Economics Mock Test - 11

The correct answer is Scarcity

Key Points

• When faced with limited resources, we have to make choices.
• Economics is the study of how humans make choices under conditions of scarcity.
• These decisions can be made by individuals, families, businesses, or societies.
• The resources that we value, time, money, labor, tools, land, and raw materials, exist in limited supply.
• There are simply never enough resources to meet all our needs and desires. This condition is known as scarcity.
• At any moment in time, there is a finite amount of resources available. Even when the number of resources is very large, it’s limited.
• For example, the labor force in the United States contained more than 158 million workers, that’s a lot, but it’s not infinite.
• Because these resources are limited, so are the numbers of goods and services we can produce with them. 

The correct answer is Current Account Deficit + Fiscal Deficit.

Key Points

• The twin deficit, or double deficit, occurs when a nation has both a  current account deficit and a fiscal deficit.
• This means the country's economy is importing more than it is exporting, and the country's government is spending more money than it is generating.
• Fiscal Deficit - The fiscal deficit is the difference between the government's total expenditure and its total receipts.
• As per the technical definition - Fiscal deficit = Budgetary Deficit + Borrowings and other liabilities of the government.
• Current Account Deficit - The current account measures the flow of goods, services, and investment into and out of the country.
• There is a deficit in current account if the value of goods and services imported exceeds the value of those exported.

• Progressive tax is a type of tax which is high for high-income earners and less for low-income earners.
• Regressive Tax is opposite to the progressive tax, that is, the percentage of tax is high for low-income earners (considering their income) compared to high-income earners.
• A proportional tax is a tax that is same for all the taxpayers irrespective of their income.

The correct answer is The Finance Ministry.

Key Points

• The controlling authority of government expenditure is the Finance Ministry.
• The Ministry comprises of the five Departments namely:
  • Department of Economic Affairs
  • Department of Expenditure
  • Department of Revenue
  • Department of Investment and Public Asset Management
  • Department of Financial Services

Additional Information

• The Reserve Bank of India:
  • The Reserve Bank's affairs are governed by a central board of directors.
  • The board is appointed by the Government of India in keeping with the Reserve Bank of India Act.
  • The directors are appointed/nominated for a period of four years.
  • It implements and monitors the monetary policy and ensures price stability while keeping in mind the objective of growth.
• The Planning Commission:
  • Planning Commission (now NITI Aayog) defines economic planning as the utilisation of a country’s resources for developmental activities in accordance with national priorities.
  • It is a consciously and judiciously carried out process for optimum utilisation of existing resources in order to fulfil some well-defined objectives.
  • After independence in 1950, the Planning Commission was set up under the chairmanship of Pt Jawaharlal Nehru.
  • It was to formulate plans for the economic development of the country on the basis of the available physical, capital and human resources.
  • The Planning Commission is essentially a non-political and non-constitutional advisory body, which makes recommendations to the government.
  • It was set up through an executive order of the Union Government on 15th March 1950.
• The Finance Commission:
  • The Finance Commission (FC) is a constitutional body, that determines the method and formula for distributing the tax proceeds between the Centre and states, and among the states as per the constitutional arrangement and present requirements.
  • Under Article 280 of the Constitution, the President of India is required to constitute a Finance Commission at an interval of five years or earlier.
  • The 15th Finance Commission was constituted by the President of India in November 2017, under the chairmanship of NK Singh.
  • Its recommendations will cover a period of five years from the year 2021-22 to 2025-26.

The correct answer is Central Statistical Organisation.

National income is the total market value of production in a country’s economy during a year. The national income of a country can be measured by three alternative methods: (i) Product Method (ii) Income Method, and (iii) Expenditure Method.

In India, Central Statistical Organisation (1949) now renamed as Central Statistical Office (CSO) has been formulating National Income.

Central Statistical Office was set-up in 1949. It is one of the two wings of the National Statistical Organisation (NSO), along with the National Sample Survey Office (NSSO), responsible for the coordination of statistical activities in the country and for evolving and maintaining statistical standards
Its activities include a compilation of national accounts, the conduct of an annual survey of industries and economic census, a compilation of index of industrial production, as well as consumer price indices.
It also deals with various social statistics, training, international cooperation, industrial classification etc.

• The Reserve Bank of India was established on April 1, 1935, in accordance with the provisions of the Reserve Bank of India Act, 1934.
• The Central Office of the Reserve Bank was initially established in Kolkata but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated.
• Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India.
• Main functions of the RBI- Monopoly of Note Issue, Banker’s Bank, Banker to the Government, Controller of Credit and Exchange Management and Control.
• Planning Commission was established by an executive decision of the Government of India in 1950. The Planning Commission is a non-constitutional and non-statutory body and is responsible to formulate five years plan for social and economic development in India.

The correct answer is Budget

Key Points

• A budget is the type of plan which is time-bound and linked with measurable outcomes.
• A budget is a quantitative statement for a definite future period of time for the purpose of obtaining a given objective.
• It is also a statement that reflects the policy of that particular period.
•  Financial planning includes both short-term as well as long-term planning.
• Long-term planning relates to long-term growth and investment.
• It focuses on capital expenditure programs.
• Short-term planning covers a short-term financial plan called budget

The correct answer is option 3 i.e. Annual Financial Statement.

The Budget in constitution refers to as Annual Financial Statement. Article 112 deals with the annual financial statement.

• Budget is a statement covering estimated expenditure and receipts for the Government of India in a financial year.
• Other than that budget contains estimated revenue and capital receipts, ways to increase revenues, details for receipts and expenditure of closing financial year and economic and financial policy for the upcoming year.
• Earlier Government of India was having two budget, railway and general budget. It was separated in 1921.
• In 2016, Modi government merged the railway budget to the general budget and scraped the 92 years old practices.

The correct answer is a change in price

Key Points

• Change in quantity demand or movement along the demand curve refers to the situation where there is a change in the amount of demand of a commodity (increase or decrease) due to a change in its price
• This is while other factors affecting demand/determinants of demand (like income, taste and preference, price of related goods, advertisement, expected future price, etc.) remain constant.

The correct answer is Δs/Δy.

Key Points

• The marginal propensity to save
  • The marginal propensity to save (MPS) refers to the proportion of an aggregate raise in income that a consumer saves rather than spends on the consumption of goods and services.
  • Put differently, the marginal propensity to save is the proportion of each added money of income that is saved rather than spent.
  • MPS is a component of Keynesian macroeconomic theory and is calculated as the change in savings divided by the change in income, or as the complement of the marginal propensity to consume (MPC).
  • Marginal propensity to save is the proportion of an increase in income that gets saved instead of spent on consumption.
  • MPS varies by income level. MPS is typically higher at higher incomes.
  • MPS helps determine the Keynesian multiplier, which describes the effect of increased investment or government spending as an economic stimulus.
• Formula: MPS= dS/dY                         
  • where: MPS = marginal propensity to save
  • dS = change in savings
  • dY = change in income  

The correct answer is rate of change of consumption as income changes​.

Key Points

• Marginal propensity to consume refers to the change in consumption with respect to the change in income.
• When there is an increase in income it reflects in better purchasing power of a consumer.
• The change in income not only affects consumption but also induces changes in savings.
• The proportion of consumption depends upon the income levels and corresponding necessities of the consumer.
• It is used widely in economics to calculate the required additional production for the increased demand(consumption).

Additional Information

• The complement of the MPC( Marginal propensity to Consume) is Marginal Propensity to Save(MPS).
• They both reflect the increase in income.

• Marginal Propensity To Consume (MPC)- 

  In economics, the marginal propensity to consume (MPC) is defined as the proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services, as opposed to saving it. The marginal propensity to consume is a component of Keynesian macroeconomic theory and is calculated as the change in consumption divided by the change in income. 

  The marginal propensity to consume is equal to ΔC / ΔY, where ΔC is the change in consumption, and ΔY is the change in income. If consumption increases by 80 cents for each additional dollar of income, then MPC is equal to 0.8 / 1 = 0.8.

The correct answer is Trading in securities by RBI.

• An open market operation is an activity undertaken by the central bank to give or take liquidity in the country's currency.

Key Points

• It is given or taken from the bank or group of banks.
• In this method, the Central bank buys or sells government bonds in the open market.
• To reduce credit in the market Reserve Bank of India sells government securities thus reducing the supply of money in the market so there will be less money in the hands of commercial banks and the common public.

The correct answer is Tax on profit from the sale of a capital asset during a year.

• A capital gains tax (CGT) is a tax on the profit realized on the sale of a non-inventory asset.
• The most common capital gains are realized from the sale of stocks, bonds, precious metals, real estate, and property.

Additional Information

Types of Taxes:

• There are different types of tax as follows:
• Direct Tax:
  • It comprises the tax which we pay directly to the government. These taxes are levied on an individual. Different types of Direct taxes are:
    • Income Tax
    • Gift Tax
    • Wealth Tax
    • Capital Gains Tax
    • Securities transaction tax
    • Corporate tax
• Indirect Tax: 
  • ​These taxes are not levied on an individual but on goods and services.
  • Various types of Indirect taxes are;-
    • Sales Tax
    • Services Tax
    • Goods and Services Tax
    • Value Added Tax
    • Customs Duty
    • Toll Tax 

Statutory liquidity ratio (SLR) is the reserve requirement that the commercial banks in India are required to maintain in the form of cash, gold reserves, government approved securities before providing credit to the customers.

The correct answer is Scheduled commercial banks will cut their lending rates.

Key Points

• Should the RBI reduce the statutory liquidity ratio by 50 basis points, then Scheduled commercial banks will cut their lending rates.
  • SLR is a mechanism used by RBI to regulate the liquidity of assets and requires the banks to invest a certain portion of their deposits in RBI-approved securities or gold.
  • When SLR is reduced, banks have more money to lend which may lead to a decrease in lending rates.
  • By changing the level of SLR, the Reserve Bank of India can increase or decrease bank credit expansion.
    • Ensuring the solvency of commercial banks.
  • By reducing the level of SLR, the RBI can increase liquidity with the commercial banks, resulting in increased investment.
  • This is done to fuel growth and demand.
• Hence, option 3 is correct. 

Additional Information

• SLR is used to control the bank's leverage for credit expansion.
• The Central Bank controls the liquidity in the Banking system with CRR.
• In the case of SLR, the securities are kept with the banks themselves, which they need to maintain in the form of liquid assets.
  • If the SLR increases, it restricts the bank's lending capacity and helps in controlling inflation by soaking the liquidity from the market.
• Consequently, banks will have less money available to lend, and they will charge higher interest rates on loans to keep up with their profit margin.

The correct answer is money multiplier.

• The ratio that relates the change in the money supply to a given change in the monetary base is called the money multiplier.

Key Points

• Money Multiplier:
  • It is the amount of Broad money that banks generate with each rupee of reserves or base money available with them. 
  • However, Reserves are the number of deposits that the RBI requires banks to hold and not to lend.
  • It tells how fast the money supply from bank lending will grow.
  • The higher the reserve ratio is, the fewer deposits will be available for lending, resulting in a smaller money multiplier and vice versa.
  • Thus, the higher the value money multiplier, the higher will be liquidity in the market and vice versa.

Additional Information

• Narrow money:
  • Narrow money is the most liquid part of the money supply because the demand deposits can be withdrawn anytime during banking hours. Hence, statement 2 is not correct.
• Broad money:
  • Broad money does not include interbank deposits. At the same time, time deposits of the public with the banks, including the cooperative banks are also included in Broad money.

The correct answer is ​Reserve Bank of India.

• Sterilization is a monetary action used by Reserve Bank of India in order to stem the negative effects emerging from capital inflows or outflows from a country's economy.
• Classical sterilization involves central banks conducting buy and sell operations in open markets.

Key Points

• To ease the threat of currency appreciation or inflation, central banks often attempt what is known as the "sterilization" of capital flows.
• In a successful sterilization operation, the domestic component of the monetary base (bank reserves plus currency) is reduced to offset the reserve inflow, at least temporarily. 

The correct answer is  RBI.

• Monetary policy in India is implemented by RBI.

Key Points

• The responsibility is mandated under the RBI act, 1934.
• Many instruments are used by RBI to control monetary policy.
• These instruments include reserved systems, bank rate policies, credit control, moral persuasion, etc.
• The flow of money is controlled by RBI through Repo and Reverse Repo rate.
• To control the flow of money RBI constantly changes these rates based on the market situation.

Risk is the probability that actual results will defer from expected results.

List - I	List - II
Foreign exchange risk	A change in the exchange rate will result in a change in the amount received in the local currency of a bill drawn in foreign currency, this risk is called foreign exchange risk. It refers to the financial risk arising from the fluctuations in the value of a base currency against the foreign currency. It can affect investors who trade in the international market, and businesses engaged in the trade of products or services to multiple countries.
Import risk	Risks associated while importing goods from a foreign country to the base country are known as import risks. Import of goods is associated with a number of risks like: Transport risk - associated with the loss of goods during transportation. Quality risk - associated with the final quality of the product. Delivery risk - when goods are not delivered on time. Exchange risk - due to change in the value of the currency.
Transaction risk	Transaction risk refers to a change in the cash flow of a foreign transaction settlement due to an unfavorable change in the exchange rate. Transaction risk is the exchange rate, or currency risk, associated with the time delay between entering into a trade and then settling it. The parties involved in this transaction can use hedging techniques to reduce the rate of transaction risk.
Monetary risk	Monetary risk, also known as financial risk, is the risk that involves financial loss to the firm. Monetary risks are risks faced in terms of handling finances of a business, such as debt load, defaulting on loans, or delay in delivery of goods. It generally arises due to losses and instability in the financial market caused by movements is currencies, stock prices, interest rates, etc.

Therefore, a change in the exchange rate will result in a change in the amount received in the local currency of a bill drawn in foreign currency, this risk is called foreign exchange risk.

The correct answer is option 3. 

Key Points

• Currency in circulation refers to the amount of cash–in the form of paper notes or coins–within a country that is physically used to conduct transactions between consumers and businesses.
• Currency in circulation is an important component of a country's money supply.
• Currency in circulation can also be thought of as currency in hand because it is the money used throughout a country's economy to buy goods and services.
• If there is too much money in circulation, both in terms of cash and credit, then the value of legal tender decreases.
  • This leads to "too much money chasing too few goods", causing demand-pull inflation.  
• An increase in bank deposits and the use of digital payments reduce the currency in circulation.
• Currency in circulation could further rise if the government were to introduce a cash transfer scheme. Hence, option 3 is the correct answer.
  • Although most of the Jan Dhan Yojana account holders have a debit card, previous years experience showed that the tendency among accountholders was to immediately withdraw funds from their account.
• An increase or decrease in population has no effect on the currency in circulation.

Additional Information

• Banknotes in circulation surged during the financial year 2020-21 as many people preferred to hold cash amid the disruption to normal life and economic activities due to the Covid-19 pandemic.
  • The currency circulation in India rose 10% in October 2020 since March 2020.

The percentage of cash required to be kept in reserves, vis-a-vis a bank's total deposits, is called the Cash Reserve Ratio. Cash Reserve Ratio ensures that a part of the bank’s deposit is with the Central Bank and is hence, secure. The Reserve Bank of India or RBI mandates that banks store a proportion of their deposits in the form of cash so that the same can be given to the bank’s customers if the need arises. The cash reserve is either stored in the bank’s vault or is sent to the RBI. Banks do not get any interest on the money that is with the RBI under the CRR requirements. Hence, option 1 is correct.

Statutory Liquidity Ratio or SLR is a minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold or other securities In the case of SLR, the securities are kept with the banks themselves, which they need to maintain in the form of liquid assets. Banks earn returns on money parked as SLR. Like CRR, SLR can also be used to mitigate bank crises. Hence, option 2 is correct.

The correct answer is A panic situation when the deposit holders start withdrawing cash from the banks.

Key Points

• Bank run
  • A panic situation when deposit holders start withdrawing cash from the banks Bank runs happen when a large number of people start making withdrawals from banks because they fear the institutions will run out of money. Hence, Option 3 is correct.
  • A bank run is typically the result of panic rather than true insolvency.
  • A bank run triggered by fear that pushes a bank into actual insolvency represents a classic example of a self-fulfilling prophecy.
  • The bank does risk default, as individuals keeping withdrawing funds.
  • So what begins as panic can eventually turn into a true default situation.
  • That's because most banks don't keep that much cash on hand in their branches.
  • In fact, most institutions have a set limit to how much they can store in their vaults each day.
  • These limits are set based on need and for security reasons.
  • Because banks typically keep only a small percentage of deposits as cash on hand, they must increase their cash position to meet the withdrawal demands of their customers.
  • One method a bank uses to increase cash on hand is to sell off its assets, sometimes at significantly lower prices than if it did not have to sell quickly.
  • Losses on the sale of assets at lower prices can cause a bank to become insolvent.
  • A bank panic occurs when multiple banks endure runs at the same time. 

The correct answer is FDI.

Key Points

• Foreign direct investment(FDI):
  • Foreign direct investment(FDI) refers to a situation where a foreign entity obtains ownership or control rights over the shares of a company in a country or establishes a company in that country.
  • Foreign direct investment(FDI) is not only an inflow of capital but also an inflow of technology, knowledge, skills.
  • It is the main source of non-debt financial resources for the economic development of a country.
  • Foreign direct investment tends to take place in economies with growth prospects and skilled labor.

Additional Information

• Foreign Exchange(Forex):
  • ​Foreign exchange reserves are assets held by a country's central bank or monetary authority.
  • It is usually held in a reserve currency (usually the U.S. dollar) and to a lesser extent the Euro, Japanese Yen, and British Pound.
  • It is used to support your liabilities, such as the issued local currency and the deposit reserves of financial institutions or governments at the central bank.
  • Benefits of Foreign Institutional Investors (FII):
    • These investors generally prefer equity over debt. So this will also help maintain and even improve the capital structures of the companies they are investing in.
    • They have a positive effect on the competition in the financial markets
      FII help with the financial innovation of capital markets.
    • These institutions are professionally managed by asset managers and analysts. They generally improve the capital markets of the country.
• Cash Reserve Ratio(CRR):
  • ​The Cash Reserve Ratio (CRR) is a specific part of the total deposits held by commercial banks as reserves and applied by the Reserve Bank of India (RBI).
  • This specific amount is held as a reserve in the form of cash or cash equivalents, stored in the bank vault, or sent to the Reserve Bank of India. CRR ensures that the bank will not run out of money.
• Special Economic Zone(SEZ):
  • ​Special Economic Zone is an enclave of a country region. The region is usually tax-free and has different commercial and commercial laws, mainly to encourage investment and create jobs.
  • In addition to creating jobs and promoting investment, special economic zones have also been created to better manage these areas, thus increasing the convenience of doing business.

• Measures of Expansionary policy and Contractionary Policy:

Tool	Expansionary Policy	Contractionary Policy
Cash Reserve Ratio(CRR)	Decrease	Increase
Repo Rate	Decrease	Increase
Statutory Liquidity Ratio(SLR)	Decrease	Increase
Marginal Standing Facility Rate(MSFR)	Decrease	Increase

The correct answer is an asset of the borrower.

Important Points

• Collateral security for a loan is an asset of the borrower.
• Collateral is an asset that a borrower offers to a moneylender as security for a loan. The lender has the right to take the asset used as collateral if the borrower is unable to repay the loan.
• Reserve Bank of India has deregulated interest rates to be charged to borrowers by financial institutions (other than NBFC- Micro Finance Institution).
• The rate of interest to be charged by the company is governed by the terms and conditions of the loan agreement entered into between the borrower and the NBFCs.

Additional Information

• Through the provisions of the Banking Regulation Act, 1949, the banking system in India is regulated by the Reserve Bank of India.
• Shaktikanta Das is the present Governor of the Reserve Bank of India.

The correct answer is 1969.

Key Points

• Nationalization of Banks:
  • Prior to 1969, all the banks in India, except the State Bank of India (nationalized in 1955), were owned by private players.
  • SBI was nationalized during the time when many of the private banks were facing bankruptcy at an alarming rate.
  • By the 1960s, the Indian banking industry had become an important tool to enable the development of the Indian economy.
  • In 1969 under the Indira Gandhi Government, 14 banks were nationalized.
  • These banks, during that time, held 80% of the bank deposits in the country.

Additional Information

• The banks that were nationalized in 1969 are Allahabad Bank, Bank of Baroda, Bank of India, Bank of Maharashtra, Central Bank of India, Canara Bank, Dena Bank, Indian Bank, Indian Overseas Bank, Punjab National Bank, Syndicate Bank, Union Bank, United Bank of India, and Uco Bank.
• There were numerous problems related to the reach and flow of credit to many priority sectors within the economy.
• Needed measures were taken by the government to address this issue.
• For example, the number of banks was decreased from 566 banks in 1951 to 91 in 1967.
• Before the nationalization of banks in 1969, the government had tried to address the economic problems through “social control”.
• This was to ensure a wider spread of credit and an increase in the credit flow to emerging priority sectors.
• However, despite these measures, the banks were failing mainly due to speculative financial activities.

The correct answer is Option 2.

Key Points

• Demand deposits are so called because the bank does not impose any restriction on its withdrawal with respect to time and therefore, the interest offered on them is relatively lower than other forms of deposits like Fixed Deposits.

• Movement along the supply curve takes place when all the factors affecting supply remain constant and only the price changes.
• Therefore, when price increases supply contracts and when price decreases supply expands.

The correct answer is Option 2.

Key Points

Statutory Liquidity Ratio (SLR)	It is the amount of money that the banks are required to maintain with themselves as liquid assets, i.e.  An increase in this ratio reduces the ability of the bank to inject money into the economy.
	Uses	It ensures the fulfilling of unexpected demands of any depositor by selling the bonds.
		It regulates credit growth in the economy.
		To ensure the solvency of the commercial bank.
	Form	Gold, cash, & government-approved securities.
	Return	Banks usually earn interest as a return on the funds kept as SLR.
	Maintained by	Bank itself
	The Reserve Bank of India (RBI) has the authority to increase this ratio by up to 40%.

• Hence, option 2 is correct.

The correct answer is Option 2.

• Open Market Operations refer to the purchase and sale of the Government securities (G-Secs) by RBI from/to market respectively. Hence, Option 4 is correct.
• It acts as a monetary tool by the RBI. Hence, Option 1 is correct.
• It DOESN'T include auctioning of gold reserves by the RBI. Hence, Option 2 is NOT correct.
• The objective of Open Market Operations is to adjust the rupee liquidity conditions in the economy on a durable basis.
• When RBI sells government security in the markets, the banks purchase them.
• When the banks purchase Government securities, they have a reduced ability to lend to the industrial houses or other commercial sectors.
• This reduced surplus cash, contracts the rupee liquidity and consequently credit creation. Hence, Option 3 is correct.
• When RBI purchases the securities, the commercial banks find them with more surplus cash and this would create more credit in the system.
• Thus, in the case of excess liquidity, RBI resorts to sale of G-secs to suck out rupee from system.
• Similarly, when there is a liquidity crunch in the economy, RBI buys securities from the market, thereby releasing liquidity.

The correct answer is the Reserve Bank of India.

Key Points

• India got its central bank in 1935. It is the 'Reserve Bank of India'.
• RBI is the issuer of currency in India.
• It controls the money supply of the country through the various methods, like Bank rate, open market operations and variations in reserve ratios.
•  It acts as a banker to the government.
• RBI is the custodian of the foreign exchange reserves of the economy.
• It also acts as a bank in the banking system.

 Thus, we can say that the Reserve Bank of India controls the bank rate.

Additional Information

• The RBI can influence the money supply by changing the rate at which it gives loans to commercial banks. This rate is called the Bank Rate in India. By increasing the bank rate, loans taken by commercial banks become more expensive; this reduces the reserves held by the commercial bank and hence decreases the money supply. 

The correct answer is Commodity Money

• In the Commodity Money the resources such as gold coins, beads, shells, and spices act as a medium of exchange, store of value or mode of payment in the market.
• It is the system where goods and services are directly exchanged for other goods and services.
• In the past, ordinary commodities, such as seashells, rice, cocoa, precious metals, etc., served as money.
• The important thing to note about commodity money is that its value is defined by the intrinsic value of the commodity itself.
  Although these items are used as commodity money, they also have a value from use as something other than money. 
• Gold, for example, has been used throughout the ages as money although today it is not used as money but rather is valued for its other attributes. 
• Gold is a good conductor of electricity and is used in the electronics and aerospace industry. 
• Gold is also used in the manufacturing of energy-efficient reflective glass for skyscrapers and is used in the medical industry as well. '
• Of course, gold also has value because of its beauty and malleability in the creation of jewellery.
• As commodity money, gold has historically served its purpose as a medium of exchange, a store of value, and as a unit of account.
• Commodity-backed currencies are dollar bills or other currencies with values backed up by gold or other commodity held at a bank.

The correct answer is Change in its price.

Key Points

• Demand 
  • It is an economic principle referring to a consumer's desire to purchase goods and services and willingness to pay a price for a specific good or service.
  • A demand curve is a graphic representation of the relationship between product price and the quantity of the product demanded. 
  • The price of the product does not lead to a shift in the demand curve.
  • Income is not the only factor that causes a shift in demand.
  • The other things that change demand include tastes and preferences, the composition or size of the population, the prices of related goods, and even expectations.
  • A shift in the demand curve is when a determinant of demand other than price changes. Hence, Option 1 is correct.
  • It occurs when demand for goods and services changes even though the price didn't.
  • A shift in the demand curve is an unusual circumstance when the opposite occurs.
  • The price remains the same but at least one of the other five determinants change.

Additional Information

• Those determinants are: 
  • ​Income of the buyer.
  • Consumer trends and tastes.
  • Expectations of future price, supply, needs, etc.
  • The price of related goods.
  • The number of potential buyers.
• Factors that cause a Demand Curve to Shift: 
  • ​When the demand curve shifts, it changes the amount purchased at every price point.
  • For example, when incomes rise, people can buy more of everything they want.
  • In the short term, the price will remain the same and the quantity sold will increase.

The correct answer is Option (2) i.e WPI are expressed in numbers

• A wholesale price index (WPI) is an index that measures and tracks the changes in the price of goods in the stages before the retail level – that is, goods that are sold in bulk and traded between entities or businesses instead of consumers.
• It is usually expressed as a ratio or percentage that shows the included goods' average price change and is often seen as one indicator of a country's inflation rate.
• Although many countries and organizations use WPIs in this way, many other countries, including the United States, use the producer price index (PPI) instead.
• Wholesale prices are those prices that retailers pay to manufacturers. It is an important indicator of the manufacturing sector.
• A WPI typically takes into account commodity prices, but the products included vary from country to country, and they are subject to change as needed to better reflect the current economy. 

An open market operation is an instrument of Monetary Policy.

Open Market Operations (OMOs)

• This is conducted by RBI by way of sale/purchase of government securities to/from the market to adjust the rupee liquidity conditions in the market on a durable basis. 
• If there is excess liquidity, RBI resorts to the sale of securities and sucks out the rupee liquidity.
• Similarly, when the liquidity conditions are tight, RBI buys securities from the market, thereby releasing liquidity into the market.
• It is one of the quantitative (to regulate or control the total volume of money) monetary policy tools that are employed by the central bank of a country to control the money supply in the economy.

Aditional Information

1. Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy.
2. Budgeting provides a systematic way of reviewing estimated actual results, coordinating future activities, and setting realistic targets. It is an effective management tool and its benefits include: Provides a time frame required to control finances. Highlights cashflow shortages/financing requirements etc.
3. LPG stands for Liberalization, Privatization, and Globalization. India under its New Economic Policy approached International Banks for the development of the country. These agencies asked the Indian Government to open its restrictions on trade done by the private sector and between India and other countries.

The correct answer is option 1 i.e: Real National Income

• In economic terms, the GDP of the country is regarded as the National Income. And GDP adjusted for inflation is real GDP, which is real National Income
• Real national income is adjusted for inflation that is calculated from a reference point, which is a base year. Adjustment for inflation eliminates the rise in GDP value, due to a rise in prices of goods and not overall production.
• In India the base year: 2011-12

The correct answer is Regressive in nature.

Key Points

• Indirect taxes are generally considered regressive in nature.
• The indirect tax rate remains the same irrespective of income that is why it is called Regressive in nature.
• A poor farmer has to pay the same indirect tax for diesel as some who owns a luxury car.
• Indirect taxes are those taxes that are paid indirectly on the goods and services irrespective of personal income, which means indirect taxes are the same for all.
• In India, all the indirect taxes are merged into a single nationwide tax called Goods and Services Tax(GST) since July 2017.
• GST is paid by all the citizens irrespective of their income level although some commodities are exempted from GST like milk and dairy products, agriculture commodities.

Additional information 

• Proportional Taxation: Tax levied as a percentage of tax base irrespective of the size of the tax base, at a uniform rate. The same tax rate is applicable to all.
• Progressive Taxation: If the tax rate increases with the size of the tax base, it is called a progressive tax. Tax rate increases with an increase in income.
• Regressive Taxation: If the tax rate decreases with increases with a decrease in the tax base. A person with low income pays more tax and a person with high income pays less tax.

​Note- Here tax base means a tax on the income or amount.

Indian Statistical Institute devoted to the research, teaching, and application of statistics, natural sciences and social sciences. This institute is funded by the Ministry of Statistics and Programme Implementation, Government of India.

• It was recognized as an institute of national importance in the 1959 act of the Indian parliament.
• It has its headquarters in Bonhooghly (Baranagar), Kolkata, West Bengal.

 

The Major Objectives of the Indian Statistical Institute:

• To promote the study and dissemination of knowledge of Statistics.
• To develop statistical theory and methods, and their use in research and practical applications generally, with special reference to problems of planning of national development and social welfare.
• To undertake research in various fields of natural and social sciences, with a view to the mutual development of Statistics and these sciences.
• To provide for, and undertake the collection of information, investigation, projects, and operational research for purposes of planning and the improvement of efficiency of management and production.

The correct answer is 50% of GDP.

Important Points

• 60% of Indian GDP is contributed by the service sector.
• India's services sector covers a wide variety of activities such as trade, hotel and restaurants, transport, storage and communication, financing, insurance, real estate, business services, community, social and personal services, and services associated with construction.
• The services sector is not only the dominant sector in India’s GDP but has also attracted significant foreign investment, has contributed significantly to export, and has provided large-scale employment.
• The current growth of the service sector in India is based mainly on labor market arbitrage.
• Moving forward, India can no longer rely on ‘low cost’ for ‘low value added’ services. Therefore, the solutions that address the following:
  • Boosting the manufacturing sector with both direct and indirect spin-off benefits for the growth of the service sector in India.
  • Moving up the value chain, especially in the IT/ ITeS sector.
  • Broad - basing the Indian Services offering platform into sectors beyond the traditional IT/ ITeS by identifying the global demand for such services, and meeting these demands based on the natural competencies and comparative advantages.

The correct answer is option 3, i.e. 5th

• The Planning Commission of India was an institution of the Government of India.
• It is a non-constitutional body, whose main task was to make five-year plans.
• On 13 August 2014, the Planning Commission was abolished and replaced by the NITI Aayog, effective from Jan 1st 2015.
• The fifth Five Year Plan (1974-79) was also called the ‘Investment Model of Planning Commission’.
• The two main objectives of this plan were poverty eradication and the attainment of self-reliance.
• The top priorities were agriculture, industry, and mines.

The High Yielding Variety Programme (HYVP) was launched in the Kharif of 1966-67 in India.

• HIGH YIELDING VARIETY PROGRAMME (HYVP) was launched in 1966, which helped the country in attaining self-sufficiency in food.
• It launched in an objective to attain self-sufficiency in food by 1970-71.
• The HYVP was the responsibility of the state government for its implementation from its existing resources under the guidance and supervision of the central government.
• The aim of the programme was to increase the productivity of food grains by adopting the latest varieties of inputs of crops.
• This programme in the 4th five-year plan was a major breakthrough and a turning point in the history of agriculture development in India.

The policy of 'land to the tiller' is based on the idea that cultivators will take more interest.

Key Points

The policy of " Land of the tiller":

• The policy proposes that the cultivators should be made the owner of the land that they cultivate.
• It is because of the fact that the cultivators will have their own interests at stake.
• The incentive to earn more profits and ultimately earn more will motivate the cultivators to take all the efforts required on the land.
• If the farmers are not made the owners, and it remains with the landlords then there is no incentive for the farmers to work efficiently.
• By conferring due rights of the land to the farmers, it is actually motivating them to produce more and earn more. The policy of land to the tiller is based on the idea that the cultivators will take more interest. They have more incentive in increasing output if they are the owners of the land. The ownership of land enables the tiller to profit from the increased output.

 

The correct answer is Production of cereal crops.

Key Points

• The Green Revolution
  • The green revolution refers to the large increase in the production of food grains resulting from the use of high-yielding variety (HYV) seeds, especially for wheat and rice. 
  • The use of these seeds required the use of fertilizer and pesticide in the correct quantities as well as a regular supply of water. 
  • At independence, about 75 per cent of the country’s population was dependent on agriculture. 
  • Productivity in the agricultural sector was very low because of the use of old technology and the absence of required infrastructure for the vast majority of farmers.
  • India’s agriculture vitally depends on the monsoon and if the monsoon fell short the farmers were in trouble unless they had access to irrigation facilities which very few had.
  • The stagnation in agriculture during the colonial rule was permanently broken by the green revolution.
  • This refers to the large increase in production of food grains resulting from the use of high-yielding variety (HYV) seeds, especially for wheat and rice.
  • The use of HYV seeds required the use of fertilizer and pesticide in the correct quantities as well as a regular supply of water; the need for these inputs in correct proportions is vital.
  • The farmers who could benefit from HYV seeds required reliable irrigation facilities as well as the financial resources to purchase fertilizer and pesticides.
  • As a result, in the first phase of the green revolution (the approximately mid-1960s up to mid-1970s), the use of HYV seeds was restricted to the more affluent states such as Punjab, Andhra Pradesh, and Tamil Nadu. 
  • Further, the use of HYV seeds primarily benefited the wheat-growing regions only. 
  • A good proportion of the rice and wheat produced during the green revolution period (available as marketed surplus) was sold by the farmers in the market.
  • As a result, the price of food grains declined relative to other items of consumption.
  • The low-income groups, who spend a large percentage of their income on food, benefited from this decline in relative prices.
  • The green revolution enabled the government to procure a sufficient amount of food grains to build a stock that could be used in times of food shortage.

The correct answer is Karve Committee.

Key Points

• Karve Committee
  • In 1955, the Village and Small-Scale Industries Committee, also called the Karve Committee, noted the possibility of using small-scale industries for promoting rural development.
  • A ‘small-scale industry’ is defined with reference to the maximum investment allowed on the assets of a unit.
  • This limit has changed over a period of time.
  • In 1950 a small-scale industrial unit was one that invested a maximum of rupees five lakh. Now it is 1 cr.
  • It is believed that small-scale industries are more ‘labor intensive’ i.e., they use more labor than the large-scale industries and, therefore, generate more employment.
  • But these industries cannot compete with the big industrial firms.
  • It is obvious that the development of small-scale industries requires them to be shielded from large firms.
  • For this purpose, the production of a number of products was reserved for the small-scale industry; the criterion of reservation being the ability of these units to manufacture the goods.
  • They were also given concessions such as lower excise duty and bank loans at lower interest rates.

• The 1991 policy made ‘Licence, Permit and Quota Raj’ a thing of the past. Hence, option A is correct.
• It attempted to liberalize the economy by removing bureaucratic hurdles in industrial growth.
• The limited role of the Public sector reduced the burden on the Government.
• The policy provided easier(not restricted) entry of multinational companies, privatization, removal (not inclusion) of asset limit on MRTP companies, liberal licensing(not controlling). Hence, option B is incorrect.
• All this resulted in increased competition, which led to lower prices in many goods such as electronics prices.
• This brought domestic as well as foreign investment in almost every sector opened to the private sector. Hence, option C is correct
• The policy was followed by special efforts to increase exports. Hence, option D is correct
• The concepts like Export Oriented Units, Export Processing Zones, Agri-Export Zones, Special Economic Zones, and lately National Investment and Manufacturing Zones emerged.
• All these have benefitted the export sector of the country,
• Accordingly, option B is correct.

• Growth with social justice and equity” was the main objective of the 9^th Five-Year Plan.
• The main focus of this plan was “growth with justice and equality”.
• Its duration was from 1997 to 2002.
• This plan failed to achieve its aim and it achieved only 3.3% annual rate of growth as against its aim of 5.7%.
• Second Five Year Plan (1956-1961) focused on the development of the public sector and "rapid Industrialisation". The plan followed the Mahalanobis model.
• Fifth Five Year Plan (1974–78)  laid stress on employment, poverty alleviation (Garibi Hatao), and justice. The plan also focused on self-reliance in agricultural production and defence
• The Seventh Five-Year Plan (1985–1990) was based on striving towards steady growth, the Seventh Plan was focused on achieving the prerequisites of self-sustaining growth by the year 2000
• Fourth Five Year Plan (1969-1974)  was the first plan launched by Indira Gandhi government amid the pressure of drought, devaluation and inflationary recession. The country was fighting with the population explosion, increased unemployment, poverty and a shackling economy.

The correct answer is Privatisation of the public sector enterprises by selling off part of its equity to the public is known as disinvestment.

• Privatisation of the public sector enterprises by selling off part of the equity of Public sector enterprises to the public is known as disinvestment.
• The purpose of the sale is mainly to improve financial discipline and facilitate modernization.
• It was also thought that private capital and managerial capabilities could be effectively utilized to improve the performance of the Public sector units.
• It is also thought that privatization provide strong impetus to the inflow of FDI.
• Apart from it the government has also made attempts to improve the efficiency of such units by giving them autonomy in taking managerial decisions. For example, some public sector units have been granted special status as maharatnas, navratnas and miniratnas 

Key Points

Barriers to foreign trade:

• Tax on imports is an example of a trade barrier.
• It is called a barrier because some restriction has been set up.
• Governments can use trade barriers to increase or decrease (regulate) foreign trade and to decide what kinds of goods and how much of each, should come into the country.
• The three major barriers to international trade are natural barriers, such as distance and language; tariff barriers, or taxes on imported goods; and non-tariff barriers.
• The non-tariff barriers to trade include import quotas, embargoes, buy-national regulations, and exchange controls.

Hence, the tax on imports is a ‘barrier’ to foreign trade.

Additional Information

• Production cost: Production costs refer to the costs a company incurs from manufacturing a product or providing a service that generates revenue for the company.
• Market price: The term market price refers to the amount of money for which an asset can be sold in a market.
• Goods and services: Production of goods and providing services are economic activities, they are not barriers of trade

The correct answer is: Raw Material.

Key Points

• Raw materials and available money are called working capital. Unlike tools, machines, and buildings, they are used in production.
• Raw materials, inventory of basic products, and money used to pay workers wages and cover daily expenses belong to working capital.
• Physical capital:
  • It is a factor of production. It refers to the various inputs required at each stage of production, such as tools, machinery, computers, and other equipment necessary to produce goods and services.
  • It is used in the production process to allow the conversion of raw materials into finished products.

Additional Information

• Machine:
  • Machines are things created by humans to make work easier. It is a tool or invention that multiplies human effort.
  • The operation of a machine may involve the conversion of chemical, thermal, electrical, or nuclear energy into mechanical energy, or vice versa, or its function may simply be to modify and transmit force and motion.
• ​Tools can perform various functions, such as cutting and grinding, moving, forming, clamping, guiding, making chemical changes, clamping, processing information and data, etc. specific tools can be designated for specific purposes and most tools can be used in combination.

The Occupations of a society can be divided into three sections-

• Primary Sector- sources of raw materials (agriculture and allied sector services)
• Secondary Sector-transforms one good to another increasing the utility of the product (manufacturing sector)
• Tertiary Sector- service provider to primary and secondary sectors (service sector)

Important Points

The sources of production of raw materials for secondary and tertiary sectors are:

• Agriculture and forestry
• Fishing and poultry farming
• Animal Husbandry

Therefore, the Primary sector includes all of the above.

Key Points

Socialist economy: 

• It offers a more equitable distribution of goods & services through central planning.
• In this model, importance is given to the welfare of all sections of society rather than individual profit.
• E.g: Cuba, North Korea.
• ​​There is almost equality between rich and poor i.e: no problem of class struggle.
• There is no cut-throat competition as the state is the sole entrepreneur.
• A socialist economy is a system of production where goods and services are produced directly for use, in contrast to a capitalist economic system, where goods and services are produced to generate profit (and therefore indirectly for use).
• "Production under socialism would be directly and solely for use.

Hence, Socialist Economy is a Planned Economy.

The correct answer is 1932.

Key Points

• JRD Tata flew the first flight of Tata Airlines on October 15, 1932.
• The airline came to be known as Air India following its nationalization post-independence.
• During its initial years, Air India was called Tata Airlines.
• It was later nationalized and renamed Air India post-independence of India, which meant that the Tatas stayed out of the Business.

In News

•  Life came in a full circle for Maharaja on Thursday, January 27 as India's first commercial carrier Air India returned to the Tata Group on the Day.
• The Government officially handed over the national carrier to the business conglomerate, after PM Modi met Tata Group Chairperson N, Chandrasekaran.
• Tata Sons announced the appointment of Campbell Wilson as the MD and CEO of Air India