Daily Static MCQs Quiz for UPSC, IAS, UPPSC/UPPCS, MPPSC. BPSC, RPSC & All State PSC Exams
Subject : Economy
1. If there is a growth of revenue deficit as a percentage of fiscal deficit, what could this possibly indicate?
1. Creation of physical assets by the Government.
2. Increase in the subsidies distributed in the country.
Select the correct option using the code given below:
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Answer: (B)
Explanation: As Fiscal Deficit = Revenue Deficit + Capital Expenditure – Capital Receipts excluding borrowings, an increase in revenue deficit with fiscal deficit being constant will lead to decrease in capital expenditure. This will lead to less assets creation by the government which might lead to less infrastructure development. Hence, statement 1 is incorrect.
2. Consider the following statements regarding GDP deflator:
1. GDP deflator is a measure of the level of prices of all
new, domestically produced, final goods and services in an economy in a year.
2. Like CPI, the GDP deflator is based on a fixed basket of goods and services.
3. When GDP deflator is negative, it necessarily means that there is inflation
in the economy.
How many of the above statements are correct?
(a) Only one
(b) Only two
(c) All three
(d) None
Answer: (A)
Explanation:
- In economics, the GDP deflator is a measure of the level of prices of all new, domestically produced, final goods and services in an economy in a year. Hence, statement 1 is correct.
- Like the consumer price index (CPI), the GDP deflator is a measure of price inflation/deflation with respect to a specific base year. The GDP deflator is a more comprehensive inflation measure than the CPI index because it isn’t based on a fixed basket of goods. When GDP deflator is negative, nominal GDP is less than real DP. It means that there is deflation in the economy. Hence, statement 2 and 3 are incorrect.
3. Laffer curve is a relationship between which of the following?
(a) Tax buoyancy and tax elasticity
(b) Tax rate and tax buoyancy
(c) Tax rate and tax elasticity
(d) Tax revenue and tax rate
Answer: (D)
Explanation: In economics, the Laffer curve, developed by supply-side economist Arthur Laffer, illustrates a theoretical relationship between rates of taxation and the resulting levels of the government’s tax revenue. The Laffer curve assumes that no tax revenue is raised at the extreme tax rates of 0% and 100%, and that there is a tax rate between 0% and 100% that maximizes government tax revenue. The shape of the curve is a function of taxable income elasticity – i.e., taxable income changes in response to changes in the rate of taxation. The Laffer curve is typically represented as a graph that starts at 0% tax with zero revenue, rises to a maximum rate of revenue at an intermediate rate of taxation, and then falls again to zero revenue at a 100% tax rate. Hence, option (d) is correct.
4. A receipt is a capital receipt if it satisfies which of the following conditions?
1. The receipts must create a liability for the government.
2. The receipts must cause a decrease in the Government assets.
Which of the above statements is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Answer: (C)
Explanation: A receipt is a capital receipt if it satisfies any one of the two conditions:
- The receipts must create a liability for the government. For example, Borrowings are capital receipts as they lead to an increase in the liability of the government. However, tax received is not a capital receipt as it does not result in creation of any liability.
- The receipts must cause a decrease in the assets. For example, a receipt from sale of shares of public enterprise is a capital receipt as it leads to reduction in assets of the government.
5. Consider the following statements regarding GDP deflator:
1. The GDP deflator is basically a measure of inflation.
2. It helps show the extent to which the increase in gross domestic product has
happened on account of higher prices rather than increase in output.
3. It covers only those goods and services directly consumed by households.
How many of the above statements are correct?
(a) Only one
(b) Only two
(c) All three
(d) None
Answer: (B)
Explanation: The GDP deflator, also called implicit price deflator, is a measure of inflation. It is the ratio of the value of goods and services an economy produces in a particular year at current prices to that of prices that prevailed during the base year. This ratio helps show the extent to which the increase in gross domestic product has happened on account of higher prices rather than increase in output. Since the deflator covers the entire range of goods and services produced in the economy — as against the limited commodity baskets for the wholesale or consumer price indices — it is seen as a more comprehensive measure of inflation. Changes in consumption patterns or introduction of goods and services are automatically reflected in the GDP deflator. This allows the GDP deflator to absorb changes to an economy’s consumption or investment patterns. Often, the trends of the GDP deflator will be similar to that of the CPI. Hence, only statement 3 is incorrect.
