How the interest level of a country is affected by FDI?
(a) increases
(b) decreases
(c) remains unaffected
(d) there is an increase or decrease
Solution: (b)
A higher international interest rate will decrease FDI since it means a higher cost of fund in international market, and vice versa. Interest rate is a measure of the cost of capital. A higher interest rate implies more costly investment and, therefore, the higher the interest rate, the more it is likely to defer FDI and the relationship between FDI and the interest rate is expected to be negative. Love and Lage-Hidalgo (2000) and Erdal and Tatoglu (22002), amongst others, find that an increase in the interest rate leads to a decrease in FDI. Interest rate and FDI can both be the cause and effect of other.
A financial instrument is called a ‘primary security’ if it represents the liability of :
(a) some ultimate borrower
(b) the Government of India
(c) a primary cooperative bank
(d) a commercial bank
Solution: (a)
Instruments (certificates) issued by the ultimate borrower are called primary securities. Instruments issued by intermediaries on behalf of the ultimate borrower are called indirect securities. The market for instruments (also called securities) issued for the first time, is called the primary market. Primary security is the asset created out of the credit facility extended to the borrower and / or which are directly associated with the business / project of the borrower for which the credit facility has been extended.
Which one of the following is NOT an example of indirect tax?
(a) Sales tax
(b) Excise duty
(c) Customs duty
(d) Expenditure tax
Solution: (d)
Expenditure tax is a taxation plan that replaces the income tax (a direct tax). Instead of applying a tax based on the income earned, tax is allocated based on the rate of spending. This is different from a sales tax, which is applied at the time the goods or services are provided and is considered a consumption tax. The major benefit for this type of tax scheme is the removal of double taxation.
A tax is characterized by horizontal equity if its liability is
(a) proportional to the income of taxpayers
(b) similar for taxpayers in similar circumstances
(c) proportional to the expenditure of taxpayers
(d) the same for every taxpayer
Solution: (a)
The principle of equity includes both horizontal and vertical. Equity is determined by first assessing an individual’s ability-to-pay. The idea of the ability to-pay principle considers whether or not it is fair to tax someone higher just because that person has the ability and resources to pay. If it is decided that they should be required to pay more, the question of how much more arises. These questions can be analyzed through horizontal and vertical equity which are subsets of the ability-to-pay principle. Horizontal equity suggests it is fair for people of equal ability to pay the same amount in taxes. Vertical equity is the idea that people who has a higher ability to pay more than those who have a lower ability to pay, as long as the increase in tax level is considered to be reasonable.
The buoyancy of a tax is defined as
(a) percentage increase in tax revenue/percentage increase in the tax base
(b) increase in tax revenue/ percentage increase in tax coverage
(c) increase in tax revenue/increase in the tax base
(d) percentage increase in tax revenue/ increase in tax coverage
Solution: (c)
Buoyancy means the growth/increase in tax collections. This is in line with the GDP growth within the economy, the industry profile and the tax structure administered by the government. Tax buoyancy measures the total response of tax revenues to changes in national income. Total response takes into account both increases in income and discretionary changes (i.e., tax rates and bases) made by tax authorities in the system. The responsiveness of tax revenues to discretionary changes in the tax rate and in the tax base in relation to the GDP is termed the buoyancy of the tax system. Therefore, tax buoyancy is a measure of both the soundness of the tax bases and the effectiveness of tax changes in terms of revenue collection. Tax elasticity, on the other hand, measures the pure response of tax revenues to changes in the national income.
The existence of a Parallel Economy or Black Money
(a) makes the economy more competitive
(b) makes the monetary policies less effective
(c) ensures a better distribution of income and wealth
(d) ensures increasing productive investment
Solution: (b)
In India, Black money refers to funds earned on the black market, on which income and other taxes has not been paid. Black money leads to black liquidity which is immune to any monetary-fiscal policy. It can move around in the economy creating excess demand in several vulnerable sectors of the economy. Of particular relevance in this context is a policy dominated by sector-wise credit rationing in order to maintain inter-sectoral balances. The cost of credit is one one part of such a policy. So, in nutshell, the existence of parallel economy erodes the effectiveness of monetary policies.
The incidence of sales tax falls on
(a) Consumers
(b) Wholesale dealers
(c) Retail dealers
(d) Producers
Solution: (a)
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. The key concept is that the tax incidence or tax burden does not depend on where the revenue is collected, but on the price elasticity of demand and price elasticity of supply. A tax on the sale of goods (sales tax, excise tax) will ultimately be paid by either the consumer or the firm based on elasticities, regardless of who the government actually levies the tax on. If the consumer ultimately pays the tax, it means that the tax incidence falls on the consumer. If the firm ultimately pays the tax, it means that the tax incidence ultimately falls on the firm.
State which of the following is correct. The Consumer Price Index reflects:
(a) the standard of living
(b) the extent of inflation in the prices of consumer goods
(c) the increasing per capita income
(d) the growth of the economy
Solution: (b)
A consumer price index (CPI) measures changes in the price level of consumer goods and services purchased by households. The annual percentage change in a CPI is used as a measure of inflation. A CPI can be used to index (i.e., adjust for the effect of inflation) the real value of wages, salaries, pensions, for regulating prices and for deflating monetary magnitudes to show changes in real values.
Basic infrastructure facilities in Economics are known as:
(a) Human capital
(b) Physical capital
(c) Social overheads capital
(d) Working capital
Solution: (c)
Social overheads capital is the capital spent on social infrastructure, such as schools, universities, hospitals, libraries. They are capital goods of types which are available to anybody, hence social; and are not tightly linked to any particular part of production, hence overhead. Because of their broad availability they often have to be provided by the government. Examples of social overhead capital include roads, schools, hospitals, and public parks.
Deficit financing is an instrument of
(a) monetary policy
(b) credit policy
(c) fiscal policy
(d) tax policy
Solution: (c)
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. Deficit financing is defined as financing the budgetary deficit through public loans and creation of new money. Deficit financing in India means the expenditure which in excess of current revenue and public borrowing.
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