INSIGHTS STATIC QUIZ 2020 - 21
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Question 1 of 5
1. Question
Consider the following statements regarding Fiscal Deficit.
- Fiscal deficit is reflective of the total borrowing requirements of the Government.
- A higher fiscal deficit can lead to higher interest rates in the economy.
Which of the above statements is/are incorrect?
Correct
Solution: d)
Fiscal Deficit is the difference between the Revenue Receipts plus Non-debt Capital Receipts (NDCR) and the total expenditure.
In other words, fiscal deficit is “reflective of the total borrowing requirements of the Government”.If the fiscal deficit ratio is too high, it implies that there is a lesser amount of money left in the market for private entrepreneurs and businesses to borrow.
Lesser amount of this money, in turn, leads to higher rates of interest charged on such lending.
So, simply put, a higher fiscal deficit means higher borrowing by the government, which, in turn, mean higher interest rates in the economy.
A high fiscal deficit and higher interest rates would also mean that the efforts of the Reserve Bank of India to reduce interest rates are undone.
Incorrect
Solution: d)
Fiscal Deficit is the difference between the Revenue Receipts plus Non-debt Capital Receipts (NDCR) and the total expenditure.
In other words, fiscal deficit is “reflective of the total borrowing requirements of the Government”.If the fiscal deficit ratio is too high, it implies that there is a lesser amount of money left in the market for private entrepreneurs and businesses to borrow.
Lesser amount of this money, in turn, leads to higher rates of interest charged on such lending.
So, simply put, a higher fiscal deficit means higher borrowing by the government, which, in turn, mean higher interest rates in the economy.
A high fiscal deficit and higher interest rates would also mean that the efforts of the Reserve Bank of India to reduce interest rates are undone.
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Question 2 of 5
2. Question
Which of the following are considered or counted while calculating GDP?
- Rental value of all houses
- Newly produced cars as well as second-hand cars
- Pensions and scholarships given by the Government.
Select the correct answer code:
Correct
Solution: a)
In calculating GDP, only newly produced goods are counted. Transactions in existing goods like second-hand cars are not included, as these do not involve the production of new goods. But the services provided by the agents while selling second-hand cars are counted. The agents make some money through commission which adds to the service economy.
There are imputed values as part of GDP. All houses are assumed to be rented as it is not possible for the government to check which one is owner occupied and which one is rented. Thus, rental value of all houses is part of GDP.
Transfer payments like scholarships, pensions and universal basic income that the government gives do not fetch any direct returns in terms of addition to GDP and thus are not included in the GDP.
Incorrect
Solution: a)
In calculating GDP, only newly produced goods are counted. Transactions in existing goods like second-hand cars are not included, as these do not involve the production of new goods. But the services provided by the agents while selling second-hand cars are counted. The agents make some money through commission which adds to the service economy.
There are imputed values as part of GDP. All houses are assumed to be rented as it is not possible for the government to check which one is owner occupied and which one is rented. Thus, rental value of all houses is part of GDP.
Transfer payments like scholarships, pensions and universal basic income that the government gives do not fetch any direct returns in terms of addition to GDP and thus are not included in the GDP.
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Question 3 of 5
3. Question
Which of the following expenditure by the Government are considered as Transfer payments?
- Universal Basic Income.
- Subsidies paid to farmers
- Conditional cash transfers
Select the correct answer code:
Correct
Solution: b)
Expenditure like pensions, scholarships and UBI are direct transfers of money and do not create any output. They are called Transfer payments. They are one-way payment of money for which no good or service is received in exchange. Transfer payments may be conditional cash transfers or unconditional cash transfers.
Subsidies are not considered transfer payments because they are linked to an economic transaction.
Incorrect
Solution: b)
Expenditure like pensions, scholarships and UBI are direct transfers of money and do not create any output. They are called Transfer payments. They are one-way payment of money for which no good or service is received in exchange. Transfer payments may be conditional cash transfers or unconditional cash transfers.
Subsidies are not considered transfer payments because they are linked to an economic transaction.
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Question 4 of 5
4. Question
Consider the following statements.
- Factor cost refer to the price arrived after deducting from the market price the government subsidy and adding the indirect taxes.
- GDP at factor cost is useful to see how competitive market forces are and how distortionary indirect taxes are.
Which of the above statements is/are incorrect?
Correct
Solution: a)
Factor costs are the actual production costs at which goods and services are produced in an economy.
Factor cost refer to the price arrived after deducting from the market price the indirect taxes and adding to the resulting number government subsidies if any.
Incorrect
Solution: a)
Factor costs are the actual production costs at which goods and services are produced in an economy.
Factor cost refer to the price arrived after deducting from the market price the indirect taxes and adding to the resulting number government subsidies if any.
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Question 5 of 5
5. Question
In India, deficit financing is usually resorted in order to
- Finance the revenue deficit component
- Undertake developmental expenditure
- Bridge the short-term Current Account Deficit (CAD)
Select the correct answer code:
Correct
Solution: a)
In India, revenue deficit is one of the major reasons for a large fiscal deficit. This means that the government cannot finance its revenue operations by the resources it generates.
Statement 2: This is done because the internal resources of the government are not adequate to undertake development expenditure. It must borrow money from the market.
CAD is financed by external flows. If government borrows from outside it would increase our external capital deficit, but not affect the short-term CAD.
Incorrect
Solution: a)
In India, revenue deficit is one of the major reasons for a large fiscal deficit. This means that the government cannot finance its revenue operations by the resources it generates.
Statement 2: This is done because the internal resources of the government are not adequate to undertake development expenditure. It must borrow money from the market.
CAD is financed by external flows. If government borrows from outside it would increase our external capital deficit, but not affect the short-term CAD.
