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Part 001 – Indian Economy Previous Year Questions

Q1. To achieve high rates of growth of national output, the economy has to
(a) reduce the rate of growth of population
(b) borrow foreign capital
(c) step up the rate of savings
(d) increase the rate of investment and reduce the capital output ratio
Ans: (d) The immediate effect of devoting a larger share of national output to investment is that the economy devotes a smaller share to consumption; that is, “living standards” as measured by consumption fall. The higher investment rate means that the capital stock increases more quickly, so the growth rates of output and output per worker rise. According to Smith, in a developing economy, both income level and capital stock rise. In addition to this, the rate of capital accumulation also shows a tendency to increase. This leads to increase in the capital stock in successive periods as investment keeps on increasing. Another important factor which contributes to the progress of an economy is the successive decline in the incremental capital-output ratio due to the influence of capital on the productivity of labour.

Q2. The proceeds of income tax go to

(a) Central Government
(b) State Government
(c) Centre and States
(d) Corporation authorities
Ans: (c) The proceeds of income tax are compulsorily shareable between the Centre and the States. It is imposed and collected by the Central government but the proceeds are shared between the both. The share of the states in the net proceeds of income tax has varied from 55 per cent as under the First Finance Commission to 85 per cent as under the ninth Commission. regarding criterion for fixation of the shares of individual states, the percentage of the net proceeds of income tax assigned to them, the first to seventh finance commissions recognised ‘population’ and contribution to be the relevant factors. So a major portion of the proceeds of income tax goes to the states. But, the truth is they are shared between the centre and the states.

Q3. National income refers to

(a) money value of goods and services produced in a country during a year.
(b) money value of stocks and shares of a country during a year.
(c) money value of capital goods produced by a country during a year.
(d) money value of consumer goods produced by a country during a year.
Ans: (c) National Income is one of the basic concepts in macroeconomics. National Income means the total income of the nation. The aggregate economic performance of the whole economy is measured by the national income data. National Income refers to the money value of all final goods and services produced by the normal residents of a country while working both within and outside the domestic territory of a country in an accounting year. National Income also includes net factor income from abroad. Symbolically, Y = PG + PS, where, Y = National Income; P = Price; G = Goods; and S = Service.

Q4. A Scheduled Bank is one which is included in the

(a) II Schedule of Banking Regulation Act
(b) II Schedule of Constit-ution
(c) II Schedule of Reserve Bank of India Act
(d) None of the above
Ans: (c) Commercial banks are classified into two: (a) Scheduled banks and (b) other banks. A scheduled bank is one which is included in the second schedule of Reserve Bank of India Act, 1934. A scheduled bank should comply with the following terms: (i) It must have paid up capital and reserves as specified; and (ii) the activities to be carried out should not be detrimental to the interests of the depositors; and (iii) it should be incorporated under the Companies Act, 1956, that is, it should not be the sole trader for a partnership firm or business organization.

Q5. What is the extent of change of the literacy rate envisaged by the end of the Xth Five Year Plan ?

(a) From 65% to 75%
(b) From 60% to 70%
(c) From 50% to 55%
(d) From 45% to 50%
Ans: (a) The Tenth Five-Year Plan (2002–2007) envisaged attainment of 8% GDP growth per year; reduction of poverty ratio by 5 percentage points by 2007; and reduction in gender gaps in literacy and wage rates by at least 50% by 2007. It set the goal that the rate of literacy must be increased by at least 75%, within the tenure of the Tenth Five Year Plan.

Q6. Which of the following Mahatma Gandhi series of currency notes issued by the RBI has “ecology” depicted on it?

(a) Rs. 500 (b) Rs. 100
(c) Rs. 50 (d) Rs. 5
Ans: (b) The Reserve Bank has the sole authority to issue bank notes in India. Reserve Bank, like other central banks the world over, changes the design of banknotes from time to time. The Reserve Bank has introduced banknotes in the Mahatma Gandhi Series since 1996 and has so far issued notes in the denominations of Rs.5, Rs.10, Rs.20, Rs.50, Rs.100, Rs.500 and Rs.1000 in this series. Mahatma Gandhi series of Rs. 100 notes has picture of Indian Himalayan mountain ranges on its reverse which is of ecological and environmental significance.

Q7. What has been the order of India’s imports during the last three years ?

(a) US $ 30 billion
(b) US $ 40 billion
(c) US $ 50 billion
(d) US $ 60 billion
Ans: (b) India’s exports for the month of August 2012 stood at USD 22.3 billion compared to August 2011 when it stood at USD 24.7 billion registering a decline of (-) 9.7%. During August 2012, the imports were $ 38 billion as compared to $ 40 billion in August 2011 registering a decline on (-) 5.08%.

Q8. What is the purpose of the India Brand Equity Fund ?

(a) To promote in-bound tourism.
(b) To make ‘Made in India’ a label of quality.
(c) To organise trade fairs.
(d) To provide venture capital to IT sector.
Ans: (b) India Brand Equity Foundation is a Trust established by the Ministry of Commerce with the Confederation of Indian Industry (CII) as its associate. IBEF’s primary objective is to promote and create international awareness of the Made in India label in markets overseas and to facilitate the dissemination of knowledge of Indian products and services. Towards this objective IBEF works closely with stakeholders across government and industry. IBEF works with a network of stakeholders – domestic and international – to promote Brand India.

Q9. Which of the following Mahatma Gandhi seires of currency notes issued by the RBI has a drawing of the ‘Parliament House’ depicted on it?

(a) Rs. 500 (b) Rs. 100
(c) Rs. 50 (d) Rs. 10
Ans: (c) The Reserve Bank has introduced banknotes in the Mahatma Gandhi Series since 1996 and has so far issued notes in the denominations of Rs.5, Rs.10, Rs.20, Rs.50, Rs.100, Rs.500 and Rs.1000 in this series. Mahatma Gandhi series of Rs. 50 notes has picture of Parliament of India on its reverse.

Q10. What are “Open Market Operations”?

(a) Activities of SEBI registered brokers
(b) Selling of currency by the RBI
(c) Selling of gilt-edged securities by the Government
(d) Sale of shares by FIIs
Ans: (c) An open market operation (also known as OMO) is an activity by a central bank to buy or sell government bonds on the open market. A central bank uses them as the primary means of implementing monetary policy. The usual aim of open market operations is to control the short term interest rate and the supply of base money in an economy, and thus indirectly control the total money supply. This involves meeting the demand of base money at the target interest rate by buying and selling government securities, or other financial instruments. Monetary targets, such as inflation, interest rates, or exchange rates, are used to guide this implementation.

Q11. Why did the Government ban the import of “Terminator seeds”?

(a) To contain a virus which can destroy local crops
(b) These seeds are injurious to human and animal health
(c) These seeds contain genetically engineered properties to prevent further multiplication
(d) These seeds multiply at very slow rates
Ans: (c) The Indian government banned the import of terminator seeds on fears the seeds would threaten traditional crops and put the well-being of Indian farmers at risk. The technology would have serious implications on the crop biodiversity. It may lead to gradual extinction of traditional varieties. Crop related wild varieties, important for natural evolution for crop species would be affected by cross-contamination. Inserting terminator genes into crops would prevent them from producing fertile seeds.

Q12. How does the consumer benefit with VAT ?

(a) It removes tax on tax and thus reduces prise-rise
(b) Reduces the cost of production
(c) With the abolition of the sales tax
(d) Due to the exemption of small businesses from the tax within certain limits prescribed by the State
Ans: (a) Value Added Tax (VAT) is a tax applied on the value that is added to goods and services at each stage in the production and distribution chain. It forms part of the final price the consumer pays for the goods or services. On the domestic market, VAT is collected in stages, by registered manufacturers, wholesalers, retailers and services providers. It is only individuals and firms registered with the VAT Service who can charge VAT on their supplies. However, the collection of the tax at more than one stage does not lead to duplication of the tax. VAT is designed to ensure that most forms of consumer spending are taxed evenly and fairly. VAT is not a tax on the seller for it is the buyer who pays the tax. VAT will not be an additional tax, but a replacement for some existing indirect taxes. It will be a broad-based, comprehensive and simplified system of taxation on transactions. VAT will improve, simplify and modernize tax system.

Q13. In estimating the budgetary deficit, the official approach in India is to exclude

(a) long term borrowing from the market
(b) borrowings from the Reserve Bank of India
(c) drawing down of the cash balance
(d) borrowing from Reserve Bank in the form of ways and means advance
Ans: (c) When the government expenditure exceeds revenues, the government is having a budget deficit. Thus the budget deficit is the excess of government expenditures over government receipts (income). When the government is running a deficit, it is spending more than it’s receipts. Budgetary Deficit is the difference between all receipts and expenditure of the government, both revenue and capital. This difference is met by the net addition of the treasury bills issued by the RBI and drawing down of cash balances kept with the RBI. So when it is estimated, drawing down of cash balances is excluded.

Q14. The best way, a bank can avoid loss is to

(a) lend only to individuals known to the bank
(b) accept sound collateral
(c) give only short-term loans
(d) lend only to bank’s old customers
Ans: (b) The best way for a bank to avoid loss is to accept only sound collateral. In lending agreements, collateral is a borrower’s pledge of specific property to a lender, to secure repayment of a loan. The collateral serves as protection for a lender against a borrower’s default – that is, any borrower failing to pay the principal and interest under the terms of a loan obligation. If a borrower does default on a loan (due to insolvency or other event), that borrower forfeits (gives up) the property pledged as collateral – and the lender then becomes the owner of the collateral. In a typical mortgage loan transaction, for instance, the real estate being acquired with the help of the loan serves as collateral. Should the buyer fail to pay the loan under the mortgage loan agreement, the ownership of the real estate is transferred to the bank. The bank uses a legal process called foreclosure to obtain real estate from a borrower who defaults on a mortgage loan. Collateral, especially within banking, traditionally refers to secured lending (also known as asset-based lending).

Q15. Which amidst the following rural banks has been named after a river ?

(a) Prathama Bank
(b) Varada Grameen Bank
(c) Thar Anchalik Grameen Bank
(d) Aravali Kshetriya Grameen Bank
Ans: (b) Varada Grameena Bank is a Regional Rural Bank (RRB) named after the Wardha River which is one of the biggest rivers in Vidarbha region in India. It is one of those banks which were amalgamated and newly opened. It has been serving Kumta in Karnataka, providing excellent banks service to those in need.

Q16. Which of the following is an open market operation of the RBI ?

(a) Buying and selling of shares
(b) Trading in securities
(c) Transactions in gold
(d) Lending to commercial banks
Ans: (b) Open Market Operations (OMOs) are the market operations conducted by the Reserve Bank of India by way of sale/ purchase of Government securities to/ from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis. When the RBI feels there is excess liquidity in the market, it resorts to sale of securities thereby sucking out the rupee liquidity. Similarly, when the liquidity conditions are tight, the RBI will buy securities from the market, thereby releasing liquidity into the market. The two traditional type of OMO’s used by RBI are: Outright purchase (PEMO): Is outright buying or selling of government securities; and Repurchase agreement (REPO): Is short term, and are subject to repurchase.

Q17. During which Five-Year Plan did India lay down the objective of the need to ensure environmental sustainability of the development strategy ?

(a) 6th Five Year Plan
(b) 7th Five Year Plan
(c) 8th Five Year Plan
(d) 9th Five Year Plan
Ans: (d) The Ninth Plan recognised the integral link between rapid economic growth and the quality of life of the mass of the people. Ensuring environmental sustainability of the development process through social mobilisation and participation of people at all level was one of the specific objectives of the Ninth Plan as approved by the National Development Council. In the Ninth Plan document, policies and programmes during the Eighth Plan period were reviewed, shortcomings identified and new policy framework suggested overcoming the shortcomings and ensuring sustainability of the development process not only in economic terms but also in terms of social and environmental factors.

Q18. Which of the following is not an objective of the monetary policy of the RBI ?

(a) Boost economic development
(b) Direct credit in desirable direction
(c) Control inflationary pressure
(d) Ensure social justice
Ans: (d) Monetary policy is the process by which monetary authority of a country, generally a central bank controls the supply of money in the economy by exercising its control over interest rates in order to maintain price stability and achieve high economic growth. In India, the central monetary authority is the Reserve Bank of India (RBI). It is so designed as to maintain the price stability in the economy.

Q19. Which Bank was merged in the Punjab National Bank in February, 2003 ?

(a) Catholic Syrian Bank Ltd.
(b) Nainital Bank Ltd.
(c) Nedungadi Bank Ltd.
(d) Madurai Bank Ltd.
Ans: (c) In February 2003, the Punjab National Bank took over Nedungadi Bank, the oldest private sector bank in Kerala. At the time of the merger with PNB, Nedungadi Bank’s shares had zero value, with the result that its shareholders received no payment for their shares. It was first private sector commercial bank to be set up in South India. The bank was incorporated in 1913 and in 1965 it took over selected assets and liabilities of the Coimbatore National Bank Ltd. NOTE : On 15 February 2017, the Union Cabinet approved the merger of 5 associate banks with SBI. Finally, the five associate banks, along with Bharatiya Mahila Bank, merged with SBI on 31 March 2017. With effect from April 1, 2017; all the branches of Associates Banks viz State Bank of Patiala, State Bank of Hyderabad, State Bank of Bikaner & Jaipur, State Bank of Mysore and State Bank of Travancore, will function as branches of STATE BANK OF INDIA (SBI). On 7 October 2014, Arundhati Bhattacharya became the first woman to be appointed Chairman of the bank. She is serving as present chairman of SBI.

Q20. State which amongst the following is not true about VAT ?

(a) All States have uniform VAT for the same product
(b) State have discretion to fix the rate of tax within the four rates prescribed
(c) It will promote production efficiency of investments
(d) It will make our exports more competitive
Ans: (d) A value added tax (VAT) is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the value added to a product, material, or service, from an accounting point of view, by this stage of its manufacture or distribution. Being a consumption tax, VAT is usually used as a replacement for sales tax. Ultimately, it taxes the same people and businesses the same amounts of money, despite its internal mechanism being different. This means that, without special measures, goods that are imported from one country that does have VAT to another country that does not have VAT will be taxed twice. The exporting country will charge VAT and the importing country will charge sales tax.

Q21. Reserve Bank of India keeps some securities against notes.
These securities are always less in comparison to

(a) Gold and foreign bonds
(b) Gold
(c) Government bonds
(d) Gold, foreign bonds and Government bonds.
Ans: (d) Statutory Liquidity Ratio refers to the amount that the commercial banks require to maintain in the form gold or government approved securities before providing credit to the customers. Here by approved securities we mean, bond and shares of different companies. Statutory Liquidity Ratio is determined and maintained by the Reserve Bank of India in order to control the expansion of bank credit. Statutory liquidity ratio is the amount of liquid assets such as precious metals (Gold) or other approved securities, that a financial institution must maintain as reserves other than the cash. In a growing economy banks would like to invest in stock market, not in Government Securities or Gold as the latter would yield less returns. One more reason is long term Government Securities (or any bond) are sensitive to interest rate changes. But in an emerging economy interest rate change is a common activity.

Q22. Merchant Banking is an institution which provides finances to :

(a) domestic whole sale trade
(b) international trade among countries
(c) domestic retail trade among
(d) international aid agencies.
Ans: (b) A merchant bank is a financial institution which provides capital to companies in the form of share ownership instead of loans. It is a bank that deals mostly in (but is not limited to) international finance, long-term loans for companies and underwriting. Merchant banks do not provide regular banking services to the general public.

Q23. The system of issuing and monitoring of money in the market is known as–

(a) Proportional reserve ratio
(b) Fixed reserve ratio
(c) Minimum reserve ratio
(d) Floating reserve ratio
Ans: (c) The reserve requirement (or cash reserve ratio) is a central bank regulation that sets the minimum reserves each commercial bank must hold (rather than lend out) of customer deposits and notes. These required reserves are normally in the form of cash stored physically in a bank vault (vault cash) or deposits made with a central bank. The required reserve ratio is sometimes used as a tool in monetary policy, influencing the country’s borrowing and interest rates by changing the amount of funds available for banks to make loans with. The main objective of minimum reserves is the stabilisation of money market rates. Minimum reserves allow credit institutions to smooth out fluctuations in liquidity such as those caused by the demand for banknotes.

Q24. Which among the following Indian State does not transacts its business through Reserve Bank of India ?

(a) Sikkim
(b) Jammu and Kashmir
(c) Arunachal Pradesh
(d) Mizoram
Ans: (b) State Government transactions are carried out by Reserve Bank of India in terms of the agreement entered into with the State Governments in terms of section 21 A of the Act. As of now, such agreements exist between RBI and all the State Governments except with the Government of Jammu and Kashmir.

Q25. Which among the following subjects is not an aim of the monetary policy of the Reserve Bank of India ?

(a) Giving impetus to economic development
(b) Direct credit with objective criteria
(c) To control pressure of inflation
(d) To ensure social justice.
Ans: (d) The Reserve Bank of India is the main monetary authority of the country and beside that the central bank acts as the bank of the national and state governments. It formulates, implements and monitors the monetary policy as well as it has to ensure an adequate flow of credit to productive sectors. Objectives are maintaining price stability and ensuring adequate flow of credit to productive sectors.

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