Daily Static MCQs for UPSC & State PSC Exams - Economy (06 July 2023)

   

Daily Static MCQs Quiz for UPSC, IAS, UPPSC/UPPCS, MPPSC. BPSC, RPSC & All State PSC Exams

Subject : Economy

1. Which of the following actions can be taken by the Government to reduce the deficit budget?

1. Reducing revenue expenditure
2. Introducing new welfare schemes
3. Rationalizing subsidies
4. Reducing import duty

Select the correct answer using the code given below:

(a) 1 and 2 only
(b) 1 and 3 only
(c) 1, 2 and 3 only
(d) 1, 2, 3 and 4

Answer: (B)

Explanation:

  • Statement 1: Unnecessary revenue expenditure bloats the fiscal deficit, and since it forms the majority of government spending, its reduction has a very large effect on the fiscal deficit.
  • Statement 2: It will further increase the fiscal deficit.
  • Statement 3: Subsidies are a major component of government spending, and its reduction will cut down fiscal deficit.
  • Statement 4: It reduces tax revenue and thus increases fiscal deficit.

Hence, option (b) is correct.

2. Consider the following statements regarding difference between Consumer Price Index (CPI) and GDP deflator:

1. While CPI is released by Central Statistics Office (CSO), the data on GDP deflator is released by Labour Bureau.
2. GDP deflator includes prices of imported goods but they are not included in CPI.
3. The weights are constant in CPI, but they differ according to production level of each good in GDP deflator.

How many of the above statements is/are correct?

(a) Only one
(b) Only two
(c) All three
(d) None

Answer: (A)

Explanation:

CPI may differ from GDP deflator because:

  1. The goods purchased by consumers do not represent all the goods which are produced in a country. GDP deflator takes into account all such goods and services.
  2. CPI includes prices of goods consumed by the representative consumer; hence it includes prices of imported goods. GDP deflator does not include prices of imported goods. Hence, statement 2 is incorrect.
  3. The weights are constant in CPI – but they differ according to production level of each good in GDP deflator. Hence, statement 3 is correct.

Ministry of Statistics and Programme Implementation (MOSPI) comes out with GDP deflator in National Accounts Statistics as price indices. Hence, statement 1 is incorrect.

3. Consider the following statements regarding Opportunity cost:

1. Opportunity costs represent the potential benefits that an individual, investor, or business misses out on when choosing one alternative over another.
2. For companies, opportunity costs do not show up in the financial statements but are useful in planning by management.

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: Opportunity costs represent the potential benefits that an individual, investor, or business misses out on when choosing one alternative over another. To properly evaluate opportunity costs, the costs and benefits of every option available must be considered and weighed against the others. Considering the value of opportunity costs can guide individuals and organizations to more profitable decision-making. Opportunity cost is a strictly internal cost used for strategic contemplation; it is not included in accounting profit and is excluded from external financial reporting. For example, a company decides to buy a new piece of manufacturing equipment rather than lease it. The opportunity cost would be the difference between the cost of the cash outlay for the equipment and the improved productivity vs. how much money could have been saved in interest expense had the money been used to pay down debt. Hence, both statements are correct.

4. In taxation, horizontal equity implies:

(a) Everyone pays the same amount of tax.
(b) Better off people pay more taxes.
(c) Similarly situated people pay the same taxes.
(d) Taxation is independent of income levels.

Answer: (C)

Explanation: Taxation is based on the idea of Fairness. Though fairness (i.e., the first criteria of a good tax system) is not always easy to define, economists suggested inclusion of two elements in the tax system to make it fair namely, horizontal equity and vertical equity. Individuals in identical or similar situations paying identical or similar taxes are known as horizontal equity. When ‘better off people pay more taxes it is known as vertical equity. Hence, option (c) is correct.

5. Which of the following are considered or counted while calculating GDP?

1. Rental value of all houses
2. Buying of newly produced cars as well as second-hand cars
3. Pensions and scholarships given by the Government.

How many of the above statements are correct?

(a) Only one
(b) Only two
(c) All three
(d) None

Answer: (A)

Explanation:

  • In calculating GDP, only newly produced goods are counted. Transactions in existing goods like second-hand cars are not included, as these do not involve the production of new goods. But the services provided by the agents while selling second-hand cars are counted. The agents make some money through commission which adds to the service economy.
  • There are imputed values as part of GDP. All houses are assumed to be rented as it is not possible for the government to check which one is owner occupied and which one is rented. Thus, rental value of all houses is part of GDP.
  • Transfer payments like scholarships, pensions and universal basic income that the government gives do not fetch any direct returns in terms of addition to GDP and thus are not included in the GDP.

Hence, option (a) is correct.