Economics MCQ- 06

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#1 In an economy a situation of liquidity trap ischaracterised by which of the following? 1. High savings rate 2. High demand for bonds 3. Expansionary monetary policy. Select the correct answer using the codegiven below.?Solution (c)

Liquidity trap is a situation when expansionary monetary policy (increase in money supply) does not increase the interest rate, income and hence does not stimulate economic growth.

It is the situation in which prevailing interest rates are low and savings rates are high, making monetary policy ineffective.

In a liquidity trap, consumers choose to avoid bonds and keep their funds in savings, because of the prevailing belief that interest rates will soon rise. Because bonds have an inverse relationship to interest rates, many consumers do not want to hold an asset with a price that is expected to decline.

#2 Which of the following are the Direct taxesin India? 1. Customs duty 2. Security Transaction Tax 3. Capital Gains Tax 4. Professional Tax. Select the correct answer using the code given below.?Solution (c)

Major Direct Taxes are: income tax, corporate tax, property tax, STT, capital gains tax, professional tax, estate tax, gift tax, fringe benefit tax, etc.

Major Indirect Taxes are: customs duty, central sales tax, service tax, VAT, anti-dumping duty etc.

#3 Which of the following statements is/arecorrect regarding fiscal deficit? 1. It leads to crowding-out of private investment 2. It leads to inflation in economy. 3. It leads to increase in primary deficit. Select the correct answer using the code given below.?Solution (d)

Fiscal deficit means Government need to borrow from the market which leads to crowding-out of funding for private players.

Fiscal deficit is inflationary and not deflationary as it leads to borrowing of money without any asset created for that.

Fiscal deficit adds to borrowings of the government and hence leads to increase in interest liabilities and thus adds to primary deficit.

#4 Which of the following sets of figures can be found in the Budget presented annually by the Government of India? 1. Actual figures for the preceding year 2. Actual figures for the current year 3. Revised figures for the current year 4. Budget estimates for the following year. Select the correct answer using the code given below.?Solution (b)

The Budget of the Government of India, for any year, gives a complete picture of the estimated receipts and expenditures of the Government for that year on the basis of the budget figures of the two previous years.Every budget, for instance, gives three sets of figures:
· actual figures for preceding year
· budget and revised figures for the current year
· budget estimates for the following year
For instance, the budget estimate for the year 2008-09 2017-18 contains:
· ‘actuals’ or accounts for the year 2015-16
· budget and revised figures for the year 2016-17
· budget estimates for 2017-18.

#5 Consider the following statements regarding Domestic Systemically Important Banks (D-SIBs): 1. These are banks whose failure would have an impact on the entire domestic financial system. 2. Banks are designated as D-SIBs by the RBI. Which of the statements given above is/are correct??Solution (c)

Domestic systemically important banks (D-SIBs) are banks whose failure would have an impact on the domestic financial system or real economy. The rationale for imposing capital buffers on systemically important banks (SIBs) is at least twofold. First, capital buffers reduce the probability of failure of SIBs, which may be desirable given the high economic and social cost of their failure. Second, capital buffers require SIBs to internalize externalities they impose on the financial system, and the buffers may provide incentives for SIBs to reduce their systemic importance.

RBI discloses the names of banks designated as D-SIBs every year in August starting August 2015. RBI chooses these banks as D-SIBs primarily because of their size. The RBI uses a methodology to determine whether a bank is systemically important or not on the basis of its size, inter-connectedness, substitutability and complexity. Such banks have been termed as domestic-systemically important banks (D-SIB). The Reserve Bank of India announced State Bank of India and ICICI Bank Ltd as Domestic Systemically Important Banks (D-SIBs) & subjected them to higher levels of supervision to prevent disruption to financial services in event of any failure.



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