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Part 035 – Macro Economics Previous Year Questions

Q1. A mixed economy refers to an economic system where
(a) The economy functions with foreign collaboration
(b) Only the private sector operates under government control
(c) Both the government and the private sectors operate sectors operate simultaneously
(d) No foreign investment is allowed
Ans: (c) Mixed economy is an economic system in which both the state and private sector direct the economy, reflecting characteristics of both market economies and planned economies. The basic idea of the mixed economy is that the means of production are mainly under private ownership; that markets remain the dominant form of economic coordination; and that the government wields indirect influence over the economy through fiscal and monetary policies.

Q2. A Black Market is a situation wherein

(a) Goods are loaded by the producers
(b) Goods are sold secretly
(c) Goods are sold at prices higher than what is fixed by the Government
(d) Goods are made available
(sold) only after there is a rise in prices
Ans: (b) Black market is the market in which illegal goods are traded. Goods acquired illegally take one of two price levels: (i) they may be cheaper than legal market prices as the supplier does not have to pay for production costs or taxes; or (ii) they may be more expensive than legal market prices as the product is difficult to acquire or produce, dangerous to handle or not easily available legally. Black-market transactions typically occur as a way for participants to avoid government price controls or taxes, conducting transactions ‘under the table.’ So the most defining feature of black markets is that they have to be carried out secretly as they are illegal.

Q3. The ‘Canons of Taxation’ were propounded by

(a) Edwin Canon
(b) Adam Smith
(c) J.M. Keynes
(d) Dalton
Ans: (b) Canons of Taxation were first originally laid down by economist Adam Smith in his famous book “The Wealth of Nations”. In this book, Adam smith only gave four canons of taxation: (i) canon of equity; (ii) canon of certainty; (iii) canon of convenience; and (iv) canon of economy.

Q4. Beyond a certain point deficit financing will certainly lead to

(a) inflation
(b) deflation
(c) recession
(d) economic stagnation
Ans: (a) Deficit financing is a practice in which a government spends more money than it receives as revenue, the difference being made up by borrowing or minting new funds. Some economists are of the view that it leads to inflation as governments pay off debts by printing fiat money, increasing the money supply and the purchasing power of the people which increases the aggregate demand.

Q5. In public budgets, zero-base budgeting was first introduced in

(a) USA (b) UK
(c) France (d) Sweden
Ans: (a) Zero-based budgeting is an approach to planning and decision-making which reverses the working process of traditional budgeting. This technique of budgeting was developed by Peter Phyrr in the United States and was first implemented at Texas Instruments in the 1960s. In 1973, President Jimmy Carter contracted with Phyrr to implement a ZBB system for the State of Georgia executive budget process.

Q6. The sale proceeds of Government Bonds come under the budget head of

(a) Revenue Receipts
(b) Current Expenditure
(c) Capital Outlay
(d) Capital Receipts
Ans: (d) Capital receipts are the funds received into the businesses that are not part of the operating activities of the establishment. Capital receipts primarily include external assistance, market loans, small savings, principal investment in bonds, and Government provident funds. A capital receipt is a receipt which is derived from sale or purchase of capital assets like plant and machinery, furniture, investment (long term) etc., which shall not be occurring all the time.

Q7. The tax levied on gross sales revenue from business transactions is called

(a) Turnover Tax
(b) Sales Tax
(c) Capital Gains Tax
(d) Corporation Tax
Ans: (a) A turnover tax is similar to a sales tax or a VAT, with the difference that it taxes intermediate and possibly capital goods. It is charged on gross sales revenue from business transactions. Unlike a sales tax, which is levied only on gross value at the point of retail sale, a turnover tax is levied on all intermediate transactions between businesses leading to and including the final sale.

Q8. Ad Valorem tax is levied

(a) according to value added by the Government.
(b) according to value addition to a commodity
(c) according to value given by producers
(d) according to value added by the finance ministry
Ans: (c) An ad valorem tax (Latin for “according to value”) is a tax based on the value of real estate or personal property. It is more common than a specific tax, a tax based on the quantity of an item, such as cents per kilogram, regardless of price. It is levied on the basis of value given by producers. So sometimes, the primary difficulty with such taxation, especially in the case of tariffs, is in establishing a satisfactory value figure.

Q9. Paraellel economy emerges due to

(a) Tax Avoidance
(b) Tax Evasion
(c) Tax Compliance
(d) Tax Estimation
Ans: (b) Parallel economy (black economy) indicates the functioning of an unsanctioned sector in the economy whose objectives run parallel with the social objectives. Major contributory factor to such an economy is black money which is any money that a person or an organization acquires as by a means that involves tax evasion. It is that income from illegal activities that is not reported to the government for tax purposes.

Q10. Under-writting refers to

(a) under estimation
(b) under selling
(c) winding up the business
(d) an act of insuring risk
Ans: (d) The word “underwriter” is said to have come from the practice of having each risk-taker write his or her name under the total amount of risk that he or she was willing to accept at a specified premium. In a way, this is still true today, as new issues are usually brought to market by an underwriting syndicate in which each firm takes the responsibility (and risk) of selling its specific allotment.

Q11. The incidence of Tax refers to

(a) Who pays the Tax ?
(b) Who bears the burden of Tax ?
(c) How Taxes can be shifted ?
(d) Who transfers the Tax burden ?
Ans: (b) In economics, tax incidence is the analysis of the effect of a particular tax on the distribution of economic welfare. Tax incidence is said to “fall” upon the group that ultimately bears the burden of, or ultimately has to pay, the tax.

Q12. Core Industries are

(a) Basic industries
(b) Consumer goods industries
(c) Capital goods industries
(d) Government industries
Ans: (a) Core Industries are those necessary industries in an economy that are necessary for industrialization of a country. Such industries include Machine tools, chemicals, power, steel, etc. The Planning Commission of India has defined them as industries “involving significant investments or foreign exchange.” The Commission indicated that the core sector should include all the basic, strategic and critical industries, and no single criterion such as that of foreign exchange requirements should govern the definition of the core sector.

Q13. Interest paid by the government on the loans raised is called

(a) Debt Servicing
(b) Deficit Financing
(c) Discounted Budgeting
(d) Bridge-loan
Ans: (a) Debt service is the amount of money required to make payments on the principal and interest on outstanding loans, the interest on bonds, or the principal of maturing bonds. An individual or company unable to make such payments is said to be “unable to service one’s debt.”

Q14. In an economy, the sectors are classified into public and private on the basis of

(a) employment conditions
(b) nature of economic activities
(c) ownership of enterprises
(d) use of raw materials
Ans: (c) The classical breakdown of all economic sectors is: primary, secondary and tertiary. However, on the basis of ownership, the sectors are: business sector, private sector (privately run businesses), public sector (state sector) and voluntary sector.

Q15. The best Index of Economic Development is provided by:

(a) Growth in Percapita Real Income from year to year.
(b) Growth in National Income at Current Prices.
(c) Growth in savings ratio.
(d) Improvement in the Balance of Payments Position.
Ans: (a) Per capita Gross National Product (GNP) is the best index of development. It can be derived by dividing the GNP of a country with its population. Higher the level of per capita income, higher is the economic development. The World Bank, in its world development report 1998, classified the countries in the world on the bases of per capita GNP.

Q16. Which one of the following is not a ‘canon of taxation’ according to Adam Smith ?

(a) Canon of certainty
(b) Canon of simplicity
(c) Canon of convenience
(d) Canon of economy
Ans: (b) In this book, titled ‘The Wealth of Nations, ‘Adam smith only gave four canons of taxation: (i) canon of equity; (ii) canon of certainty; (iii) canon of convenience; and (iv) canon of economy.

Q17. Indirect taxes by nature are

(a) degressive (b) regressive
(c) progressive (d) proportional
Ans: (b) An indirect tax is one in which the burden can be shifted to others. The tax payer is not the tax bearer. The impact and incidence of indirect taxes are on different persons. Since, most of the indirect taxes are not progressive in nature, individuals may not mind to pay them. In other words, indirect taxes are generally regressive in nature. Therefore, individuals would not be de-motivated to work and to save, which may increase investment.

Q18. Taxation is a tool of

(a) Monetary policy
(b) Fiscal policy
(c) Price policy
(d) Wage policy
Ans: (b) In economics, fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy. The two main instruments of fiscal policy are government taxation and expenditure.

Q19. Which one of the following is the most appropriate reason for Inequalities in Income ?

(a) Racial factors
(b) Lack of opportunities
(c) Inheritance from family Environment
(d) Differences in Ability
Ans: (b) Joseph E. Stiglitz, a Nobel laureate in economics, has pointed how lack of opportunity leads to widening of inequality. It leads to concentration of income and wealth at the top, the hollowing out of the middle, and increasing poverty at the bottom.

Q20. Which one of the following is not included in current revenue of the Union Government ?

(a) Tax revenue
(b) Non-tax revenue
(c) Loans
(d) Interest payments
Ans: (c) Loans are not included in the current revenue of the Union Government.

Q21. Which one of the following is a direct tax ?

(a) Sales Tax
(b) Excise Tax
(c) Wealth Tax
(d) Entertainment Tax
Ans: (c) Direct tax is a tax levied directly on the person or company that has to pay it. These taxes are paid directly to the tax authority.

Q22. Custom duty is an instrument of

(a) Monetary Policy
(b) Foreign Trade Policy
(c) Industrial Policy
(d) Fiscal Policy
Ans: (b) Custom duty is a tax on imports imposed on an ad valorem basis, i.e, fixed in the form of a percentage on the value of the commodity imported.

Q23. The New Economic Policy was introduced by:

(a) Lenin (b) Stalin
(c) Kerensky (d) Khrushchev
Ans: (a) The New Economics Policy was introduced by Vladimir Ilyich Lenin (1870-1924). He was founder of modern communist Russia. He was the leader of Soviet Revolution of October 1917 . He liberated the country from the Czars and became Head of its first Communist Government (1917-1924) . He dedicated himself to the cause of workers’ revolution.

Q24. “Functional Finance” is associated with :

(a) Adolph Wogner
(b) Adam Smith
(c) Adams
(d) Abba ‘P’ Lerner
Ans: (d) Functional finance is an economic theory proposed by Abba P. Lerner, based on effective demand principle and chartalism. It states that government should finance itself to meet explicit goals, such as taming the business cycle, achieving full employment, ensuring growth, and low inflation.

Q25. ‘Gold’ is mainly related to

(a) Local market
(b) National market
(c) International market
(d) Regional market
Ans: (c) Gold is mainly related to the international market as of all the precious metals, it is the most popular as an investment. Gold has been used throughout history as money and has been a relative standard for currency equivalents specific to economic regions or countries, until recent times. Gold price has shown a long term correlation with the price of crude oil.

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