Passage – 1
A demonetization that delegitimizes a certain currency, or even certain denominations of it, would extinguish wealth held in that form. What we have seen, however, is a less extreme case. In this one, holders of Rs.500 or Rs.1000 notes can exchange them or pay these into their bank accounts. This does not extinguish wealth as much as it will bring the hoards into the taxman’s radar when their owners draw upon them to make payments. For, as these will be bank transactions there would be a record of them. So, existing black money cannot be used to generate more of the same. To this extent the scheme
cannot be faulted. Of course, it cannot be assumed that what is in a bank will necessarily be declared to the income tax authorities, but it will certainly come under scrutiny in a way that it was not when stashed under the mattress.
What are some reasons why we may welcome such a move? First, the concealment of income with a view to avoid tax is a crime. So, in a constitutional democracy such as ours those who avoid tax deserve to be punished. Second, in order to evade the law, those with unaccounted wealth proceed to corrupt others, most importantly representatives of the state. This criminalizes the system further. If
democracy is a way of actualizing the public will, such criminalization of the machinery of government works against the ideal. So, the practice of tax evasion needs to be rooted. To that extent this move of the government may be welcomed.
But how significant is it likely to be in the punishment it metes out to tax evaders and in its ability to control the generation of unaccounted wealth in the future? The quantitative significance of this move depends upon the extent to which unaccounted, or ‘black’, wealth is held in the form of high-value currency notes of the specified denomination. If unaccounted money by Indians is held in
the form of foreign bank accounts, the present scheme can do nothing about it. This speculation would suggest that if unaccounted money is not held as Rs.500 or Rs.1000 notes, the move is pretty much useless. There is, however, the separate issue of counterfeit currency. If there is a significant volume of counterfeit currency circulating in the form of Rs.500 or Rs.1000 notes, the demonetization will also extinguish unaccounted money from this source. If counterfeit currency is actually used to de-stabilize the Indian Union, as has been claimed, deflating this route enhances its security. This would count as another reason to welcome the move.
Now to the question of whether the demonetization will eliminate the black economy of the future. It should be obvious that it cannot by itself. For this we would need a policy that checks the generation of black incomes at source. It would be a good surmise that much of the unaccounted money is generated in the purchase and sale of gold and of property. The markets for gold and property are highly concentrated, with relatively few sellers exerting considerable control over supply. Monopoly power combined with the cultural significance of both a home and gold ornaments in India empowers these sellers to insist that they are paid in cash, leaving many ordinary people in
this country to have to abet criminal activity. However, the very fact of property firms, lesser builders and jewelers being highly visible and small in number makes it that much easier for the long arm of the law to control them. For this to take place though, action by the tax authorities alone will not suffice. It would require the Central government to step in and legislate that all transactions in gold and property go through banks. There could be hue and cry following this of course, but you can’t govern crime by being sensitive to the grief of criminals.
New words with their meanings: Demonetization-t he withdrawal of a coin, note, or precious metal from use as legal tender.
Monopoly-an organization or group that has) complete control of something, especially an area of business, so that others have no share:
Destabilize: to make a government, area, or political group lose power or control, or to make a political or economic situation less strong or safe, by causing changes and problems
Counterfeit: made to look like the original of something, usually for dishonest or illegal purposes
Unaccounted :lost or unpaid, without explanation
Delegitimize : to make something seem not valid or not acceptable
1. Which of the following is one of the main objectives of demonetization of Rs. 500 and Rs.1000 notes?
a) To stop the circulation of money in the economy.
b) To identify the population living below the poverty line.
c) To bring the hoarders of money into the taxman’s radar.
d) To increase the inflation in the economy.
Answer: c)
Explanation: The first paragraph clearly indicates that demonetization of Rs. 500 and Rs.1000 notes will bring the hoards into the taxman’s radar.
2. The author of the passage is referring to what with the phrase ‘stashed under the mattress’:
a) Plastic money
- b) Black money
- c) White money
- d) Liquid money
Answer: b)
Explanation: The author is referring to the illegal money hoarded by the people and stashed under their mattress.
3. Which of the following is incorrect regarding demonetization in India?
a) It will help in identifying the tax invaders holding the black money.
b) Unaccounted wealth will be scrutinized.
c) Black money will be redistributed in the economy in various forms.
d) Income tax authorities will not be authorized to look into the bank account details of the hoarder of black money.
Answer: d)
Explanation: Clearly, option d) is incorrect as does not support the main purpose of demonetization which is eradication of black money in India.
4. According to the author of the passage, the demonetization move is only helpful when:
a) Black money is kept in the bank accounts outside India.
b) Black money is kept in the form of gold.
c) Black money is kept in the form of high-value currency notes of the specified denomination.
d) Black money is kept in the demat accounts.
Answer: c)
Explanation: The thirds paragraph clearly states that ‘the quantitative significance of this move depends upon the extent to which unaccounted, or ‘black’, wealth is held in the form of high-value currency notes of the specified denomination’.
5. Other than the issue of black money, which of the following issue is being addressed by the demonetization step?
- a) Increase in the population in India.
- b) Increase in the circulation of
counterfeit currency in India.
c) Increase in the unemployment in India.
d) Increase in the demand and supply of currency in India.
Answer: b)
Explanation: The third paragraph of the passage clearly mentions that if there is a significant volume of counterfeit currency circulating in the form of
Rs.500 or Rs.1000 notes, the demonetization will also extinguish unaccounted money from this source.
Passage – 2
Donald Trump’s surprise win in the U.S. presidential elections has lent the dollar new wings. It has soared against most currencies, including the rupee, on the expectation that his economic policies will spur growth and inflation in the world’s largest economy. The prospect of the Federal Reserve raising interest rates provided an up draught that helped the dollar extend a record appreciating streak against the euro last week and pushed the rupee past 68 to a dollar. In
Congressional testimony last week, Fed Chair Janet Yellen signaled that the central bank was close to a decision to raise rates again. Some economists predict U.S. GDP growth could see appreciable acceleration in 2017 — with one projection positing even a doubling of the pace by the fourth quarter — if the new administration delivers on some of its promises, including tax cuts, deregulation and infrastructure spending. In fact, with a Republican majority in both the House of Representatives and the Senate, Mr. Trump could benefit from smoother Congressional backing for policy initiatives to boost economic activity. U.S. stocks and bonds have also
reflected the optimism over the outlook for U.S. growth and prospects that increased fiscal spending will help reflate the economy, with the S&P 500 Index adding gains for the second straight week and benchmark bond yields climbing in anticipation of faster inflation.
For the rupee, which has slumped 2.3 per cent from its 66.62 a dollar close on November 8, the flight of capital from emerging market assets has inflicted significant pressure that has been exacerbated by the Centre’s decision to withdraw higher denomination currencies. Foreign institutional investors have sold more than $2.5
billion of Indian equity and debt holdings so far this month, compared with the about $1.5 billion they offloaded through October. With the demonetization move infusing a surge of liquidity into the banking system, domestic interest rates are expected to decline, making the rupee less attractive to investors seeking to benefit from an interest rate arbitrage. And with consumption and broader economic activity predicted to take a hit on account of the shortage of cash in the wake of the currency move, GDP growth may slow sharply. That in turn could weaken overseas investor appetite for rupee assets. The task before policymakers, and the monetary policy committee that is set to meet a
week before the Federal Open Market Committee’s rate decision, will be to reassure markets and investors that India’s economy remains robust.
6. According to the passage, against most of the currencies the value of US dollar has:
- a) Remained constant
- b) Decreased slowly
c) Decreased rapidly d) Increased rapidly Answer: d)
Explanation: The first paragraph clearly indicates that US Dollar has soared against most currencies, which means it
has increased rapidly above the usual level.
7. What does the author mean by saying ‘raising interest rates provided an up draught that helped the dollar extends a record appreciating streak against the euro’?
a) Dollar became weak against the Euro.
b) Dollar became strong against the Euro.
c) Euro became strong against the Dollar.
d) Both dollar and Euro became strong against each other.
Answer: b)
Explanation: The author means to say that because of the prospect of the Federal Reserve raising interest rates the value of Dollar became strong against the Euro.
8. Which of the following factor can result in boosting the economic activities in US?
a) A Republican majority in the House of Representatives.
b) A Republican majority in the Senate.
c) A Republican majority in both the House of Representatives and the Senate.
d) Raising interest rates by Central Bank.
Answer: c)
Explanation: The first paragraph clearly states that ‘with a Republican majority in both the House of Representatives and the Senate, Mr. Trump could benefit from smoother Congressional backing for policy initiatives to boost economic activity’.
9. Which of the following factor reflects an optimistic outlook for the growth of US economy?
- a) Decrease in inflation.
- b) Increase in stock returns and
bond yields.
c) Decrease in stock returns and bond yields.
d) Decrease in fiscal spending. Answer: b)
Explanation: The last of the first paragraph clearly states that ‘U.S. stocks and bonds have also reflected the optimism over the outlook for U.S. growth and prospects that increased fiscal spending will help reflate the economy, with the S&P 500 Index adding gains for the second straight week and benchmark bond yields climbing in anticipation of faster inflation’.
10. Because of the demonetization move, investors will benefit from which of the following way?
a) Regulatory arbitrage b) Political arbitrage
c) Interest rate arbitrage d) Statistical arbitrage Answer: c)
Explanation: The author is talking about the covered interest arbitrage which is a trading strategy in which an investor uses a forward currency contract to hedge against exchange rate risk.