Structure of the Indian Economy & Demographics (Part-II)

Total Questions: 62

51. With reference to Indian economy, demand-pull inflation can be caused/increased by which of the following? [2021-1]

1. Expansionary policies

2. Fiscal stimulus

3. Inflation-indexing wages

4. Higher purchasing power

5. Rising interest rates

Select the correct answer using the code given below.

Correct Answer: (a) 1, 2 & 4 only
Solution:Demand-pull inflation is the rising pressure on prices that follows a shortage in supply, a situation that describe as "too many dollars chasing too few goods." When government spends more generously, money in the market is increased which leads to increase demand for the goods and fuels demand-pull inflation. Rising loan interest rate will decrease the demand of goods and services and so it will decrease the demand pull inflation. Question requires us to find the factors that will increase the demand. Thus #5 (interest rate) is wrong, B/C/D are eliminated & we are left with Correct Option "(a)".

52. Which among the following steps is most likely to be taken at the time of an economic recession? [2021-1]

Correct Answer: (b) Increase in expenditure on public projects
Solution:This was even highlighted by the latest economic survey that during the times of recession and economic slowdown → government should spend more money using counter cyclic fiscal policy strategy. So, B is most appropriate. Increasing loan interest rate will decrease the demand of goods/services→ so, not advisable Increasing tax rate will also decrease the demand of goods/services so, not advisable.

53. Indian Government Bond yields are influenced by which of the following? [2021-1]

1. Actions of the United States Federal Reserve

2. Actions of the Reserve Bank of India

3. Inflation and short-term interest rates.

Select the correct answer using the code given below

Correct Answer: (d) 1, 2 & 3
Solution:Bond yield is the amount of profit made by an investor in Bond investment. RBI tries to influence the Bond Yield by buying/selling G-Sec in the Secondary market for example they tried to do it in the "operation twist". So, #2 is right. The actions of the US Feds also influence Bond Yields of Indian G-Sec Because the foreign investors will accordingly buy/sell/dump Indian government securities in the secondary market depending on the returns offered by the US feds on US Treasury Bonds & this will influence Indian Govt's Bond yields. → So, I is right. Similarly, Inflation and short term interest rate also Influence the investor to buy/sell/dump Indian government securities in the secondary market to move money elsewhere 3 is also right.

54. With reference to the Indian economy, consider the following statements: [2022-11]

1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.

2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.

3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars.

Which of the statements given above are correct?

Correct Answer: (b) 2 and 3 only
Solution:

Role of RBI in controlling Inflation: Using Monetary Policy

  • It is the macroeconomic policylaid down by the central bank-RBI.
  • Monetary policy is a set of tools that a nation's central bank has available to promote sustainable economic growth by controlling the interest rate and the overall supply of money that is available to the nation's banks, its consumers, and its businesses.
  • It is the demand side economic policy that is used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity.
  • In India, monetary policy of the Reserve Bank of India is aimed at managing the quantity of money in order to meet the requirements of different sectors of the economy and to increase the pace of economic growth.
  • The RBI implements the monetary policy through open market operations, bank rate policy, reserve system, credit control policy, moral persuasion and through many other instruments.
  • Using any of these instruments will lead to changes in the interest rate, or the money supply in the economy.

55. With reference to the Indian economy, what are the advantages of "Inflation-Indexed Bonds (IIBs)"? [2022-1]

1. Government can reduce the coupon rates on its borrowing by way of IIBs.

2. IIBs provide protection to the investors from uncertainty regarding inflation.

3. The interest received as well as capital gains on IIBs-are not taxable.

Which of the statements given above are correct?

Correct Answer: (a) 1 and 2 only
Solution:
  • Inflation-Indexed bonds, or IIBs, are securities designed to help protect investors from inflation. IIBs are indexed to inflation so that the principal and interest payments rise and fall with the rate of inflation. Government can reduce coupon rates on its borrowing by way of IIBs. So, statement 1 is correct.
  • An inflation-indexed bond protects both investors and issuers from the uncertainty of inflation over the life of the bond. So, statement 2 is correct.
  • Extant tax provisions will be applicable on interest payment and capital gains on IIBs. There will be no special tax treatment for these bonds. So, statement 3 is not correct.

Features of Inflation Indexed Bonds

  • Coupon payments: Twice a year, you will receive a fixed interest payment on the adjusted principal amount of your investment.
  • Investment term: These bonds are issued for a period of 10 years.
  • SLR status: As government securities (G-secs), these bonds are eligible for Statutory Liquidity Ratio (SLR) status, which means that banks and other financial institutions are required to hold a certain percentage of their assets in G-secs.
  • Objective: These bonds are designed to protect the savings of the middle class and the poor from inflation.
  • Investment limits: Individual investors can invest up to Rs. 10 lakh per year, while institutional investors can invest up to Rs.25 lakh per year. The minimum investment amount is Rs. 5000.

56. With reference to the Indian economy, consider the following statements: [2022-1]

1. A share of the household financial savings goes towards government borrowings.

2. Dated securities issued at market-related rates in auctions form a large component of internal debt.

Which of the above statements is/are correct?

Correct Answer: (c) Both 1 and 2
Solution:Both statements are correct as per the economic survey.
  • In India, households invest in various financial instruments, including bank deposits, pension funds, insurance schemes, and government securities.
  • A portion of these savings is indeed channeled into government borrowings through the purchase of government bonds and securities, thereby helping the government to finance its deficit and undertake public expenditures.
  • The Indian government raises funds through the issuance of dated securities, which are long-term government bonds with a fixed maturity date.
  • These securities are issued at market-related rates, determined by the dynamics of demand and supply in the market. The government conducts auctions for these securities, attracting bids from various financial institutions and investors.
  • These dated securities constitute a significant portion of the government’s internal debt, which represents the debt owed by the government to domestic creditors.

57. Consider the following statements: [2022-1]

1. Tight monetary policy of US Federal Reserve could lead to capital flight.

2. Capital flight may increase the interest cost of firms with existing External Commercial Borrowings (ECBs).

3. Devaluation of domestic currency decreases the currency risk associated with ECBs.

Which of the statements given above are correct?

Correct Answer: (a) 2 only
Solution:
  • Tight monetary policy is an action undertaken by a central bank such as the Federal Reserve to slow down overheated economic growth. Central banks engage in tight monetary policy when an economy is accelerating too quickly or inflation—overall prices—is rising too fast.
  • Central Banks enact monetary policy to keep inflation, unemployment, and economic growth stable and positive. When the economy overheats central banks raise interest rates and take other contractionary measures to slow things down — this can discourage investment and depress asset prices. Thus, tight monetary policy of the US Federal Reserve could lead to capital flight by the investors.
  • Capital flight can drive up the interest costs as there is reduced money supply in the system. Thus, it would lead to increase in the interest cost of firms that have external commercial borrowings.
  • Devaluation of domestic currency does not affect the External Commercial Borrowings as it is denominated in the foreign currency and not in the domestic currency.

58. In India, which one of the following is responsible for maintaining price stability by controlling inflation? [2022-1]

Correct Answer: (d) Reserve Bank of India
Solution:As per the RBI act amendment of 2016, inflation control is the responsibility of RBI. Presently they are trying to control the inflation between 2 to 6% CPI (All India). Option (d) is correct.

  • There is a close link between the money supply and inflation, Therefore, controlling money supply with the help of monetary policy can be controlled.

  • Using contractionary monetary policy, the money supply in the economy can be decreased. This leads to decrease in aggregate demand in the market and thereby reduces inflation.

  • Decrease in supply of money → rate of interest increases → Investment decreases → Aggregate demand decreases →prices decline → rate of inflation is lower

  • Similar process follows when CRR, SLR, Repo Rates are increased and decreased.

  • Rates like CRR, SLR, Repo Rate and Reverse Repo Rate are increased to impact the money supply in the economy by the RBI to control inflation.

59. With reference to Non-Fungible Tokens (NFTs), consider the following statements: [2022-1]

1. They enable the digital representation of physical assets.

2. They are unique cryptographic tokens that exist on a blockchain.

3. They can be traded or exchanged at equivalency and therefore can be used as a medium of commercial transactions.

Which of the statements given above are correct?

Correct Answer: (a) 1 and 2 only
Solution:Statement 3 may be wrong since the word Non-fungible itself insinuate that it cannot be used as a medium of exchange because it will not be divisible easily and its individual parts value will not equal to each other. So mutual substitution will difficult therefore number3 is wrong and by elimination answer should be "(a)".

60. The total fertility rate in an economy is defined as: [2024-1]

Correct Answer: (d) the average number of live births a woman would have by the end of her child-bearing age.
Solution:According to WHO, "The average number of children a hypothetical cohort of women would have at the end of their reproductive period if they were subject during their whole lives to the fertility rates of a given period and if they were not subject to mortality.

It is expressed as children per woman." The correct answer is (d).