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Economic Survey 2016-17 for IAS Prelims: Demonetisation To Deify or Demonize Part 1

Feb 20, 2017 13:14 IST

    Economic Survey on demonetisationThe Finance Ministry of India presents the Economic Survey in the parliament every year, just before the Union Budget. According to the survey via demonetisation government announced a historic measure, with profound implications for the economy.

    Economic Survey 2016-17 for IAS Prelims: The Economic Vision for Precocious Cleavage India Part 2

    The two largest denomination notes, Rs 500 and Rs 1000, were “demonetized” with immediate effect, ceasing to be legal tender except for a few specified purposes.

    ECONOMIC SURVEY 2016-17 IMPORTANT QUESTIONS

    Here, we provide exclusive questions on demonetisation from the Economic Survey 2017 which can prove to be extremely helpful in IAS Prelims 2017 preparation.

    1. According to the economic survey 2016- 2017, the aim of the demonetisation action was fourfold:

    1) To curb corruption.
    2) Counterfeiting.
    3) To stop the use of low denomination notes for terrorist activities.
    4) To discourage the accumulation of “black money”.

    Which of the above statements is the correct aim?

    a. 1, 2 and 4
    b. 1, 2 and 3
    c. 2, 3 and 4
    d. All of the above

    Answer: a

    Explanation:

    On November 8, 2016, the government announced a historic measure, with profound implications for the economy. The two largest denomination notes, Rs 500 and Rs 1000, were “demonetized” with immediate effect, ceasing to be legal tender except for a few specified purposes.

    The aim of the action was fourfold: to curb corruption; counterfeiting; the use of high denomination notes for terrorist activities; and especially the accumulation of “black money”, generated by income that has not been declared to the tax authorities.

    Union Budget 2017 Questions for IAS Exam

    2. Consider the following statements regarding the history of the demonetisation instances in Indian economy:

    1) There were two previous instances of demonetisation, in 1946 and in 1978.
    2) Demonetisation instance in 1946 didn’t have any significant effect on cash circulation in the country.
    3) All before demonetisations have occurred in the context of hyperinflation, wars, political upheavals, or other extreme circumstances.

    Which of the above statements is correct?

    a. 1 and 2
    b. 2 and 3
    c. 1 and 3
    d. 1, 2 and 3

    Answer: c

    Explanation:

    India’s demonetisation is unprecedented in international economic history, in that it combined secrecy and suddenness amidst normal economic and political conditions. All other sudden demonetisations have occurred in the context of hyperinflation, wars, political upheavals, or other extreme circumstances.

    India’s action is not unprecedented in its own economic history: there were two previous instances of demonetisation, in 1946 and 1978, the latter not having any significant effect on cash. But the recent action had large, albeit temporary, currency consequences.

    For 2016-17, the annual percentage changes in currency are expected to be only 1.2 percent year-on-year, more than 2 percentage points lower than four previous troughs, which averaged about 3.3 percent.

    3. India has given a whole new expression to unconventional monetary policy. Why India’s monetary policy would be considered a “helicopter hoover”?

    a. India’s monetary policy is focussed on expanding the money supply.
    b. India’s monetary policy on demonetisation has reduced the money supply.
    c. India’s monetary policy on demonetisation will largely expand the money supply.
    d. None of the above.

    Answer: b

    Explanation:

    In the wake of the Global Financial Crisis (GFC), advanced economies have used monetary policy to stimulate growth, stretching its use to domains heretofore considered heretical such as negative interest rate policies and “helicopter drops” of money.

    In fact, India has given a whole new expression to unconventional monetary policy, with the difference that whereas advanced economies have focused on expanding the money supply, India’s demonetisation has reduced it. This policy could be considered a “reverse helicopter drop”, or perhaps more accurately a “helicopter hoover”.

    Economic Survey 2016-17 Fiscal Rules

    4. Which of the following is another earlier effort (before demonetisation) to curb illicit activities like black money, terrorism funding, corruption and counterfeiting?

    a. The creation of the Special Investigative Team (SIT)
    b. The Black Money and Imposition of Tax Act 2015
    c. The Benami Transactions Act 2016
    d. All of the above

    Answer: d

    Explanation:

    Demonetisation was aimed at signalling a regime change, emphasising the government’s determination to penalise illicit activities and the associated wealth. In effect, the tax on all illicit activities, as well as legal activities that were not disclosed to the tax authorities, was sought to be permanently and punitively increased.

    It followed a series of earlier efforts to curb such illicit activities, including the creation of the Special Investigative Team(SIT) in the 2014 budget; the Black Money and Imposition of Tax Act 2015; Benami Transactions Act 2016; the information exchange agreement with Switzerland; changes in the tax treaties with Mauritius, Cyprus and Singapore; and the Income Disclosure Scheme.

    5. According to the economic survey 2017, what percentage of cash in circulation was rendered invalid due to the demonetisation action?

    a. 70 percent
    b. 90 percent
    c. 86 percent
    d. All cash was restored

    Answer: c

    Explanation:

    On November 8, 2016, the government announced a historic measure, with profound implications for the economy. The two largest denomination notes, Rs 500 and Rs 1000, were “demonetized” with immediate effect, ceasing to be legal tender except for a few specified purposes.

    At one fell stroke, 86 percent of the cash in circulation was thereby rendered invalid. These notes were to be deposited in the banks by December 30, 2016, while restrictions were placed on cash withdrawals. In other words, restrictions were placed on the convertibility of domestic money and bank deposits.

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