1. In India, which of the following is/are a mechanism of deficit financing?
1. borrowing from RBI.
2. borrowing from commercial banks.
3. issuing fresh currency notes.
Select the correct answer using the codes given below.
a) 1 and 2 only
b) 1 and 3 only
c) 2 and 3 only
d) 1, 2 and 3
Answer & Explanation
b) 1 and 3 only. Deficit financing is a method of meeting government deficits through the creation of new money. The deficit is the gap caused by the excess of government expenditure over its receipts. Deficit financing in India is done by – 1. Withdrawal of past accumulated cash balances 2. Borrowing from RBI 3. Issuing fresh currency notes. Borrowing from commercial banks is not a part of deficit banking.
2. International Development Association (IDA) is called the ‘soft’ window of the World Bank (WB) because
a) it lends for software and It development
b) taking loans from it is very easy
c) its loans are interest free
d) none
Answer & Explanation
c) its loans are interest free. Very important point to remember about IDA. Its loans are interest free (only administrative cost is charged). Further, the repayment period is very long like 35-40 years and the repayment starts after 10 years of taking loans. This way, it helps the developing countries to fo focus on development without worrying about paying back of loan quickly.
3. Development expenditure would include
1. expenditure on building roads.
2. debt service liabilities.
3. grants-in-aid.
Select the correct answer using the codes given below.
a) 1 and 2 only
b) 1 and 3 only
c) 2 and 3 only
d) 1, 2 and 3
Answer & Explanation
b) 1 and 3 only. Simple question. Building roads, grants-in-aid is part of development expenditure. Money spent on servicing debt would not lead to development hence 2 is not part of development expenditure.
4. With reference to narrow money, consider the following statements :
1. They are highly liquid.
2. Banks run their lending programme mainly with this money.
Which of the statements given above is/are correct ?
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Answer & Explanation
a) 1 only. Narrow money = currency with public + demand deposit with banks + “other’ deposits with RBI. It is denoted by M1. It is highly liquid. Now, banks cannot carry their lending progam with such highly liquid money as they have to return it pay when required by depositor. For eg. demand deposit is a part of M1. Banks have to return the demand deposit immediately if the depositor demands it. But if bank had lent that money to others, it cannot return it. So, the lending program is mainly carried by such money which is less liquid, like broad money (M3). So, statement 2 is incorrect.
5. 100 people went for a job in a company. The company told them that while there is a vacancy, none of them posses the skill required for the job. What kind of unemployment would this be called?
a) disguised unemployment
b) structural unemployment
c) cyclical unemployment
d) none
Answer & Explanation
b) structural unemployment. Structural unemployment is a category of unemployment arising from the mismatch between the jobs available in the market and the skills of the available workers in the market. So when people cannot be employed because they do not possess the requisite skills it is called structural unemployment.
6. Credit Default Swaps (CDS) can be beneficial for an economy as they
1. helps in redistribution of loans.
2. enhance investment opportunities
3. leads to loan waivers.
Select the correct answer using the codes given below.
a) 1 and 2 only
b) 1 and 3 only
c) 2 and 3 only
d) 1, 2 and 3
Answer & Explanation
a) 1 and 2 only. CDS is a tool to transfer and manage credit risk. If giving credit (like lending) is made less risky by CDS, it would definitely increase the investor’s interest thus enhancing investment opportunities. So statement 1 and 2 are correct. CDS does not waive off loans, it just redistributes the risk of lending. Even if you had no idea about CDS, you still could have got the ans, by eliminating statement 3 as any kind of loan waiver is never good for economy. In UPSC prelims, you will need such kind of cross thinking to answer questions.
7. Twin deficit in a economy means
a) high current account deficit and high fiscal deficit.
b) high capital account deficit and high fiscal deficit.
c) high current account deficit and high capital account deficit.
d) high budget deficit and high fiscal deficit.
Answer & Explanation
a) high current account deficit and high fiscal deficit. Economies that have both a fiscal deficit and a current account deficit are often referred to as having “twin deficits.” Higher twin deficit is inherently destabilizing and was the primary reason why India faced a currency crisis back in 1991. Higher current account deficit means higher demand for foreign currency, which results in depreciation of the domestic currency. It also discourages capital inflow and leads to capital flight from the country. Higher fiscal deficit, apart from affecting savings and growth, affects business confidence.
8. The current account of the balance of payments (BoP) includes
1. foreign aid.
2. foreign institutional investments.
3. remittances.
Select the correct answer using the codes given below.
a) 1 and 2 only
b) 1 and 3 only
c) 3 only
d) 2 and 3 only
Answer & Explanation
b) 1 and 3 only. Foreign institutional investment (FII) are part of capital account. Remittances and foreign aid (under the heading of transfers) come under current account.
9. Which of the following prices is/are fixed by the central government?
1. Maximum Retail Price (MRP)
2. Minimum Support Price (MSP)
3. Fair and Remunerative Price (FRP)
Select the correct answer using the codes given below.
a) 1 and 2 only
b) 1 and 3 only
c) 2 only
d) 2 and 3 only
Answer & Explanation
d) 2 and 3 only. MSP is fixed by the central govt (CG) on the recommendations of the Commission on Agricultural Cost and Prices (CAPC). FRP is fo sugar, which is fixed by the central government. Its normally higher than MSP, but serves the same purpose of providing a guarantee to sugarcane farmers that their produce will be bought at a given price. FRP is the existing arrangement for the price to be paid to sugarcane farmers by the Sugar Mills and is is announced each year by the Centre, under the Sugarcane Control Order and on the advice of Commission for Agricultural Costs and Prices (CACP), as the minimum price of sugarcane. However, many states in north India also announce a State Advised Price (SAP) under state legislation. Generally, the SAP is substantially higher than the FRP, and therefore wherever SAP is declared, it is the ruling price. Mill owners are obligated to pay SAP to farmers. MRP is fixed by manufacturers. However, government can play a regulatory and advisory role in fixing of MRP. MSP has been a favorite topic for UPSC, hence please read on it in detail.
10. Consider the following statements about Securities Transaction Tax (STT)
1. The point of incidence and impact of STT is not same.
2. Government securities are exempted from STT.
Which of the statements given above is/are correct ?
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Answer & Explanation
b) 2 only. The first statement might look a bit complicated to understand. But essential what it is saying is that STT is an indirect tax, which is incorrect as STT is a direct tax. An indirect tax is whose point of incidence (i.e where it is applied) and impact (those who are affected by it) is not same, like VAT. In VAT, it seems that producers, wholesalers, retailers are paying the tax, but actually its the consumer who in getting impacted. But in case of direct tax both point of incidence and impact is same, like income tax, STT etc. UPSC often uses definition of term (instead of using the term itself) to make a question confusing.
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Please read these important articles about prelims preparation
1. How UPSC asks current affairs in GS Prelims
2. How to practice prelims MCQs for UPSC
3. Applying logic in UPSC General Studies Prelims
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