DAY – 45 : Insta 75 Days Revision Plan-2026 : ECONOMY

Answer: (d) I, II and III

Explanation:

The Laffer Curve, a concept in public finance, illustrates the relationship between tax rates and the total tax revenue collected by the government.

Statement I:
The Laffer Curve indeed represents the relationship between tax rates and tax revenue. At a 0% tax rate, revenue is zero, and at a 100% tax rate, revenue is also theoretically zero due to the disincentive to work or invest. Hence, the statement is correct.

Statement II:
The curve posits that beyond an optimal tax rate, further increases in tax rates lead to a decline in total revenue. This occurs due to reduced economic activity, tax evasion, and disincentives for investment and production. Therefore, the statement is correct.

Statement III:
In the Indian context, the abolition of the so-called “Angel Tax” (tax on excess share premium under Section 56(2)(viib) of the Income Tax Act) in 2024 was aimed at improving the investment climate for startups and encouraging capital formation. This policy shift aligns with the logic of the Laffer Curve, where reducing distortionary taxes can potentially enhance compliance, investment, and overall revenue in the long run. Hence, the statement is correct.

Answer: (b) Only two

Explanation:

Statement I:
Inflation accounting refers to a set of accounting techniques used to adjust financial statements to reflect the impact of changes in price levels. It aims to present a more realistic picture of a firm’s financial position by accounting for the erosion of purchasing power during inflationary periods. Hence, the statement is correct.

Statement II:
Under historical cost accounting, assets and costs are recorded at their original purchase value. In periods of high inflation, this leads to understated costs (such as depreciation and cost of inventory) and consequently overstated profits. Thus, reported profits may not reflect real economic gains. Hence, the statement is correct.

Statement III:
The current Indian taxation framework under the Income Tax Act, 1961 does not mandate comprehensive inflation-adjusted accounting for corporates. While certain provisions such as indexation benefits apply to capital gains, there is no general requirement for companies to compute taxable income using full inflation-adjusted financial statements. Therefore, the statement is incorrect.

Answer: (b) Both Statement I and Statement II are correct but Statement II is not the correct explanation for Statement I

Explanation:

Statement I:
The Standing Deposit Facility (SDF), introduced by the Reserve Bank of India in April 2022, enables the RBI to absorb surplus liquidity from the banking system without providing collateral. Unlike the reverse repo operation, which involves government securities as collateral, SDF is an uncollateralised instrument, strengthening the RBI’s ability to manage liquidity efficiently.
Hence, Statement I is correct.

Statement II:
The SDF has replaced the Fixed Rate Reverse Repo as the floor of the Liquidity Adjustment Facility (LAF) corridor. This means that SDF now represents the lower bound of interest rates in the corridor, influencing short-term market rates.
Hence, Statement II is correct.

While both statements are factually correct, Statement II does not explain Statement I. The replacement of reverse repo as the floor of the LAF corridor is a policy positioning decision, whereas the collateral-free nature of SDF is a structural design feature of the instrument. The latter does not arise because of the former.

Answer: (a) Only one

Explanation:

• Call Money – Incorrect
  Call Money refers to inter-bank borrowing for a very short duration of 1 day (overnight). Borrowings beyond one day and up to 14 days fall under Notice Money, not Call Money. Hence, the period mentioned is incorrect.
• Notice Money – Incorrect
  Notice Money denotes funds borrowed for a period of more than 1 day and up to 14 days. It is not repayable “on demand” for 1 day; such transactions are classified as Call Money. Hence, this pairing is incorrect.
• Commercial Bill – Correct
  A Commercial Bill (or Bill of Exchange) is a negotiable instrument drawn by the seller (drawer) on the buyer (drawee) for the value of goods supplied, with payment to be made at a future date. This definition is accurate.

Answer: (c) I, II and IV

Explanation:

Statement I:
Open Market Operations (OMO) involve the buying and selling of government securities by the RBI to regulate liquidity in the banking system. By injecting or absorbing liquidity, RBI influences the overall money supply in the economy.
Hence, Statement I is correct.

Statement II:
OMO also impacts the yields on government securities. When RBI purchases securities, demand increases, leading to a rise in prices and fall in yields; conversely, selling securities raises yields. Thus, OMO is an important tool for influencing interest rates in the economy.
Hence, Statement II is correct.

Statement III:
OMO is a monetary policy tool, not a fiscal instrument. It is not intended to directly manage or finance the fiscal deficit of the Union Government. Although it involves government securities, its purpose is liquidity management, not deficit financing.
Hence, Statement III is incorrect.

Statement IV:
OMO is also used for sterilization operations, wherein RBI neutralizes the impact of large foreign capital inflows on domestic liquidity. For example, excess liquidity created due to forex purchases can be absorbed through OMO sales.
Hence, Statement IV is correct.

Answer: (b) III only

Explanation:

Statement I:
The Green Shoe Option (overallotment option) permits the underwriter to sell additional shares—typically up to 15% more than the original issue size—to stabilize post-listing prices in an IPO.
Hence, Statement I is correct.

Statement II:
As per SEBI (Alternative Investment Funds) Regulations, 2012, an Alternative Investment Fund (AIF) in India can be established as a trust, a company, or a Limited Liability Partnership (LLP).
Hence, Statement II is correct.

Statement III:
Sovereign Green Bonds (SGrBs) issued by the Government of India are treated as government securities (G-Secs). They are eligible for Statutory Liquidity Ratio (SLR) requirements and are actively traded in the secondary market.
The statement incorrectly claims they are ineligible for SLR.
Hence, Statement III is incorrect.

Answer: (b) They are part of the Basel III regulatory framework for bank solvency

Explanation:

• Tier-2 Bonds:
  These are subordinated debt instruments that form part of a bank’s regulatory capital (Tier-2 capital) under the Basel III norms. They enhance the bank’s ability to absorb losses in case of stress.
• Capital Conservation Buffer (CCB):
  This is an additional capital requirement under Basel III, requiring banks to maintain extra capital (over minimum requirements) to absorb losses during periods of financial and economic stress.
• Counter-Cyclical Capital Buffer (CCCB):
  This buffer is also prescribed under Basel III and is activated during periods of excessive credit growth to build resilience. It helps banks withstand systemic risks arising from economic cycles.

Answer: (d) All the four

Explanation:

The Cash Reserve Ratio (CRR) is the percentage of a bank’s Net Demand and Time Liabilities (NDTL) that must be maintained as cash reserves with the Reserve Bank of India (RBI). It is applicable to banks that accept deposits and are part of the regulated banking system.

1. Payment Banks:
   Payment Banks accept demand deposits (with limits) and are regulated by the RBI. They are required to maintain CRR on their NDTL.
   Hence, included.
2. Regional Rural Banks (RRBs):
   RRBs are scheduled banks governed by the RBI and are mandated to maintain CRR similar to other commercial banks.
   Hence, included.
3. Small Finance Banks (SFBs):
   SFBs are full-fledged banks (with certain mandates like priority sector lending) and are required to maintain both CRR and SLR.
   Hence, included.
4. Local Area Banks (LABs):
   LABs are also licensed banks under RBI regulation and are required to maintain CRR like other banking institutions.

Answer: (a) I, II and IV

Explanation:

• Statement I is correct:
  The Multilateral Convention to Implement Tax Treaty Related Measures (MLI) is a key outcome of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project, aimed at curbing tax avoidance strategies used by multinational enterprises.
• Statement II is correct:
  The MLI enables participating countries to simultaneously modify multiple bilateral tax treaties (DTAAs) without renegotiating each treaty individually. This enhances efficiency and ensures swift implementation of BEPS-related measures.
• Statement III is incorrect:
  India has ratified the MLI.
  • India signed the MLI in 2017 and ratified it in 2019.
  • The provisions have been brought into effect for India’s covered tax agreements.
    Hence, the statement is factually incorrect.
• Statement IV is correct:
  One of the primary objectives of the MLI is to prevent treaty abuse, particularly “treaty shopping”, where entities exploit tax treaties to minimize tax liability through artificial arrangements.

Answer: (b) Trade Distortion through Export Dumping

Explanation:

The given scenario reflects a classic case of export dumping under international trade law.

Nature of the Practice:
Dumping occurs when a country exports a commodity at a price lower than its normal value, which is typically the domestic price or the cost of production. In the present case, Country A exports cereal ‘X’ at a price significantly lower than its own Domestic Wholesale Price, thereby satisfying the core condition of dumping.

Role of Subsidies and Trade Distortion:
The surplus production in Country A is attributed to extensive state-provided input subsidies. Such subsidies artificially reduce production costs, enabling exporters to sell goods abroad at lower prices. This leads to trade distortion, as prices no longer reflect true market conditions but are influenced by state intervention.

Impact on Importing Country:
The inflow of underpriced imports adversely affects domestic producers in the importing country. Local farmers face declining revenues and market displacement, which constitutes material injury, a key criterion under WTO anti-dumping provisions.

Price Undertaking Mechanism:
The initiation of a ‘Price Undertaking’ investigation is significant. Under WTO rules, instead of imposing anti-dumping duties, the exporting country or firms may agree to revise export prices upward to remove the injurious effect. This is a recognized remedy specifically associated with anti-dumping actions, further confirming the nature of the practice.

Answer: 14791954

Solution:

1. Analyze the word POWER:
   • Reverse the letters: R, E, W, O, P.
   • Find the positional values: R=18, E=5, W=23, O=15, P=16.
   • Concatenate them: 185231516. This matches the given code exactly.
2. Verify with SYSTEM:
   • Reverse the letters: M, E, T, S, Y, S.
   • Find the positional values: M=13, E=5, T=20, S=19, Y=25, S=19.
   • Concatenate them: 13520192519. This matches the logic.
3. Apply to DESIGN:
   • Reverse the letters: N, G, I, S, E, D.
   • Positional values: N=14, G=7, I=9, S=19, E=5, D=4.
   • Concatenate them: 14791954.

Answer: FWPMH

Solution

Step 1: Identify the pattern

STARK → LBSUT

• Reverse: K R A T S
• Apply +1 shift:
  • K → L
  • R → S
  • A → B
  • T → U
  • S → T

Pattern: Reverse + shift each letter by +1

HEART → USBFI

• Reverse: T R A E H
• Apply +1 shift:
  • T → U
  • R → S
  • A → B
  • E → F
  • H → I

Step 2: Apply to GLOVE

• Reverse: E V O L G
• Apply +1 shift:
  • E → F
  • V → W
  • O → P
  • L → M
  • G → H

Answer: 189532

Detailed Solution:

1. Extract the letter-to-digit mapping from the first word:

• G = 6
• L = 7
• A = 8
• R = 1
• E = 0

2. Extract the letter-to-digit mapping from the second word:

• M = 2
• O = 3
• N = 9
• S = 5
• O = 3 (Matches previous O)
• O = 3 (Matches previous O)
• N = 9 (Matches previous N)

3. Construct the code for ‘RANSOM’ using the identified digits:

• R = 1 (from GLARE)
• A = 8 (from GLARE)
• N = 9 (from MONSOON)
• S = 5 (from MONSOON)
• O = 3 (from MONSOON)
• M = 2 (from MONSOON)

4. Concatenate the digits: 1 | 8 | 9 | 5 | 3 | 2

Answer: (c)-  5

Solution:

1. Compare ‘321’ (Cup is blue) and ‘426’ (Sky is bright):
   • Common word: ‘is’.
   • Common digit: ‘2’.
   • Therefore, is = 2.
2. Compare ‘321’ (Cup is blue) and ‘156’ (Blue and bright):
   • Common word: ‘blue’.
   • Common digit: ‘1’.
   • Therefore, blue = 1.
3. Compare ‘426’ (Sky is bright) and ‘156’ (Blue and bright):
   • Common word: ‘bright’.
   • Common digit: ‘6’.
   • Therefore, bright = 6.
4. In the third statement ‘156’ (Blue and bright):
   • We know 1 = Blue and 6 = bright.
   • The remaining word is ‘and’ and the remaining digit is ‘5’.

Answer: (c)

Solution:

1. The passage explicitly states that while a stipend (UBI) covers “caloric needs” (financial/survival), it ignores “purpose,” “social integration,” and “dignity” (non-monetary values).
2. Option (a) is incorrect as the author suggests an alternative (Employer of Last Resort).
3. Option (b) is incorrect as the author focuses on psychological costs, not fiscal/budgetary costs.
4. Option (d) is incorrect as the author accepts “technological progress” but wants to mitigate its social cost through employment, not by slowing down technology.
5. Option (c) correctly identifies the author’s primary concern: that employment provides value beyond just money, which a cash transfer cannot replace.