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Test: Indian Economy -8 - UPSC MCQ


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25 Questions MCQ Test - Test: Indian Economy -8

Test: Indian Economy -8 for UPSC 2024 is part of UPSC preparation. The Test: Indian Economy -8 questions and answers have been prepared according to the UPSC exam syllabus.The Test: Indian Economy -8 MCQs are made for UPSC 2024 Exam. Find important definitions, questions, notes, meanings, examples, exercises, MCQs and online tests for Test: Indian Economy -8 below.
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Test: Indian Economy -8 - Question 1
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Which of the following is/are the components of high-powered money?

  1. Currency held by public
  2. Currency held by commercial banks
  3. Foreign Exchange reserves held by RBI

Select the correct answer using the code given below.

Detailed Solution for Test: Indian Economy -8 - Question 1
  • Determination of the money supply is currently expressed in terms of the monetary base or high-powered money.
  • High-powered money is the sum of commercial bank reserves and currency (notes and coins) held by the Public. High-powered money is the base for the expansion of bank deposits and the creation of a money supply. Hence only options 1 and 2 are correct.
  • The supply of money varies directly with changes in the monetary base and inversely with the currency and reserve ratios.
  • The use of high-powered money consists of the demand of commercial banks for the legal limit or required reserves with the central bank and excess reserves, and the demand of the public for currency. Thus, High power money
    • H = C + RR + ER
      Where, C = represent currency, RR = Required reserves, ER = The Excess reserves
  • A commercial bank’s reserves depend upon its deposits. But a bank usually holds reserves in excess of its required reserves. In fact, banks do not advance loans up to the legal limits and remain precisely under that. Hence the need arises for maintaining excess reserves by them.
  • Thus, the money supply is determined by the required reserve ratio and the excess reserve ratio of commercial banks.
  • The formal relation between the money supply and high powered money can be stated as in the form of equations:
    • The money supply(M) consists of deposits of commercial banks (D) and currency (C) held by the public.
    • Thus the supply of money (M) = D + C
  • High-powered money (H) (or monetary base) consists of currency held by the public(C), required reserves (RR) and excess reserves of commercial banks.
  • Thus, High powered money (H) = C + RR + ER
Test: Indian Economy -8 - Question 2
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Consider the following statements with reference to Monetized deficit of the Government of India:

  1. It is that part of the government deficit which is financed solely by borrowing from the Reserve Bank of India.
  2. It involves only printing of high value currency notes by the RBI.

Which of the statements given above is/are correct?

Detailed Solution for Test: Indian Economy -8 - Question 2
  • Monetized deficit, also known as the ‘net reserve bank credit to the government’, is that part of the government deficit which is financed solely by borrowing from the RBI. Hence statement 1 is correct
  • Since borrowings from the RBI can be both short-term and long-term, therefore, monetized deficit is the sum of the net issuance of short-term treasury bills, dated securities (that is, long-term borrowing from the RBI) and rupee coins held exclusively by the RBI, net of Government’s deposits with the RBI. Hence statement 2 is not correct.
  • This is different from the Traditional Budget deficit in two ways-
  • Traditional Budget deficit includes 91-day treasury bills held by both, the RBI and non-RBI entities whereas Monetized deficit includes 91-day Treasury Bills held only by the RBI.
  • Traditional Budget deficit includes only short-term sources of finance whereas Monetized deficit includes long-term securities also.
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Test: Indian Economy -8 - Question 3
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A government cuts taxes and runs a budget deficit in order to stimulate consumer spending. However, consumer responds to it by increasing savings instead of spending more. The forward looking approach of consumers is based on the fact that increased borrowings by the government will be repaid by taxes in future. This will lead to a similar impact on the economy as borrowing by the government today. Which of the following is best described in the passage given above?

Detailed Solution for Test: Indian Economy -8 - Question 3
  • The Ricardian equivalence theorem (RET) plays an important role in macroeconomic theory. The RET suggests that fiscal stimuli which are defined in terms of deficit-financed public spending hikes or tax cuts will lead to a crowding out of private consumption, thereby decreasing the effectiveness of fiscal policy in boosting economic activity.
  • It states that consumers are forward-looking and will base their spending not only on their current income but also on their expected future income. They will understand that borrowing today means higher taxes in the future.
  • Further, the consumer will be concerned about future generations because they are the children and grandchildren of the present generation and the family which is the relevant decision making unit, continues living. They would increase savings now, which will fully offset the increased government dissaving so that national savings do not change.
  • This view is called Ricardian equivalence after one of the greatest nineteenth century economists, David Ricardo, who first argued that in the face of high deficits, people save more. Hence option (a) is the correct answer.
  • It is called ‘equivalence’ because it argues that taxation and borrowing are equivalent means of financing expenditure. When the government increases spending by borrowing today, which will be repaid by taxes in the future, it will have the same impact on the economy as an increase in government expenditure that is financed by a tax increase today.
  • Goodhart’s Law – It was the idea by goodhart which suggests that attempts by a central bank (RBI in case of India) to regulate the level of lending by banks imposing certain controls can be circumvented by the banks searching the alternatives out of regulatory preview.
  • Okun's Law is based on the empirical research of Arthur Okun. It describes the relationship between unemployment and growth rate in an economy. The law is still used by policymakers as a rule of thumb to estimate the relationship between growth rate and job creation.
  • A grandfather clause is an exemption that allows persons or entities to continue with activities or operations that were approved before the implementation of new rules, regulations, or laws. Such allowances can be permanent, temporary, or instituted with limits. 
Test: Indian Economy -8 - Question 4
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Consider the following statements regarding NIPUN Bharat Mission:

  1. It covers children in the age group of 6-14 years.
  2. NITI Aayog is the nodal agency for implementing this scheme.

Which of the statements given above is/are correct?
Detailed Solution for Test: Indian Economy -8 - Question 4
  • NIPUN Bharat Mission has been launched to ensure that every child in the country necessarily attains foundational literacy and numeracy by the end of Grade 3, by 2026-27. NIPUN stands for National Initiative for Proficiency in Reading with Understanding and Numeracy.
    • NIPUN Bharat comes under the aegis of the centrally sponsored scheme of Samagra Shiksha.
    • It is being launched as a part of NEP (National Education Policy) 2020.
    • Department of School Education and Literacy is the nodal agency for implementing this scheme. Hence, statement 2 is not correct.
  • It focuses on
    • Providing access and retaining children in foundational years of schooling
    • Teacher capacity building
    • Development of high quality and diversified Student and Teacher Resources/Learning Materials
    • Tracking the progress of each child in achieving learning outcomes.
  • NIPUN Bharat aims to cover the learning needs of children in the age group of 3 to 9 years. Hence, statement 1 is not correct.
  • Goals of the Mission are set in the form of Lakshya Soochi or Targets for Foundational Literacy and Numeracy. The Laskhyas are based on the learning outcomes developed by the NCERT and international research and ORF studies.
  • Outcomes that have been envisaged from the implementation of the goals and objectives of NIPUN Bharat Mission are:
    • Foundational skills enable to keep children in class thereby reducing the dropouts and improve transition rate from primary to upper primary and secondary stages
    • Activity-based learning and conducive learning environment will improve quality of education.
    • Innovative pedagogies such as toy-based and experiential learning will be used in classroom transaction thereby making learning a joyful and engaging activity.
    • Intensive capacity building of teachers will make them empowered and provide greater autonomy for choosing the pedagogy.
    • Holistic development of the child by focusing on different domains of development like physical and motor development, socio-emotional development, literacy and numeracy development, cognitive development, life skills etc. which are interrelated and interdependent, which will be reflected in a Holistic Progress Card.
    • Since almost every child attends early grades, therefore, focus at that stage will also benefit the socioeconomic disadvantageous group thus ensuring access to equitable and inclusive quality education.
  • A five-tier implementation mechanism will be set up at the National- State- District- Block- School level in all States and Union Territories under the aegis of the centrally sponsored scheme of Samagra Shiksha.
  • A special package for foundational literacy and Numeracy (FLN) under NISHTHA (National Initiative for School Heads and Teachers Holistic Advancement) is being developed by NCERT.
Test: Indian Economy -8 - Question 5
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Consider the following statements about the Livestock Census:

  1. It has been conducted in the country once every 5 years, since 1919-20.
  2. It covers all domesticated animals and their headcounts.
  3. It is conducted by the Union Ministry of Statistics and Program Implementation.

Which of the statements given above is/are correct?
Detailed Solution for Test: Indian Economy -8 - Question 5
  • The Livestock Census started in the country in the year 1919. It is being conducted once in 5 years. So far, 20 livestock censuses have been conducted. Hence statement 1 is correct.
  • Livestock Census is a complete count of the livestock and poultry at a pre-defined reference point of time. Similar to population census, primary workers are engaged to undertake house to house enumeration and ascertain the number, age, sex, etc., of livestock/poultry possessed by every household/household enterprise/non-household/non-household enterprises and institutions in rural & urban areas of the country.
  • The census usually covers all domesticated animals and headcounts of these animals are taken. Hence statement 2 is correct.
  • It is conducted by the Ministry of Fisheries, Animal Husbandry & Dairying in participation with all State Governments and UT Administrations. Hence statement 3 is not correct.
  • The 20th Livestock Census was launched during the month of October 2018. The enumeration was done in both rural and urban areas. Various types of animals (cattle, buffalo, mithun, yak, sheep, goat, pig, horse, pony, mule, donkey, camel, dog, rabbit, and elephant)/poultry birds (fowl, duck, and other poultry birds) possessed by the households, household enterprises/non-household enterprises were counted at that site. Another important feature of the 20th Livestock Census is it has been designed to capture a Breedwise number of animals and poultry birds.
Test: Indian Economy -8 - Question 6
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Arrange the following renewable sources of energy in increasing order of their contribution to total installed capacity in India.

  1. Solar Power
  2. Wind Power
  3. Bio Power

Select the correct answer using the code given below.
Detailed Solution for Test: Indian Economy -8 - Question 6
  • As of 31 May 2021, the total installed capacity for Renewables is 95.66 GW with the following break up:
    • Wind power: 39.44 GW
    • Solar Power: 41.09 GW
    • BioPower: 10.34 GW
    • Small Hydro Power: 4.79 GW
  • Wind energy capacity in India has increased by 2.2 times from FY 2016-17 to FY 2020-21
  • Solar power capacity has increased by more than 5 times in the last five years from 6.7 GW to 40 GW in March 2021. Government of India further targets to increase the total Renewable Energy Capacity to 450GW by 2030.
  • 42 solar parks of aggregate capacity 23,499 MW have been approved in 17 states up to March 2019Solar Parks in Pavagada (2 GW), Kurnool (1 GW) and Bhadla-II (648 MW) included in top 5 operational solar parks of 7 GW capacity in the country.
  • The world’s largest renewable energy park of 30 GW capacity solar-wind hybrid project is under installation in Gujarat
    Hence, option (b) is the correct answer. 
Test: Indian Economy -8 - Question 7
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Consider the following statements with reference to Agriculture sector during 1950- 1990:

  1. Indian agricultural productivity had increased during this period
  2. The proportion of GDP contributed by agriculture increased significantly.
  3. The proportion of the population working/depending on agriculture declined significantly.

Which of the statements given above is/are correct?
Detailed Solution for Test: Indian Economy -8 - Question 7
  • At independence, about 75 per cent of the country’s population was dependent on agriculture. Productivity in the agricultural sector was very low because of the use of old technology and the absence of required infrastructure for the vast majority of farmers.
  • The stagnation in agriculture induced as a result of colonial rule was permanently broken by the green revolution. This refers to the large increase in production of food grains resulting from the use of high yielding variety (HYV) seeds especially for wheat and rice.
  • The nation had immensely benefited from the green revolution. Thus, by the late 1960s, Indian agricultural productivity had increased sufficiently to enable the country to be self-sufficient in food grains. Hence, statement 1 is correct.
  • Economists have found that as a nation becomes more prosperous, the proportion of GDP contributed by agriculture as well as the proportion of the population working in the sector declines considerably. In India, between 1950 and 1990, the proportion of GDP contributed by agriculture declined significantly from more than 50 percent in 1950 to 34 percent in 1990. Hence, statement 2 is not correct.
  • On the negative side, some 65 per cent of the country’s population continued to be employed in agriculture even as late as 1990. The population depending on agriculture declined slightly from 67.5 per cent in 1950 to 64.9 per cent by 1990. Hence, statement 3 is not correct.
Test: Indian Economy -8 - Question 8
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Consider the following statements with reference to the cost-push inflation:

  1. It is inflation caused by an increase in prices of inputs like labour and raw material.
  2. This inflation is always a strong indicator of an expanding economy.

Which of the statements given above is/are correct?
Detailed Solution for Test: Indian Economy -8 - Question 8
  • Cost-push inflation is inflation caused by an increase in prices of inputs like labor, raw material, etc. The increased price of the factors of production leads to a decreased supply of these goods. While the demand remains constant, the prices of commodities increase causing a rise in the overall price level. This is in essence cost-push inflation. In this case, the overall price level increases due to higher costs of production which reflects in terms of increased prices of goods and commodities which majorly use these inputs. This is inflation triggered from the supply-side i.e. because of less supply. The opposite effect of this is called demand-pull inflation where higher demand triggers inflation. Hence statement 1 is correct
  • Apart from the rise in prices of inputs, there could be other factors leading to supply-side inflation such as natural disasters, global pandemics such as COVID-19 or depletion of natural resources, monopoly, government regulation or taxation, change in exchange rates, etc. Generally, cost-push inflation may occur in the case of an inelastic demand curve where the demand cannot be easily adjusted according to rising prices.
  • Recently the global pandemic of COVID-19 acted as a double-sided sword wherein India witnessed a cost-push as well as Demand-Pull inflation. The mass exodus of migrant labourers from industrial belts led to a decreased supply of manpower and thus leading to reduced production.
  • Demand-pull inflation is an indicator of a growing economy as when consumers feel confident, they spend more and take on more debt. This leads to a steady increase in demand, which means higher prices. Hence statement 2 is not correct.
Test: Indian Economy -8 - Question 9
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Consider the following statements:

  1. Autonomous transactions are independent of the deficit or surplus in the Balance of Payments.
  2. Accommodating transactions refer to transactions that take place to cover deficit or surplus arising from autonomous transactions.

Which of the statements given above is/are correct?
Detailed Solution for Test: Indian Economy -8 - Question 9
  • When the country’s reserve bank is using its reserves of foreign exchange in order to balance any deficit in its balance of payments (BoP), it is called official reserve sale.
  • International economic transactions are called autonomous when transactions are made due to some reason other than to bridge the gap in the balance of payments, that is, when they are independent of the state of BoP. One reason could be to earn profit. These items are called ‘above the line’ items in the BoP. Hence, statement 1 is correct.
  • Accommodating transactions (termed ‘below the line’ items) refer to transactions that take place to cover deficit (or surplus) arising from autonomous transactions. They are determined by the gap in the balance of payments, that is, whether there is a deficit or surplus in the balance of payments. Since the official reserve transactions are made to bridge the gap in the BoP, they are seen as the accommodating item in the BoP (all others being autonomous). Hence, statement 2 is correct.
Test: Indian Economy -8 - Question 10
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With reference to Small Finance Banks (SFB), consider the following statements:

  1. They are subject to the norms of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).
  2. At least 25 percent of its branches shall be in unbanked rural centers.
  3. Priority sector must comprise 75% of their net credit.

Which of the statements given above is/are correct?
Detailed Solution for Test: Indian Economy -8 - Question 10
  • The Small Finance Bank (SFB) is a private financial institution intended to further the objective of financial inclusion by primarily undertake basic banking activities of acceptance of deposits and lending to un-served and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganized sector entities, but without any restriction in the area of operations, unlike Regional Rural Banks or Local Area Banks.
  • Small Finance Banks were created pursuant to the announcement in Union Budget 2014-2015.
  • Eligibility to Setup SFB:
    • Resident individuals/professionals with 10 years of experience in banking and finance and companies and societies owned and controlled by residents will be eligible to set up small finance banks.
    • Existing Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs), and Local Area Banks (LABs) that are owned and controlled by residents can also opt for conversion into small finance banks.
  • Conditions:
    • The minimum capital for SFBs is prescribed at Rs. 100 crore with an initial contribution of 40% coming from the promoters, which over a period of 12 years, have to be reduced to 26%.
    • Foreign Investment is permitted as in the case of other private sector commercial banks.
    • After the small finance bank reaches the net worth of Rs.500 crore, listing its shares on a stock exchange will be mandatory within three years of reaching that net worth.
  • Regulations:
    • They are subject to all prudential norms and regulations of RBI as applicable to existing commercial banks like maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). Hence, statement 1 is correct.
    • They are required to extend 75 percent of its Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL) by the Reserve Bank. Hence, statement 3 is correct.
    • At least 50 percent of its loan portfolio should constitute loans and advances of up to Rs. 25 lakh.
    • It cannot set up subsidiaries to undertake non-banking financial services activities.
    • It is stipulated that at least 25 percent of its branches shall be in unbanked rural centers. Hence, statement 2 is correct.
  • Other function which can be performed by SFB:
    • Distribution of mutual fund units, insurance products, pension products, etc.
    • They can also become a Category II Authorized Dealer in foreign exchange business for its clients’ requirements.
Test: Indian Economy -8 - Question 11
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With reference to Ways and Means Advances (WMA), consider the following statements:

  1. It is a facility for both the Centre and states to borrow from the RBI, to balance temporary mismatches in cash flows.
  2. Normal Ways and Means Advances are provided at lower interest rate than the repo rate.
  3. The interest levied for Special Drawing Facilities/Special WMA is equal to the repo rate.

Which of the statements given above is/are correct?
Detailed Solution for Test: Indian Economy -8 - Question 11
  • Recent Context: Reserve Bank of India (RBI) has extended the interim ways and means advances (WMAs) limit to state governments to help them tide over the financial stress posed by the second wave of COVID-19.
  • Under the RBI Act, 1934, WMAs are the temporary advances given by the RBI to Centre and States to tide over any mismatch in receipts and payments. Borrowings through WMA are to be repaid within three months and usually offered at the repo rate. Hence, statement 1 is correct.
  • There are two types of WMAs — normal Ways and Means Advances; and Special Drawing Facilities (SDF) against government securities held by States as collateral. Any amount drawn by a State in excess of the normal WMA is an overdraft. There is a State-wise limit for the funds that can be availed via WMA. These limits depend on many factors, including total expenditure, revenue deficit and fiscal position of the State. WMA limits are revised periodically and the previous utilisation rates are considered while determining revised limits.
  • The rate of interest applicable for normal WMA funding from RBI is the repo rate. Hence, statement 2 is not correct. The governments are, however, allowed to draw amounts in excess of their WMA limits. The interest on such overdraft is 2 percentage points above the repo rate.
  • The interest levied for special WMAs or Special Drawing Facility (SDF) is one percentage point less than the repo rate due to the backing of government securities. Hence, statement 3 is not correct. After the state has exhausted the limit of SDF, it gets normal WMA. 
Test: Indian Economy -8 - Question 12
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Which of the following are excluded from the National Income to calculate Personal Income?

  1. Corporate Tax
  2. Personal Tax payments
  3. Transfer payments to the households from the Government
  4. Undistributed profits

Select the correct answer using the code given below.
Detailed Solution for Test: Indian Economy -8 - Question 12
  • We can subdivide the National Income into smaller categories. The part of NI which is received by households is called Personal Income (PI). It is calculated as follows.
  • First, out of NI, which is earned by the firms and government enterprises, a part of the profit is not distributed among the factors of production. This is called Undistributed Profits (UP). We have to deduct UP from NI to arrive at PI since UP does not accrue to the households.
  • Similarly, Corporate Tax, which is imposed on the earnings made by the firms, will also have to be deducted from the NI, since it does not accrue to the households.
  • On the other hand, the households do receive interest payments from private firms or the government on past loans advanced by them. And households may have to pay interests to the firms and the government as well, in case they had borrowed money from either. So we have to deduct the net interests paid by the households to the firms and government.
  • The households receive transfer payments from the government and firms (pensions, scholarships, prizes, for example) which have to be added to calculate the Personal Income of the households.
  • Thus, Personal Income (PI) ≡ NI – Undistributed profits – Net interest payments made by households – Corporate tax + Transfer payments to the households from the government and firms.
  • However, even PI is not the income over which the households have complete say as they have to pay taxes from PI. If we deduct the Personal Tax Payments (income tax, for example) and Non-tax Payments (such as fines) from PI, we obtain what is known as the Personal Disposable Income. So Personal Income includes tax payments.
    Hence option (a) is the correct answer.
Test: Indian Economy -8 - Question 13
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In the context of the types of Inflation, consider the following statements:

  1. Headline Inflation refers to the change in the value of all goods in the basket including food and fuel.
  2. Core Inflation is more volatile than headline inflation.

Which of the statements given above is/are correct?
Detailed Solution for Test: Indian Economy -8 - Question 13
  • Headline inflation is the total inflation in an economy. The headline inflation figure includes inflation in a basket of goods that includes commodities like food and energy. Hence statement 1 is correct.
  • Core inflation excludes food and fuel items from headline inflation. Since the prices of fuel and food items tend to fluctuate and create ‘noise’ in inflation computation, core inflation is less volatile than headline inflation. Hence statement 2 is not correct.
Test: Indian Economy -8 - Question 14
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Consider the following statements about the Micro Small and Medium Enterprises (MSMEs):

  1. This sector is the largest employer of human resources in India.
  2. It generates more employment opportunities per unit of capital invested compared to large industries.

Which of the statements given above is/are correct?
Detailed Solution for Test: Indian Economy -8 - Question 14
  • Small Scale Industries in India have a large share of contribution to the socio-economic and balanced regional development of the country. These industries in India account for 95% of the industrial units in the country.
  • Statement 1 is not correct: Micro Small and Medium Enterprises (MSMEs) have the second-largest share in terms of human resource employability after the Agriculture sector. It supplies an enormous variety of mass consumption products which includes readymade garments, hosiery goods, stationery items, soaps and detergents, plastic and rubber goods, processed foods and vegetables, etc.
  • Statement 2 is correct: MSMEs sector generates more employment opportunities per unit of capital invested compared to large-scale industries. That is why they are considered to be less capital intensive and more labour intensive. This is a boon for a labour surplus country like India.
Test: Indian Economy -8 - Question 15
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Aedes aegypti mosquito is an important vector that spreads many diseases. In this context which of the following diseases are spread by the Aedes aegypti mosquito?

  1. Zika Virus
  2. Chikungunya
  3. Dengue
  4. Yellow fever

Select the correct answer using the code given below.
Detailed Solution for Test: Indian Economy -8 - Question 15
  • Recently in July 2021 multiple cases of Zika virus were identified in the state of Kerala and the state was put on a high alert.
  • Zika virus is a member of the virus family Flaviviridae and It is spread by daytime-active Aedes mosquitoes like Aedes aegypti and Aedes albopictus.
    • Zika virus infection during pregnancy can result in a condition called microcephaly in infants.
  • Apart from the Zika virus, Aedes aegypti is the primary transmitter of the viruses like:
    • Chikunguna: Chikungunya is found worldwide, particularly in Africa, Asia and India. Symptoms usually appear within a week of infection. Fever and joint pain come on suddenly. Muscle pain, headache, fatigue and rash may also occur. Treatment is aimed at relieving symptoms.
    • Dengue: Symptoms include high fever, headache, rash and muscle and joint pain. In severe cases, there is serious bleeding and shock, which can be life threatening.
    • Yellow fever: Symptoms include fever, headache, nausea and vomiting. Serious cases may cause fatal heart, liver and kidney conditions. No specific treatment for the disease exists.
  • Hence, option (d) is the correct answer. 
Test: Indian Economy -8 - Question 16
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In the context of Indian economy, which of the following measures is regarded as the National Income?
Detailed Solution for Test: Indian Economy -8 - Question 16
  • Gross National Product is the total measure of the flow of goods and services at market value resulting from current production during a year in a country, including net income from abroad. Hence, GNP ≡ GDP + Net factor income from abroad.
  • A part of the capital gets consumed during the year due to wear and tear. This wear and tear is called depreciation. Naturally, depreciation does not become part of anybody’s income. If we deduct depreciation from GNP the measure of aggregate income that we obtain is called Net National Product (NNP).
    • NNP ≡ GNP – Depreciation
  • It is to be noted that the above variables are evaluated at market prices. But market price includes indirect taxes. When indirect taxes are imposed on goods and services, their prices go up. Indirect taxes accrue to the government. We have to deduct them from NNP evaluated at market prices in order to calculate that part of NNP which actually accrues to the factors of production. Similarly, there may be subsidies granted by the government on the prices of some commodities (in India petrol is heavily taxed by the government, whereas cooking gas is subsidised). So we need to add subsidies to the NNP evaluated at market prices. The measure that we obtain by doing so is called Net National Product at factor cost which is also called as National Income.
  • Thus, NNP at factor cost ≡ National Income (NI ) ≡ NNP at market prices – (Indirect taxes – Subsidies) ≡ NNP at market prices – Net indirect taxes (Net indirect taxes ≡ Indirect taxes – Subsidies)
  • Hence option (b) is the correct answer.
Test: Indian Economy -8 - Question 17
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Consider the following statements:

  1. The Nominal effective exchange rate (NEER) is a multilateral rate representing the basket of foreign currencies, each weighted by its importance to the domestic country in international trade.
  2. The Real Effective exchange rate (REER) is interpreted as the quantity of domestic goods required to purchase one unit of a given basket of foreign goods.
  3. The nominal exchange rate is the true measure of a country’s international competitiveness.

Which of the statements given above is/are correct?
Detailed Solution for Test: Indian Economy -8 - Question 17
  • Foreign exchange market is the market in which national currencies are traded for one another. The major participants in this market are commercial banks, foreign exchange brokers and other authorised dealers and the monetary authorities. • The price of one currency in terms of the other is known as the exchange rate.
  • The nominal exchange rate describes the rate at which an individual can trade the currency of one country for the currency of another country. That means it measures how much of currency B can be bought in exchange for currency A or vice versa
  • The real exchange rate describes the rate at which an individual can trade the goods and services of one country for the goods and services of another country. That means it describes how much of a foreign good or service can be exchanged for one unit of a domestic product.
  • Real exchange rate = ePf/ P, where P and Pf are the price levels here and abroad, respectively, and e is the rupee price of foreign exchange (the nominal exchange rate).
  • If the real exchange rate is equal to one, currencies are at purchasing power parity.
  • If the real exchange rises above one, this means that goods abroad have become more expensive than goods at home. The real exchange rate is often taken as a measure of a country’s international competitiveness. Hence statement 3 is not correct.
  • Nominal Effective Exchange Rate (NEER) which is a multilateral rate representing the price of a representative basket of foreign currencies, each weighted by its importance to the domestic country in international trade. The average of export and import shares is taken as an indicator of this. Hence statement 1 is correct.
  • The Real Effective Exchange Rate (REER) is calculated as the weighted average of the real exchange rates of all its trade partners, the weights being the shares of the respective countries in its foreign trade. It is interpreted as the quantity of domestic goods required to purchase one unit of a given basket of foreign goods. Hence statement 2 is correct.
Test: Indian Economy -8 - Question 18
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Consider the following statements regarding Pre-paid Payment Instruments (PPIs) in India:

  1. These are payment instruments that facilitate the purchase of goods and services.
  2. Only those companies incorporated in India can issue PPIs in India.
  3. These instruments do not permit cash withdrawal or redemption.

Which of the statements given above is/are correct?
Detailed Solution for Test: Indian Economy -8 - Question 18
  • Pre-paid Payment Instruments (PPIs) are defined in the RBI Guidelines issued under the Payment and Settlements Systems Act, 2005 as payment instruments that facilitate the purchase of goods and services, including funds transfer, against the value stored on such instruments. Hence, statement 1 is correct.
  • The value stored on such instruments represents the value paid for by the holders by cash, by debit to a bank account, or by credit card.
  • The pre-paid instruments can be issued as smart cards, magnetic stripe cards, internet accounts, internet wallets, mobile accounts, mobile wallets, paper vouchers and any such instrument which can be used to access the pre-paid amount.
  • The Payment and Settlement Systems Act, 2007 provides for the regulation and supervision of PPIs in India. Reserve Bank of India (RBI) is the regulatory authority for this purpose.
  • RBI has broadly classified the PPIs into three categories:
    • Closed System Payment Instruments
      (i) These are issued by an entity for facilitating the purchase of goods and services from it.
      (ii) They do not permit cash withdrawal or redemption.
      (iii) They are not classified as payment systems. Hence, RBI approval is not required for issuing them.
      (iv) E.g. online shopping vouchers by Flipkart, Amazon etc.
    • Semi-Closed System Payment Instruments
      (i) Besides the purchase of goods and services, they can be used for financial services at a group of clearly identified merchant locations/ establishments which have a specific contract with the issuer to accept the payment instruments.
      (ii) They do not permit cash withdrawal or redemption by the holder.
      (iii) Instruments of upto Rs.1,00,000/- can be created by with full Know Your Client norms (KYC) and can be reloaded.
    • Open System Payment Instruments
      (i) Besides, purchase of goods and services, financial services like funds transfer at any card accepting merchant locations they also permit cash withdrawal at ATMs / Banking Correspondents (BCs). Hence, statement 3 is not correct.
      (ii) However, cash withdrawal at POS is permitted only upto a certain limit set by RBI.
    • Who can issue prepaid payment instruments in India?
      (i) Only those companies incorporated in India and have a minimum paid-up capital of Rs. 5 crore and minimum positive net worth of Rs. 1 crore at all times are permitted to issue PPIs in India. Hence, statement 2 is correct.
      (ii) Banks who comply with the eligibility criteria are permitted to issue all categories of PPIs. However, only those banks which have been permitted to provide Mobile Banking Transactions by the Reserve Bank of India are permitted to launch mobile-based pre-paid payment instruments (mobile wallets & mobile accounts).
      (iii) Non-Banking Financial Companies (NBFCs) and other persons are permitted to issue only closed and semi-closed system payment instruments, including mobile phone-based pre-paid payment instruments.
      (iv) Non-bank persons issuing payment instruments are required to maintain their outstanding balance in an escrow account with any one of the scheduled commercial banks
Test: Indian Economy -8 - Question 19
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With reference to India's foreign trade on the eve of Independence, consider the following statements:

  1. More than half of India’s foreign trade was restricted to Britain.
  2. During the colonial period, India often recorded a huge trade deficit.

Which of the statements given above is/are correct?
Detailed Solution for Test: Indian Economy -8 - Question 19
  • The restrictive policies of commodity production, trade, and tariff pursued by the colonial government adversely affected the structure, composition and volume of India’s foreign trade.
  • Consequently, India became an exporter of primary products and an importer of finished consumer goods produced in the factories of Britain.
  • For all practical purposes, Britain maintained monopoly control over India’s exports and imports. As a result, more than half of India’s foreign trade was restricted to Britain while the rest was allowed with a few other countries like China, Ceylon (Sri Lanka) and Persia (Iran). Hence, statement 1 is correct.
  • The most important characteristic of India’s foreign trade throughout the colonial period was the generation of a large export surplus. But this surplus came at a huge cost to the country’s economy. Several essential commodities—food grains, clothes, kerosene etc. — were scarcely available in the domestic market. Hence, statement 2 is not correct.
  • Furthermore, this export surplus did not result in any flow of gold or silver into India. Rather, this was used to make payments for the expenses incurred by an office set up by the colonial government in Britain, expenses on war, again fought by the British government, and the import of invisible items, all of which led to the drain of Indian wealth.
Test: Indian Economy -8 - Question 20
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Consider the following statements with reference to the voting shares in International Monetary Fund (IMF):

  1. United States has the maximum voting share followed by United Kingdom.
  2. India occupies the fourth position with a voting share of above 5%.

Which of the statements given above is/are correct?
Detailed Solution for Test: Indian Economy -8 - Question 20
  • When a country joins the IMF, it is assigned an initial quota in the same range as the quotas of existing members of broadly comparable economic size and characteristics. The IMF uses a quota formula to help assess a member’s relative position.
  • The quota in turn determines the weight each country has within the IMF—and hence its voting rights—as well as how much financing it can receive from the IMF. Twenty-five percent of each country's quota is paid in the form of special drawing rights (SDRs), which are a claim on the freely usable currencies of IMF members.
  • The top 10 largest members according to the voting share are:
    • United States (16.50%), Japan (6.14%), China (6.08%) Hence statement 1 is not correct.
    • Germany (5.31%), France (4.03%), United Kingdom (4.03%)
    • Italy (3.02%), India (2.63%) Hence statement 2 is not correct. o Russia (2.59%) and Brazil (2.22%)
Test: Indian Economy -8 - Question 21
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With reference to Outright Open Market Operations (OMO), consider the following statements:

  1. Outright OMO are conducted without any promise to buy/sell the securities at a later stage.
  2. Outright OMO are conducted for managing overnight liquidity mismatches.

Which of the statements given above is/are correct?
Detailed Solution for Test: Indian Economy -8 - Question 21
  • The RBI is authorised to deal in Government securities under Section 17(8) of the Reserve Bank of India Act, 1934 through open market operations.
  • There are two types of open market operations: outright and repo
  • Outright open market operations
    • They are permanent in nature: when the central bank buys these securities (thus injecting money into the system), it is without any promise to sell them later. Similarly, when the central bank sells these securities (thus withdrawing money from the system), it is without any promise to buy them later. Hence statement 1 is correct.
    • As a result, the injection/absorption of money is of permanent nature. 
  • Repo open market operations 
    • When the central bank buys the security, the agreement of purchase also has specifications about date and price of the resale of this security. This type of agreement is called a repurchase agreement or repo. The interest rate at which the money is lent in this way is called the repo rate.
    • Similarly, instead of an outright sale of securities the central bank may sell the securities through an agreement which has a specification about the date and price at which it will be repurchased. This type of agreement is called a reverse repurchase agreement or reverse repo. The rate at which the money is withdrawn in this manner is called the reverse repo rate. 
    • Open market operations via Repo and Reverse Repo operations are conducted under Liquidity Adjustment Facility. 
  • While the outright OMO are directed at influencing enduring (long term) liquidity, the LAF OMO operations target the temporary liquidity in the system. Hence, statement 2 is not correct.
Test: Indian Economy -8 - Question 22
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Which of the following characterise a situation of a 'liquidity trap' in an economy?

  1. Decline in bond prices
  2. Lower interest rates
  3. High savings rates

Select the correct answer using the code given below.
Detailed Solution for Test: Indian Economy -8 - Question 22
  • A liquidity trap is a contradictory economic situation in which interest rates are very low and savings rates are high, rendering monetary policy ineffective. Hence options 2 and 3 are correct.
  • It was first described by economist John Maynard Keynes.
  • During a liquidity trap, consumers choose to avoid bonds and keep their funds in cash savings because of the prevailing belief that interest rates could soon rise (which would push bond prices down and yields up). Because bonds have an inverse relationship to interest rates, many consumers do not want to hold an asset with a price that is expected to decline. Hence option 1 is correct.
  • At the same time, central bank efforts to spur economic activity are hampered as they are unable to lower interest rates further to incentivize investors and consumers.
  • While a liquidity trap is a function of economic conditions, it is also psychological since consumers are making a choice to hoard cash instead of choosing higher-paying investments because of a negative economic view.
  • A liquidity trap is not limited to bonds. It also affects other areas of the economy, as consumers are spending less on products which means businesses are less likely to hire.
  • Some ways to get out of a liquidity trap include raising interest rates, hoping the situation will regulate itself as prices fall to attractive levels, or increased government spending.
Test: Indian Economy -8 - Question 23
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Which of the following taxes are subsumed within the Goods and Service Tax (GST)?

  1. Central Excise Duty
  2. Stamp Duty
  3. Octroi Tax
  4. Luxury Tax

Select the correct answer using the code given below.
Detailed Solution for Test: Indian Economy -8 - Question 23
  • Goods and Services Tax (GST) refers to the single unified tax created by amalgamating a large number of Central and State taxes presently applicable in India.
  • The 101st Constitution Amendment Act of September 2016 made in this regard, inserted a definition of GST in Article 366 of the constitution by inserting a sub-clause 12A. As per that, GST means any tax on supply of goods, or services, or both, except taxes on supply of the alcoholic liquor for human consumption. And here, services are defined to mean anything other than goods.
  • GST replaced the following taxes levied and collected by the Centre: Central Excise duty, Excise Duty levied under the Medicinal and Toilet Preparations (Excise Duties) Act 1955. Additional Excise Duties (Goods of Special Importance), Additional Excise Duties (Textiles and Textile Products). Additional Customs Duty (commonly known as Countervailing duties or CVD). Special Additional Duty of Customs (SAD). Service Tax. Cesses and Surcharges in so far as they relate to the supply of goods and services. Taxes on the sale or purchase of newspapers and on advertisements published therein.
  • State taxes that are subsumed within the GST are: State VAT/ Sales Tax, Central Sales Tax (levied by the Center and collected by the States). Luxury Tax-Octroi Tax-Entry Tax i.e, taxes on the entry of goods into a local area for consumption, use or sale therein. (other than those in lieu of octroi). Purchase Tax Entertainment Tax which is not levied by the local bodies; i.e. panchayats, municipalities and District councils of autonomous districts can impose taxes on entertainment and amusements. Taxes on general advertisements, Taxes on lotteries, betting and gambling. State cesses and surcharges insofar as they relate to supply of the goods or services.
  • GST does not subsume Stamp Duty and Basic Custom Duty
  • Basic custom duty is the duty imposed on the value of the goods at a specific rate. The duty is fixed at a specified rate of ad-valorem basis. Other Customs duties like Countervailing Duty (CVD) and Special Additional Duty (SAD) is subsumed under GST.
    Hence option (b) is the correct answer.
Test: Indian Economy -8 - Question 24
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Recently, India has exported various Geographical Indication (GI) certified products. In this context which of the following is/are GI-tagged products?

  1. Bhalia Wheat
  2. Madurai Malli
  3. Malda Fazli Mango

Select the correct answer using the code given below.
Detailed Solution for Test: Indian Economy -8 - Question 24
  • A geographical indication (GI) is a sign used on products that have a specific geographical origin and possess qualities or a reputation that are due to that origin. In order to function as a GI, a sign must identify a product as originating in a given place.
  • India has enacted the Geographical Indications of Goods (Registration and Protection) Act,1999. This Act seeks to provide for the registration and better protection of geographical indications relating to goods in India.
  • This Act is administered by the Controller General of Patents, Designs and Trade Marks, who is the Registrar of Geographical Indications. The Geographical Indications Registry is located at Chennai.
  • Recently in July 2021, the first shipment of Geographical Indication (GI) certified Bhalia variety of wheat was exported to Kenya and Sri Lanka from Gujarat. Hence option 1 is correct.
    • The GI-certified wheat has high protein content and is sweet in taste. The crop is grown mostly across Bhal region of Gujarat, including Ahmedabad, Anand, Kheda, Bhavanagar, Surendranagar, Bharuch districts. 
  • In July 2021 Madurai Malli a GI-certified flower has been exported to United States. Hence option 2 is correct. 
    • Agriculture and Processed Food Export Development Authority (APEDA) included jasmine from the Madurai region as a prominent floriculture product and is encouraging its export by offering a slew of incentives to growers. 
  • A consignment of GI-certified Fazil mango variety sourced from the Malda district of West Bengal has been exported to Bahrain recently. Hence option 3 is correct. 
    • Fazil Mango is cultivated mainly in West Bengal. It is a late-maturing fruit and is commonly used in jams and pickles in the cuisine of the Indian subcontinent.
Test: Indian Economy -8 - Question 25
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Consider the following statements with respect to the Association of Southeast Asian Nations (ASEAN):

  1. ASEAN was established in 1967 with the signing of the Bangkok Declaration by the ten ASEAN member states.
  2. The ASEAN Charter is a legally binding agreement on its member states.

Which of the statements given above is/are not correct?
Detailed Solution for Test: Indian Economy -8 - Question 25
  • The Association of Southeast Asian Nations, or ASEAN, was established on 8 August 1967 in Bangkok, Thailand, with the signing of the ASEAN Declaration (Bangkok Declaration) by the Founding Fathers of ASEAN, namely Indonesia, Malaysia, Philippines, Singapore and Thailand. Hence, statement 1 is not correct. 
  • Brunei Darussalam then joined on 7 January 1984, Viet Nam on 28 July 1995, Lao PDR and Myanmar on 23 July 1997, and Cambodia on 30 April 1999, making up what is today the ten Member States of ASEAN. 
  • The ASEAN Charter entered into force on 15 December 2008. With the entry into force of the ASEAN Charter, ASEAN will henceforth operate under a new legal framework and establish a number of new organs to boost its community-building process. In effect, the ASEAN Charter has become a legally binding agreement among the 10 ASEAN Member States. Hence, statement 2 is correct. 
  • The ASEAN-India Trade in Goods Agreement was signed in 2009 and on ASEAN-India Trade-inServices and Investments in 2015. With the signing of these Agreements, the ASEAN-India FTA is complete.
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