoted as invisible trade (because they are not seen to cross national borders). Services trade includes both factor and non-factor income. Factor income includes net international earnings on factors of production (like labor, land, and capital). Non-factor income is the net sale of service products like shipping, banking, tourism, software services, etc.

• Transfer payments are receipts which the residents of a country receive ‘for free’, without having to make any present or future payments in return. They consist of remittances, gifts and grants. They could be official or private. The balance of exports and imports of goods is referred to as the trade balance. Adding trade in services and net transfers to the trade balance, we get the current account balance. The capital account records all international purchases and sales of assets such as money, stocks, bonds, etc.

• Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over some period of time.

• All else being equal, inflation decreases the amount of goods or services you would be able to purchase. Inflation reduces the value of a currency's purchasing power, having the effect of an increase in prices.

• Consumers are worst affected by rise in prices or inflation. Consumers will have to pay more for the rising cost of products due to the declining purchasing power of the currency. Increase in spending due to inflation would also eat into the savings of the poor and middle-income group. Thus poor and middle-income group are worst affected by the rise in the price level. Hence, statement 1 is correct.

• Most commonly used inflation indexes are the Consumer Price Index (CPI) and the Wholesale Price Index (WPI).

• Deflation is a general decline in prices for goods and services, typically associated with a contraction in the supply of money and credit in the economy. During deflation, the purchasing power of currency rises over time. Producers are worst affected by fall in prices or deflation. Their profit level falls due to fall in prices forcing them to reduce investment. Hence, statement 2 is not correct.

• Apart from the categories of aggregate macroeconomic variables such as National Income, Personal Income, Personal Disposable Income, another aggregate income categories used in National Income accounting is National Disposable Income.

• National Disposable Income = Net National Product at market prices + Net current transfers from the rest of the world.

• The significance of the National Disposable Income is that it gives an idea of what is the maximum amount of goods and services the domestic economy has at its disposal. Current transfers from the rest of the world include items such as gifts, aids, etc.

Hence both the statements are correct.

• Stagflation was first recognized during the 1970s, where many developed economies experienced rapid inflation and high unemployment as a result of an oil shock.

• Stagflation refers to an economy that is experiencing a simultaneous increase in inflation and stagnation of economic output. It is a period of rising inflation and unemployment but falling output. Hence, statement 1 is correct.

• Stagflation is a combination of stagnant economic growth, high unemployment, and high inflation. This scenario, of course, directly contradicts the theory behind the Philips curve.

• Stagflation was long believed to be impossible because the economic theories that dominated academic and policy circles ruled it out of their models by construction. In particular, the economic theory of the Phillips Curve portrayed macroeconomic policy as a trade-off between unemployment and inflation.

• The theory claims that economic growth comes with inflation, which in turn should lead to more jobs and less unemployment. However, the concept has been somewhat disproven empirically due to the occurrence of stagflation in the 1970s, when there were high levels of both inflation and unemployment. Hence, statement 2 is not correct.

• National Crime Records Bureau (NCRB) established on the recommendations of the National Police Commission (1977-1981) and the MHA’s Task Force (1985). Hence, statement 1 is correct.

• NCRB has also been designated as the Central Nodal Agency to manage technical and operational functions of the ‘Online Cyber-Crime Reporting Portal’ through which any citizen can lodge a complaint or upload a video clip as an evidence of crime related to child pornography, rape/gang rape. The Bureau has been entrusted to maintain National Database of Sexual Offenders (NDSO) and share it with the States/UTs on regular basis. Hence, statement 2 is correct.

• Industrial Policy Resolution 1956 (IPR 1956): In accordance with the goal of the state controlling the commanding heights of the economy, the Industrial Policy Resolution of 1956 was adopted. This resolution formed the basis of the Second Five Year Plan, the plan which tried to build the basis for a socialist pattern of society.

• This resolution classified industries into three categories:

  • The first category comprised industries which would be exclusively owned by the state

  • the second category consisted of industries in which the private sector could supplement the efforts of the state sector, with the state taking the sole responsibility for starting new units

  • the third category consisted of the remaining industries which were to be in the private sector. Hence option 1 is not correct.

• Although there was a category of industries left to the private sector, the sector was kept under state control through a system of licenses. No new industry was allowed unless a license was obtained from the government. This policy was used for promoting industry in backward regions; it was easier to obtain a license if the industrial unit was established in an economically backward area. In addition, such units were given certain concessions such as tax benefits and electricity at a lower tariff. The purpose of this policy was to promote regional equality. Hence option 2 is correct.

• Even an existing industry had to obtain a license for expanding output or for diversifying production (producing a new variety of goods). This was meant to ensure that the number of goods produced was not more than what the economy required. A license to expand production was given only if the government was convinced that the economy required a larger quantity of goods. Hence option 3 is not correct.

• The International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), commonly known as the World Bank, were created in 1944 at a meeting of 44 nations (the Allies) at Bretton Woods, New Hampshire to rebuild devastated economies after the war and to promote economic stability and economic development on a global scale.

• The founders wished to protect future generations against a repeat of a worldwide economic crisis like the one experienced during the Great Depression which was believed to have partially caused the subsequent rise of fascism and the outbreak of World War II. It was thought that if economic cooperation could be arranged on a permanent institutional basis, the world would be better protected against economic depression, and war and humanity could achieve economic prosperity on a global scale.

• World Economic Forum (WEF), based in Cologny-Geneva, Switzerland, is an NGO, founded in 1971. It is a membership-based organization, and membership is made up of the world's largest corporations.

Hence option (c) is the correct answer.

• Option 1 is correct: In the short run an important factor in determining exchange rate movements is the interest rate differential i.e. the difference between interest rates between countries. There are huge funds owned by banks, multinational corporations and wealthy individuals which move around the world in search of the highest interest rates. If we assume that government bonds in country A pay 8 percent rate of interest whereas equally safe bonds in country B yield 10 percent, the interest rate differential is 2 percent. Investors from country A will be attracted by the high interest rates in country B and will buy the currency of country B selling their own currency.

• Option 2 is correct: Exchange rates in the market depend not only on the demand and supply of exports and imports, and investment in assets, but also on foreign exchange speculation where foreign exchange is demanded for the possible gains from appreciation of the currency. Money in any country is an asset. If Indians believe that the British pound is going to increase in value relative to the rupee, they will want to hold pounds. This expectation would increase the demand for pounds and cause the rupee-pound exchange rate to increase in the present, making the beliefs self-fulfilling.

• Option 3 is correct: When income increases, consumer spending increases. Spending on imported goods is also likely to increase. When imports increase, the demand curve for foreign exchange shifts to the right (i.e. demand of foreign currency increases). There is a depreciation of the domestic currency. If there is an increase in income abroad as well, domestic exports will rise and the supply curve of foreign exchange shifts outward. On balance, the domestic currency may or may not depreciate. What happens will depend on whether exports are growing faster than imports. In general, other things remaining equal, a country whose aggregate demand grows faster than the rest of the world’s normally finds its currency depreciating because its imports grow faster than its exports. Its demand curve for foreign currency shifts faster than its supply curve.