Daily Quiz: UPSC Prelims Marathon – January 16

Statement 1 is correct. GDP is the total value of final goods and services produced within a country’s border in a year, regardless of ownership.

Statement 2 is incorrect. The failure of GDP to incorporate environmental costs of development is one its major drawback. So it does incorporate environmental damage caused by oil spills etc.

Statement 3 is incorrect. GDP does not account for the opportunity cost.

Statement 1 is correct. Effects of low oil prices: A lower price level raises the real value of households’ money holdings, which stimulates consumer spending.

Statement 2 is incorrect. The second is the interest-rate effect: A lower price level reduces the quantity of money households demand; as households try to convert money into interest-bearing assets then interest rates fall, which stimulates investment spending.

Statement 3 is correct. The third is the exchange-rate effect: As a lower price level reduces interest rates, the dollar depreciates in the market for foreign-currency exchange, which stimulates net exports.

Statement 1 is correct. Inflation favors the debtors as the amount which the debtor actually pays is less due to inflation.

Statement 3 is incorrect. Purchasing power of money decreases if there is inflation in the market as inflation makes things costly.

Statement 2 is correct. Inflation may signify higher aggregate demand and less supply. With inflation investors may invest more because of higher demand.

Statement 1 is correct. Currency depreciation makes exports cheaper and hence can increase export.

Statement 2 is incorrect. Increase in NRI deposits leads to currency appreciation.

Statement 3 is correct. RBI can intervene in foreign exchange market by selling dollars to prevent depreciation of rupee.

All of the above are reason for crowding out effect.

The crowding out effect is an economic theory arguing that rising public sector spending drives down or even eliminates private sector spending.

One of the most common forms of crowding out takes place when a large government increases its borrowing. The sheer scale of this borrowing can lead to substantial rises in the real interest rate, which has the effect of absorbing the economy’s lending capacity and of discouraging businesses from making capital investments.

Other reason is expansionary fiscal policy reduces investment spending by the private sector.

All the statements are correct. In India, total Central Government Liabilities constitutes the following three categories;

[i] Internal Debt.

[ii] External Debt.

[iii] Public Account Liabilities.

Public Debt in India includes only Internal and External Debt incurred by the Central Government. Internal Debt includes liabilities incurred by resident units in the Indian economy to other resident units, while External Debt includes liabilities incurred by residents to non-residents.

Both statements are correct. Fiscal deficit is the Market borrowings and other liabilities added to budget deficit .Monetized deficit indicates the level of support extended by the Reserve Bank of India to the government’s borrowing programme. Since borrowings from Reserve Bank of India directly add to money supply, this measure is termed monetized deficit. It is obvious that monetized deficit is only a part of fiscal deficit.