Daily Static Quiz (Economy) March 18, 2025
Daily Static Quiz (Economy)
1. With reference to the Capital Receipts in India, consider the following statements:
They are generated by selling assets or creating liabilities
All capital receipts are subject to capital gains tax
They aim to increase an enterprise’s revenue-generating ability
Disinvestment targets set by the Government of India are a form of capital receipts
Which of the statements given above are correct?
A) 1, 2 and 3 only
B) 1, 3 and 4 only
C) 2, 3 and 4 only
D) 1, 2, 3 and 4
2. Consider the following statements regarding Revenue Receipts in India:
They are generated from day-to-day activities of the government
They involve creation of liabilities or sale of assets
They are exempt from tax unless there is a specific provision for taxing them
Tax and non-tax revenue are components of revenue receipts
Which of the statements given above is/are correct?
A) 1 and 4 only
B) 2 and 3 only
C) 1, 3 and 4 only
D) 1, 2, 3 and 4
3. With reference to the Indian economy, consider the following statements:
If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities
If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market
If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars
Which of the statements given above are correct?
A) 1 and 2 only
B) 2 and 3 only
C) 1 and 3 only
D) 1, 2 and 3
4. Which of the following is/are examples of Revenue Expenditure by the Government of India?
Salaries and wages paid to government employees
Construction of highways
Interest payments on loans
Purchase of land for setting up a new airport
Select the correct answer using the code given below:
A) 1 and 3 only
B) 2 and 4 only
C) 1, 2 and 3 only
D) 1, 2, 3 and 4
5. The primary purpose of the RBI monetary policy is to maintain:
A) Price stability
B) Economic growth
C) Exchange rate stability
D) Full employment
6. Which among the following steps is most likely to be taken at the time of an economic recession?
A) Cut in tax rates accompanied by increase in interest rate
B) Increase in expenditure on public projects
C) Increase in tax rates accompanied by reduction of interest rate
D) Reduction of expenditure on public projects
7. Which of the following are potential consequences of the depreciation of the Indian Rupee?
Decrease in imported inflation
Difficulty in maintaining low interest rates
Indian products and services become costlier to buy internationally
Improvement in export competitiveness
Select the correct answer using the code given below:
A) 1 and 3 only
B) 2 and 4 only
C) 1, 3 and 4 only
D) 2, 3 and 4 only
8. With reference to the relationship between RBI and the Government of India, which of the following statements is/are correct?
The separation of debt management from RBI is being challenged globally
Independent management of government debt could distort the sovereign yield curve
Pure monetary approach to inflation in India is effective as inflation is largely driven by monetary factors
The Public Debt Management Agency (PDMA) would be more efficient than RBI in handling cash management
Select the correct answer using the code given below:
A) 1 and 2 only
B) 3 and 4 only
C) 1, 2 and 3 only
D) 1, 2, 3 and 4
9. Which type of inflation is India predominantly facing at present?
A) Demand-pull inflation
B) Cost-push inflation
C) Built-in inflation
D) Hyperinflation
10. Consider the following statements about different types of inflation:
In demand-pull inflation, consumer demand pulls prices higher because firms cannot keep up with supply
Cost-push inflation occurs when businesses raise prices to maintain profit margins despite increased input costs
Built-in inflation is linked to expectations of future inflation and often results in wage-price spirals
India is usually immune to cost-push inflation due to its self-sufficient agricultural sector
Which of the statements given above is/are correct?
A) 1 and 3 only
B) 2 and 4 only
C) 1, 2 and 3 only
D) 1, 2, 3 and 4
Answer Key with Explanations
Answer 1: B) 1, 3 and 4 only
Explanation:
Statement 1 is correct: Capital receipts are generated by selling assets or creating liabilities. They include loans raised by the government, borrowing from the RBI, and sale of government assets.
Statement 2 is incorrect: All capital receipts are exempt from tax unless there is a specific provision for taxing them. Capital receipts are subject to capital gains tax only when they involve a transaction in capital assets.
Statement 3 is correct: The main goal of capital receipts is to increase an enterprise’s revenue-generating ability, leading to a significant inflow of cash in a short period for long-term investments or paying off debts.
Statement 4 is correct: The Government of India sets yearly disinvestment targets as a means to raise revenue and manage the fiscal deficit of the economy, which is a form of capital receipt.
Answer 2: A) 1 and 4 only
Explanation:
Statement 1 is correct: Revenue receipts refer to the receipts of income which a company or government makes from its day-to-day activities.
Statement 2 is incorrect: Revenue receipts do not involve the creation of liabilities or the sale of assets. These characteristics apply to capital receipts.
Statement 3 is incorrect: Revenue receipts are taxable unless they have been granted any exemption. It is capital receipts that are exempt from tax unless there is a specific provision for taxing them.
Statement 4 is correct: Tax and non-tax revenue are components of revenue receipts. Revenue receipts are generated from the daily business activities such as buying and selling of goods and services.
Answer 3: B) 2 and 3 only
Explanation:
Statement 1 is incorrect: If inflation is too high, RBI is likely to sell (not buy) government securities to reduce money supply in the economy, which helps in controlling inflation. This is known as contractionary monetary policy.
Statement 2 is correct: If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market to increase the supply of dollars and reduce its demand, which helps in stabilizing the value of the rupee.
Statement 3 is correct: If interest rates in the USA or European Union were to fall, it would likely induce RBI to buy dollars. Lower interest rates in these economies would lead to capital outflows from them, which RBI might want to capture by buying dollars to increase its forex reserves and also to prevent excessive appreciation of the rupee.
Answer 4: A) 1 and 3 only
Explanation:
Statement 1 is correct: Salaries and wages paid to government employees are examples of revenue expenditure, as they are part of the government’s operating demands and do not result in the creation of assets.
Statement 2 is incorrect: Construction of highways is a capital expenditure, not revenue expenditure, as it results in the creation of an asset.
Statement 3 is correct: Interest payments on loans are a form of revenue expenditure as they do not result in the creation of assets.
Statement 4 is incorrect: Purchase of land for setting up a new airport is a capital expenditure as it involves the acquisition of an asset.
Answer 5: A) Price stability
Explanation:
The primary purpose of the RBI monetary policy is to maintain price stability while keeping in mind the objective of growth. Price stability is a necessary precondition to sustainable growth. According to the RBI Act (amended in 2016), maintaining price stability is the primary objective of monetary policy, with an inflation target of 4% Consumer Price Index with an upper tolerance limit of 6% and a lower tolerance limit of 2%. While promoting economic growth, exchange rate stability, and employment are important considerations, they are secondary to the primary goal of price stability.
Answer 6: B) Increase in expenditure on public projects
Explanation:
During an economic recession, the most appropriate fiscal policy measure is to increase expenditure on public projects. This is a classic Keynesian approach to combat recessions. By increasing public expenditure, the government injects money into the economy, creates jobs, and stimulates demand through increased spending. This approach is based on Keynesian economic theory, which advocates for increased government expenditures and lower taxes to stimulate demand and pull the economy out of a recession.
Option A (cut in tax rates accompanied by increase in interest rate) is contradictory since increased interest rates would dampen economic activity, working against the stimulus of tax cuts.
Option C (increase in tax rates accompanied by reduction of interest rate) sends mixed signals, with tax increases potentially offsetting the stimulative effect of lower interest rates.
Option D (reduction of expenditure on public projects) would likely deepen the recession by reducing economic activity and employment.
Answer 7: D) 2, 3 and 4 only
Explanation:
Statement 1 is incorrect: Depreciation of the Indian Rupee would increase, not decrease, imported inflation as imported goods become more expensive in the domestic currency.
Statement 2 is correct: Depreciation of the Rupee can lead to difficulty in maintaining low interest rates, as higher rates might be needed to attract foreign capital and stabilize the currency.
Statement 3 is correct: When the Rupee depreciates, Indian products and services become costlier to buy internationally when priced in Rupees.
Statement 4 is correct: Currency depreciation generally improves export competitiveness as domestic goods become relatively cheaper for foreign buyers when priced in their currency.
Answer 8: A) 1 and 2 only
Explanation:
Statement 1 is correct: The separation of debt management from central banks (including RBI) is being challenged globally, particularly in the context of elevated debt levels.
Statement 2 is correct: Independent management and issuance of government debt could distort the sovereign yield curve in a thin market, potentially jeopardizing monetary signaling and its transmission.
Statement 3 is incorrect: The pure monetary approach to inflation in India is not considered fully effective because inflation in India is largely driven by food and fuel prices over which Monetary Policy has very little control.
Statement 4 is incorrect: There are doubts over the capability of the Public Debt Management Agency (PDMA) vis-à-vis RBI. It is questioned whether an independent body will have the experience to handle cash management of such magnitude as efficiently as the RBI.
Answer 9: B) Cost-push inflation
Explanation:
According to economic analysis, India is predominantly facing cost-push inflation at present. This type of inflation occurs when businesses raise their prices to maintain profit margins despite increased costs of inputs or raw materials, regardless of the level of demand. For example, if the price of rice increases, restaurant-owners must raise the prices of all dishes made with rice to maintain profitability.
Answer 10: C) 1, 2 and 3 only
Explanation:
Statement 1 is correct: In demand-pull inflation, consumer spending remains high, and consumer demand pulls prices higher because firms cannot keep up with supply. When supply is short, consumers agree to pay more to purchase products.
Statement 2 is correct: Cost-push inflation occurs when businesses face increases in the prices of raw materials or inputs, and they respond by raising their own prices to maintain profit margins, regardless of the level of demand.
Statement 3 is correct: Built-in inflation occurs when employees ask for higher wages due to increased living costs from demand-pull and cost-push inflation. Employers then raise prices further to cover the higher wage costs, creating a wage-price spiral based on expectations of future inflation.
Statement 4 is incorrect: India is not immune to cost-push inflation despite its agricultural sector. In fact, India is currently experiencing cost-push inflation. Food prices, which are a significant component of India’s inflation basket, can be affected by various factors like weather conditions, global prices, and supply chain issues.