Daily Static MCQs for UPSC & State PSC Exams - Economy (27 July 2023)

   

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

Subject : Economy

1. Consider the following statements regarding Special Drawing Right (SDR):

1. SDRs can be exchanged for freely usable currencies.
2. A Gold backing is mandatory for a nation to increase SDR deposits.
3. The SDR is a financial claim on the IMF as it is accepted by most international organizations.

How many of the above statements are correct?

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

Answer: (A)

Explanation:

  • The SDR was created by the IMF in 1969 as a supplementary international reserve asset, in the context of the Bretton Woods fixed exchange rate system. A country participating in this system needed official reserves—government or central bank holdings of gold and widely accepted foreign currencies—that could be used to purchase its domestic currency in foreign exchange markets, as required to maintain its exchange rate. Hence, statement 1 is correct.
  • The value of the SDR is based on a basket of five major currencies—the US dollar, the euro, the Chinese renminbi (RMB), the Japanese yen, and the British pound sterling. No gold backing is needed. Hence, statement 2 is incorrect.
  • The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions. Hence, statement 3 is incorrect.

2. 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:

  • 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. Hence, statement 1 is correct.
  • 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. Hence, statement 2 is incorrect.
  • 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, statement 3 is incorrect.

3. Consider the following statements:

1. While Gross Domestic Product includes the production of goods and services within a country by all producers, Gross National Product captures all goods and services that is produced by the citizens of a country.
2. Usually Gross National Product tends to be less, if an economy is highly globalised and competitive and many of its MNCs are operating in other countries.

Which of the above statements is/are incorrect?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: (B)

Explanation:

  • Gross Domestic Product (GDP) includes the production within a country by all producers i.e. citizens as well as foreign multinational corporations. Gross National Product (GNP) captures all that is produced by the citizens of the country, whether it is within the geography of the country or abroad. Hence, statement 1 is correct.
  • In the age of globalisation, one country’s GDP is another country’s GNP. If it’s a highly globalised and competitive economy and many of its MNCs are operating in other countries, its GNP tends to be more. Hence, statement 2 is incorrect.

4. Which of the following is disadvantageous to developing countries’ international trade?

(a) Protection to domestic industries from dumping
(b) Establishing regional trading blocs
(c) Export of primary articles and import of manufactured goods
(d) Free trade with other developing nations

Answer: (C)

Explanation: The present integration of global markets favours the more competitive product from a more competitive country. Developed countries have an edge over manufactured goods due to advance in physical as well as human capital. Developing countries are preferred for exporting primary articles because they have an abundance of it. This affects their competitiveness in the long-run as they miss out on the chance to build a manufacturing base, and remain a primary producer backward economy. Hence, option (c) is correct.

5. 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.