UPSC STATIC QUIZ – Economy : 22 May 2024

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We will post 5 questions daily on static topics mentioned in the UPSC civil services preliminary examination syllabus. Each week will focus on a specific topic from the syllabus, such as History of India and Indian National Movement, Indian and World Geography, and more.

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• Question 1 of 5 1. Question If the rupee is devalued against foreign currencies, it may lead to A higher Cash Reserve Ratio (CRR) in the banking system Increase in the inflow of foreign exchange Greater exports and lesser imports How many of the above statements is/are correct? a) Only one b) Only two c) All three d) None Correct Solution: b) Statement 1 is incorrect. As rupee is devalued, it becomes cheaper for other country residents. So, they demand greater Indian goods (exports). Reverse happens for us, we demand lesser imports (as they become costlier in terms of Indian currency). Statement 3 leads to statement 2, i.e. inflow of foreign exchange. There is another channel for this flow, which is greater FDI or FII. For a foreign investor, Indian securities or land or labour would become cheaper, and there is thus an incentive to invest in India. Incorrect Solution: b) Statement 1 is incorrect. As rupee is devalued, it becomes cheaper for other country residents. So, they demand greater Indian goods (exports). Reverse happens for us, we demand lesser imports (as they become costlier in terms of Indian currency). Statement 3 leads to statement 2, i.e. inflow of foreign exchange. There is another channel for this flow, which is greater FDI or FII. For a foreign investor, Indian securities or land or labour would become cheaper, and there is thus an incentive to invest in India.

#### 1. Question

If the rupee is devalued against foreign currencies, it may lead to

• A higher Cash Reserve Ratio (CRR) in the banking system

• Increase in the inflow of foreign exchange

• Greater exports and lesser imports

How many of the above statements is/are correct?

• a) Only one

• b) Only two

• c) All three

Solution: b)

Statement 1 is incorrect.

As rupee is devalued, it becomes cheaper for other country residents. So, they demand greater Indian goods (exports). Reverse happens for us, we demand lesser imports (as they become costlier in terms of Indian currency).

Statement 3 leads to statement 2, i.e. inflow of foreign exchange. There is another channel for this flow, which is greater FDI or FII. For a foreign investor, Indian securities or land or labour would become cheaper, and there is thus an incentive to invest in India.

Solution: b)

Statement 1 is incorrect.

• Question 2 of 5 2. Question Movements in the foreign currency assets (FCA) in India occur mainly on account of External aid receipts of the Central Government Effects of revaluation of the assets Purchase and sale of foreign exchange by the RBI Income arising out of the deployment of the foreign exchange reserves How many of the above statements is/are correct? a) Only one b) Only two c) Only three d) All four Correct Solution: d) “Movements in the FCA occur mainly on account of purchases and sales of foreign exchange by the RBI, income arising out of the deployment of the foreign exchange reserves, external aid receipts of the Central Government and the effects of revaluation of the assets,” Incorrect Solution: d) “Movements in the FCA occur mainly on account of purchases and sales of foreign exchange by the RBI, income arising out of the deployment of the foreign exchange reserves, external aid receipts of the Central Government and the effects of revaluation of the assets,”

#### 2. Question

Movements in the foreign currency assets (FCA) in India occur mainly on account of

• External aid receipts of the Central Government

• Effects of revaluation of the assets

• Purchase and sale of foreign exchange by the RBI

• Income arising out of the deployment of the foreign exchange reserves

How many of the above statements is/are correct?

• a) Only one

• b) Only two

• c) Only three

• d) All four

Solution: d)

“Movements in the FCA occur mainly on account of purchases and sales of foreign exchange by the RBI, income arising out of the deployment of the foreign exchange reserves, external aid receipts of the Central Government and the effects of revaluation of the assets,”

Solution: d)

• Question 3 of 5 3. Question Consider the following statements regarding transfer pricing. Transfer pricing is an accounting practice that represents the price that one division in a company charges another division for goods and services provided. Transfer pricing is used by companies to reduce the overall tax burden of the parent company. The transfer pricing practice does not extend to cross-border transactions. How many of the above statements is/are correct? a) Only one b) Only two c) All three d) None Correct Solution: b) Statement 3 is incorrect. Transfer pricing is an accounting practice that represents the price that one division in a company charges another division for goods and services provided. Transfer pricing allows for the establishment of prices for the goods and services exchanged between subsidiaries, affiliates, or commonly controlled companies that are part of the same larger enterprise. Transfer pricing can lead to tax savings for corporations. The transfer pricing practice extends to cross-border transactions as well as domestic ones. Companies use transfer pricing to reduce the overall tax burden of the parent company. How does transfer pricing work? The I-T Department gives the following example: “Suppose a company A purchases goods for 100 rupees and sells it to its associated company B in another country for 200 rupees, who in turn sells in the open market for 400 rupees. “Had A sold it (the good) direct, it would have made a profit of 300 rupees. But by routing it through B, it (A) restricted it (profit) to 100 rupees, permitting B to appropriate the balance. “The transaction between A and B is arranged and not governed by market forces. The profit of 200 rupees is, thereby, shifted to the country of B. The goods is transferred on a price (transfer price) which is arbitrary or dictated (200 hundred rupees), but not on the market price (400 rupees).” The effect of transfer pricing is that the parent company — or a specific subsidiary — tends to produce insufficient taxable income or excessive loss on a transaction. Profits accruing to the parent can be increased by setting high transfer prices to siphon profits from subsidiaries domiciled in high-tax countries, and low transfer prices to move profits to subsidiaries located in low-tax jurisdiction. Incorrect Solution: b) Statement 3 is incorrect. Transfer pricing is an accounting practice that represents the price that one division in a company charges another division for goods and services provided. Transfer pricing allows for the establishment of prices for the goods and services exchanged between subsidiaries, affiliates, or commonly controlled companies that are part of the same larger enterprise. Transfer pricing can lead to tax savings for corporations. The transfer pricing practice extends to cross-border transactions as well as domestic ones. Companies use transfer pricing to reduce the overall tax burden of the parent company. How does transfer pricing work? The I-T Department gives the following example: “Suppose a company A purchases goods for 100 rupees and sells it to its associated company B in another country for 200 rupees, who in turn sells in the open market for 400 rupees. “Had A sold it (the good) direct, it would have made a profit of 300 rupees. But by routing it through B, it (A) restricted it (profit) to 100 rupees, permitting B to appropriate the balance. “The transaction between A and B is arranged and not governed by market forces. The profit of 200 rupees is, thereby, shifted to the country of B. The goods is transferred on a price (transfer price) which is arbitrary or dictated (200 hundred rupees), but not on the market price (400 rupees).” The effect of transfer pricing is that the parent company — or a specific subsidiary — tends to produce insufficient taxable income or excessive loss on a transaction. Profits accruing to the parent can be increased by setting high transfer prices to siphon profits from subsidiaries domiciled in high-tax countries, and low transfer prices to move profits to subsidiaries located in low-tax jurisdiction.

#### 3. Question

Consider the following statements regarding transfer pricing.

• Transfer pricing is an accounting practice that represents the price that one division in a company charges another division for goods and services provided.

• Transfer pricing is used by companies to reduce the overall tax burden of the parent company.

• The transfer pricing practice does not extend to cross-border transactions.

How many of the above statements is/are correct?

• a) Only one

• b) Only two

• c) All three

Solution: b)

Statement 3 is incorrect.

Transfer pricing is an accounting practice that represents the price that one division in a company charges another division for goods and services provided.

Transfer pricing allows for the establishment of prices for the goods and services exchanged between subsidiaries, affiliates, or commonly controlled companies that are part of the same larger enterprise. Transfer pricing can lead to tax savings for corporations. The transfer pricing practice extends to cross-border transactions as well as domestic ones.

Companies use transfer pricing to reduce the overall tax burden of the parent company.

How does transfer pricing work?

The I-T Department gives the following example: “Suppose a company A purchases goods for 100 rupees and sells it to its associated company B in another country for 200 rupees, who in turn sells in the open market for 400 rupees.

“Had A sold it (the good) direct, it would have made a profit of 300 rupees. But by routing it through B, it (A) restricted it (profit) to 100 rupees, permitting B to appropriate the balance.

“The transaction between A and B is arranged and not governed by market forces. The profit of 200 rupees is, thereby, shifted to the country of B. The goods is transferred on a price (transfer price) which is arbitrary or dictated (200 hundred rupees), but not on the market price (400 rupees).”

The effect of transfer pricing is that the parent company — or a specific subsidiary — tends to produce insufficient taxable income or excessive loss on a transaction.

Profits accruing to the parent can be increased by setting high transfer prices to siphon profits from subsidiaries domiciled in high-tax countries, and low transfer prices to move profits to subsidiaries located in low-tax jurisdiction.

Solution: b)

Statement 3 is incorrect.

Transfer pricing is an accounting practice that represents the price that one division in a company charges another division for goods and services provided.

Companies use transfer pricing to reduce the overall tax burden of the parent company.

How does transfer pricing work?

“Had A sold it (the good) direct, it would have made a profit of 300 rupees. But by routing it through B, it (A) restricted it (profit) to 100 rupees, permitting B to appropriate the balance.

The effect of transfer pricing is that the parent company — or a specific subsidiary — tends to produce insufficient taxable income or excessive loss on a transaction.

• Question 4 of 5 4. Question Consider the following statements. A stock broker holds securities like shares, debentures and bonds of investors in electronic form at the request of the investors. National Securities Depository Ltd (NSDL) and Central Depository Services (India) Ltd CDSL are the depository participants which provide depository services to the investors. Which of the above statements is/are incorrect? a) 1 only b) 2 only c) Both 1 and 2 d) Neither 1 nor 2 Correct Solution: c) A stock broker is a member of a recognised stock exchange, who is permitted to do trades on the screen-based trading system of different stock exchanges. He is enrolled as a member of the concerned exchange and is registered with Sebi. A depository is an organisation which holds securities (like shares, debentures, bonds, government securities, mutual fund units etc.) of investors in electronic form at the request of the investors through a registered depository participant. A depository participant is an agent of the depository – National Securities Depository Ltd (NSDL) and Central Depository Services (India) Ltd CDSL – through which it interfaces with the investor and provides depository services. Incorrect Solution: c) A stock broker is a member of a recognised stock exchange, who is permitted to do trades on the screen-based trading system of different stock exchanges. He is enrolled as a member of the concerned exchange and is registered with Sebi. A depository is an organisation which holds securities (like shares, debentures, bonds, government securities, mutual fund units etc.) of investors in electronic form at the request of the investors through a registered depository participant. A depository participant is an agent of the depository – National Securities Depository Ltd (NSDL) and Central Depository Services (India) Ltd CDSL – through which it interfaces with the investor and provides depository services.

#### 4. Question

Consider the following statements.

• A stock broker holds securities like shares, debentures and bonds of investors in electronic form at the request of the investors.

• National Securities Depository Ltd (NSDL) and Central Depository Services (India) Ltd CDSL are the depository participants which provide depository services to the investors.

Which of the above statements is/are incorrect?

• c) Both 1 and 2

• d) Neither 1 nor 2

Solution: c)

A stock broker is a member of a recognised stock exchange, who is permitted to do trades on the screen-based trading system of different stock exchanges. He is enrolled as a member of the concerned exchange and is registered with Sebi.

A depository is an organisation which holds securities (like shares, debentures, bonds, government securities, mutual fund units etc.) of investors in electronic form at the request of the investors through a registered depository participant.

A depository participant is an agent of the depository – National Securities Depository Ltd (NSDL) and Central Depository Services (India) Ltd CDSL – through which it interfaces with the investor and provides depository services.

Solution: c)

• Question 5 of 5 5. Question Consider the following statements regarding Subsidies. A subsidy shall be deemed to exist if there is a financial contribution by a government or any public body where government practice involves a direct transfer of funds. Tax preferences are considered as implicit subsidies to preferred tax payers. It also includes taxes and charges that are not collected by the Government. How many of the above statements is/are incorrect? (a) Only one (b) Only two (c) All three (d) None Correct Solution: d) A subsidy shall be deemed to exist if there is a financial contribution by a government or any public body where government practice involves a direct transfer of funds (e.g., grants, loans and equity infusion), and/or government revenue that is otherwise due is foregone or not collected, and/or a government provides goods or services. What is included in subsidy? Income and Price support: Subsidy can also be any form of income or price support granted by the government. Taxes and charges: It include not only direct transfer payments by the governments but also taxes and charges that are not collected. Tax preferences: which are built into both direct and indirect tax regimes for realizing specific benefits serving the greater public good. Tax preferences are considered as implicit (indirect) subsidies to preferred tax payers. Incorrect Solution: d) A subsidy shall be deemed to exist if there is a financial contribution by a government or any public body where government practice involves a direct transfer of funds (e.g., grants, loans and equity infusion), and/or government revenue that is otherwise due is foregone or not collected, and/or a government provides goods or services. What is included in subsidy? Income and Price support: Subsidy can also be any form of income or price support granted by the government. Taxes and charges: It include not only direct transfer payments by the governments but also taxes and charges that are not collected. Tax preferences: which are built into both direct and indirect tax regimes for realizing specific benefits serving the greater public good. Tax preferences are considered as implicit (indirect) subsidies to preferred tax payers.

#### 5. Question

Consider the following statements regarding Subsidies.

• A subsidy shall be deemed to exist if there is a financial contribution by a government or any public body where government practice involves a direct transfer of funds.

• Tax preferences are considered as implicit subsidies to preferred tax payers.

• It also includes taxes and charges that are not collected by the Government.

How many of the above statements is/are incorrect?

• (a) Only one

• (b) Only two

• (c) All three

Solution: d)

A subsidy shall be deemed to exist if there is a financial contribution by a government or any public body where government practice involves a direct transfer of funds (e.g., grants, loans and equity infusion), and/or government revenue that is otherwise due is foregone or not collected, and/or a government provides goods or services.

What is included in subsidy?

• Income and Price support: Subsidy can also be any form of income or price support granted by the government.

• Taxes and charges: It include not only direct transfer payments by the governments but also taxes and charges that are not collected.

Tax preferences: which are built into both direct and indirect tax regimes for realizing specific benefits serving the greater public good.

Tax preferences are considered as implicit (indirect) subsidies to preferred tax payers.

Solution: d)

What is included in subsidy?

• Income and Price support: Subsidy can also be any form of income or price support granted by the government.

• Taxes and charges: It include not only direct transfer payments by the governments but also taxes and charges that are not collected.

Tax preferences: which are built into both direct and indirect tax regimes for realizing specific benefits serving the greater public good.

Tax preferences are considered as implicit (indirect) subsidies to preferred tax payers.

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