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Economics Test -03

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#1 Consider the following statements regarding Debt of India? 1. External debt includes both the government debt and private debt. 2. NRI deposit is not a part of external debt. 3. External debt has to be paid back in the currency in which it is borrowed but can be done in SDR also. Which of the following statements is/are INCORRECT ??Solution (d)

India’s external debt accounts for commercial borrowings, short term trade credits, and rupee denominated Non-resident Indian deposits.

External debt includes both the government and private debt.

The strategy of the government in external debt management consists of emphasis on raising sovereign loans on concessional terms with longer maturities, regulating the levels of commercial borrowing and their end-use, rationalizing interest rates on NRI deposits, monitoring short term debt and encouraging non-debt creating capital flows.

External debt payment can be done in USD, INR, YEN and EURO, NOT in SDR.

Internal debt includes loans raised by the government in the open market through treasury bills and government securities, special securities issued to the RBI and most importantly various bonds like the oil bonds, fertilizer bonds etc.

  • Internal debt is that part of the total debt that is owed to lenders within the country.
  • It is the money the government borrows from its own citizens.
  • The government borrows by issuing the Government Bonds and T-Bills (Treasury Bills).
  • It also includes the Market borrowings by the government.
  • The government bonds and T-Bills are traded in the market which is also known as Gilt Market.
  • When government borrows from the domestic sources, the increase in inflation is less in comparison to simply printing the money.
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#2 With reference to the ‘Cess’, consider the following statements: 1. It is a type of tax that is levied to fulfil a specific purpose. 2. The cess collected goes to the Consolidated Fund of India. Select the correct answer using the code given below?Solution (b)

  • A cess is a levy for a specific purpose which may bear the characteristics of a tax or a fee.
  • The quintessential feature of a cess is that it is levied for a ‘specific purpose’ and the proceeds are earmarked as such.
  • Under Article 270 of the Constitution, a cess tax has special privilege as the proceeds can be retained exclusively by the Union and need not be shared with States.
  • The object of granting this special status is to ensure expenditure for a specific purpose, as is evident from the Fourth Finance Commission Report. 
  • This is a tax on tax, levied by the government for a specific purpose.
  • All the taxes collected by the government usually go into the Consolidated Fund of India (CFI) which can be spent on any legitimate activity.
  • But the collections from a cess are required to be kept outside of the CFI to be spent only on the specific purpose for which it was levied.
  • Few examples are- Education cess, Krishi Kalyan cess and infrastructure cess, Swachh Bharat cess (SBC) ext.

 

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#3 Consider the following statements about Balance of Payment? 1. Balance of payment is an overall statement of a country’s economic transaction with the rest of the world over a time period. 2. The ” balance of payments ” data includes actual payments made and received by an economy. 3. Balance of Payment covers all trades conducted by both the private and public sectors. Which of the following above statement(s) is/are correct??Solution (a)

  • The “balance of payments” data is not concerned with actual payments made and received by an economy, but rather with transactions.
  • It involves both capital and current account.
  • India’s Balance of Payment varies from being surplus to deficit.
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#4 Which of the following will add to the foreign exchange reserve of RBI? 1. Remittances 2. Huge Imports 3. High Inflation. Select the appropriate code:?Solution (c)

  • Only remittances will add to foreign exchange reserves as NRIs will send the money in dollars or other foreign currencies.
  • Huge imports will drain our foreign currencies instead.
  • Cheap money policy will increase the supply of rupee in comparison to dollars thus causing depreciation and boosting the exports.
  • High inflation will rather attract cheap imports causing the foreign exchange to decline.
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#5 Consider the following statements about taxation system in India? 1. Income Tax is a both direct and progressive tax. 2. GST has subsumed both direct and indirect taxes applicable in Centre and States. Which of the above statements is/are correct??Solution (a)

  • In progressive taxation, the tax liability increases with individual or entity income.
  • This is based on principle of “ability to pay”.
  • Under this system, lowest income people are generally exempted while highest income people pay highest taxes.
  • Income Tax is thus an example of progressive tax.
  • Progressive taxation results in redistribution of income from rich to poor.

GST covers only indirect taxes.

Key examples of direct taxes are

· Income tax

· Wealth tax
· Corporation tax

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