DAY – 44 (InstaTest-44): Insta 75 Days Revision Plan-2022: Topic – Economy, Tests 30 June 2021 CA

Solution: C

Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note.

A corporate would be eligible to issue CP provided (and not automatically)

1. the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crores
2. company has been sanctioned working capital limit by bank/s or all-India financial institution/s; and
3. the borrowal account of the company is classified as a Standard Asset by the financing bank/s/ institution/s.

CP will be issued at a discount to face value as may be determined by the issuer

Solution: C

The Rahn curve is a graph used to illustrate an economic theory, proposed in 1996 by American economist Richard W. Rahn, which indicates that there is a level of government spending that maximizes economic growth. The theory is used by classical liberals to argue for a decrease in overall government spending and taxation. The inverted-U-shaped curve suggests that the optimal level of government spending is 15–25% of GDP.

Solution: D

Stagflation is a condition of slow economic growth and relatively high unemployment, or economic stagnation, accompanied by rising prices, or inflation. It can also be defined as inflation and a decline in gross domestic product (GDP).

Solution: A

Mezzanine financing is defined as a financial instrument which is a mix of debt and equity finance. It is a debt capital that gives the lender the rights to convert to an ownership or equity interest in the company. Mezzanine finance is listed as an asset on company’s balance sheet.

Solution: D

What Is Factor Income?

Factor income is the flow of income that is derived from the factors of production—the general inputs required to produce goods and services.

Factor income on the use of land is called rent, income generated from labor is called wages, and income generated from capital is called profit. The factor income of all normal residents of a country is referred to as the national income, while factor income and current transfers together are referred to as private income.

Key Takeaways

• Factor income is income received from the factors of production: the resources used to produce goods or services.
• Factor income on the use of land is called rent, income generated from labor is called wages, and income generated from capital is called profit.
• Factor income is most commonly used in macroeconomic analysis, helping governments to determine the difference between gross domestic product (GDP) and gross national product (GNP).
• It can also be used to expose disparities in income distribution.

Solution: A

Simon Kuznets, a Russian-American development economist and statistician, was awarded the 1971 Nobel Memorial Prize in Economics for his research on economic growth. He set the standard for national income accounting, enabling accurate estimates of gross national product to be calculated for the first time.

Key Takeaways

• Simon Kuznets, a Russian-American economist, set the standard for national income accounting that helped advance ideas of Keynesian economics and the study of econometrics.
• Kuznets is also known for the Kuznets curve, which hypothesizes that industrializing nations experience a rise and subsequent decline in income inequality.
• The rise in inequality occurs after rural labor migrates to urban areas and becomes socially mobile. After a certain income level is reached, inequality declines as a welfare state takes hold.
• A modification of the curve, known as environmental Kuznets curve, has become popular to chart the rise and decline of pollution in an industrializing nation’s economy.

Kuznets Curve

Kuznets’ work on economic growth and income distribution led him to hypothesize that industrializing nations experience a rise and subsequent decline in economic inequality, characterized as an inverted “U”—the “Kuznets curve.”

He thought economic inequality would increase as rural labor migrated to the cities, keeping wages down as workers competed for jobs. But according to Kuznets, social mobility increases again once a certain level of income was reached in “modern” industrialized economies, as the welfare state takes hold.

However, since Kuznets postulated this theory in the 1970s, income inequality has increased in advanced developed countries—although inequality has declined in fast-growing East Asian countries.

Solution: A

The base effect refers to the impact of the rise in price level (i.e. last year’s inflation) in the previous year over the corresponding rise in price levels in the current year (i.e., current inflation): if the price index had risen at a high rate in the corresponding period of the previous year leading to a high inflation rate, some of the potential rise is already factored in, therefore a similar absolute increase in the Price index in the current year will lead to a relatively lower inflation rates. On the other hand, if the inflation rate was too low in the corresponding period of the previous year, even a relatively smaller rise in the Price Index will arithmetically give a high rate of current inflation.

Solution: A

scrip share

A share given to the existing shareholders without any charge—also known as bonus share.

sweat share

A share given to the employees of the company without any charge.

Badla

When the buyers want postponement of the transaction—in Western world called Contango. Hence, statement 2 is incorrect.

Undha badla

When the sellers want postponement of the transaction—also known as the reverse badla or backwardation.

spread

The difference between the buying and selling prices of a share is called spread. Higher the liquidity of a share lower its spread and vice versa. Also known as Jobber’s Turn or Margin or Hair cut.

Solution: A

Collective Investment Schemes (CIS) and Chit Funds

Are Collective Investment Schemes (CIS) regulated by the Reserve Bank of India?

No. CIS are schemes where money is exchanged for units, be it time share in resorts, profit from sale of wood or profits from the developed commercial plots and buildings and so on. Collective Investment Schemes (CIS) do not fall under the regulatory purview of the Reserve Bank.

Which is the authority that regulates Collective Investment Schemes (CIS)?

SEBI is the regulator of CIS. Information on such schemes and grievances against the promoters may be immediately forwarded to SEBI as well as to the EOW/Police Department of the State Government.

Is the conducting of Chit Fund business permissible under law?

The chit funds are governed by Chit Funds Act, 1982 which is a Central Act administered by state governments. Hence, statement 3 is incorrect.

Those chit funds which are registered under this Act can legally carry-on chit fund business.

If Chit Fund companies are financial entities, why are they not regulated by RBI?

Chit Fund companies are regulated under the Chit Fund Act, 1982, which is a Central Act, and is implemented by the State Governments. RBI has prohibited chit fund companies from accepting deposits from the public in 2009. In case any Chit Fund is accepting public deposits, RBI can prosecute such chit funds.

Solution: D

The term ‘Washington Consensus’ was coined by the US economist John Williamson (in 1989) under which he had suggested a set of policy reforms which most of the official in Washington (i.e., International Monetary Fund and World Bank) thought would be good for the crisis-driven Latin American countries of the time. The policy reforms included ten propositions:

(i) Fiscal discipline

(ii) A redirection of public expenditure priorities toward fields offering both high economic returns and the potential to improve income distribution, such as primary health care, primary education, and infrastructure.

(iii) Tax reform (to lower marginal rates and broaden the tax base)

(iv) Interest rate liberalisation

(v) A competitive exchange rate

(vi) Trade liberalisation

(vii) Liberalisation of FDI inflows

(viii) Privatisation

(ix) Deregulation (in the sense of abolishing barriers to entry and exit)

(x) Secure property rights

However, in coming times, the term became synonymous to neo-liberalism (in Latin America), market fundamentalism (as George Soros told in 1998) and even globalization across the world. It has often been used to describe an extreme and dogmatic commitment to the belief that markets can handle everything.

Solution: B

GDP is the sum total of value of goods and services created within the geographical boundary of a country in a particular year. It gets distributed among the people as incomes (except for retained earnings). So we may be tempted to treat higher level of GDP of a country as an index of greater well-being of the people of that country (to account for price changes, we may take the value of real GDP instead of nominal GDP). But there are at least three reasons why this may not be correct.

1. Distribution of GDP – how uniform is it: If the GDP of the country is rising, the welfare may not rise as a consequence.

This is because the rise in GDP may be concentrated in the hands of very few individuals or firms. For the rest, the income may in fact have fallen. In such a case the welfare of the entire country cannot be said to have increased.

2. Non-monetary exchanges: Many activities in an economy are not evaluated in monetary terms. For example, the domestic services women perform at home are not paid for. The exchanges which take place in the informal sector without the help of money are called barter exchanges. In barter exchanges, goods (or services) are directly exchanged against each other.

But since money is not being used here, these exchanges are not registered as part of economic activity.

3. Externalities: Externalities refer to the benefits (or harms) a firm or an individual causes to another for which they are not paid (or penalised). Externalities do not have any market in which they can be bought and sold.

Solution: A

In case of a bank, apart from buildings, furniture, etc., its assets are loans given to public. When the bank gives out loan of Rs 100 to a person, this is the bank’s claim on that person for Rs 100. Another asset that a bank has is reserves. Reserves are deposits which commercial banks keep with the Central bank, Reserve Bank of India (RBI) and its cash. These reserves are kept partly as cash and partly in the form of financial instruments (bonds and treasury bills) issued by the RBI. Reserves are similar to deposits we keep with banks. We keep deposits and these deposits are our assets, they can be withdrawn by us. Similarly, commercial banks like State Bank of India (SBI) keep their deposits with RBI and these are called Reserves.

Assets = Reserves + Loans

Liabilities for any firm are its debts or what it owes to others. For a bank, the main liability is the deposits which people keep with it.

Liabilities = Deposits

Solution: C

When a government spends more than it collects by way of revenue, it incurs a budget deficit. There are various measures that capture government deficit and they have their own implications for the economy.

Revenue Deficit: The revenue deficit refers to the excess of government’s revenue expenditure over revenue receipts

Revenue deficit = Revenue expenditure – Revenue receipts

The revenue deficit includes only such transactions that affect the current income and expenditure of the government. When the government incurs a revenue deficit, it implies that the government is dissaving and is using up the savings of the other sectors of the economy to finance a part of its consumption expenditure. This situation means that the government will have to borrow not only to finance its investment but also its consumption requirements. This will lead to a build up of stock of debt and interest liabilities and force the government, eventually, to cut expenditure. Since a major part of revenue expenditure is committed expenditure, it cannot be reduced. Often the government reduces productive capital expenditure or welfare expenditure. This would mean lower growth and adverse welfare implications.

Solution: B

Financial Benchmark India Private Ltd (FBIL) was jointly promoted by Fixed Income Money Market & Derivative Association of India (FIMMDA), Foreign Exchange Dealers’ Association of India (FEDAI) and Indian Banks’ ‘Association (IBA). Hence, statement 1 is incorrect.

It was incorporated on 9th December 2014 under the Companies Act 2013. It was recognised by Reserve bank of India as an independent Benchmark administrator on 2nd July 2015.

The company is run by a Board of Directors, assisted by an oversight committee. The main object of the company is to act as the administrators of the Indian interest rate and foreign exchange benchmarks and to introduce and implement policies and procedures to handle the benchmarks. It also will make policies for possible cessation of any benchmark and to follow steps for ensuring orderly transition to the new benchmarks. FBIL will review each benchmark to ensure that the benchmarks accurately represent the economic realities of the interest that it intends to measure. It will take up/consider such other benchmarks as may be required from time to time by periodically assessing the emerging needs of the end -users

Solution: C

What is a Non-Banking Financial Company (NBFC)?

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.

NBFCs are doing functions similar to banks. What is difference between banks & NBFCs?

NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:

1. NBFC cannot accept demand deposits;
2. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself; Hence, statement 2 is incorrect.

iii. deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

Solution: A

Solution:

• 30 by 30 (or 30×30) is a worldwide initiative for governments to designate 30% of Earth’s land and ocean area as protected areas by 2030.The target was proposed by a 2019 article in Science Advances “A Global Deal for Nature: Guiding principles, milestones, and targets”, highlighting the need for expanded nature conservation efforts to mitigate climate change. Launched by the High Ambition Coalition in 2020, more than 50 nations had agreed to the initiative by January 2021 which had expanded to over 70 by October the same year. 30 by 30 was promoted at the COP15 meeting of the Convention on Biological Diversity.This includes the G7 and European Union.

Solution: D

Solution:

• Indian Army has deployed “Pinaka and Smerch” Multiple Rocket Launcher Systems (MRLS) at a forwarding position near the China border to counter any threat arising across the Line of Actual Control (LAC).
• Both Pinaka and Smerch have 12 rockets in each launcher.
• Both these weapon systems (Pinaka and Smerch) are designed to fire a variety of ammunition like high explosives and submunitions against area targets.
• About Smerch system:
• It is procured from Russia and is the longest range conventional rocket system in Indian army inventory having a maximum range of 90 Km.
• A battery of four launchers can fire a salvo of 48 rockets in 40 seconds neutralising an area of 1200m by 1200m.

Solution: D

Solution:

• Tribunal is a quasi-judicial body set up to deal with problems such as resolving administrative or tax-related disputes.
• The provision for Tribunals was added by the 42nd Constitutional Amendment Act which added two new articles to the constitution.
• Article 323A: It empowers the parliament to provide for the establishment of administrative tribunals for adjudicating the disputes relating to recruitment and conditions of service of a person appointed to public service of centre, states, local bodies, public corporations and other public authority.Accordingly, parliament has enacted the Administrative Tribunals Act, 1985 which authorizes parliament to establish Centre and state administrative tribunals (CAT & SATs).
• Article 323B: It empowers the parliament and the state legislatures to establish tribunals for adjudication of disputes related to matters of taxation, foreign exchange, industry and labour, land reforms, elections to parliament and state legislature, rent and tenancy Rights, etc.The tribunals perform an important and specialised role in the justice mechanism. They take a load off the already overburdened courts. They hear disputes related to the environment, armed forces, tax and administrative issues.
• The Finance Act, 2017 merged tribunals based on domain. It also empowered the central government to notify rules on the Composition of search-cum-selection committeesQualifications of tribunal members.Their terms and conditions of service (such as their removal and salaries).

Solution: B

Solution:

• Contactless payment is a secure payment method using a debit or credit card, smartcard, or another payment device by using RFID technology and Near-field communication(NFC).
• To use the system, a consumer taps the payment card near a point-of-sale terminal equipped with the technology.
• FASTag is an electronic toll collection system in India, operated by the National Highway Authority of India (NHAI). It employs Radio Frequency Identification (RFID) technology for making toll payments directly from the prepaid or savings account linked to it or directly toll owner.

Solution: C

Solution:

• Two new Ramsar sites — Khijadiya wildlife sanctuary in Gujarat and Bakhira wildlife sanctuary in Uttar Pradesh — were announced on the occasion of World Wetlands Day at Sultanpur national park in Gurgaon Wednesday. Forest and Wildlife Department officials said India has a network of 49 such sites, the highest in South Asia, covering 10,93,636 hectares.

Solution : C

Solution :  Radio Frequency Identification (RFID) Tags its a  technology whereby digital data encoded in RFID tags or smart labels are captured by a reader via radio waves. RFID belongs to a group of technologies referred to as Automatic Identification and Data Capture (AIDC).  RFID tags contain an integrated circuit and an antenna, which are used to transmit data to the RFID reader (also called an interrogator).

Solution: B

Solution : Zero Trust is a security framework requiring all users, whether in or outside the organization‘s network, to be authenticated, authorized, and continuously validated for security configuration and posture before being granted or keeping access to applications and data.  A zero trust architecture follows the maxim ―never trust, always verify. 

Solution: C

Solution : The Reserve Bank of India  launched a new Unified Payments Interface (UPI) payments solution for feature phones (keypad wale phone) users called the UPI123Pay. UPI123 doesn’t require an internet for payments.

Solution : C

Solution : Quadrilateral Security Dialogue (Quad) is an strategic dialogue between INDIA, USA, JAPAN and AUSTRALIA . In 2020, all four Quad Countries – Japan, India, Australia and the USA took part in the Malabar exercise

Solution : C

Solution : The G4 nations comprising Brazil, Germany, India, and Japan are four countries which support each other’s bids for permanent seats on the United Nations Security Council. Basis for these demands. Each of these four countries have figured among the elected non-permanent members of the council since the UN’s establishment.

Correct Answer : A

Many human tragedies will be prevented if we start fighting poverty. Thus human rights start from poverty alleviation. B is only about social realm effects caused by poverty not about other tragedies. C is narrow not giving whole message of the passage. D is absurd, the passage is not meant to define what is helping people and what is not.

Correct Answer : C

One couple is A2 A1. A3 and A6 are the children of A5. So, the other couple is A5,A4. A5 is a Director. A4 is a female writer. A2 is a lawyer.

So, A1 is a Chef and hence a female. A4 is the mother of A3 and A6.

A1 has one son and one grandson. So, A5 is the son of A1 and A3 or A6 is the grandson. The grandson is a male civil engineer and the grand-daughter is a college going student. A3 may be the brother or sister of A6.

Answer : C

The alphabets are coded as follows :

D E L H I C A L C UT T A

7 3 5 4 1 82589662

So, in CALICUT, C is coded as 8, A as 2, L as 5, I as 1, U as 9 and T as 6. Thus, the code for CALICUT is 8251896

Answer : C

Suppose the boy got x sums right and 2x sums wrong. Then, x + 2x = 54

3x = 54 x = 18.

Answer  : D

Answer Justification :

From 3, we have: Kamlesh ‘s basic salary = Rs. 1550.

From 1, we have: Vishak ‘s basic salary = Rs. (1550 + 100) = Rs. 1650.

From 2, we have: Kamlesh ‘s other allowances = Rs. 2000 and Vishak ‘s other allowances = Rs. 2050.

Therefore Vishak ‘s monthly salary = Rs. (1650 + 2050) = Rs. 3700.