20 July Static Quiz 2021 (Indian Economy)

Solution: b)
Justification: NDP is basically the GDP minus the total value of the ‘wear and tear’ (depreciation) that happened in the assets while the goods and services were being produced. So, if the depreciation levels are low, it may show the achievements of the economy in the area of research and development which have tried cutting the levels of depreciation in a historical time period. The governments of the economies decide and announce the rates by which assets depreciate (done in India by the Ministry of Commerce and Industry) and a list is published.

Solution: d) Justification: To calculate economic growth, you need to estimate the total actual production of the last year and
compare it to that of next year.
Option A: Market cost calculations include inflation, and thus a mere increase in prices will indicate an increase in
GDP even if there has not been an actual production increase. So, A is wrong.
Option B: GNP at factor cost is more realistic because it also takes into account the NFIA as well as factor cost (which
is the manufacturing cost). But, then it does not take into account the depreciation of goods in the economy which
effectively reduces the total effective production of last year.
Option C and D: By these means, option D is the best choice, as option C is calculated at market cost.

Solution: b)
Justification: Value of a currency is determined by the forces of supply and demand in the international market. If
the demand for a currency is high, and supply low, its value tends to be higher. Any factor that increases supply or
reduces demand will instead lead to currency depreciation. Currency depreciation can occur due to any number of
reasons – economic fundamentals, interest rate differentials, political instability, risk aversion among investors and
so on. Countries with weak economic fundamentals such as chronic current account deficits and high rates of
inflation generally have depreciating currencies. Currency depreciation, if orderly and gradual, improves a nation’s export competitiveness and may improve its trade deficit over time. But abrupt and sizeable currency depreciation
may scare foreign investors who fear the currency may fall further, and lead to them pulling portfolio investments
out of the country, putting further downward pressure on the currency.

Solution: d)
Justification:M0 and M1, for example, are also called narrow money and include coins and notes that are in circulation and other money equivalents that can be converted easily to cash such as demand deposits held in banks.M2 includes M1 and, in addition, short-term time deposits in banks and certain money market funds, such as post office savings. M3 includes M2 in addition to long-term deposits, such as time deposits. M4 includes M3 plus other deposits. The term broad money is used to describe M2, M3 or M4, depending on the local practice.

Solution: b)
Justification: Truncation is the process of stopping the flow of the physical cheque issued by a drawer at some point
by the presenting bank en-route to the paying bank branch. In its place, an electronic image of the cheque is
transmitted to the paying branch through the clearing house, along with relevant information like data on the MICR
band, date of presentation, presenting bank, etc. Cheque truncation thus obviates the need to move the physical
instruments across bank branches, other than in exceptional circumstances for clearing purposes. This effectively
eliminates the associated cost of movement of the physical cheques, reduces the time required for their collection
and brings elegance to the entire activity of cheque processing. Thus, it also reduces the scope of loss of instruments in transit and removes reconciliation-related and logistics-related problems, thus benefitting the
system as a whole. CTS has been implemented in New Delhi, Chennai and Mumbai with effect from February 1,
2008, September 24, 2011 and April 27, 2013 respectively. After migration of the entire cheque volume from MICR
system to CTS, the traditional MICR-based cheque processing has been discontinued across the country.