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Prelims-IAS –ECONOMICS MCQ Ans-14

1..Which of the following statements regarding the buoyancy of the tax system is correct?

(a)  It is the responsiveness of tax revenues to changes in the tax rate and in the tax base in relation to the GDP.
(b)  It is the ratio of percentage change in tax revenue to percentage change in GDP, without any changes in the tax rate or tax base.
(c)  Under this system, government’s revenue collection, mainly from direct tax, increases without increasing the tax rate.

(d)  Both the statements (a) and (c) given above are correct.

  • ANS-A
  • Buoyancy of the tax system: It is the responsiveness of tax revenues to changes in the tax rate and in the tax base in relation to the GDP.
  • It is a measure of both the soundness of the tax bases and the effectiveness of tax changes in terms of revenue collection.
  • Hence, tax buoyancy shows the association between economy’s performance and the government’s tax revenue. It indicates realization of tax revenue is highly sensitive to GDP growth.
  • Under this system, government’s direct tax revenue also increases without increasing the tax rate, provided national income increases.
  • Therefore, it is a useful concept for measuring the performance of both tax policy and tax administration over time.
  • Tax Elasticity: It is the ratio of percentage change in tax revenue to percentage change in GDP, without any changes in the tax rate or tax base.
  • However, instead of tax buoyancy, it is tax elasticity that is more relevant factor for revenue forecasting purposes.
  • The tax elasticity coefficient gives an indication to policymakers of whether tax revenues will rise at the same pace as the national income.

2.. In Economic terminology, the term “Transfer Payments” is used for:
(a)  Payments made in lieu of imported goods and services in an economy.
(b)  Subsidies by government which are directly credited to the beneficiary accounts.
(c)  Payments made by government for which there is no economic activity involved like scholarship and pension.

(d)  Transfer of money from remittances taken as a whole for an economy.

  • ANS-C
  • Transfer Payment refers to payments made by government to individuals for which there is no economic activity is produced in return by these individuals.
  • Examples of transfer are scholarship, pension etc.

3..Consider the following statements regarding deficit financing in India :

  1. Money for deficit financing can be generated by printing more currency.
  2. Borrowing from domestic banks and market preferred over borrowing from external market because repayment of borrowing from external market depend on exchange rate which is risky.
  3. Aids from IMF and other institutions are not generally used for deficit financing.

Which of the options given above is/are correct?
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

  • ANS-A
  • Money for deficit financing can be generated by printing more currency but it is not advisable as printing more currency increases inflation in economy. 
  • Borrowing from external market preferred over borrowing from domestic market due to crowding out effect.
  • If the government itself goes on borrowing from the banks and market of the country than money available for industry to invest will reduce. So external borrowings are preferred over internal borrowing.
  • External Aids are best source for deficit financing.

4..Consider the following statements: The Indian rupee is fully convertible

  1. In respect of Current Account of Balance of Payment
  2. In respect of Capital Account of Balance of Payment
  3. Into gold

Which of the statements is/are correct?

(a) 1 only
(b) 3 only
(c) 1 and 2 only

(d) 1, 2 and 3

  • ANS-A
  • The Indian rupee is fully convertible in respect of current account of Balance of payment.
  • Tarapore Committee recommended for full convertibility of rupee i.e. both current and capital account convertibility.

5..Consider the following statements regarding Budgeting in India:

  1. Revenue expenditure reduces the assets of the government while capital expenditure leads to reduction in capital stock.
  2. Revenue receipts do not impact liability status of the government where as capital receipts add to the liabilities.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

  • ANS-B
  • Revenue expenditure does not cause either increase or decrease the assets of Government because such expenditures are of ‘consumptive’ nature and do not involve creation of productive assets i.e. they are either used in running of a productive process.
  • Whereas, Capital expenditure are asset creating in nature, like on construction of infrastructure adds to the capital stock. 
  • In case of receipts, revenue receipts do not impact assets or liabilities whereas capital receipts are for investment purposes and are supposed to be spent on plan-development by a government. Thus add to the liabilities of the government. 

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