[Mission 2023] STATIC QUIZ, 20 October 2022 – Economy

Solution: d)

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)

Inflation redistributes wealth from creditors to debtors, i.e., lenders suffer and borrowers benefit out of inflation. The opposite effect takes place when inflation falls (i.e., deflation).

Holding money does not remain an intelligent economic decision (because money loses value with every increase in inflation).

With every inflation the currency of the economy depreciates (loses its exchange value in front of a foreign currency) provided it follows the flexible currency regime. Though it is a comparative matter, there might be inflationary pressure on the foreign currency against which the exchange rate is compared.

Solution: a)

The Office of the Economic Adviser, Department for Promotion of Industry and Internal Trade is releasing index numbers of wholesale price in India. Current base year: 2011–12.

WPI continues to constitute three major groups—Primary Articles, Fuel and Power, and Manufactured Products.

The prices used for compilation do not include indirect taxes in order to remove impact of fiscal policy. This is in consonance with international practices.

Highest weightage under WPI is for Manufactured Products.

Solution: b)

Major traits of recession, to a great extent, are similar to that of ‘depression’—may be summed up as follows:

(i) there is a general fall in demand as economic activities takes a downturn;

(ii) inflation remains lower or/and shows further signs of falling down;

(iii) employment rate falls/unemployment rate grows;

(iv) Industries resort to ‘price cuts’ to sustain their business.

Solution: d)

According to the RBI, a wilful default is deemed to have occurred in any of the following four circumstances:

• When there is a default in repayment obligations by the unit (company/individual) to the lender even when it has the capacity to honour the said obligations. There is deliberate intention of not repaying the loan.
• The funds are not utilised for the specific purpose for which finance was availed but have been diverted for other purposes.
• When the funds have been siphoned off and not been utilised for the purpose for which it was availed. Further, no assets are available which justify the usage of funds.
• When the asset bought by the lenders’ funds have been sold off without the knowledge of the bank/lender.