Indian Economy Mixed Quiz: Set 49

The correct answer is C. Nominal GDP values each year's output at that year's own (current) prices, not at constant prices, so this statement is not correct.

GDP is the money value of all final goods and services produced within a country in a year. Nominal GDP uses current prices, so it can rise simply because prices have gone up. Real GDP removes this effect by valuing the output of every year at the prices of one base year, which shows the true change in production. The ratio of nominal to real GDP, multiplied by 100, gives the GDP deflator, a broad measure of inflation.

A is correct: valuing different years at common, or base-year, prices is exactly how real GDP is worked out.

B is correct: potential GDP is the output the economy could produce with full employment of labour and capital.

D is correct: real GDP divided by population gives real GDP per capita, a common measure of living standards.

Exam tip: nominal GDP = current prices; real GDP = constant (base-year) prices; deflator = nominal ÷ real × 100.

The correct answer is B, foreign territory. The law deems a special economic zone to be outside the customs territory of India for trade operations, duties and tariffs, which is why a supply from the rest of the country into the zone is an export and a sale from the zone into the rest of the country is an import attracting customs duty. A is wrong because the domestic tariff area is defined as the part of India outside the zones, so a zone is precisely what the domestic tariff area is not. C is wrong because a union territory is a unit of the political map administered by the Union, and a zone has no such constitutional status. D is wrong because a bonded warehouse only stores goods on which duty is deferred, and it is licensed under the customs law rather than deemed foreign territory.

The correct answer is A, 1 and 2 only. The real sector produces actual goods and services, so harvesting crops and making cloth belong to it, while lending and issuing bonds belong to the financial sector.

Economists divide an economy into the real sector and the financial sector. The real sector covers the production, distribution and consumption of goods and services: agriculture, mining, manufacturing, construction and trade. Its output is measured in physical terms and adds directly to GDP. The financial sector deals with money and claims on money, such as bank loans, shares, bonds and insurance, and its job is to move savings to those who invest in the real sector. Rupee-denominated bonds sold abroad, popularly called "masala bonds", are a financial instrument used to raise funds.

B is wrong: it includes activities 3 and 4, which are financial, and leaves out farming.

C is wrong: it includes the two financial activities and leaves out textile manufacturing.

D is wrong: bank lending and bond issues are not real-sector activities.

Exam tip: real sector = goods and services produced (farm, factory, trade); financial sector = money, credit, bonds and shares.

The correct answer is C, 2021. Infrastructure needs loans of twenty years or more, while a commercial bank takes deposits for a few years, and the mismatch between the two had crippled infrastructure lending after earlier development finance institutions were converted into banks. Parliament therefore passed the National Bank for Financing Infrastructure and Development Act in 2021, setting up NaBFID as a development financial institution with paid-up capital of twenty thousand crore rupees and a grant of five thousand crore rupees from the Central Government, with the mandate to lend long term and to deepen the bond and derivatives market for infrastructure. A and B are the years of other reforms and are offered only as near misses, and D is later than the Act.

The correct answer is C, 9 percent. The Approach Paper to the Twelfth Five Year Plan, released in 2011, aimed at average GDP growth of 9% a year for 2012–17.

The Twelfth Plan carried the theme "Faster, Sustainable and More Inclusive Growth". The Planning Commission's Approach Paper, approved by the National Development Council in October 2011, set the 9% target, up from the 8.2% achieved in the Eleventh Plan. Because the economy slowed sharply in 2012, the final Plan document approved in December 2012 cut the target to 8%. The Twelfth Plan was the last Five Year Plan, as the Planning Commission was replaced by NITI Aayog on 1 January 2015.

A is wrong: 7% was below even the growth recorded in the Eleventh Plan and was never the target.

B is wrong: 8% was the revised target of the final Plan document, not of the Approach Paper.

D is wrong: 10% was considered as a high-growth scenario but not adopted as the target.

Exam tip: Twelfth Plan: Approach Paper 9%, final document 8%; last plan before NITI Aayog.

The correct answer is C, Mahila Samriddhi Yojna. It is the micro-finance scheme under which women borrow small sums at a concessional rate of interest, so the rebate in interest is built into the scheme itself. It is run by the National Backward Classes Finance and Development Corporation under the Ministry of Social Justice and Empowerment, and the money reaches women through State Channelising Agencies and self-help groups, mostly for petty trade and self-employment. A parallel scheme is run for Scheduled Caste women by the National Scheduled Castes Finance and Development Corporation. Option A is wrong because the National Maternity Benefit Scheme paid a one-time cash grant to poor pregnant women and was later merged into Janani Suraksha Yojana. Option B is wrong because it is a pilot for social security cover, not a credit scheme for women. Option D is wrong because Raj Rajeshwari Mahila Kalyan Yojana is a personal accident insurance cover for women, not a loan. Exam tip: Mahila Samriddhi Yojana means micro-credit for women at a concessional interest rate, run by NBCFDC.

The correct answer is B, Collateral. Collateral is an asset that the borrower pledges to the lender as security until the loan is repaid.

When a bank lends money it wants protection against default. So the borrower offers an asset he or she owns, such as land, a house, a vehicle, gold or deposits, and the lender keeps a claim over it. If the loan is not repaid, the lender has the right to sell the collateral to recover the money. The NCERT economics textbook lists collateral as one of the 'terms of credit', along with the interest rate, documentation and the mode of repayment. People without collateral, such as poor rural households, therefore find it hard to get bank loans.

A is wrong: a cheque is a written order to a bank to pay money from an account, not a security for a loan.

C is wrong: a guarantee card is a product warranty given by a seller, unrelated to loans.

D is wrong: a bond is a debt instrument through which a government or company borrows from investors.

Exam tip: collateral is one of the four terms of credit: interest rate, collateral, documentation and mode of repayment.

The correct answer is A, Marginal product curve. The marginal product of a variable factor first rises, reaches a peak and then falls, so the curve traced out is an inverted U. This is the law of variable proportions at work. In the first stage the extra units of labour get plenty of the fixed factor to work with and each one adds more to output than the last; at the peak the fixed factor is being used best; after that each extra worker has too little of the fixed factor, so the addition to output keeps shrinking and can even turn negative. B is wrong because the short run marginal cost curve is U-shaped, falling and then rising, as cost moves opposite to product. C is wrong because the average variable cost curve is U-shaped for the same reason. D is wrong because the long run average cost curve is a flatter U-shaped envelope of the short run curves. Exam tip: product curves are inverted U, cost curves are U.

The correct answer is A, 1 only. The MPC fixes the policy repo rate, the RBI's benchmark rate, but it has six members and is chaired by the RBI Governor.

The Monetary Policy Committee was set up under Section 45ZB of the RBI Act, 1934, added by the Finance Act, 2016. It decides the policy repo rate needed to keep inflation within the target the government sets, currently 4% CPI inflation with a band of 2% to 6%. It has six members: the RBI Governor as chairperson, a Deputy Governor, one other RBI officer nominated by the central board, and three external members appointed by the Central Government for four years. Each member has one vote, and the Governor has a casting vote in case of a tie.

B is wrong: the MPC has six members, not twelve, and external members serve four-year terms; it is not reconstituted every year.

C is wrong: the RBI Governor, not the Finance Minister, chairs the MPC.

D is wrong: both statements 2 and 3 are false.

Exam tip: MPC = 6 members, 3 from RBI and 3 external, Governor in the chair with a casting vote; it sets the repo rate.

The correct answer is C, Refinery products, with a weight of 28.04 per cent, more than a quarter of the whole index. Refining turns crude oil into petrol, diesel, kerosene, naphtha and feedstock for chemicals, and the value of that output is so large that a shutdown at a big refinery shows up in the national figure. Option A, electricity, comes next at 19.85 per cent, and option B, steel, follows at 17.92 per cent, so all three options are near the top and only their order distinguishes them. Option D, coal, carries 10.33 per cent and stands fourth. The full descending order worth memorising is refinery products, electricity, steel, coal, crude oil at 8.98, natural gas at 6.88, cement at 5.37 and fertilisers at 2.63 per cent, and the eight weights add up to a hundred.

The correct answer is D, creation of new money to finance a budget deficit. Printing new money adds fresh purchasing power to the economy without any matching rise in goods, so it pushes prices up the most.

When the government covers its deficit by borrowing from the central bank, which creates new money, the money supply grows directly. This method is called deficit financing or monetisation of the deficit. In India, the practice of automatic monetisation through ad hoc treasury bills was ended by an agreement between the government and the RBI in 1997, and the FRBM Act later barred the RBI from buying government securities in the primary market except in special cases.

A is wrong: repaying public debt returns money already in the system and tends to be neutral or even disinflationary.

B is wrong: borrowing from the public only moves existing savings to the government, so total money supply does not rise.

C is wrong: borrowing from commercial banks can expand credit somewhat, but far less than printing new money.

Exam tip: inflationary effect of deficit financing, from most to least: new money creation, bank borrowing, borrowing from the public.

The correct answer is C, Customs union. A customs union removes duties on trade among its members and, in addition, requires every member to levy the same tariff on goods coming from outside the union, which is the common external tariff. Option A is wrong because a preferential trade agreement only lowers duties on a listed set of products and leaves external tariffs entirely to each country. Option B is wrong because a free trade area removes internal duties but each member keeps its own external tariff; this is the single commonest confusion in the topic. Option D is wrong because an economic union is a higher stage that already includes a common external tariff but adds the free movement of labour and capital and common economic policies, so the defining feature asked about belongs to the customs union stage.

The correct answer is A, I and II only. Capital receipts either add to liabilities or reduce assets, and borrowings and disinvestment are typical examples; interest received is a revenue receipt.

In the Union Budget, a receipt is a capital receipt if it creates a liability (as with market borrowings, small savings and other debt, which must be repaid) or reduces an asset (as with disinvestment, where the government sells part of its stake in public sector enterprises, or recovery of loans it gave earlier). Revenue receipts do neither: tax revenue and non-tax revenue such as interest received, dividends, profits and fees simply come in. So interest earned on loans given by the government is non-tax revenue and creates no liability.

B is wrong: it includes statement III, which is false.

C is wrong: it includes the false statement III and leaves out the true statement II.

D is wrong: statement III is false, so all three cannot be correct.

Exam tip: capital receipt = liability up or asset down (borrowing, disinvestment, loan recovery); interest and dividends = revenue receipts.

The correct answer is A, Any privately held startup company with a value of over $1 billion. A unicorn is a startup that is not listed on the stock market and is valued at more than one billion US dollars. The term was coined in 2013 by the American venture capitalist Aileen Lee, who picked the mythical animal because such startups were then very rare. Related words follow the same pattern: a decacorn is valued at over 10 billion dollars and a hectocorn at over 100 billion dollars. Once a unicorn lists its shares through an IPO, it becomes a listed company and, strictly speaking, is no longer called a unicorn. B is wrong, because merging one public sector company with another, as done with several public sector banks, is consolidation. C is wrong, because selling a loss-making state-owned company is privatisation or disinvestment. D is wrong, because a foreign firm working with an Indian partner forms a joint venture. Exam tip: unicorn, private startup, over 1 billion dollars; decacorn, over 10 billion.

The correct answer is D, Loss of revenue to the State Exchequer due to tax evasion. Black money is, by definition, income hidden from the tax authorities, so its most direct and serious effect is the tax the government never receives.

Black money is income on which tax due has not been paid, whether it is earned legally and concealed or earned through illegal activity. Every rupee kept outside the books is a rupee of tax lost, which reduces what the government can spend on infrastructure, health and welfare, widens the fiscal deficit and pushes up the tax burden on honest taxpayers. This is why measures such as the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, and the Benami Transactions (Prohibition) Amendment Act, 2016, focus on taxing and penalising hidden income.

A is wrong: investment in real estate is one way black money is used, but it is a consequence, not the main worry.

B is wrong: buying gold and jewellery is another use of black money, again secondary to the revenue loss.

C is wrong: political funding is a concern, but regionalism is not a recognised effect of black money.

Exam tip: black money = untaxed income; the core harm is revenue loss to the exchequer.

The correct answer is A, agriculture. On a small family holding every member of the household may work on the land even though the work needs far fewer hands; if some of them were withdrawn, total output would not fall. Their labour is therefore adding nothing, which is what disguised or hidden unemployment means.

Option B, information technology, and option C, banking, are organised service activities where posts are sanctioned and surplus workers are not carried in this way. Option D, mining, is organised and capital intensive for the most part. The other forms of unemployment are worth learning alongside: seasonal unemployment, where work exists only in certain months, which also afflicts agriculture, and open unemployment, where a person willing to work at the going wage finds none at all. Papers ask all three definitions in rotation.

The correct answer is C, Controller General of Accounts. PFMS is run by the office of the Controller General of Accounts (CGA) in the Department of Expenditure, Ministry of Finance.

PFMS began in 2009 as the Central Plan Scheme Monitoring System, built to track funds released under central schemes. It grew into a single platform for payment, accounting and reporting of government money. It links the accounts of the Centre, states and implementing agencies with banks, so that money can be followed down to the last beneficiary, and it is the backbone of Direct Benefit Transfer payments. The CGA is the principal accounting adviser to the Union government.

A is wrong: the Department of Financial Services handles banks, insurance and pension policy, not government accounting software.

B is wrong: the Institute of Government Accounts and Finance (INGAF) is the CGA's training institute, not the owner of PFMS.

D is wrong: the National Institute of Financial Management at Faridabad trains officers in finance; it does not run PFMS.

Exam tip: PFMS = Controller General of Accounts, Department of Expenditure; started 2009 as CPSMS.

The correct answer is C. The whole point of comparative advantage is that a country gains from trade even when it has no absolute advantage in any good.

David Ricardo showed that what matters is opportunity cost. In his example, Portugal could make both wine and cloth more cheaply than England, yet both countries gained when Portugal specialised in wine and England in cloth, because each gave up less to produce that good. This improved on Adam Smith's idea of absolute advantage, which could not explain trade between a highly efficient country and a less efficient one.

A is a correct statement: the theory is credited to the British economist David Ricardo.

B is a correct statement: he set it out in On the Principles of Political Economy and Taxation, first published in 1817.

D is a correct statement: specialising in the good with the lower opportunity cost and trading lets both nations consume more.

Exam tip: Adam Smith = absolute advantage (1776); David Ricardo = comparative advantage (1817).

The correct answer is A, 1 only. Devaluation makes domestic goods cheaper abroad, so export competitiveness improves, but it lowers the external value of the currency and does not necessarily improve the trade balance.

Devaluation is a deliberate cut in the official exchange value of a currency under a fixed or managed exchange rate; India devalued the rupee in 1966 and in 1991. After it, each unit of foreign currency buys more domestic currency, so the foreign-currency price of exports falls and the domestic price of imports rises. Whether the trade balance improves depends on how strongly export and import volumes respond (the Marshall-Lerner condition), and in the short run it often worsens first, a pattern known as the J-curve.

B is wrong: statement 2 is the opposite of what happens, as devaluation reduces the foreign value of the domestic currency.

C is wrong: improvement in the trade balance is not guaranteed.

D is wrong: both statements 2 and 3 are false.

Exam tip: devaluation = cheaper exports, dearer imports; trade balance improves only if demand is elastic (Marshall-Lerner), J-curve in the short run.

The correct answer is B, 1 and 2. Retail investors can bid for government securities in primary auctions, and NDS-OM is the RBI's trading platform for them, but CDSL was not promoted by the RBI.

Statement 1 is correct: under the non-competitive bidding scheme, retail investors can buy treasury bills and dated Government of India securities in primary auctions through stock exchanges and brokers, holding them in a demat account. The RBI Retail Direct scheme of 2021 also lets them open a gilt account with the RBI directly.

Statement 2 is correct: the Negotiated Dealing System-Order Matching (NDS-OM) is an anonymous, screen-based electronic platform owned by the RBI for secondary-market trading in government securities, run with the Clearing Corporation of India.

Statement 3 is wrong: Central Depository Services (India) Ltd. was promoted by BSE together with banks such as State Bank of India, Bank of India, Bank of Baroda and HDFC Bank. The RBI is not a promoter.

So A leaves out statement 2, while C and D include the false statement 3.

Exam tip: India's two depositories are NSDL (promoted by NSE, IDBI and UTI) and CDSL (promoted by BSE with banks).