Quiz Questions 23 January 2023


Quiz Questions 23 January 2023


#1. Consider the following statements regarding Base Erosion and Profit Shifting (BEPS): (1). BEPS refers to the phenomenon where companies invest in a host country via shell companies situated in tax havens to reduce their tax liability. (2). The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS is an outcome of the World Economic Forum BEPS Project. (3). India has ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS. Which of the above statements is/are correct?

Explanation:   The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting is an outcome of the OECD / G20 Project to tackle Base Erosion and Profit Shifting (the “BEPS Project”) i.e., tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no tax being paid. The companies need not invest via shell companies to be accused of BEPS. India has ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting

#2. In WTO terminology, subsidies in general are identified by “boxes” which are given the colours of traffic lights. Consider the following about it: 1.Most domestic support measures considered to distort production and trade fall into the amber box. 2.Green box subsidies are allowed even if they distort trade. 3.At present there are no limits on spending on blue box subsidies. Select the correct answer using the codes below?

Explanation:

 

Statement 1: All domestic support measures considered to distort production and trade (with some exceptions) fall into the amber box, which is defined as all domestic supports except those in the blue and green boxes.These include measures to support prices, or subsidies directly related to production quantities.These supports are subject to limits: “de minimis” minimal supports are allowed (5% of agricultural production for developed countries, 10% for developing countries)

Statement 2: In order to qualify, green box subsidies must not distort trade, or at most cause minimal distortion. They have to be government-funded (not by charging consumers higher prices) and must not involve price support. Statement 3: Blue Box is the “amber box with conditions” — conditions designed to reduce distortion. Any support that would normally be in the amber box, is placed in the blue box if the support also requires farmers to limit production.At present there are no limits on spending on blue box subsidies. In the current negotiations, some countries want to keep the blue box as it is because they see it as a crucial means of moving away from distorting amber box subsidies without causing too much hardship.

#3. Which of these are included in the “Current account” transactions of India with the world? 1.Trade balance for goods 2.Flow of remittances 3.Trade in invisibles 4.Grants given by foreign governments Select the correct answer using the code below:

Explanation:

 

The current account records exports and imports in goods and services and transfer payments. Trade in services denoted as invisible trade (because they are not seen to cross national borders) includes both factor income (payment for inputs-investment income, that is, the interest, profits and dividends on our assets abroad minus the income foreigners earn on assets they own in India) and non-factor income (shipping, banking, insurance, tourism, software services, etc.). Transfer payments are receipts which the residents of a country receive ‘for free’, without having to make any present or future payments in return. They consist of remittances, gifts and grants. They could be official or private.

#4. Suppose India manufactures only Cars and United States manufactures only Clothes. Both nations float their currency. In such a scenario, the exchange rate between Indian and US currency will depend on: 1.Productivity of labour and capital in India and USA 2.Demand for Indian cars in USA 3. Demand for USA manufactured clothes in India Select the correct answer using the codes below?

Explanation:

 

Exchange rate of a currency basically depends on the supply and demand of the currency.These two in turn are affected by export/import demand, political stability of a nation, its income etc. Statement 1: Suppose if labour and capital are highly productive in India, this will increase the overall productivity of firms. This will lead to low cost products as well as high wages for labour and high returns for capital owners. Increased income will push up import demand and thus affect exchange rates.Same argument can be given for the opposite case.

Statement 2: Higher demand for Indian cars will mean India’s exports are large, which in turn implies a high demand for Indian currency by foreigners (US Residents) and thus a highly valued rupee as compared to the Dollar.

Statement 3: Same argument applies here too.

#5. India’s economic openness is measured by? 1.Volume of exports and imports 2.Private sector domestic investment growth 3.Ease of doing business index Select the correct answer using the codes below:

Explanation:

 

The Openness Index is an economic metric calculated as the ratio of country’s total trade, the sum of exports plus imports, to the country’s gross domestic product = (Exports Imports) / (Gross Domestic Product).The interpretation of the Openness Index is: the higher the index the larger the influence of trade on domestic activities, and the stronger that country’s economy.Ease of doing business index is a passive indicator of openness, and openness as such is not measured by it.

#6. Consider the following about “Trade Secrets”: 1.It is an informal term for ‘patents’ when recognized only within national borders. 2.It confers a competitive commercial advantage to those who possess such information. 3.It is regulated under TRIPS agreement. Select the correct answer using the codes below?

Explanation:

 

Statement 1 and 2: Protection of undisclosed information (or trade secrets) is any information that has been intentionally treated as secret and is capable of commercial application with an economic interest.It protects information that confers a competitive advantage to those who possess such information, provided such information is not readily available with or discernible by the competitors (for e.g. unique psychological marketing techniques not known to all). It is different from patents, which is a recognized innovation.Statement 3: TRIPS Agreement is, by its coverage, the most comprehensive international instrument on IPRs, dealing with all types of IPRs, with the sole exception of breeders’ rights. IPRs covered under the TRIPS agreement are: copyrights, trade secrets, patents, GIs, industrial designs etc.

#7. The S&D box, with reference to WTO agreements, is related to?

Explanation:

 

It comes under some of the crucial development-related issues in WTO which also include establishment of a Development Box, special and differential treatment (S&D) for developing countries, single commodity producer’s treatment, and the status of small island developing states (SIDS).S&D box gives the developing countries required flexibility in several WTO agreements to adapt to changed rules so as to create a level playing field with developed countries.

#8. Which of the following incentives is/are offered by the government for the promotion of PPPs? 1.Viability Gap Funding (VGF) in the form of a capital grant. 2.Long-term debt for financing infrastructure projects through India Infrastructure Finance Company Ltd. 3.Interest-free loan amounting 75 per cent of the total project cost through India Infrastructure Project Development Fund. Select the correct answer using the code given below:

Explanation:

 

Public-Private Partnership (PPP) means an arrangement between a Government / statutory entity / Government-owned entity on one side and a private sector entity on the other, for the provision of public assets and/or public services, through investments being made and/or management being undertaken by the private sector entity, for a specified period of time. Public-private partnerships (PPPs) can take a wide range of forms varying in the degree of purpose, the involvement of the private entity, legal structure and risk-sharing. A PPP is generally memorialized in a contract or agreement to outline the responsibilities of each party and clearly allocate risk.

Ministry of Finance, GoI requires the Project sponsors to award PPP projects through a transparent open competitive bidding process, for greater transparency and consistency to the bid process and terms of the contract, throughout the project life cycle and market discovery of rates.The Government has facilitated the PPP sector by offering:Viability Gap Funding (VGF): Viability Gap Funding of up to 40% of the cost of the project can be accessed in the form of a capital grant. Hence statement 1 is correct. IIFCL: infrastructure projects typically involve long gestation periods and debt finance for such projects is done through the Scheme for Financing Viable Infrastructure Projects through a Special Purpose Vehicle called India Infrastructure Finance Company Ltd (IIFCL). Foreign Direct Investment (FDI): up to 100% FDI in the equity of SPVs in the PPP sector is allowed on the automatic route for most sectors. India Infrastructure Project Development Fund (IIPDF): IIPDF’s primary objective would be to fund potential PPP projects’ project development expenses in respect of feasibility studies, environmental impact studies, financial structuring, legal reviews and development of project documentation, including concession agreement, commercial assessment studies (including traffic studies, demand assessment, capacity to pay assessment), grading of projects etc.

The Fund will assist ordinarily up to 75% of the project development expenses (not total project cost which includes cost of land, buildings, equipments etc).. The Viability Gap Funding Scheme of the Government of India for Financial Support to Public-Private Partnerships in Infrastructure, provides financial support of up to 40% of the Total Project Cost in the form of a grant (one time or deferred) to infrastructure projects undertaken through public-private partnerships with a view to making them commercially viable. Administered by the Ministry of Finance, budgetary provisions are made in the Annual Plans on a year-to-year basis for the Scheme.

#9. Which of the following factor/s determines flexible exchange rate? 1.Demand & Supply of exports and imports 2.Speculations 3.Investment in assets Select the correct answer using the code given below:

Explanation:

 

Exchange rates in the market depend not only on the demand and supply of exports and imports, and investment in assets, but also on foreign exchange speculation where foreign exchange is demanded for the possible gains from appreciation of the currency.

#10. With reference to Alternative Investment Fund (AIF), consider the following statements: (1). AIF is a privately pooled investment vehicle which collects funds from sophisticated investors. (2). The definition of AIF is laid down by the Reserve Bank of India (RBI). Which of the statements given above is/are correct?

Explanation:

 

Alternative Investment Fund (AIF) means any fund established or incorporated in India which is a privately pooled investment vehicle which collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors.Regulation 2(1)(b) of Securities and Exchange Board of India (SEBI) Regulations (AIFs), 2012 lays down the definition of AIFs.

#11. Sanitary and phytosanitary measures are related to?

Explanation:

 

Sanitary and phytosanitary (SPS) measures are measures to protect humans, animals, and plants from diseases, pests, or contaminants. So, B is correct.The Agreement on the Application of Sanitary and Phytosanitary Measures is one of the final documents approved at the conclusion of the Uruguay Round of the Multilateral Trade Negotiations. So, A is correct.It applies to all sanitary (relating to animals) and phytosanitary (relating to plants) (SPS) measures that may have a direct or indirect impact on international trade.

#12. Consider the following statements: (1). Disinvestment can either reduce the government’s share in the public sector undertakings (PSUs) or transfer the ownership of the PSU altogether to the highest bidder. (2). Department of Investment and Public Asset Management (DIPAM) under the Ministry of Finance is tasked with managing the Centre’s investments in the PSUs. (3). In the last five years, the Government has been unable to meet the Disinvestment target it wanted at the start of the year. Which of the above statements is/are correct?

Explanation:

 

The Union government invests in several public sector undertakings (PSUs) such as Air India, Bharat Petroleum, Delhi Metro Rail Corporation etc. Since it is the majority shareholder (meaning that it owns more than 51% of the shares), the Centre can raise money through the liquidation of its shareholding in these PSUs.Such asset sales can either reduce the government’s share — like when it attempted to do with the public listing of Life Insurance Corporation in 2020 — or it can also transfer the ownership of the firm altogether to the highest bidder — as it did with Bharat Aluminium Company, which was sold to the Vedanta group in 2001.All PSUs work under different departments and ministries within the government. However, the Department of Investment and Public Asset Management (DIPAM) under the Ministry of Finance is tasked with managing the Centre’s investments in the PSUs. Sale of the Centre’s assets falls within the mandate of DIPAM.

#13. Consider the following statements: (1). Foreign Portfolio Investment (FPI) is often referred to as hot money. (2). FPI does not provide the investor with direct ownership of financial assets. (3). FPI is part of a country’s capital account and is shown on its Balance of Payments. Which of the statements given above is/are correct?

Explanation:

 

FPI is often referred to as “hot money” because of its tendency to flee at the first signs of trouble in an economy. FPI is more liquid and less risky than Foreign Direct Investment.FPI consists of securities and other financial assets passively held by foreign investors. It does not provide the investor with direct ownership of financial assets and is relatively liquid depending on the volatility of the market.FPI is part of a country’s capital account and is shown on its Balance of Payments (BOP).

#14. Consider the following statements: (1). Qualified Institutional Buyers (QIBs) enjoy greater access in the security market. (2). The individual investors can also obtain QIB status. Which of the statements given above is/are correct?

Explanation:

 

Recently, the Security and Exchange Board of India (SEBI) sought comments on the proposal to introduce the concept of ‘Accredited Investors’ in the Indian securities market.Currently, the Indian markets have the concept of Qualified Institutional Buyers (QIBs), which include mutual funds, insurance companies or foreign portfolio investors. These investors enjoy greater market access..An individual investor cannot obtain the QIB status. The concept of accredited investor will provide QIB-like status to individual investors.Qualified Institutional Buyers are those institutional investors who are generally perceived to possess expertise and the financial capacities to evaluate and invest in the capital markets.

#15. Consider the following statements with respect to Regulation S bonds: (1). Regulation S bonds are issued by foreign issuers in the U.S. debt market. (2). These bonds are denominated in U.S. dollars.Resident American citizens cannot subscribe to them. Which of the given statement/s is/are correct?

Explanation:

 

Regulation S provides a way for non-US companies to raise capital and for US companies to raise capital outside the U.S.A Regulation S offering can issue equity or debt securities.These bonds are denominated in U.S. dollars.Resident American citizens cannot subscribe to them.

#16. The “Dutch Disease” refers to: 1.Impact of loose monetary policies on long-term growth prospects 2.Hyperinflation resulting from an inflow of foreign exchange Which of the above is/are correct?

Explanation:

 

When an increase in one form of net exports drives up a country’s exchange rate, it is called the Dutch Disease. Such instances make other exports non-competitive in the world market and impair the ability of domestic products to compete with imports. The term originated from the supposed effect of natural gas discoveries on the Netherlands economy. As gas started to be exported, it lead to appreciation of their currency and rendered other exports noncompetitive thereby harming the economy.

#17. Consider the following statements regarding E-commerce sector in India: (1). Marketplace model is where goods sold on the portal is owned or controlled by the ecommerce company. (2). Inventory-based model is where the e-commerce firm simply acts as a platform that connects buyers and sellers.100% FDI is allowed in e-commerce companies in marketplace model. Which of the above statements is/are not correct?

Explanation:

 

E-commerce companies can operate under two different models in India.The first is the marketplace model where the e-commerce firm simply acts as a platform that connects buyers and sellers. In order to increase the participation of foreign players in the e-commerce field, the Government has increased the limit of foreign direct investment (FDI) in the e-commerce marketplace model for up to 100%.The second model is inventory-based where the inventory of goods sold on the portal is owned or controlled by the e-commerce company. FDI is not allowed under this model.

#18. “Vulture funds” generally invest in:

Explanation:

 

It is a fund that buys securities in distressed investments, such as high-yield bonds in or near default, or equities that are in or near bankruptcy. These funds are like circling vultures patiently waiting to pick over the remains of a rapidly weakening company. The goal is high returns at bargain prices. Investors in the fund profit by buying debt at a discounted price on a secondary market and then using numerous methods to gain a larger amount than the purchasing price. Debtors include companies, countries, and individuals.

#19. Consider the following statements: 1.FDI up to 100% is allowed in Telecom Services Sector wherein 75% under automatic route and beyond 25% through government route 2.Under the Automatic Route, the non-resident investor or the Indian company does not require any approval from Government of India for the investment. Which of the statements given above is/are correct?

Explanation:

 

FDI up to 100% is allowed in Telecom Services Sector wherein 49% under automatic route and beyond 49% through government route subject to observance of licensing and security conditions by the licensee as well as investors as notified by the Department of Telecommunications (DoT) from time to time. Under the Automatic Route, the non-resident investor or the Indian company does not require any approval from Government of India for the investment.

#20. The real exchange rate (RER) is often taken as a measure of a country’s international competitiveness because: 1.It is not subject to depreciation by destabilizing speculation. 2.It takes into account purchasing power of nations involved. 3.It is fixed by an agreement between the Central banks involved. Select the correct answer using the codes below?

Explanation:

 

Statement 2: The real exchange rate is often taken as a measure of a country’s international competitiveness as it takes into account purchasing power at both nations.The real exchange rates are nothing but the nominal exchange rates multiplied by the price indices of the two countries.This means the market price level of goods and services, given by indices of inflation. So if the price level in the US is higher than the price level in India, then the real exchange rate of the rupee versus the dollar will be greater than the nominal exchange rate.Suppose the nominal exchange rate is Rs 50 and US prices are greater than Indian prices, a dollar will buy more in India than what Rs 50 will buy in the US.

Statement 1: Just like NER, RER too is subject to devaluations and depreciation. RER is only a mathematical adjustment of NER. If NER is volatile, RER too will be volatile.

Statement 3: Since NER is not fixed by an agreement between Central banks, RER too is not. 3 will be incorrect.

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