Day-494 | Daily MCQs | UPSC Prelims | ECONOMY

Answer: B
Explanation:
● Statement 1 is correct: It occurs when there is an increase in money supply.
● Statement 2 is incorrect: Government policies like tax reduction give consumers a higher discretionary income for spending on goods and services.
● Statement 3 is correct: Government spending increases demand for certain products. If this outpaces supply, it causes demand-pull inflation.
Additional information:
● Inflation is a general rise in the price of goods in an economy. Demand-pull inflation causes upward pressure on prices due to shortages in supply, a condition that economists describe as “too many dollars chasing too few goods.” An increase in aggregate demand can also lead to this type of inflation.
● In Keynesian economics, an increase in aggregate demand may be caused by a rise in employment, as companies need to hire more people to increase their output. A tight labor market means higher wages, which translates into greater demand.
● When aggregate demand surpasses available supply, higher prices are the result. This is demand-pull inflation.
Five primary causes of demand-pull inflation:
• A growing economy: When consumers feel confident, they spend more and take on more debt. This leads to a steady increase in demand, which means higher prices.
• Increasing export demand: A sudden rise in exports forces an undervaluation of the currencies involved.
• Government spending: When the government spends more freely, prices go up.
• Inflation expectations: Companies may increase their prices in expectation of inflation in the near future.
• More money in the system: An expansion of the money supply with too few goods to buy makes prices increase.

Answer: B
Explanation:
● Statement 1 is correct: It occurs when the government officially increases the exchange rate in a fixed exchange rate system.
● Statement 2 is correct: It leads to decline in purchasing power of people as in general when currency loses value it costs more money.
● Statement 3 is incorrect: It is generally used as a monetary policy tool to increase exports.
Additional information:
● Currency devaluation refers to the downward adjustment to a country’s value of money relative to a foreign currency or standard.
● The negative implications of devaluation include fostering uncertainty within the global markets and creating tension between other competing countries.
● Devaluation can result in an increase in the prices of products and services over time. The increase in the price of imports causes consumers to purchase their goods from domestic industries. The amount of the price increases, however, is dependent on the competition of supply and aggregate demand.

Answer: B
Explanation:
● Statement 1 is incorrect: It explains the relationship between changes in government tax revenue growth and changes in GDP. Tax elasticity refers to change in tax revenue in response to changes in tax rate.
● Statement 2 is correct: When a tax is buoyant, it generates more income without increasing the rate of taxation.
Additional information:
● Tax buoyancy is the relationship among variations in the government’s tax income change and the potential in GDP. It has to do with the sensitivity of tax revenue growth to changes in GDP.
● When a tax collects greater revenue without changing the rate of taxing, it is said to be buoyant. Tax buoyancy is influenced by several factors, including the volume of the tax base, the attractiveness of the tax authorities, and the rationale and transparency of the tax rates.
● As a result, tax buoyancy inside a given year may show the effects of a series of negative events that occurred during that year. However, policy adjustments initiated a few years ago usually result in a lengthier tendency of tax buoyancy over roughly five years. As a result, the delayed impact of changes in policy on tax buoyancy is difficult to overlook.
● The Tax Buoyancy Formula is measured as the proportion of tax revenue growth to nominal GDP growth for a particular year. If gross tax receipts improve more than proportionally in response to an increase in GDP estimates, the tax system is buoyant.

Answer: B
Explanation:
● Statement 1 is incorrect: Inventory based model of e-commerce means an e-commerce activity where inventory of goods and services is owned by e-commerce entities and is sold to the consumers directly. While the Marketplace based model is a platform to act as a mere facilitator of transactions between buyer and seller.
● Statement 2 is correct: No FDI is allowed in the inventory model of e -commerce, while 100% FDI is allowed in the marketplace model under automatic route in India.
Additional information:
● Inventory based model of e-commerce refers to the model where e-commerce marketplaces store inventory from brands, merchants, and sellers and sell the products directly to the consumers. Marketplaces following the inventory model manage the stocks from their sellers, thus helping them in order fulfillment.
● The most common example of brands following the inventory model is Amazon FBA. Amazon FBA sources the inventory from the sellers and manufacturers, stores it, and dispatches the orders. Other examples include Jabong, Yepme, and LatestOne, which aced on speedier delivery, enhanced customer experience, and better quality control.
● The marketplace model of e-commerce refers to the business model where e-commerce marketplaces provide a centralized platform to multiple sellers where they can sell their products while connecting with potential customers.
● The most common examples of the Marketplace Model of E-commerce are Amazon FBM, Shopclues, eBay, Etsy, etc.

Answer: C
Explanation:
● Statement 1 is correct: All banknotes issued by RBI are backed by assets as gold or government securities. However, one rupee note is issued by GoI and not backed by any assets by RBI.
● Statement 2 is correct: Currency notes and coins do not have intrinsic value i.e. the piece of paper in case of rupee note or the iron in case of coin does not have the value of the material but it derives its value from the promise of RBI.
● Statement 3 is correct: They are called as legal tenders as they cannot be refused by any citizens of the country.
Additional information:
● Currency in circulation refers to the amount of cash in the form of paper notes or coins within a country that is physically used to conduct transactions between consumers and businesses.
● Currency in circulation is all of the money that has been issued by a country’s monetary authority, minus cash that has been removed from the system. Currency in circulation represents part of the overall money supply, with a portion of the overall supply being stored in checking and savings accounts.
● Currency in circulation can also be thought of as currency in hand because it is the money used throughout a country’s economy to buy goods and services. Monetary authorities of central banks pay attention to the amount of physical currency in circulation because it represents one of the most liquid asset classes.
● Currency in circulation is less important to central banks’ monetary policy relative to other types of money (for example bank reserves) because the quantity of currency is relatively less flexible.