Economics Test -05



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#1 Which of the following statement is correct regarding the Primary deficit??Solution (c)

Primary deficit is one of the parts of fiscal deficit. While fiscal deficit is the difference between total revenue and expenditure, primary deficit can be arrived by deducting interest payment from fiscal deficit. Interest payment is the payment that a government makes on its borrowings to the creditors.

· Primary deficit = government spending – tax revenues
· Fiscal deficit = primary deficit + interest payments on borrowings.

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#2 Consider the following: 1. Current Account Deficit 2. Primary Deficit 3. Gross Fiscal Deficit. Which of the given above is/ are considered as Fiscal Indicators??Solution (b)

Fiscal Indicators: Gross Fiscal Deficit, Revenue Deficit, Primary Deficit.

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#3 Consider the following components 1. Treasury Bills 2. Small savings and provident funds 3. Loans from International Monetary Fund (IMF). Which of the components are included into the internal debt of the Union Government??Solution (a)

Loans from the external countries or multilateral organization become part of external debt.

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#4 Consider the following statements regarding Cash Reserve Ratio 1. It is the ratio of the total deposits of a bank with the Reserve Bank of India in cash form on monthly basis. 2. Banks doesn’t earn interest rate on their deposits with Reserve Bank of India. 3. Banks can lend this portion of money to borrowers. Which of the statements given above are correct??Solution (b)

  • Banks don’t earn interest rate on their deposits with RESERVE BANK OF INDIA.
  • It is the percentage of cash deposits that banks need to keep with the Reserve Bank of India on a fortnightly basis.
  • Presently the CRR is 4% that is, for every Rs. 100 deposited in the bank; bank will need to deposit Rs 4 with RBI.
  • So, it has Rs. 96 to lend.
  • Increasing the CRR also means banks have lesser money to lend.
  • In the absence of enough liquidity in the financial system, banks have to increase their lending rates to decrease the demand for money.
  • On the other hand, a cut in CRR infuses more liquidity in the market and banks are pressurized to lend these funds.
  • The lending interest rates to increase the demand for money.
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#5 Budget deficit can be reduced by: 1. decreasing the direct taxes 2. implementation of GST 3. increasing expenditure on welfare programmes. Select the correct answer using the code given below.?Solution (d)

When a government spends more than it collects by way of revenue, it incurs a budget deficit.

Decrease in taxes decreases the revenue base of the government. So, it would increase its deficit further rather than decreasing it.

The implementation of GST will rationalize the tax structure and increase the tax revenue of the government. So, this will decrease the deficit.

By increasing expenditure on welfare schemes government will have to spend more money out of its budget which will increase the deficit and not reduce it.

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