1. A decrease in Cash Reserve Ratio (CRR) can lead to which among the following ?
1. increase in cash availability of the banks
2. increase in repo rate
3. decrease in SLR
Select the correct answer using the codes given below.
a) 1 only
b)1 and 2 only
c) 1 and 3 only
d) 1,2 and 3
Answer & Explanation
a) 1 only.Under CRR a certain percentage of the total bank deposits has to be kept in the current account with RBI which means banks do not have access to that much amount for any economic activity or commercial activity. Banks can’t lend the money to corporates or individual borrowers, banks can’t use that money for investment purposes.In short, CRR is the amount in cash which banks have to keep with RBI. Any decrease in CRR will therefore increase cash availability with the banks. Repo rate and SLR would not be affected by changes in CRR. They r separate mechanisms, the rate of which is decided by RBI.
2. The WTO follows the principle of ‘self selection’. This means :
a) countries decides to which agreement they want to be party.
b) countries decide the rate of tariff and tariff reduction
c) countries themselves decide whether they want to be in developed or developing categories.
d) None of the above
Answer & Explanation
c) countries themselves decide whether they want to be in developed or developing categories. There are no WTO definitions of “developed” or “developing” countries. Developing countries in the WTO are designated on the basis of self-selection although this is not necessarily automatically accepted in all WTO bodies.
3. Which of the following also acts as a mechanism for government lending.
1. CRR
2. Repo rate
3. Reverse repo rate
4. SLR
Select the correct answer using the codes given below.
a) 1 and 3 only
b) 1, 2 and 4 only
c) 1 and 4 only
d) 4 only
Answer & Explanation
d) 4 only. SLR, statutory liquidity ratio is the amount of money that is invested in certain specified securities predominantly central government and state government securities. Investing in government securities by bank is one way of fulfilling the requirement of SLR. In this way, SLR acts as a lending mechanism to government. Repo rate is a rate at which banks borrow from RBI for short periods up to 7 or 14 days but predominantly overnight.
4. With reference to foreign portfolio investments (FPI), consider the following statements :
1. FPIs are more volatile than loans from international financial institutions.
2. Foreign Direct Investments are part of FPIs.
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
Answer & Explanation
a) 1 only. FPI is also called Foreign institutional Investments ( FIIs). Because of their volatility they are also called hot money. Loans from international financial institutions are given for a fixed tenure and hence are stable. FDI is not part of FPI, but are accounted separately.
5. India’s central bank, RBI performs various functions. Which of these are its functions according to the RBI act, 1934.
1. managing inflation
2. acting as banker’s bank
3. managing India’s Forex
4. handling government’s borrowing program
Select the correct answer using the codes given below.
a) 2, 3 and 4 only
b) 1, 2 and 3 only
c) 2 and 3 only
d) 1, 2, 3 and 4
Answer & Explanation
d) 1, 2, 3 and 4. RBI’s functions – acting as banker’s bank, managing India’s Forex and handling govt’s borrowing programme
These three are well defined, no confusion over this.
Now let’s read more on inflation management by RBI . Before march 2015, the Reserve Bank was not formally an inflation targeting central bank. The defining features of an inflation targeting central bank are a precise mandate, a single instrument (the policy interest rate) in its armoury, a single minded devotion to achieving this target and a principal-agent relationship with the Government. This is what D.Subbarao said in 2011 -https://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=563
So, even though RBI was informally helping manage inflation, it was not it’s function as defined by the RBI Acvt, 1934
However, in March 2015 it was formally decided that from now, RBI will have the official mandate to manage inflation. Read here – http://www.thehindu.com/business/Economy/pact-binds-rbi-to-inflation-target/article6952317.ece
For this the RBI Act, 1934 will be amended. The amendment has yet not happened, because passing a legislation takes some time. But it has been now fully agreed that such an amendment will be made.
http://www.livemint.com/Politics/MnCWYH7KLMzth6uugVVJDO/Budget-2015–RBI-Act-to-be-amended-inflation-to-be-kept-be.html
6. Which among the following can result in ‘demand pull inflation’ ?
1. increase in subsidy on LPG
2. increase in fuel prices
3. decrease in income tax rates
Select the correct answer using the codes given below.
a) 1 and 2 only
b) 1 and 3 only
c) 2 and 3 only
d) 1, 2 and 3
Answer & Explanation
b) 1 and 3 only. Increase in subsidy of LPG will reduce the pocket expenditure of people on LPG, making more money available with them, thereby increasing demand and pulling inflation. Similar will be the effect of decrease of income tax rates – more money availability. Increase in fuel prices will lead to cost-push inflation.
7. The term ‘narrow banking’ is best described as :
a) banks acting only as payment banks
b) banking by non-banking financial companies
c) limited areas of operation by banks
d) banks lending only to risk free sectors
Answer & Explanation
d) banks lending only to risk free sectors. A ‘Narrow Bank’ can be defined as the system of banking under which a bank places its funds in risk-free assets with maturity period matching its liability maturity profile, so that there is no problem relating to asset liability mismatch and the quality of assets remains intact without leading to emergence of sub-standard assets.
8. If indirect taxes in an economy are increased, then which of the following can occur ?
1. GDP at factor cost increases
2. GDP at factor cost decreases
3. GDP at market price increases
4. GDP at market price decreases
Select the correct answer using the codes given below.
a) 1 only
b) 2 and 3 only
c) 3 only
d) 4 only
Answer & Explanation
c) 3 only. GDP (market price) = GDP ( factor cost) + indirect taxes – subisdies. This equation makes it clear that any increase in indirect taxes will increase the GDP at market prices.
9. Equity market instruments help in financing a firm. Which of these is/are equity market instruments ?
1. Bonds
2. Shares
3. Debentures
Select the correct answer using the codes given below.
a) 1 and 2 only
b) 2 only
c) 2 and 3 only
d) 1, 2 and 3
Answer & Explanation
b) 2 only. Shares are equity instruments, while bonds and debentures are debt instruments. Debt instruments are assets that require a fixed payment to the holder, usually with interest. Examples of debt instruments include bonds (government or corporate), debentures and mortgages. Equity financing allows a company to acquire funds (often for investment) without incurring debt, eg shares.
10. An economy pursuing an expansionary fiscal policy can witness :
1. increase in fiscal deficit
2. increase in wages of labour
3. increase in rate of income tax
Select the correct answer using the codes given below.
a) 1 only
b) 1 and 2 only
c) 1 and 3 only
d) 1,2 and 3
Answer & Explanation
a) 1 only. Expansionary fiscal policy is a macroeconomic policy that seeks to expand the money supply to encourage economic growth or combat inflation (price increases). One form of expansionary policy is fiscal policy, which comes in the form of tax cuts, rebates and increased government spending. Expansionary policies can also come from central banks, which focus on increasing the money supply in the economy. Such a fiscal policy will increase the expenditure, thereby increasing fiscal deficit. Increase in wages of labour is unrelated. There can be a decrease ( not increase ) in income tax rates, so statement 3 is false.
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2. How to practice prelims MCQs for UPSC
3. Applying logic in UPSC General Studies Prelims
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