[Solution] – Tuesday Economy Quiz #3

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We, ForumIAS team hope that you are preparing well for IAS Prelims by attempting our Daily Quiz Initiative. Yesterday, we had published the  Tuesday Economy Quiz #3, and hope that you have already attempted the quiz and made comment in the comment section. If you have not done yet, visit the link provided below to attempt the test quiz.
https://forumias.com/portal/the-tuesday-economy-quiz-3/

Now, its time to cross check your answer with ForumIAS answers.

 

[Solutions]

Q.1) Fiscal Consolidation is one of the objectives of India’s economic policy. Which of the following would help in fiscal consolidation?

1.  Increasing taxes
2. Getting more loans
3. Reducing subsidies

Choose the correct answer using the codes given below:
a) 1 and 2 only
b) 1 and 3 only
c) 1 only
d) 1, 2 and 3

Ans- [B]

Explanation– According to OECD, Fiscal consolidation is a policy aimed at reducing government deficits and debt accumulation. It means taking steps to fix the fiscal deficit problem in its root and prevent heavy fiscal deficits situation from occurring in future. Some steps are:

1. Cutting down subsidies.
2. Stop leakages in subsidies.
3. Reform the tax structure (implement GST).
4. Improve the performance of PSUs.
5. Recover black money
6. Policy reforms and creating environment conducive for economy.
7. Controlling wasteful expenditures.

Q.2) The Fiscal Responsibility and Budget Management Act aimed for

1. Eliminating revenue deficit and fiscal deficit
2. Giving flexibility to RBI for inflation management

Which of the above statements is/are correct?
a) 1 only
b) 2 only
c) Both 1 and 2
c) Neither 1 nor 2

Ans-[B]

Explanation- In late 1980s and early 1990s, Indian economy faced  the problem of large fiscal deficit and its effects on to the external sector. Govt was not able to pay for large borrowings. This crisis ultimately scaled up to the economic crisis of 1991. Consequently, Economic reforms were introduced in 1991 and fiscal consolidation emerged as one of the key areas of reforms. Initially it gave good results but fiscal consolidation faltered after 1997-98. The fiscal deficit started rising after 1997-98.

The Government then introduced FRBM Act,2003 to check the fiscal situation. This act was brought in to institutionalise the financial discipline, introduce transparent fiscal management systems in the country, introduce a more equitable and manageable distribution of the country’s debts over the years, to aim for fiscal stability for India in the long run.

Main purpose of the act was elimination of the revenue deficit and building revenue surplus thereafter. It also aimed for reducing fiscal deficit to 3% of GDP till 2008. As statement 1 is saying elimination of revenue deficit and fiscal deficit, it is wrong. It only talked about elimination of revenue deficit. Zero fiscal deficit is bad for the country.

This law also gives flexibility to the Reserve Bank of India to undertake monetary policy to tackle inflation and take corrective measures in order to give an impetus to the economic environment. Statement 2 is correct.

Q.3) Consider the following statements regarding Index of Industrial Production (IIP):

1. It is released monthly by Central Statistical Organisation(CSO)
2. It shows the volume of Industrial activity

Which of the above statements is/are correct?
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2

Ans-[A]

Explanation– IIP measures the growth of various sectors in the economy by measuring the industrial activity of the country. It does not show volume of activity and only shows the magnitude which represents the status of production in the industrial sector for a given period of time as compared to a reference period of time. IIP is released every month by the CSO.

Q.4) Gross Capital Formation will increase if:

1. Gross domestic savings increase
2. Gross domestic consumption increases
3. GDP increases

Choose the correct answer using the codes given below:
a) 1 and 2 only
b) Either 1 or 2
c) 3 only
d) None of the above

Ans – [D]

Explanation- Gross capital formation increase means increase in the net investment. None of the statements can certainly say that their increase will result in the increase of the Gross Capital Formation.

So, answer would be (D).

Q.5) The WTO follows the method of “Self Selection”. This means

1. Member countries decide to which agreement they want to be a party
2. Member countries decide the rate of tariff and tariff reduction
3. Member countries decide whether they want to be in developed or developing category

Which of the above statements is/are correct?
a) 1 and 2 only
b) 1 and 3 only
c) 1 only
d) 3 only

Ans-[D]

Explanation– Developing countries enjoy special benefits in WTO. 2/3rd of the WTO Members are developing countries. There is no agreed definition of what is a “developed” or a “developing” Member in the WTO. It is up to each Member to decide if it is to be considered “developing Member” or not. This is known as self selection. However, other Members can challenge the decision of a Member to be considered as a developing Member.

Q.6) World Economic Outlook is a report published by
a) World Bank
b) IMF
c) OECD
d) None of the above

Ans-[B]

Explanation- WEO is a report conducted and published by the International Monetary Fund. It is published biannually. It depicts the world economy in the near and medium context.

OECD report is known as economic outlook and The world Bank publishes Global Economic prospects.

Q.7) How does National Rural Livelihood Mission seek to improve livelihood options of rural poor?

1. By setting up a large number of new manufacturing industries and agribusiness centres in rural areas
2. By strengthening ‘self-help’ groups and providing skill development
3. By supplying seeds, fertilizers, diesel pump sets and micro irrigation equipment free of cost to farmers

Select the correct answer by using the codes given below:
a) 1 and 2 only
b) 2 only
c) 1 and 3 only
d) 3 only

Ans-[B]

Explanation – NRLM or Aajeevika is a poverty alleviation project implemented by Ministry of Rural Development, Government of India. It focus on promoting self-employment of rural poor. The basic idea behind this programme is to organize the poor into SHG groups and make them capable for self-employment.

Q.8) Which of the following is/are treated as artificial currency?
a) ADR
b) GDR
c) SDR
d) Both ADR and SDR

Ans-[C]

Explanation- SDRs or special drawing rights are used by the members of the IMF to pay their dues and transfer funds between countries. It is an international type of monetary reserve currency, created by the International Monetary Fund (IMF) in 1969.

ADR is a negotiable security that represents securities of a non-US company that trades in the US financial markets and GDR are A global depositary receipt (GDR) is a bank certificate issued in more than one country for shares in a foreign company.

Q.9) Consider the following actions by the government:

1. Cutting the tax rates
2. Increasing government spending
3. Abolishing the subsidies

In the context of an economic recession, which of the above actions can be considered a part of the ‘fiscal stimulus’ package?
a) 1 and 2 only
b) 2 only
c) 2 and 3 only
d) 1, 2 and 3

Ans- [ A]

Explanation– Recession occurs when there is significant drop in level of economic activity due to lack of demand. To tackle it, government has to make policy in such a way that more consumer spending occurs. Cutting the tax rates and increasing the government spending will revitalize the stagnant economy. Abolishing the subsidies will increase the cost of subsidised products which will further slow down the economy.

Q.10) Consider the following:

1. Fringe Benefit Tax
2. Securities Transaction Tax
3. Interest Tax

Which of the above taxes is/are indirect taxes?
a) 1 only
b) 1 and 2 only
c) 1, 2 and 3
d) None of the above

Ans – [ D]

Explanation– List of Indirect taxes-

1. Service tax,
2. sales tax,
3. custom,
4. excise duties,
5. VAT,
6. MODVAT,
7. CENVAT and
8. proposed GST.

Direct taxes include-

1. Income tax
2. Corporate Tax (and MAT)
3. Interest tax (on banks)
4. Fringe benefits tax
5. Hotel receipt Tax
6. Wealth Tax
7. Securities transaction Tax (STT)
8. Banking cash transaction tax
9. Estate duty
10. Gift tax