Day-511 | Daily MCQs | UPSC Prelims | ECONOMY

Answer: D
Explanation:
● Statement 1 is incorrect: It can be only issued by the central government (not state government) to meet short term cash flow mismatches.
● Statement 2 is correct: CMBs are issued only for the duration of less than 91 days. Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the Government of India and are presently issued in three tenors, namely, 91 day, 182 day and 364 day.
● Statement 3 is correct: CMBs qualify as SLR securities. Under Section 24 of the Banking Regulation Act of 1949, investment in CMBs is also recognized as an eligible investment in government securities by banks for SLR purposes.
Additional information:
● The term Cash Management Bill (CMB) refers to a short-term security .The maturity of a CMB can range from a few days to three or four months.
● Unlike other Treasury Bills (T-Bills), CMBs are typically not sold on a regular basis because they are only offered when the government has a low cash balance.
● As such, the money raised through these issues is used by the Treasury to meet any temporary cash shortfalls and provide emergency funding.
● They tend to pay higher yields than fixed-maturity bills but their shorter maturities can lead to a lower overall interest expense.
● CMBs are generally meant for institutional investors because of the higher minimum investment requirement.

Answer: B
Explanation:
● Statement 1 is correct: In a market economy, economic transactions are based on the law of demand and supply.
● Statement 2 is incorrect: In market economy, individuals and private firms make the major decisions about production and consumption. In the market economy, though the government has least intervention but can look up to regulatory parts like fairs trade, policy development.
● Statement 3 is correct: Laissez faire economy is the extreme case of a market economy.
Additional information:
● A market economy is an economic system in which economic decisions and the pricing of goods and services are guided by the interactions of a country’s individual citizens and businesses. There may be some government intervention or central planning, but usually this term refers to an economy that is more market oriented in general.
● In a market economy, most economic decision making is done through voluntary transactions according to the laws of supply and demand.
● A market economy gives entrepreneurs the freedom to pursue profit by creating outputs that are more valuable than the inputs they use up, and free to fail and go out of business if they do not.
● Economists broadly agree that market-oriented economies produce better economic outcomes, but differ on the precise balance between markets and central planning that is best for a nation’s long-term wellbeing.
● Market economies may still engage in some government interventions, such as price-fixing, licensing, quotas, and industrial subsidies.
● Overall, market economies are characterized by decentralized economic decision making by buyers and sellers transacting everyday business.
● Market economies can be distinguished by having functional markets for corporate control, which allow for the transfer and reorganization of the economic means of production among entrepreneurs.

Answer: C
Explanation:
● Statement 1 is correct: The GVA is defined as the output of the country minus intermediate consumption, which is the difference between gross output and net output. The Gross value added (GVA) is defined as output (at basic prices) minus intermediate consumption (at purchaser prices)
● Statement 2 is correct: The relationship between the GVA and the GDP is defined as: GVA= GDP + subsidies on products – taxes on products. When the total subsidies on products are higher than total taxes on those products, then the GVA will be greater than the GDP.
Additional information:
● The Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.Gross Domestic Product is the monetary value of all finished goods and services made within a country during a specific period.
● The GDP provides an economic snapshot of a country, used to estimate the size of an economy and its growth rate. GDP can be calculated in three ways, using expenditures, production, or incomes and it can be adjusted for inflation and population to provide deeper insights.
● The Gross value added (GVA) is an economic productivity metric that measures the contribution of a corporate subsidiary, company, or municipality to an economy, producer, sector, or region.
● The GVA provides a dollar value for the amount of goods and services that have been produced in a country, minus the cost of all inputs and raw materials that are directly attributable to that production. GVA thus adjusts Gross Domestic Product (GDP) by the impact of subsidies and taxes (tariffs) on products.
● GVA is important because it is used to adjust GDP, which is a key indicator of the state of a nation’s total economy.

Answer: C
Explanation:
● Option 1 is correct: The government increases taxes on various goods and services to increase revenue. This helps to reduce the fiscal deficit by bringing more money into the government’s coffers.
● Option 2 is correct: Borrowing from external sources can finance the budgetary deficit.
● Option 3 is incorrect: Before, 1997, the Government of India used to borrow from the RBI by printing money directly. This is not good economic practice. In 1997, Way and Means Advances was introduced so as to meet mismatches in the receipts and payments of the government. The government can avail immediate cash from the RBI, if required. But it has to return the amount within 90 days. Interest is charged at the existing repo rate.
● Option 4 is correct: Revenue generated from the disinvestment from PSUs can be used to finance the budget deficit.
Additional information:
● A budget deficit occurs when expenses exceed revenue and can indicate the financial health of a country. The term is commonly used to refer to government spending rather than businesses or individuals.
● Budget deficits affect the national debt, the sum of annual budget deficits, and the cumulative total a country owes to creditors.
● A budget deficit can lead to higher levels of borrowing, higher interest payments, and low reinvestment, which will result in lower revenue during the following year.
● Both levels of taxation and spending affect a government’s budget deficit. Common scenarios that create deficits by reducing revenue and increasing spending include:
1) Tax structure that under taxes high-wage earners but overtaxes low-wage earners.
2) Increased spending on programs like Social Security, Medicare, or military spending.
3) Increased government subsidies to targeted industries.
4) Tax cuts that decrease revenue but provide corporations with funds to increase employment.
5) Low GDP, or gross domestic product, results in lower tax revenue

Answer: B
Explanation:
● TRIMs negotiated during the Uruguay Round, applies only to measures that affect trade in goods. Recognizing that certain investment measures can have trade-restrictive and distorting effects, it states that no Member shall apply a measure that is prohibited by the provisions of GATT Article III (national treatment) or Article XI (quantitative restrictions). Hence, statements 1 and 2 are correct.
● The agreement recognizes that certain investment measures restrict and distort trade. It provides that no contracting party shall apply any TRIM inconsistent with Articles III (national treatment) and XI (prohibition of quantitative restrictions) of the GATT. To this end, an illustrative list of TRIMs agreed to be inconsistent with these articles is appended to the agreement. The list includes measures which require particular levels of local procurement by an enterprise (“local content requirements”) or which restrict the volume or value of imports such an enterprise can purchase or use to an amount related to the level of products it exports (“trade balancing requirements”).
● Article VI of the GATT provides for the right of contracting parties to apply anti-dumping measures, i.e. measures against imports of a product at an export price below its “normal value” (usually the price of the product in the domestic market of the exporting country) if such dumped imports cause injury to a domestic industry in the territory of the importing contracting party. More detailed rules governing the application of such measures are currently provided in an Anti-dumping Agreement concluded at the end of the Tokyo Round. Negotiations in the Uruguay Round have resulted in a revision of this Agreement which addresses many areas in which the current Agreement lacks precision and detail. Hence, statement 3 is incorrect.