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Please find the solutions of the Tuesday Economy Quiz #1. In case you have not solved the quiz, please visit the link below before reading the solution
Solutions to the Tuesday Economy Quiz #1
Q.1) Which of the following initiative has not been covered under the Bharatmala Project?
a) Construction of roads along India’s borders and coastal areas
b) Improving connectivity of non-major ports, religious and tourist places
c) Development of newly declared national highways in district headquarters
d) Improving connectivity by inland waterways
Ans- d
Explanation- Bhartmala is an ambitious roads and highways project of the NDA government. It involves construction of roads and highways to India’s borders, coastal areas, ports, religious and tourist places as well as over 100 district headquarters. It will involve construction of around 25000 km of road network. Following states will have road construction under this- Gujarat, Rajasthan, JnK, HP, Uk, borders of UP and Bihar near Terai region, Sikkim, Assam, Arunanchal Pradesh and upto Indo-Myanamar border in Manipur and Mizoram. Linking with this, road network from Maharashtra to Bengal along the coastal areas will be built.
Funding of this will be done majorily by govt itself and rest through PPP model. Benefits are huge- it will be a strong strategic component with respect to national security, act as a multiplier effect in our economy, provide backward and forward linkages to the markets, connect remote mountainous areas, trade and tourism will boost and generation of huge employement. Major challenge is just of environment clearences and land acquisition.
Inland waterways construction is under Inland waterways authority of India. It is not covered under Bhartmala. Recently a bill has been passed in Rajya Sabha that will seek to make waterways in 110 rivers.
Q.2) The economic survey talks about “Chakravyuha” by which it means
1. Difficult entry of firm in market
2. Difficult exit of firm from market
Select the incorrect answer using the codes given below:
a) 1 only
b) 2 only
c) Both 1 and 2
d) None of the above
Ans- a*
Explanation- It is the difficulty of exit of firm from the market.
Chakarvyuh is the name of a military strategy described in Hindu Epic Mahabharatha. During the great Mahabharatha war Kauravas’ army general created a chakarvyuh to trap elder Pandava Yuddhisthira. This if successful would have resulted into the defeat of Pnadavas. Only Arjun knew how to break this by entering into it and exiting out of it. Unfortunately when the war was going on and Kaurav’s army proceeded to trap Yuddhisthira, they were stopped and challenged by Arjun’s son Abhimanyu. Abhimanyu knew only how to enter into it but not how to exit. As a result he went inside this but could not come out and died fighting valiantly. This phenomenon is now commonly in India reffered to as getting trapped in chakarvyuh when you can’t escape out from any situation.
Indian firms due to the existing laws , rules and regulations face the big problem when businesses go bust. The current laws make it almost impossible for firms to close business. This is often a disincentive for strating a business based on innovative and risky idea.
Economic survey address the situation by 5 ways- first, by promoting competition via private sector entry rather than change of ownership from public to private. Secondly, direct policy action through better laws like the Insolvency and Bankruptcy Code 2015 will expedite exit. Thirdly, use of technology to layers of intermediaries. The fourth is increasing transparency and highlighting social costs. Finally, showcasing exit as an opportunity.
Q.3) What would be the impact on price of a commodity with rise in indirect taxes?
1. Increase in its Factory price
2. Increase in its Ex-factory price
3. Increase in its Market price
Select the correct answer using the codes given below:
a) 1 and 3 only
b) 1 and 2 only
c) 2 and 3 only
d) All of the above
Ans – d
Explanation– Indirect taxes are taxes which are collected from manufacturer or retailer. Customs duty, central excise duty, service tax, sales tax, octroi entertainment tax etc are a few types of indirect taxes.
Factory price is the total cost of making a product at the production location, and comprising of raw material, labor, and overhead costs.
Ex factory price is the factor price of the final good made + Indirect taxes of the central government only.Look at Q2,Link.
Now increase in any of the mentioned indirect tax is going to affect factory price first via Raw materials. Ex factory price will also increase if rise is in GoI indirect taxes.
After factory when product will move to market it will be levied with other taxes like sales tax, octroi and other state indirect taxeswhich will further increase the market price.
Q.4) The Economic Survey has prescribed a 4-D model for the banking sector to face competition in the changed environment. These 4-D stands for
a) Deregulation, Development, Diversification and Disinvestment
b) Deregulation, Double financial repression, Diversification and Disinvestment
c) Deregulation, Disinterring, Diversification and Disinvestment
d) Deregulation, Disinterring, Diversification and Differentiation
Ans-d
Explanation-The four Ds include:
De-regulation (addressing the statutory liquidity ratio (SLR) and priority sector lending (PSL))
Differentiation (within the public sector banks in relation to recapitalisation, shrinking balance sheets, and ownership)
Diversification (of source of funding within and outside banking)
Disinterring (by improving exit mechanisms).
Q.5) Human Development Index measured on the basis of three broad parameters. These are
a) Per capita income, school enrollment and child mortality
b) Purchasing power parity, educated adults and infant mortality
c) Real per capita income, Level of education and Life expectancy at birth
d) Gross national income, literacy rate and life expectancy at birth
Ans- c
Explanation
A HDI is an index that ranks the countries into four tiers of human development. This index was developed by Amartya Sen and Mahbub ul haq. It is composite index which is made from 3 indexes, these are:
- Life expectancy at birth
- Education index=Mean years of scholing+expected years of schooling
- GNI per capita
In the question it is asking about broad parameters.
Real per capital income is = Nominal income-inflation
This nominal income is GNI
Q.6) Due to recession, there has been a drastic rise in job cuts. This is a case of
1. Structural unemployment
2. Cyclical unemployment
Select the correct answer using the codes given below:
a) 1 only
b) 2 only
c) Both 1 and 2
d) None of the above
Ans- b
Explanation- Economists mainly classify unemployment on 5 heads. They are cyclical, structural, frictional, classical and Marxian.
Cyclical unemployment is an unemployment that relates to the cyclical trends in growth and production in a business cycle. When business cycles are at their peak, cyclicalunemployment will be low because total economic output is being maximized. When economic output falls cyclical unemployment will rise.
Recession is slowdown of economic activities. It is the result of businesses not having enough demand. The lack of demand comes from a lack of spending and consumption in an economy. This causes in turn job cuts or unemployment.
Structural unemployment is unemployment caused by a mismatch between the present skills of worker and the skills demanded by employers. It is also known as the skills gap. Structural unemployment is often brought about by technological changes.
Q.7) Which of the following is/are tools of Monetary policy?
1. Repo rate
2. Tax rate
Select the correct answer using the codes given below:
a) 1 only
b) 2 only
c) Both 1 and 2
d) None of the above
Ans- a
Explanation- Monetary policy is the policy made by central bank of a country to control the flow of money in the economy. This is done by keeping control over interest rates in order to maintain price stability. Various modes of operations and instruments used are-
Open market operations involves buying and selling of government securities from or to the public or bank.
Cash Reserve Ratio – It is a certain percentage of bank deposits which banks are required to keep with RBI in the form of reserves or balances.
Statutory Liquidity ratio – Every financial institution has to maintain a certain quantity of liquid assets with themselves at any point of time of their total time and demand liabilities. These assets have to be kept in non cash form such as G-secs precious metals, approved securities like bonds etc. Currently it is 21.5%
The bank rate– It is the rate of interest charged by the RBI for providing funds or loans to the banking system. Currently it is 7.75%
Moral Suasion – Request by the RBI to the commercial banks to take action and measures wrt any trend of the economy. RBI may request commercial banks not to give loans for unproductive purpose which does not add to economic growth but increases inflation.
Repo rate-It is the rate at which RBI lends to commercial banks generally against government securities. Reduction in Repo rate helps the commercial banks to get money at a cheaper rate and increase in Repo rate discourages the commercial banks to get money as the rate increases and becomes expensive. Currently it is 6.75%
Reverse Repo rate is the rate at which RBI borrows money from the commercial banks. The increase in the Repo rate will increase the cost of borrowing and lending of the banks which will discourage the public to borrow money and will encourage them to deposit. Currently it is 5.75%
Tax rate is the rate imposed by government to individuals and companies at the rate of which they have to pay taxes to them.
Q.8) ‘Liquidity Trap’ is a situation in which:
a) People want to hold only cash because prices are falling everyday
b) People want to hold only cash because there is too much of liquidity in the economy
c) The rate of interest is so low that no one wants to hold interest bearing assets and people wants to hold cash
d) There is an excess of foreign exchange reserves in the economy leading to excess money supply
Ans- c
Explanation-The liquidity trap is the situation in which prevailing interest rates are low and savings rates are high.Public choose to avoid bonds , making monetary policy ineffective.All this happen under apprehension of belief that interest rates will increase. In liquidity trap public do not want to hold an asset with a price that is expected to decline.
Q.9) The most appropriate measure of a country’s economic growth is the:
a) Gross Domestic Product
b) Net Domestic Product
c) Net National Product
d) Per capita real income
Ans- c
Explanation-
GNP= GDP+net property income from abroad (rent, interest, profits and dividends)
NNP= GNP- Depreciation
NNP is the amount of goods that can be consumed within a nation each year without reducing the amount that can be consumed in following years.Thus, it gives the real trend of economic growth .
Q.10) The main argument advanced in favour of small scale and cottage industries in India is that:
a) Cost of Production is low
b) They require small capital investment
c) They advance the goal of equitable distribution of wealth
d) They generate a large volume of employment
Ans- d
Explanation- They are labour intensive industries and in a country where we have labour surplus, they act as an important area to absorb big portion of people looking for employment. The employment generating capacity of small scale cottage industries could be noted from the fact that in India, rupees one lakh of investment in plant and machinery in this sector provides employment to 21-25 persons, while in large scale units, the same amount of investment provides employment to only 4 persons. It provides both self employement and wage employment. It accounts for 80% of the total employment in industrial seector.
With little capital investment they can be set up anywhere in rural or semi urban places easily. They also provide part time employment to women and unskilled labourers.
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