IAS Prelims Question 2022

 IAS Prelims Question 2022

1- "Rapid Financing Instrument" and "Rapid Credit Facility" are related to the provisions of lending by which one of the following? 

(a) Asian Development Bank 

(b) International Monetary Fund 

(c) United Nations Environment Programme Finance Initiative 

(d) World Bank

Ans. 

Both the "Rapid Financing Instrument" and the "Rapid Credit Facility" are related to the provisions of lending by the (b) International Monetary Fund (IMF).

The International Monetary Fund (IMF) offers these financial instruments to provide rapid financial assistance to its member countries facing urgent balance of payments needs or economic crises. These facilities are designed to provide quick and flexible financial support to help countries stabilize their economies and address financial vulnerabilities.

1. Rapid Financing Instrument (RFI):

The RFI is a financial instrument created by the IMF to provide quick and flexible financial assistance to its member countries facing urgent balance of payments needs. Balance of payments refers to the record of all economic transactions between a country and the rest of the world over a specific period. When a country faces a sudden shortage of foreign exchange reserves or struggles to meet its international financial obligations, it can approach the IMF for support through the RFI.

The RFI was introduced by the IMF in 2011 to address the need for faster financial assistance to member countries without requiring them to adopt a full-fledged economic reform program typically associated with other IMF lending facilities. The RFI allows eligible countries to access funds swiftly to address their immediate financial and economic challenges.

2. Rapid Credit Facility (RCF):

The Rapid Credit Facility (RCF) is another financial instrument offered by the IMF, similar to the RFI. It was established to provide financial assistance to low-income countries facing urgent balance of payments problems, such as external shocks, natural disasters, or health crises. The RCF is designed to disburse funds quickly and efficiently to help these countries respond to pressing economic and social challenges without the need for a full-fledged economic program.

3. Relationship with the International Monetary Fund (IMF):

Both the RFI and the RCF are administered and provided by the International Monetary Fund (IMF). The IMF is an international organization that aims to promote global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.

Member countries contribute financial resources to the IMF, creating a pool of funds that can be used to provide financial assistance to countries facing economic difficulties. When a member country encounters urgent balance of payments needs or is dealing with unforeseen economic challenges, it can request financial assistance through the RFI or the RCF. These facilities allow the IMF to respond quickly and provide the necessary funds to support the country in stabilizing its economy and overcoming the immediate crisis.

It's important to note that while both the RFI and the RCF offer rapid financial assistance, they differ in their eligibility criteria and the types of countries they are designed to assist. The RFI is available to all IMF member countries, whereas the RCF specifically targets low-income countries. Additionally, the RFI may require some policy commitments from the borrowing country, while the RCF is generally concessional and comes with fewer conditions.

2 - 

With reference to the Indian economy, consider the following statements : 1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee. 2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness. 3. An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER. Which of the above statements are correct? (a) 1 and 2 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3

Ans- The correct answer is (c).

• Statement 1: An increase in NEER indicates the appreciation of rupee. This is because NEER is a weighted average of the exchange rates of the rupee against a basket of currencies. If the rupee appreciates against the currencies in the basket, then the NEER will increase.
• Statement 2: An increase in REER indicates an improvement in trade competitiveness. This is because REER is a measure of the real value of the rupee against a basket of currencies. If the real value of the rupee increases, then exports will become more competitive and imports will become less competitive.
• Statement 3: An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER. This is because NEER is not adjusted for inflation, while REER is. If domestic inflation increases, then the real value of the rupee will decrease, which will cause the REER to decrease. However, the NEER will not decrease, which will cause the divergence between NEER and REER to increase.

Therefore, statements 1 and 3 are correct. Statement 2 is not correct because an increase in REER does not necessarily indicate an improvement in trade competitiveness. For example, if the rupee appreciates against the currencies in the basket, but the inflation rate in India also increases, then the REER may increase even though trade competitiveness may not improve.

3-  

With reference to the Indian economy, consider the following statements: 1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities. 2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market. 3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars. Which of the statements given above are correct? (a) 1 and 2 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3

Ans-  The correct answer is (b), 2 and 3 only.

Statement 1 is correct because if inflation is too high, the RBI will want to increase the money supply in the economy. Buying government securities is one way to do this.

Statement 3 is correct because if interest rates in the US or EU fall, it will make it more attractive for investors to invest in India. This will increase the demand for rupees, which will put upward pressure on the value of the rupee. To prevent the rupee from appreciating too much, the RBI may buy dollars in the market.

Statement 2 is not correct because if the rupee is depreciating, the RBI will want to sell dollars in the market to try to prop up the value of the rupee.

Here is a table summarizing the effects of the three statements on the Indian economy:

Statement	Effect on the Indian economy
RBI buys government securities	Increase in money supply, which can lead to inflation
RBI sells dollars in the market	Decrease in demand for rupees, which can lead to depreciation
RBI buys dollars in the market	Increase in supply of rupees, which can lead to appreciation

4- With reference to the "G20 Common Framework", consider the following statements: 1. It is an initiative endorsed by the G20 together with the Paris Club. 2. It is an initiative to support Low Income Countries with unsustainable debt. Which of the statements given above is/are correct ? 

(a) 1 only 

(b) 2 only 

(c) Both 1 and 2 

(d) Neither 1 nor 2

Ans- The correct answer is (c), both 1 and 2.

The G20 Common Framework is an initiative endorsed by the G20 together with the Paris Club to support Low Income Countries with unsustainable debt. The framework provides a coordinated approach to debt treatment for these countries, with the aim of ensuring that they can achieve debt sustainability and continue to provide essential services to their citizens.

Statement 1 is correct because the G20 Common Framework was endorsed by the G20 and the Paris Club. The G20 is a group of 20 major economies, and the Paris Club is a group of official creditors that provide debt relief to countries in financial difficulty.

Statement 2 is also correct because the G20 Common Framework is specifically designed to support Low Income Countries with unsustainable debt. These countries are often unable to service their debt without external assistance, and the G20 Common Framework provides a mechanism for providing this assistance.

Therefore, both statements 1 and 2 are correct. The G20 Common Framework is an important initiative that is designed to help Low Income Countries with unsustainable debt.

5- With reference to the

Indian economy, what

are the advantages of

"Inflation-Indexed

Bonds (IIBs)" ?

1. Government can

reduce the coupon

rates on its borrowing

by way of IIBs. With reference to the

Indian economy, what

are the advantages of

"Inflation-Indexed

Bonds (IIBs)" ?

1. Government can

reduce the coupon

rates on its borrowing

by way of IIBs.With reference to the

Indian economy, what

are the advantages of

"Inflation-Indexed

Bonds (IIBs)" ?

1. Government can

reduce the coupon

rates on its borrowing

by way of IIBs.With reference to the

Indian economy, what

are the advantages of

"Inflation-Indexed

Bonds (IIBs)" ?

1. Government can reduce the coupon rates on its borrowing by way of IIBs. With reference to the Indian economy, what are the advantages of "Inflation-Indexed Bonds (IIBs)" ?

1. Government can

reduce the coupon

rates on its borrowing

by way of IIBs.With reference to the

Indian economy, what

are the advantages of

"Inflation-Indexed

Bonds (IIBs)" ?

1. Government can

reduce the coupon

rates on its borrowing

by way of IIBs. 2. IIBs provide

protection to the

investors from

uncertainty regarding

inflation.

3. The interest

received as well as

capital gains on IIBs are

not taxable.

Which of the

statements given

above are correct ?

(a) 1 and 2 only

(b) 2 and 3 only

(c) 1 and 3 only

(d) 1, 2 and 3

Ans- 

The correct answer is (a), 1 and 2 only.

The advantages of Inflation-Indexed Bonds (IIBs) in the Indian economy are:

• Reduced coupon rates on government borrowing: IIBs are issued with a fixed coupon rate, but the principal amount is adjusted for inflation. This means that the investor is protected from the erosion of their investment due to inflation. As a result, the government can afford to offer a lower coupon rate on IIBs than on other types of bonds.
• Protection from uncertainty regarding inflation: IIBs provide investors with protection from uncertainty regarding inflation. This is because the principal amount of the bond is adjusted for inflation, so the investor is guaranteed to receive a real return on their investment.

Statement 1 is correct because IIBs can help the government to reduce the coupon rates on its borrowing. This is because the government can offer a lower coupon rate on IIBs than on other types of bonds, since the principal amount of the bond is adjusted for inflation.

Statement 2 is also correct because IIBs provide protection to investors from uncertainty regarding inflation. This is because the principal amount of the bond is adjusted for inflation, so the investor is guaranteed to receive a real return on their investment.

Statement 3 is not correct because the interest received on IIBs is taxable, but the capital gains on IIBs are not taxable. This means that investors do have to pay tax on the interest they receive on IIBs, but they do not have to pay tax on the capital gains they make on IIBs.

Therefore, the correct answer is (a), 1 and 2 only.

6- With reference to

foreign-owned ecommerce firms,

operating in India,

which of the following

statements is/are

correct? 1. They can sell their

own goods in addition

to offering their

platforms as market

-

places.

2. The degree to which

they can own big

sellers on their

platforms is limited.

Select the correct

answer using the code

given below:

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Ans - 

The correct answer is (a), only statement 1.

Foreign-owned e-commerce firms operating in India can sell their own goods in addition to offering their platforms as marketplaces. This is because they are allowed to operate as both marketplace and inventory-based models. However, there is no limit on the degree to which they can own big sellers on their platforms.

Therefore, only statement 1 is correct.

Here are the relevant rules and regulations governing foreign-owned e-commerce firms in India:

• The Foreign Direct Investment (FDI) policy for e-commerce allows 100% FDI under the automatic route for marketplace models and up to 25% FDI under the government approval route for inventory-based models.
• The Competition Commission of India (CCI) has not imposed any cap on the market share of any single seller on a marketplace platform.
• The Consumer Protection (E-Commerce) Rules, 2020 prohibit e-commerce platforms from engaging in unfair trade practices, such as favoring certain sellers over others.

I hope this helps! Let me know if you have any other questions.

Which of the following

activities constitute

real sector in the

economy?

1. Farmers harvesting

their crops

2. Textile mills

converting raw cotton

into fabrics

3. A commercial bank

lending money to a

trading company

4. A corporate body

issuing Rupee

Denominated Bonds

overseas

Select the correct

answer using the code

given below: (a) 1 and 2 only

(b) 2, 3 and 4 only

(c) 1, 3 and 4 only

(d) 1, 2, 3 and 4

Ans- The correct answer is (a), 1 and 2 only.

The real sector of the economy is the part of the economy that produces goods and services. This includes agriculture, manufacturing, construction, and transportation. The financial sector, on the other hand, is the part of the economy that facilitates the exchange of goods and services. This includes banks, insurance companies, and investment firms.

Activities 1 and 2 are both examples of the real sector of the economy. Farmers harvesting their crops and textile mills converting raw cotton into fabrics are both examples of the production of goods.

Activities 3 and 4 are both examples of the financial sector of the economy. A commercial bank lending money to a trading company is an example of financial intermediation, and a corporate body issuing Rupee Denominated Bonds overseas is an example of financial investment.

Therefore, the only activities that constitute the real sector of the economy are 1 and 2.

Here is a table summarizing the activities and the sectors they belong to:

Activity	Sector
Farmers harvesting their crops	Real sector
Textile mills converting raw cotton into fabrics	Real sector
A commercial bank lending money to a trading company	Financial sector
A corporate body issuing Rupee Denominated Bonds overseas	Financial sector

I hope this helps! Let me know if you have any other questions.

8- Which one of the following situations best reflects "Indirect Transfers" often talked about in media recently with reference to India ? 

(a) An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment 

(b) A foreign company investing in India and paying taxes to the country of its base on the profits arising out of its investment 

(c) An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India 

(d) A foreign company transfers shares and such shares derive their substantial value from assets located in India

Ans. The correct answer is (d), a foreign company transfers shares and such shares derive their substantial value from assets located in India.

Indirect transfers are a way for companies to avoid paying taxes in India. They do this by transferring assets or shares that derive their substantial value from assets located in India to a foreign company. The foreign company then pays taxes on the profits arising out of these assets or shares in the country where it is located.

In the situation described in option (d), the foreign company would be able to avoid paying taxes in India on the profits arising out of the shares. This is because the shares would be located in a foreign country and the profits would be taxed in that country.

The other options do not reflect indirect transfers. In option (a), the Indian company is investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment. This is not an indirect transfer because the Indian company is actually investing in the foreign enterprise and is therefore subject to taxes in the foreign country.

In option (b), the foreign company is investing in India and paying taxes to the country of its base on the profits arising out of its investment. This is not an indirect transfer because the foreign company is actually investing in India and is therefore subject to taxes in India.

In option (c), the Indian company is purchasing tangible assets in a foreign country and selling such assets after their value increases and transfers the proceeds to India. This is not an indirect transfer because the Indian company is actually purchasing and selling assets in a foreign country.

Therefore, the only option that reflects indirect transfers is option (d).

9- With reference to the expenditure made by an organisation or a company, which of the following statements is/are correct? 

1. Acquiring new technology is capital expenditure. 

2. Debt financing is considered capital expenditure, while equity financing is considered revenue expenditure. Select the correct answer using the code given below: 

(a) 1 only 

(b) 2 only 

(c) Both 1 and 2 

(d) Neither 1 nor 2

Ans- The correct answer is (a), only statement 1.

Capital expenditure is the expenditure incurred on acquiring long-term assets, such as land, buildings, machinery, and equipment. This type of expenditure is expected to generate benefits for the company over a long period of time.

Revenue expenditure is the expenditure incurred on acquiring short-term assets, such as raw materials, consumables, and wages. This type of expenditure is expected to generate benefits for the company over a short period of time.

Statement 1 is correct because acquiring new technology is a long-term investment that is expected to generate benefits for the company over a long period of time.

Statement 2 is incorrect because debt financing and equity financing are both forms of financing, not expenditure. Financing is the process of raising money to fund a business or project. Debt financing is the process of raising money by borrowing from a lender, while equity financing is the process of raising money by issuing shares to investors.

Therefore, the only statement that is correct is statement 1.

10- With reference to the Indian economy, consider the following statements : 

1. A share of the household financial savings goes towards government borrowings. 

2. Dated securities issued at marketrelated rates in auctions form a large component of internal debt. Which of the above statements is/are correct ? 

(a) 1 only 

(b) 2 only 

(c) Both l and 2 

(d) Neither 1 nor 2

Ans- The correct answer is (c), both 1 and 2.

Household financial savings are the savings of households in an economy. These savings can be in the form of cash, bank deposits, investments, and other assets.

Government borrowings are the loans that the government takes from the public. These borrowings can be in the form of treasury bills, bonds, or other debt instruments.

Dated securities are long-term debt instruments that are issued at a premium to their face value. They are typically issued at market-related rates and are a popular form of government borrowing.

Statement 1 is correct because a share of the household financial savings goes towards government borrowings. This is because the government often issues dated securities at market-related rates in auctions to raise funds.

Statement 2 is also correct because dated securities issued at market-related rates in auctions form a large component of internal debt. This is because the government often issues dated securities to raise funds, and these securities form a large part of the government's debt portfolio.

Therefore, both statements 1 and 2 are correct.

Here is a table summarizing the two statements:

Statement	Explanation
1. A share of the household financial savings goes towards government borrowings.	Household financial savings are the savings of households in an economy. These savings can be in the form of cash, bank deposits, investments, and other assets. The government often issues dated securities at market-related rates in auctions to raise funds. A share of these savings is used to purchase these securities, which in turn go towards government borrowings.
2. Dated securities issued at market-related rates in auctions form a large component of internal debt.	Dated securities are long-term debt instruments that are issued at a premium to their face value. They are typically issued at market-related rates and are a popular form of government borrowing. The government often issues dated securities to raise funds, and these securities form a large part of the government's debt portfolio.