Case Study (1-4)

There are three main justifications for imposing a tax on a specific good. Firstly, it raises money for the government. Secondly; its use inflicts costs on third parties that are not factored into its price. The third rationale for imposing sin taxes is to discourage the use of undesirable goods. Critics of such taxes have argued that they are ineffective because the goods they target tend to be addictive, making consumers relatively unresponsive to changes in price. In fact, study after study has shown that sin taxes do tend to reduce consumption.

Without intervention from the government, the economy will produce too many goods that foul up the atmosphere and that benefits both manufacturers and consumers but harms everyone who breathes in the by-products. Proponents of so-called “sin taxes” apply this logic to goods deemed to be socially undesirable. Many studies have a tendency to overstate the magnitude of such externalities since they present gross costs instead of net ones.  

                                                                  The Economist; July 31st, 2018

Q1) Intermediate consumption refers to the use of __________(durable/intermediate) goods in the production process. (Choose the correct alternative)

Ans.) Intermediate

Q2) Goods purchased for the satisfaction of wants are__________. (Choose the correct alternative)

  1. Capital goods
  2. Final goods
  3. Consumption goods
  4. None of these

Ans.) Consumption goods

Q3) ‘Pollution created by factories/vehicles’ is an example of_________(positive/negative) externality. (Choose the correct alternative)

Ans.) Negative 

Q4) Total addition of capital goods to the existing stock of capital during the given year is known as _______________ (Choose the correct alternative)

  1. Depreciation
  2. Gross costs
  3. Gross investment 
  4. Net investment 

Ans.) Gross investment

Case Study (5-8)

The average growth of money supply in the economy may slip to 9% in the near term if 25-30% of unaccounted currency does not flow back into the banking system post-demonetization move. Based on the result of the demonetization that took place in 1978; if 25-30% of unaccounted/uncleared money does not come back in the system that is Rs. 3.5 trillion to Rs. 4.3 trillion, it will impact growth in money supply by about 3%, the report said. However, it noted that in case the RBI decides to print the entire 86% of the high denomination notes, the money supply will pick up with the new notes being gradually circulated over some time.

On the evening of November 8, the government announced that Rs. 500 and Rs. 1,000 notes would no longer be legal tender, as part of its move to eradicate black money or terrorist activities.

                                                             Press Trust of India; December 7th, 2016

Q5) _______________ (Central bank/ Co-operative societies) is/are the main source(s) of money supply in an economy. (Choose the correct alternative)

Ans.) Central bank

Q6) Demonetisation aimed at __________. (Choose the correct alternative)

  1. To curb corruption
  2. To curb counterfeiting
  3. To curb the high denomination notes for illegal activities
  4. All of these

Ans.) (d) All of these

Q7) __________ (Ministry of Commerce/ Ministry of Finance) is responsible for issuing Rupee 1 currency note in India. (Choose the correct alternative)

Ans.) Ministry of Finance

Q8) Which of the following is not a function of the Central Bank? (Choose the correct alternative)

  1. Banking facilities to government 
  2. Banking facilities to the public
  3. Lending to government 
  4. Lending to commercial banks

Ans.) (b) Banking facilities to the public

Case Study (9-12)

The Indian economy saw its worst contraction in decades, with Gross Domestic Product (GDP) shrinking by a record 23.9% in  April to June quarter in comparison to the same period last year. The contraction reflects several impacts of COVID-19 lockdown, which halted most economic activities, as well as the slowdown trend of the economy even pre- COVID-19.

The Indian economy is in a deeply vicious cycle, where demand is contracting so heavily, while the capacity to neutralize this contraction has also contracted equally because of tax revenue contraction.

Agriculture was the only sector which recorded modest growth of 3.4% in year-on-year terms. All other sectors saw a contraction, with the sleepest fall coming from the 50% in construction, and 47% fall in trade, hotels, transport, and communication. Manufacturing shrank more than 39%, while mining and quarrying dropped 23%.

On the expenditure side, private consumption fell 26.7%, while investments, as reflected by gross fixed capital formation plunged 47%, and exports contracted almost 20%. Government final consumption expenditure grew 16.4%.

                                                                        The Hindu; August 31st, 2020

Q9) Gross investment is also known as _________ (gross capital formation/ gross domestic capital formation). (Choose the correct alternative)

Ans.) Gross domestic capital formation

Q10) The biggest driver of economic growth is: (Choose the correct alternative)

  1. Consumption demand
  2. Inventory investment
  3. Gross fixed capital formation
  4. None of these

Ans.) (a)Consumption demand

Q11) Net exports is calculated as________ (Exports-Imports/Imports-Exports). (Choose the correct alternative)

Ans.) Exports-Imports

Q12) _________ is crucial for revenue collection. (Choose the correct alternative)

  1. National Income
  2. Gross value-added
  3. Net value-added
  4. None of these

Ans.) (d)None of these

Case Study (13-16)

India’s balance of payments this year is going to be “very very strong” on the back of significant improvement in exports and a fall in imports said Commerce and Industry Minister Piyush Goyal. He said that “good” green shoots are visible in the economy and exports have shown a “good” turnaround. “We are in July at about 91% export level of July 2019 figures. Imports are still 7–71% level of July 2019. So, broadly our balance of payments this year is going to be very strong, that is why we feel confident that the Indian industry will see opportunities for themselves, will see opportunities of growth,” he said at a FICCI webinar.

India’s exports fell for the fourth straight month in June as shipment of key segments like petroleum and textiles declined but the country’s trade turned surplus for the first time in 18 years as imports dropped by a steeper 47.59%. The country posted a trade surplus of USD 0.79 billion in June. 

                                                                      The Economic Times; August 10th, 2020

Q13) _____________ (Balance of Trade/Balance of Payments) refers to the net difference between export and import of goods. (Choose the correct alternative)

Ans.) Balance of Trade

Q14) Import of goods and services raises the___________ of foreign exchange. (Choose the correct alternative)

  1. Supply
  2. Demand
  3. Both (a) and (b)
  4. Neither (a) nor (b)

Ans.) (b) Demand

Q15) Surplus in Balance of Payments (BOP) arises when: (Choose the correct alternative)

  1. Autonomous payments > Autonomous receipts
  2. Accommodating receipts > Accommodating payments
  3. Accommodating payments > Accommodating receipts 
  4. Autonomous receipts > Autonomous payments

Ans.) (b) Autonomous receipts > Autonomous payments

Q16) Balance of Payment (BOP) is a _________ (Wider/narrower) concept. (Choose the correct alternative)

Ans.) Wider

Case Study (17-20)

Economic costs of COVID- 19 are going to be high and widely spread. Even if the world economy is lucky to see a recovery in the second half of the year, the IMF estimates that pandemic will shrink world output by at least 3%. To mitigate the economic costs of the disease rich countries have rolled out huge fiscal and monetary packages. On average the developed economies are looking at fiscal deficits upward of 11% of their gross domestic products (GDP). For this, they are also allocating separate funds in their budgets.

In India, a timely executed lockdown has helped in flattering the COVID curve, saving many lives. The process, however, has put brakes on the economic engine. Rating agencies Fitch and Moody’s have slashed growth forecasts for FY21 to 0.8%, to 0.2%, respectively. To revive, the economy needs a raft of fiscal and monetary measures.

                                                         The Economic Times; May 6th, 2020

Q17) A budget shows ________ (monetary/fiscal) policy of the government. (Choose the correct alternative)

Ans.) fiscal

Q18) A large fiscal deficit implies ________. (Choose the correct alternative)

  1. A very small amount of savings
  2. A small number of borrowings
  3. A large number of borrowings
  4. No borrowings

Ans.) (c) a Large number of borrowings

Q19) ____________ (Revenue/Fiscal) deficit refers to the excess of total revenue expenditure over total revenue receipts. (Choose the correct alternative)

Ans.) Fiscal

Q20) While financing a deficit, under which measure government can print more currency? (Choose the correct alternative)

  1. Deficit financing
  2. Disinvestment
  3. By issuing bonds
  4. None of these

Ans.) (a) Deficit financing

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