Daily Quiz: UPSC Prelims Marathon – April 3, 2018

Recession is a slowdown or a massive contraction in economic activities.

A significant fall in spending generally leads to a recession. To tackle the menace, economies generally react by loosening their monetary policies by infusing more money into the system, i.e., by increasing the money supply. This is done by reducing the interest rates. Increased spending by the government and decreased taxation are also considered good answers for this problem. The recession which hit the globe in 2008 is the most recent example of a recession. Hence, statement 1 is incorrect.

Statements 2 and 3 are correct. Deflation is the persistent fall in the general price level of goods and services. It occurs when the inflation are falls below zero (a negative inflation rate).

Disinflation is a decrease in the rate of inflation, i.e. a slowdown in the rate of increase of general price level of goods and services.

Disinflation occurs when the increase in the “consumer price level” slows down from the previous period. When the prices were rising. Disinflation is the reduction in the general price level in the economy but for a very short period of time.

Tax Expenditures does not relate to the expenditures incurred by the Government in the collection of taxes. Rather it refers to the opportunity cost of taxing at concessional rates, or the opportunity cost of giving exemptions, deductions, rebates, deferrals credits etc. to the tax payers.

Tax expenditures indicate how much more revenue could have been collected by the Government if not for such measures. In other words, it shows the extent of indirect subsidy enjoyed by the tax payers in the country.

A tax refund or tax rebate is a refund on taxes when the tax liability is less than the taxes paid. Taxpayers can often get a tax refund on their income tax if the tax they owe is less than the sum of the total amount of the withholding taxes and estimated taxes that they paid, plus the refundable tax credits that they claim.

Tax deferral refers to instances where a taxpayer can delay paying taxes to some future period. Taxes can sometimes be deferred indefinitely, or may be taxed at a lower rate in the future, particularly for deferral of income taxes.

Macroeconomic Vulnerability Index which adds up rate of inflation, current account deficit and fiscal deficit of a country is quite helpful in comparing countries across years. In developing countries the MVI is determined by various structural conditions which expose an economy to financial shocks. There are broadly two approaches to understand Macroeconomic vulnerability of a country.

Both the statements are incorrect.

The activities covered under Agriculture are classified under three sub-categories viz. Farm credit, Agriculture infrastructure and Ancillary activities.

For classification under priority sector, no limits are prescribed for bank loans sanctioned to Micro, Small and Medium Enterprises engaged in the manufacture or production of goods under any industry specified in the first schedule to the Industries (Development and Regulation) Act, 1951 and as notified by the Government from time to time. The manufacturing enterprises are defined in terms of investment in plant and machinery under MSMED Act 2006.

Bank loans to Micro, Small and Medium Enterprises engaged in providing or rendering of services and defined in terms of investment in equipment under MSMED Act, 2006, irrespective of loan limits, are eligible for classification under priority sector, w.e.f. March 1, 2018.

Statements 1 and 4 are correct.

Global financial Stability report and World Economic Outlook are released by IMF

The sequence of these decreasing order of Liquidity is:

1. Currency
2. Demand deposits with the banks
3. Savings deposits with the banks
4. Time deposits with the banks

Capital account convertibility (CAC) means the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. This implies that Capital Account Convertibility allows anyone to freely move from local currency into foreign currency and back.

Current Account Convertibility allows free inflows and outflows of foreign currency for all purpose including resident Indians buying foreign goods and services (imports), Indians selling foreign goods and services (exports), Indians receiving and sending remittances, accessing foreign currency for travel, study abroad, medical tourism purpose etc.

On the other hand, Capital Account Convertibility is widely regarded as the hallmark of developed countries. It is also seen as the major comfort factor for foreign investors since it allows them to reconvert local currency back into their own currency and move out from India.

Presently, India has current account convertibility. This means one can import and export goods or receive or make payments for services rendered. However, investments and borrowings are restricted. Hence, statement 1 is correct.

Statement 2 is incorrect. The flip side of capital account convertibility is that it can destabilize an economy due to massive capital flows in and out of the country.