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Question 1 of 10
1. Question
2 points
Which of the following is/are objectives of the Fiscal Policy in India?
1. Reallocation of Resources
2. Keeping the inflation within limits by maintaining interest rates
3. Reducing inequalities in Income and Wealth
4. Bringing Economic Stability
Select the correct answer using the code given below:
Correct
Correct Answer: B
Explanation
Statements 1, 3 and 4 are correct. Statement 2 is incorrect.
Objectives of Fiscal Policy:
Reallocation of Resources– It helps to distribute resources keeping in view the social and economic conditions of the country. Reducing Inequalities in Income and Wealth– Government aims to bring economic equality by imposing taxes on the elite class and spending the collected money on the welfare of the poor. Contributing to Economic Growth– A country’s economic growth is based on the rate of investment and savings.
Reducing Regional Differences– It aims to reduce regional inequalities by promoting the installation of production units in the underdeveloped regions. Keeping the inflation within limits- Policies such as Deficit Budget (during deflation) and Surplus Budget (during inflation) assist in balancing the prices in the economy. (Interest rates are decided by the RBI through its monetary policy.) Hence statement 2 is incorrect. Rest are correct statements.
Incorrect
Correct Answer: B
Explanation
Statements 1, 3 and 4 are correct. Statement 2 is incorrect.
Objectives of Fiscal Policy:
Reallocation of Resources– It helps to distribute resources keeping in view the social and economic conditions of the country. Reducing Inequalities in Income and Wealth– Government aims to bring economic equality by imposing taxes on the elite class and spending the collected money on the welfare of the poor. Contributing to Economic Growth– A country’s economic growth is based on the rate of investment and savings.
Reducing Regional Differences– It aims to reduce regional inequalities by promoting the installation of production units in the underdeveloped regions. Keeping the inflation within limits- Policies such as Deficit Budget (during deflation) and Surplus Budget (during inflation) assist in balancing the prices in the economy. (Interest rates are decided by the RBI through its monetary policy.) Hence statement 2 is incorrect. Rest are correct statements.
Question 2 of 10
2. Question
2 points
If the economy is booming, which of the following step/steps would amount to a countercyclical approach to fiscal policy?
1. Increasing government spending
2. Raising tax rates
3. Increasing direct subsidies
Select the correct answer using the code given below:
Correct
Correct Answer: B
Explanation
Statement 2 is correct. Statement 1 and 3 are incorrect.
Counter-cyclical fiscal policy:
Counter-cyclical fiscal policy refers to strategy by the government to counter boom or recession through fiscal measures. It works against the ongoing boom or recession trend; thus, trying to stabilize the economy. Understandably, countercyclical fiscal policy works in two different direction during these two phases.
Boom: In the case of boom, economic activities will be on upswing. Amplifying the boom is disastrous as it may create inflation and debt crisis and the government’s responsibility here is to bring down the pace of economic activities. Increasing taxes and reducing public expenditure will make boom mild. Thus, slowing down demand should be the nature of countercyclical fiscal policy during boom. Hence Statement 2 is correct. Statement 1 is incorrect.
Recession: Recession is a business cycle situation where there is slowing demand and falling growth in the economy. Here, the Government’s responsibility is to generate demand by finetuning taxation and expenditure policies. Reducing taxes and increasing expenditure will help to create demand and producing upswing in the economy. Hence Statement 3 is incorrect.
Incorrect
Correct Answer: B
Explanation
Statement 2 is correct. Statement 1 and 3 are incorrect.
Counter-cyclical fiscal policy:
Counter-cyclical fiscal policy refers to strategy by the government to counter boom or recession through fiscal measures. It works against the ongoing boom or recession trend; thus, trying to stabilize the economy. Understandably, countercyclical fiscal policy works in two different direction during these two phases.
Boom: In the case of boom, economic activities will be on upswing. Amplifying the boom is disastrous as it may create inflation and debt crisis and the government’s responsibility here is to bring down the pace of economic activities. Increasing taxes and reducing public expenditure will make boom mild. Thus, slowing down demand should be the nature of countercyclical fiscal policy during boom. Hence Statement 2 is correct. Statement 1 is incorrect.
Recession: Recession is a business cycle situation where there is slowing demand and falling growth in the economy. Here, the Government’s responsibility is to generate demand by finetuning taxation and expenditure policies. Reducing taxes and increasing expenditure will help to create demand and producing upswing in the economy. Hence Statement 3 is incorrect.
Question 3 of 10
3. Question
2 points
Consider the following statements with reference to the Union budget in India:
1. According to Article 112 of the Indian Constitution, the Union Budget of a year is referred to as the Annual Financial Statement (AFS).
2. It is a statement of the estimated receipts and expenditure of the Government in a financial year.
3. According to Article 116, the appropriation Bill gives power to the government to withdraw funds from the Consolidated Fund of India for meeting the expenditure during the financial year.
Which of the given statements are correct?
Correct
Correct Answer: A
Explanation
Statement 1 and 2 are correct. Statement 3 is incorrect.
Union budget in India:
According to Article 112 of the Indian Constitution, the Union Budget of a year is referred to as the Annual Financial Statement (AFS). Hence Statement 1 is correct.
It is a statement of the estimated receipts and expenditure of the Government in a financial year. In addition to it, the Budget contains: Estimates of revenue and capital receipts, Estimates of expenditure, Details of the actual receipts and expenditure of the closing financial year and the reasons for any deficit or surplus in that year, and The economic and financial policy of the coming year, i.e., taxation proposals, prospects of revenue, spending programme and introduction of new schemes/projects. According to Article 114, Appropriation Bill gives power to the government to withdraw funds from the Consolidated Fund of India for meeting the expenditure during the financial year. Article 116 is for the vote on account. Hence statement 3 is incorrect.
Incorrect
Correct Answer: A
Explanation
Statement 1 and 2 are correct. Statement 3 is incorrect.
Union budget in India:
According to Article 112 of the Indian Constitution, the Union Budget of a year is referred to as the Annual Financial Statement (AFS). Hence Statement 1 is correct.
It is a statement of the estimated receipts and expenditure of the Government in a financial year. In addition to it, the Budget contains: Estimates of revenue and capital receipts, Estimates of expenditure, Details of the actual receipts and expenditure of the closing financial year and the reasons for any deficit or surplus in that year, and The economic and financial policy of the coming year, i.e., taxation proposals, prospects of revenue, spending programme and introduction of new schemes/projects. According to Article 114, Appropriation Bill gives power to the government to withdraw funds from the Consolidated Fund of India for meeting the expenditure during the financial year. Article 116 is for the vote on account. Hence statement 3 is incorrect.
Question 4 of 10
4. Question
2 points
Consider the following statements with reference to the Capital Expenditure:
1. They are the expenditures of the government that result in the creation of physical or financial assets, or depletion in financial liabilities.
2. This incorporates expenditure on the investment of building, land, equipment, machinery, investment in shares, and interest payment of loans.
3. Generally Capital expenditures are regular and recurring in nature.
Which of the given statement(s) is/are correct?
Correct
Correct Answer: A
Explanation
Statement 1 is correct. Statements 2 and 3 are incorrect.
Capital Expenditure: They are the expenditures of the government that result in the creation of physical or financial assets, or depletion in financial liabilities. Capital Expenditure incorporates expenditure on the investment of building, land, equipment, machinery, investment in shares, and loans (Interest on Loans forms part of revenue expenditure) and advances by the central government to state and union territory governments, Public Sector Undertakings (PSUs), and other parties. Hence Statement 2 is incorrect. Capital expenditure is also classified as plan and non-plan in the budget documents. A plan capital expenditure, like its revenue equivalent, is associated with central plan and central assistance for state and union territory plans. A non-plan capital expenditure covers different general, social, and economic services furnished by the government. They are long term, irregular and non-recurring in nature. Hence statement 3 is incorrect.
Incorrect
Correct Answer: A
Explanation
Statement 1 is correct. Statements 2 and 3 are incorrect.
Capital Expenditure: They are the expenditures of the government that result in the creation of physical or financial assets, or depletion in financial liabilities. Capital Expenditure incorporates expenditure on the investment of building, land, equipment, machinery, investment in shares, and loans (Interest on Loans forms part of revenue expenditure) and advances by the central government to state and union territory governments, Public Sector Undertakings (PSUs), and other parties. Hence Statement 2 is incorrect. Capital expenditure is also classified as plan and non-plan in the budget documents. A plan capital expenditure, like its revenue equivalent, is associated with central plan and central assistance for state and union territory plans. A non-plan capital expenditure covers different general, social, and economic services furnished by the government. They are long term, irregular and non-recurring in nature. Hence statement 3 is incorrect.
Question 5 of 10
5. Question
2 points
Which of the following measures are envisaged by the government to achieve fiscal consolidation?
1. Improved tax revenue realization
2. Enhancing tax GDP ratio
3. widening the tax base
4. increasing tax concessions and exemptions
5. Better targeting of government subsidies
Which of the following statement(s) is/are correct?
Correct
Correct Answer: C
Explanation
Statement 4 is incorrect. Statements 1, 2, 3 and 5 are correct.
Measures to achieve fiscal consolidation: Following measures from the expenditure side and revenue side are envisaged by the government to achieve fiscal consolidation. Improved tax revenue realization: For this, increasing efficiency of tax administration by reducing tax avoidance, eliminating tax evasion, enhancing tax compliance etc. are to be made. Enhancing tax GDP ratio by widening the tax base and minimizing tax concessions and exemptions also improves tax revenues. Hence statement 4 is incorrect.
Better targeting of government subsidies and extending Direct Benefit Transfer scheme for more subsidies. Higher economic growth rate will help government to get higher tax revenues as well. Augmentation of tax revenue is necessary to bring fiscal consolidation as there are limitations for reducing government expenditure in India.
Incorrect
Correct Answer: C
Explanation
Statement 4 is incorrect. Statements 1, 2, 3 and 5 are correct.
Measures to achieve fiscal consolidation: Following measures from the expenditure side and revenue side are envisaged by the government to achieve fiscal consolidation. Improved tax revenue realization: For this, increasing efficiency of tax administration by reducing tax avoidance, eliminating tax evasion, enhancing tax compliance etc. are to be made. Enhancing tax GDP ratio by widening the tax base and minimizing tax concessions and exemptions also improves tax revenues. Hence statement 4 is incorrect.
Better targeting of government subsidies and extending Direct Benefit Transfer scheme for more subsidies. Higher economic growth rate will help government to get higher tax revenues as well. Augmentation of tax revenue is necessary to bring fiscal consolidation as there are limitations for reducing government expenditure in India.
Question 6 of 10
6. Question
2 points
Which of the following fiscal policy statements are required to be laid before the Parliament under the Fiscal Responsibility and Budget Management Act, 2003 (FRBMA)?
1. Medium-term Fiscal Policy
2. Macroeconomic Framework Statement
3. Fiscal Policy Strategy
4. Medium-term Expenditure Framework
Select the correct answer using the code given below:
Correct
Correct Answer: D
• All the options are correct.
• The Fiscal Responsibility and Budget Management (FRBM) Act was enacted in 2003 which set targets for the government to reduce fiscal deficits.
• The objective of the Act is to ensure inter-generational equity in fiscal management, long run macroeconomic stability, better coordination between fiscal and monetary policy, and transparency in fiscal operation of the Government.
• It requires for the presentation of the following documents before the Parliament-the Medium Term Expenditure Framework Statement (MTEF), Medium-Term Fiscal Policy Statement, Fiscal Policy Strategy Statement and Macroeconomic Framework Statement.
• The introduction of Outcome Budget is an executive action by the government. From the year 2017-18 onwards, it has been decided that the output and outcomes of the schemes of 68 Ministries and Departments will be available along with the financial outlays as a part of the Budget documents, so that clearly defined objectives and goals for each scheme can be seen by all.
Incorrect
Correct Answer: D
• All the options are correct.
• The Fiscal Responsibility and Budget Management (FRBM) Act was enacted in 2003 which set targets for the government to reduce fiscal deficits.
• The objective of the Act is to ensure inter-generational equity in fiscal management, long run macroeconomic stability, better coordination between fiscal and monetary policy, and transparency in fiscal operation of the Government.
• It requires for the presentation of the following documents before the Parliament-the Medium Term Expenditure Framework Statement (MTEF), Medium-Term Fiscal Policy Statement, Fiscal Policy Strategy Statement and Macroeconomic Framework Statement.
• The introduction of Outcome Budget is an executive action by the government. From the year 2017-18 onwards, it has been decided that the output and outcomes of the schemes of 68 Ministries and Departments will be available along with the financial outlays as a part of the Budget documents, so that clearly defined objectives and goals for each scheme can be seen by all.
Question 7 of 10
7. Question
2 points
Which of the following supports the argument that higher public debt leads to lower growth?
1. Higher levels of public debt tend to increase consumption.
2. It can result in crowding out of private investments.
3. It can put upward pressure on the interest rates.
Which of the given statement(s) is/are incorrect?
Correct
Correct Answer: A
Statement 1 is incorrect. Statements 2 and 3 are correct.
The argument supporting higher debt leading to lower growth is as follows: Higher levels of public debt are accompanied by more taxes in the future to pay for the debt, thereby leading to lower lifetime wealth, which may decrease consumption and savings, eventually resulting in lower aggregate demand and growth rates. Hence statement 1 is incorrect.
If higher public debt (i.e. lower public savings) is not accompanied by increase in private savings, it may also lead to lower total savings in the economy. This may put upward pressure on the interest rates, resulting in crowding out of investment and thus negatively impacting the growth rates. Hence statement 2 and 3 are correct. Crowding Out Effect: As the government adopts an expansionary fiscal policy stance and increases its spending to boost economic activity. This leads to an increase in interest rates. Increased interest rates affect private investment decisions.
Incorrect
Correct Answer: A
Statement 1 is incorrect. Statements 2 and 3 are correct.
The argument supporting higher debt leading to lower growth is as follows: Higher levels of public debt are accompanied by more taxes in the future to pay for the debt, thereby leading to lower lifetime wealth, which may decrease consumption and savings, eventually resulting in lower aggregate demand and growth rates. Hence statement 1 is incorrect.
If higher public debt (i.e. lower public savings) is not accompanied by increase in private savings, it may also lead to lower total savings in the economy. This may put upward pressure on the interest rates, resulting in crowding out of investment and thus negatively impacting the growth rates. Hence statement 2 and 3 are correct. Crowding Out Effect: As the government adopts an expansionary fiscal policy stance and increases its spending to boost economic activity. This leads to an increase in interest rates. Increased interest rates affect private investment decisions.
Question 8 of 10
8. Question
2 points
Which of the following factors lead to weak transmission of Monetary policy decisions?
1. Very low-interest rates on Small Savings Schemes
2. Long Maturity Profile of Deposits at Fixed Interest Rates
3. High Non-Performing Assets.
Select the correct answer using the code given below:
Correct
Correct Answer: B
Explanation
Statement 2 and 3 are correct. Statement 1 is incorrect. Monetary transmission to bank lending interest rates is impacted by the following factors:
Long Maturity Profile of Deposits at Fixed Interest Rates: Long maturity profile of deposits in itself does not impede monetary transmission provided interest rates on such deposits move in line with the policy rate. However, almost all bank deposits are at fixed interest rates. Hence statement 2 is correct.
Competitive Pressures – Mutual Funds and Small Savings Schemes: Interest rates on small savings are administered by the government. The interest rates on small savings schemes are on average up to 100 basis points higher than the rates prevailing in the market from commercial banks.
The returns on small saving schemes, viz., 5-year time deposit, public provident fund (PPF), national savings certificate, and senior citizens’ savings scheme, as well as debt and equity mutual funds receive favorable tax treatment vis-à-vis bank time deposits. Bankers have been complaining that high rates on small savings schemes prohibit them from cutting deposit rates. This makes Monetary Policy transmission ineffective. Hence statement 1 is incorrect.
Asset Quality of Banks: A healthy bank with low default risk in its loan portfolio will be able to pass on interest rate changes by the central bank symmetrically to its deposits and loans. On the other hand, a bank faced with a high level of non-performing assets (NPA) is likely to build up provisions by loading credit risk premia on its performing loans, thereby pushing up the lending rates. Hence statement 3 is correct.
Incorrect
Correct Answer: B
Explanation
Statement 2 and 3 are correct. Statement 1 is incorrect. Monetary transmission to bank lending interest rates is impacted by the following factors:
Long Maturity Profile of Deposits at Fixed Interest Rates: Long maturity profile of deposits in itself does not impede monetary transmission provided interest rates on such deposits move in line with the policy rate. However, almost all bank deposits are at fixed interest rates. Hence statement 2 is correct.
Competitive Pressures – Mutual Funds and Small Savings Schemes: Interest rates on small savings are administered by the government. The interest rates on small savings schemes are on average up to 100 basis points higher than the rates prevailing in the market from commercial banks.
The returns on small saving schemes, viz., 5-year time deposit, public provident fund (PPF), national savings certificate, and senior citizens’ savings scheme, as well as debt and equity mutual funds receive favorable tax treatment vis-à-vis bank time deposits. Bankers have been complaining that high rates on small savings schemes prohibit them from cutting deposit rates. This makes Monetary Policy transmission ineffective. Hence statement 1 is incorrect.
Asset Quality of Banks: A healthy bank with low default risk in its loan portfolio will be able to pass on interest rate changes by the central bank symmetrically to its deposits and loans. On the other hand, a bank faced with a high level of non-performing assets (NPA) is likely to build up provisions by loading credit risk premia on its performing loans, thereby pushing up the lending rates. Hence statement 3 is correct.
Question 9 of 10
9. Question
2 points
If the RBI decides to absorb liquidity from the market, which of the following would it not do?
1. Increase Reverse repo rate
2. Decrease in Cash Reserve Ratio
3. Purchase Government Securities from the market.
Choose the correct option given below.
Correct
Correct Answer: C
Explanation
Statement 2 and 3 are correct. Statement 1 is incorrect.
RBI’s Monetary Policy :
The Reserve Bank of India has the duty to stabilize the economy by managing excess liquidity in the market. A contractionary or tight monetary policy reduces liquidity and increases interest rates which has a negative impact on both production and consumption and therefore, economic growth.
However, it helps in managing liquidity and inflation. In contrast following an Accommodative monetary policy increases the liquidity in the market.
Incorrect
Correct Answer: C
Explanation
Statement 2 and 3 are correct. Statement 1 is incorrect.
RBI’s Monetary Policy :
The Reserve Bank of India has the duty to stabilize the economy by managing excess liquidity in the market. A contractionary or tight monetary policy reduces liquidity and increases interest rates which has a negative impact on both production and consumption and therefore, economic growth.
However, it helps in managing liquidity and inflation. In contrast following an Accommodative monetary policy increases the liquidity in the market.
Question 10 of 10
10. Question
2 points
Devaluation of currency would help an economy by
1. Reducing the current account deficit
2. Making exports competitive
3. Increasing import
Which of the statements given above is/are correct?
Correct
Correct Answer: B
Explanation
• Statements 1 and 2 are correct. Statement 3 is incorrect.
• The reduction in the external value of the home currency is called Devaluation.
• For example, changing the exchange rate from Rs.50 = US$1 to Rs.75 = US$1 is called devaluation.
• A key effect of devaluation is that it makes the domestic currency cheaper relative to other currencies. There are two implications of a devaluation. First, devaluation makes the country’s exports relatively less expensive for foreigners.
• Second, the devaluation makes foreign products relatively more expensive for domestic consumers, thus discouraging imports. This may help to increase the country’s exports and decrease imports, and may therefore help to reduce the current account deficit.
Incorrect
Correct Answer: B
Explanation
• Statements 1 and 2 are correct. Statement 3 is incorrect.
• The reduction in the external value of the home currency is called Devaluation.
• For example, changing the exchange rate from Rs.50 = US$1 to Rs.75 = US$1 is called devaluation.
• A key effect of devaluation is that it makes the domestic currency cheaper relative to other currencies. There are two implications of a devaluation. First, devaluation makes the country’s exports relatively less expensive for foreigners.
• Second, the devaluation makes foreign products relatively more expensive for domestic consumers, thus discouraging imports. This may help to increase the country’s exports and decrease imports, and may therefore help to reduce the current account deficit.
