[Mission 2022] QUIZ – 2022: INSIGHTS STATIC QUIZ, 02 April 2022 – Economy

Solution: a)

Solution : d)

The term ‘deficit financing’ is used to denote the direct addition to gross national expenditure through budget deficits, whether the deficits are on revenue or on capital account.

Deficit financing in India is said to occur when the Union Government’s current budget deficit is covered by the withdrawal of cash balances of the government and by borrowing money from the Reserve Bank of India.

Thus, in both cases, ‘new money’ comes into circulation. It is to be remembered here that government borrowing from the public by selling bonds is not to be considered as deficit financing.

It is said that deficit financing is inherently inflationary. Since deficit financing raises aggregate expenditure and, hence, increases aggregate demand, the danger of inflation looms large.

During inflation, private investors go on investing more and more with the hope of earning additional profits. Seeing more profits, producers would be encouraged to reinvest their savings and accumulated profits as well as increases the employment rate. Such investment leads to an increase in income—thereby setting the process of economic development rolling.

Solution: a)

Revenue deficit is the gap between the consumption expenditure (revenue expenditure) of the Government (Union or the State Governments) and its current revenues (revenue receipts). It also indicates the extent to which the government has borrowed to finance the current expenditure.

In the Union Budget (2011-12) a new methodology of capturing the ‘effective revenue deficit’ has been worked out, which takes into account those expenditures (transfers) in the form of grants for creation of capital assets.

Solution: b)

The current account measures the flow of goods, services and investments into and out of the country. We run into a deficit if the value of the goods and services we import exceeds the value of those we export. The current account includes net income, including interest and dividends, and transfers, like foreign aid.

Therefore, increasing foreign aid to underdeveloped nations increases the current account deficit.

However, increasing import duties and providing export subsidies help in reducing the current account deficit.

Solution: b)

Depreciation in the rupee impacts all expenditure in dollar terms— imports, foreign education, travel, investments abroad, medical treatment etc. On the other hand, if you are an exporter or an NRI sending money back home, depreciation would fetch you more rupees per dollar.

A depreciating rupee increases the cost of crude import. A rise in cost of crude raises fuel prices and inflation. That, in turn, leads to a rise in interest rates, which increases our borrowing cost.