UPSC Static Quiz – Economy : 26 November 2025 We will post 5 questions daily on static topics mentioned in the UPSC civil services preliminary examination syllabus. Each week will focus on a specific topic from the syllabus, such as History of India and Indian National Movement, Indian and World Geography, and more. We are excited to bring you our daily UPSC Static Quiz, designed to help you prepare for the UPSC Civil Services Preliminary Examination. Each day, we will post 5 questions on static topics mentioned in the UPSC syllabus. This week, we are focusing on Indian and World Geography.
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Question 1 of 5
1. Question
Consider the following statements:
Statement I: The Effective Revenue Deficit (ERD) of the Union Government effectively captures the consumption expenditure of the government by excluding grants used for asset creation.
Statement II: Grants-in-aid given by the Union to State Governments are recorded as Revenue Expenditure in the Union Budget even if they are used to build capital assets like roads.
Statement III: The concept of Effective Revenue Deficit was introduced in the Union Budget based on the recommendations of the Rangarajan Committee on Public Expenditure.
Which one of the following is correct in respect of the above statements?
Correct
Solution: A
- Statement I: ERD is defined as Revenue Deficit minus Grants for Creation of Capital Assets. Its purpose is to isolate “pure” consumption spending.
- Statement II is Correct. In the Union accounts, expenditure is classified based on ownership. Since assets created by States (using Centre’s money) belong to the State, the Centre classifies the outflow as “Revenue Expenditure” (Grant). This accounting practice inflates the Revenue Deficit. This statement explains Statement I because ERD is the solution to the accounting anomaly described in Statement II.
- Statement III is Correct. The Rangarajan Committee on Public Expenditure Management recommended this metric to differentiate between unproductive revenue spending and productive revenue spending (grants for assets). This origin also explains Statement I by providing the rationale (differentiation) for its introduction.
Incorrect
Solution: A
- Statement I: ERD is defined as Revenue Deficit minus Grants for Creation of Capital Assets. Its purpose is to isolate “pure” consumption spending.
- Statement II is Correct. In the Union accounts, expenditure is classified based on ownership. Since assets created by States (using Centre’s money) belong to the State, the Centre classifies the outflow as “Revenue Expenditure” (Grant). This accounting practice inflates the Revenue Deficit. This statement explains Statement I because ERD is the solution to the accounting anomaly described in Statement II.
- Statement III is Correct. The Rangarajan Committee on Public Expenditure Management recommended this metric to differentiate between unproductive revenue spending and productive revenue spending (grants for assets). This origin also explains Statement I by providing the rationale (differentiation) for its introduction.
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Question 2 of 5
2. Question
With reference to the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, consider the following statements:
- The Act prohibits the Central Government from borrowing from the Reserve Bank of India (RBI) except under the ‘Ways and Means Advances’ facility.
- The ‘Escape Clause’ allows the Centre to breach the fiscal deficit target by up to 0.5 percentage points during triggers like national security threats or structural reforms.
Which of the above statements are correct?
Correct
Solution: C
- Statement 1 is Correct: A core objective of the FRBM Act was to end the era of automatic monetization of the deficit. It prohibits the RBI from subscribing to primary issues of G-Secs. The exception is WMA, which is for temporary cash management, not deficit financing.
- Statement 2 is Correct: The 2018 amendment, based on the N.K. Singh Committee report, formalized the Escape Clause (Section 4(2)). It allows a deviation of up to 0.5% of GDP for specified grounds: national security, act of war, national calamity, collapse of agriculture, or structural reforms with fiscal implications.
Incorrect
Solution: C
- Statement 1 is Correct: A core objective of the FRBM Act was to end the era of automatic monetization of the deficit. It prohibits the RBI from subscribing to primary issues of G-Secs. The exception is WMA, which is for temporary cash management, not deficit financing.
- Statement 2 is Correct: The 2018 amendment, based on the N.K. Singh Committee report, formalized the Escape Clause (Section 4(2)). It allows a deviation of up to 0.5% of GDP for specified grounds: national security, act of war, national calamity, collapse of agriculture, or structural reforms with fiscal implications.
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Question 3 of 5
3. Question
Consider the following statements regarding tax performance indicators:
Statement I: Tax Buoyancy is calculated as the ratio of the percentage change in tax revenue to the percentage change in GDP.
Statement II: A Tax Buoyancy greater than one indicates that tax revenues are growing at a faster rate than the national income.
Statement III: Tax Elasticity measures the responsiveness of tax revenue to GDP growth including the impact of discretionary changes in tax rates.
Which of the statements given above are correct?
Correct
Solution: A
- Statement I is Correct: This is the standard definition. Buoyancy = (% Change in Tax Revenue) / (% Change in GDP).
- Statement II is Correct: If the numerator (Tax Growth) is higher than the denominator (GDP Growth), the ratio is > 1. This is a desirable state, indicating a widening tax base or efficient collection.
- Statement III is Incorrect: This is the definition of Buoyancy, not Elasticity. Tax Elasticity measures the “automatic” response of revenue to GDP, excluding discretionary changes (like new taxes or rate hikes). It reflects the inherent responsiveness of the tax structure.
Incorrect
Solution: A
- Statement I is Correct: This is the standard definition. Buoyancy = (% Change in Tax Revenue) / (% Change in GDP).
- Statement II is Correct: If the numerator (Tax Growth) is higher than the denominator (GDP Growth), the ratio is > 1. This is a desirable state, indicating a widening tax base or efficient collection.
- Statement III is Incorrect: This is the definition of Buoyancy, not Elasticity. Tax Elasticity measures the “automatic” response of revenue to GDP, excluding discretionary changes (like new taxes or rate hikes). It reflects the inherent responsiveness of the tax structure.
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Question 4 of 5
4. Question
Which of the following phenomena best describes ‘Fiscal Drag’?
Correct
Solution: B
- Option (a): This describes “Crowding Out” or ineffective stimulus.
- Option (b) is Correct: Fiscal Drag is an automatic stabilizer. In a progressive tax system, as nominal wages rise (often due to inflation), taxpayers move into higher tax slabs. They pay a higher % of income as tax. This withdraws money from the economy, cooling down demand. It “drags” the economy but also checks inflation. It increases government revenue without the political cost of raising tax rates.
- Option (c): This is “Implementation Lag.”
- Option (d): This refers to a “Debt Trap.”
Incorrect
Solution: B
- Option (a): This describes “Crowding Out” or ineffective stimulus.
- Option (b) is Correct: Fiscal Drag is an automatic stabilizer. In a progressive tax system, as nominal wages rise (often due to inflation), taxpayers move into higher tax slabs. They pay a higher % of income as tax. This withdraws money from the economy, cooling down demand. It “drags” the economy but also checks inflation. It increases government revenue without the political cost of raising tax rates.
- Option (c): This is “Implementation Lag.”
- Option (d): This refers to a “Debt Trap.”
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Question 5 of 5
5. Question
With reference to Indirect Taxes, consider the following statements:
- Specific Duty is a tax levied on the quantity, weight, or volume of the goods, irrespective of their value.
- Ad Valorem Duty is a tax levied as a percentage of the value of the goods.
- In a period of high inflation, a government relying on Specific Duties will witness a higher natural growth in tax revenue compared to a government relying on Ad Valorem Duties.
How many of the above statements are correct?
Correct
Solution: B
- Statement 1 is Correct: Specific duty is based on physical units (e.g., ₹500 per tonne of coal). It is rigid.
- Statement 2 is Correct: Ad Valorem is based on value (e.g., 28% GST on a car). It is progressive with price.
- Statement 3 is Incorrect: During inflation, prices rise. If tax is Ad Valorem (%), revenue rises automatically (Buoyancy). If tax is Specific (Fixed amount), revenue stays flat despite price rise, leading to a fall in real Thus, Ad Valorem is better for revenue during inflation, not Specific.
Incorrect
Solution: B
- Statement 1 is Correct: Specific duty is based on physical units (e.g., ₹500 per tonne of coal). It is rigid.
- Statement 2 is Correct: Ad Valorem is based on value (e.g., 28% GST on a car). It is progressive with price.
- Statement 3 is Incorrect: During inflation, prices rise. If tax is Ad Valorem (%), revenue rises automatically (Buoyancy). If tax is Specific (Fixed amount), revenue stays flat despite price rise, leading to a fall in real Thus, Ad Valorem is better for revenue during inflation, not Specific.
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