[Mission 2024] STATIC QUIZ, 28 September 2023 – Economy

Solution: d)

None of them are part of Personal Disposable Income.

In economics, personal income (PI) refers to an individual’s total earnings from wages, investment enterprises, and other ventures. It is the sum of all the incomes received by all the individuals or household during a given period.

If we deduct the Personal Tax Payments (income tax, for example) and Non-tax Payments (such as fines) from PI, we obtain what is known as the Personal Disposable Income.

Personal Disposable Income (PDI) ≡ PI – Personal tax payments – Non-tax payments.

Solution: b)

Statement 2 is incorrect.

Monetary Base is also called as High powered money.

It consists of currency (notes and coins in circulation with the public and vault cash of commercial banks) and deposits held by the Government of India and commercial banks with RBI.

If a member of the public produces a currency note to RBI the latter must pay her value equal to the figure printed on the note.

Similarly, the deposits are also refundable by RBI on demand from deposit-holders. These items are claims which the general public, government or banks have on RBI and hence are considered to be the liability of RBI.

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 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.

The deficit financing results in an increase in government expenditure which produces a favourable multiplier effect on national income, saving, employment, etc.

Solution: b)

Statement 2 is incorrect.

Indirect Tax is a tax levied by the Government on goods and services and not on the income, profit or revenue of an individual and it can be shifted from one taxpayer to another.

Indirect taxes are charged the same for all income groups.

Few indirect taxes: Customs Duty, Central Excise Duty, Service Tax, Sales Tax and Value Added Tax (VAT).

Cascading effect of tax is a situation wherein the end-consumer of any goods or service has to bear the burden of the tax to be paid on the previously calculated tax and as a result would suffer an increased or inflated price.

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.