Test 8 – Prelims Test series 2022

Under CRR a certain percentage of the total bank deposits has to be kept in the current account with RBI. Banks can”t use this money for lending or investment purposes.
Statement 1 is correct : 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 are separate mechanisms, the rate of which is decided by RBI. Hence, 2 and 3 are not correct.

GDP is the total final value of goods and services produced within the domestic territory of a country in a specified time period (generally a financial year). Hence, 3 is correct.
The concept of domestic territory (economic territory) is different from the geographical or political territory of a country. Domestic territory of a country includes the following:
Political frontiers of the country including its territorial waters.
Ships, and aircrafts operated by the residents of the country between two or more countries for example, Air India’s services between different countries. Hence, 2 is correct.
Fishing vessels, oil and natural gas rigs and floating platforms operated by the residents of the country in the international waters or engaged in extraction in areas where the country has exclusive rights of operation. Hence, 4 is correct.
Embassies, consulates and military establishments of the country located in other countries, for example, Indian embassy in U.S.A., Japan etc. Hence, 1 is correct.
It excludes all embassies, consulates and military establishments of other countries and offices of international organisations located in India. Thus, domestic territory may be defined as the political frontiers of the country including its territorial waters, ships, aircrafts, fishing vessels operated by the residents of the country, embassies and consulates located abroad etc.

Statement 1 is correct : A bank run is a situation that occurs when a large number of bank’s customers withdraw their deposits simultaneously due to concerns about the bank’s solvency (Solvency is the ability of a company to meet its long-term financial obligations which is essential to staying in business).
Statement 2 is correct : As more and more people withdraw their funds, the probability of default increases, thereby prompting more people to withdraw their deposits. In extreme cases, the bank’s reserves may not be sufficient to cover the withdrawals.
A bank run is typically the result of panic which can ultimately lead to default. In such a situation, the RBI stands by the commercial banks as a guarantor and extends loans to ensure the solvency of the banks. This function of RBI is also called ‘lender of last resort’.
Statement 3 is not correct : RBI comes to the rescue of a bank as a ‘lender of last resort’ that is solvent (has not gone bankrupt) but faces temporary liquidity/funds problems.

Statement 1 is correct. A currency swap is a transaction in which two parties exchange an equivalent amount of money with each other but in different currencies. The purpose is to hedge exposure to exchange-rate risk, to speculate on the direction of a currency, or to reduce the cost of borrowing in a foreign currency.
Statement 2 is correct. In a currency swap, each party continues to pay interest on the swapped principal amounts throughout the length of the loan. When the swap is over, principal amounts are exchanged once more at a pre-agreed rate (which would avoid transaction risk) or the spot rate.
Statement 3 is not correct : Currency swaps are used to obtain foreign currency loans at a better interest rate than could be got by borrowing directly in a foreign market.

Statement 1 is incorrect. Repo operations do not lead to permanent injection or absorption of money in the Economy. Repo operations are a type of open market operations, in which the RBI promises to buy back the security it sells after a certain period of time if it wants to temporarily absorb money supply from the economy. Or if the RBI wants to temporarily inject money supply in the economy, it purchases securities where the seller undertakes to repurchase the security from RBI at a specified price and date.
Statement 2 is correct. The RBI can influence money supply by changing the rate at which it gives loans to the commercial banks. This rate is called the Bank Rate in India. By increasing the bank rate, loans taken by commercial banks become more expensive; this reduces the reserves held by the commercial bank and hence decreases money supply. A fall in the bank rate can increase the money supply.
Statement 3 is incorrect. to control inflation, RBI is likely to increase Repo rate to disincentivise borrowing by Banks which in turn constricts the money supply, thereby reducing inflation.

All the statements are correct.
Adam Smith was an 18th-century Scottish economist, philosopher, and author who is considered the father of modern economics. Smith argued against mercantilism and was a major proponent of laissez-faire economic policies.
In his first book, “The Theory of Moral Sentiments,” Smith proposed the idea of an invisible hand—the tendency of free markets to regulate themselves by means of competition, supply and demand, and self- interest.
Adam Smith was an 18th-century Scottish economist, philosopher, and author, and is considered the father of modern economics.
Smith is most famous for his 1776 book, “The Wealth of Nations.”
Smith's ideas–the importance of free markets, assembly-line production methods, and gross domestic product (GDP)–formed the basis for theories of classical economics. Smith is also known for creating the concept of gross domestic product (GDP) and for his theory of compensating wage differentials.
According to this theory, dangerous or undesirable jobs tend to pay higher wages as a way of attracting workers to these positions. Smith’s most notable contribution to the field of economics was his 1776 book, “An Inquiry into the Nature and Causes of the Wealth of Nations.”
The central thesis of Smith’s “The Wealth of Nations” is that our individual needs to fulfill self-interest results in societal benefit, in what is known as his “invisible hand”.
This, combined with the division of labor in an economy, results in a web of mutual interdependencies that promotes stability and prosperity through the market mechanism.
Smith rejects government interference in market activities, and instead states governments should serve just 3 functions: protect national borders; enforce civil law; and engage in public works (e.g. education).

The Currency Deposit Ratio (CDR) is the ratio of money held by the public in currency to that they hold in bank deposits.
The Currency Deposit Ratio is defined as : Cdr =CU/DD.
The Currency Deposit Ratio reflects people”s preference for liquidity. It is a purely behavioural parameter which depends, among other things, on seasonal pattern of expenditure. For example, cd increases during the festive seasons as people convert deposits to cash balance for meeting extra expenditure during such periods.

Fiscal Drag: The restraining effect of progressive taxation economies feel on their expansion- fall in the total demand in the country due to people moving from lower to higher tax brackets and government tax goes on increasing. To neutralise this negative impact, governments usually increase personal tax allowances. During fiscal drag, the tax rate remains the same but the revenue collection is increased because of the increase in incomes of the people, as more people start falling in the tax net. Thus, the net effect of taxation is not encouraging (but discouraging) the demand in the economy. Hence, statement 3 is not correct.

Gross value added (GVA) is defined as the value of output less the value of intermediate consumption.
Value added represents the contribution of labour and capital to the production process. When the value of taxes on products (less subsidies on products) is added, the sum of value added for all resident units gives the value of gross domestic product (GDP). Thus, Gross Domestic Product (GDP) of any nation represents the sum total of gross value added (GVA) (i.e, without discounting for capital consumption or depreciation) in all the sectors of the economy during the said year after adjusting for taxes and subsidies.
o GVA at basic prices will include production taxes and exclude production subsidies available on the commodity. Hence, statement 1 is not correct.
o However, We can easily arrived at the concept of GVA at factor cost by subtracting the value of any taxes on production and adding subsidies on production from GVA at basic price. Hence, GVA at factor cost includes production subsidies and excludes taxes. Hence, statement 2 is also not correct.
o The relationship between GVA at Factor Cost and GVA at Basic Prices is shown below:
GVA at factor cost + (Production taxes less Production subsidies) = GVA at basic prices.
GVA gives a picture of the state of economic activity from the producers' side or the supply side, while GDP gives a picture from the consumers' side or the demand side. Hence, statement 3 is correct.
GVA maps the “value-added” by different sectors of the economy such as agriculture, industry and services. Hence, statement 4 is correct.
Gross Value Added = GDP + subsidies on products – taxes on products.

This route is only for banks (not for financial institutions), on the lines of the liquidity adjustment facility (LAF), but it is not its part. Hence, statement 2 is not correct.
Reserve Bank of India”s liquidity adjustment facility helps banks to adjust their daily liquidity mismatches. LAF has two components — repo (repurchase agreement) and reverse repo. When banks need liquidity to meet its daily requirement, they borrow from RBI through repo. The rate at which they borrow fund is called the repo rate. When banks are flush with fund, they park with RBI through the reverse repo mechanism at reverse repo rate.
Repo rate is applied on loans that meet the banks' regular short-term financial needs while MSF is applied on loans that are required overnight due to sudden shortage of funds. Repo rate applies to commercial banks whereas MSF is applied to scheduled banks. Hence, statement 1 is not correct.
This is a facility for emergencies, through which banks obtain liquidity support at the MSF rate, which is costlier than repo rate. Hence, Statement 3 is correct.
MSF functions as last resort for banks to borrow short term funds. Hence, Statement 4 is correct.

Inflation erodes the value of money and the people who hold currency suffer in this process. As the governments have the authority of printing currency and circulating it into the economy (as they do in the case of deficit financing), this act functions as an income to the governments. This is a situation of sustaining government expenditure at the cost of people”s income. It looks as if inflation is working as a tax. Thus, this additional income of the government is termed as Inflation Tax. That is how the term inflation tax is also known as Seignorage.

RBI publishes figures for four alternative measures of money supply, viz. M1, M2, M3 and M4. Here, M3 is defined as aggregate money supply.
o M1 (Narrow Money) = CU + DD
It is known as narrow money as it contains only liquid financial assets, which are easily accessible on demand. It includes all the currency notes being held by the public on any given day. It also includes all the demand deposits with all the banks in the country, both savings as well as current account deposits and other deposits of the banks kept with the RBI. Hence, statements 1 and 3 are correct.
M1= Demand deposits with the banking system + Other deposits with the RBI.
The Narrow money has another component known as M2 money which includes M1 component and savings deposits of post office savings account. Though the size of the post office saving accounts is negligible. The term M2 is used as all the deposits in M2 are not liquid.
M2 = M1 + Savings Deposits of Post Office Savings account
Broad Money (M3): When we add time deposits into the narrow money, we get broad money which can be denoted by M3. Broad money does not include the interbank deposits. However, time deposits of the public with the banks including the cooperative banks are included in Broad money. Hence, statement 2 is correct.
M3= Narrow Money (M1) + Time deposits of public with the banks
When we add total savings deposits with post offices with the Broad money (M3) we get M4 Money. It excludes national saving certificates.
M4 = Broad Money(M3) + Total Saving deposits with Post offices (excluding National Savings Certificates).

Statement 1 is incorrect: A cess, imposed by the central government is a tax on tax, levied for a specific purpose. Generally, cess is expected to be levied till the time the government gets enough money for that purpose. It is not levied by state government.
For example, a cess for financing primary education – the education cess (which is imposed on all central government taxes) is to be spent only for financing primary education (SSA) and not for any other purposes.
Statement 2 is correct: Like any other tax, the receipt of surcharge goes to consolidated fund of India, and can be spent for any purpose.
A common feature of both surcharge and cess is that the centre need not share it with states.
Following are the differences between the usual taxes, surcharge and cess:
● The usual taxes go to the consolidated fund of India and can be spend for any purposes.
● Surcharge also goes to the consolidated fund of India and can be spent for any purposes.
● Cess goes to Consolidated Fund of India but can be spend only for the specific purposes.
Statement 3 is incorrect: A cess can be levied on both direct and indirect taxes.

Statement 2 is correct : Exchange rate of a currency depends on so many variables as given in the question. If the economy follows the “floating currency regime” for the exchange rate determination, the exchange rate is directly linked to all those factors which affect the availability of domestic and foreign currencies in the economy— higher the supply of foreign currency, higher the value domestic currency will have and vice versa.
Statement 1 is correct : The current account deficit is a component of a country's balance of payments, which includes the trade balance (exports minus imports of goods and services), net income from abroad (such as interest and dividends), and net unilateral transfers (foreign aid and remittances). When a country has a current account deficit, it means that it is importing more goods and services than it is exporting and, therefore, requires more foreign currency to settle these transactions.
The relationship between the current account deficit and the exchange rate is typically indirect. Here's how it can affect the exchange rate:
Supply and Demand: A current account deficit increases the demand for foreign currency (to pay for imports), which, in turn, puts downward pressure on the domestic currency's value. When there is higher demand for foreign currency, the exchange rate tends to depreciate.
Investor Sentiment: A large current account deficit may raise concerns among foreign investors about a country's economic stability. As a result, investors may become hesitant to invest in that country, leading to a decrease in demand for its currency and causing its value to depreciate.
Central Bank Intervention: In some cases, a country's central bank may intervene in the forex market to influence the exchange rate. If a current account deficit is putting significant pressure on the domestic currency, the central bank may choose to sell foreign currency reserves and buy its own currency to support its value.
Statement 3 is correct : Inflation is one of the key factors that can significantly influence the exchange rate of a currency in its forex market. Inflation refers to the general increase in prices of goods and services over time, which reduces the purchasing power of a country's currency.

Financial markets are generally of two types. The short term financial market is known as the money market, while the long-term financial market is known as the capital market.
• Money Market is a segment of the financial market in which financial instruments with high liquidity and very short maturities (less than one year) are traded. Money market instruments are basically debt instruments.
These markets are less risky. Following are some of the instruments of the money market:
• Cash Management Bills: In 2010, Government of India, in consultation with RBI introduced a new short-term instrument, known as Cash Management Bills (CMBs), to meet the temporary mismatches in the cash flow of the Government of India. The CMBs have the generic character of T-bills but are issued for maturities less than 91 days.
• Collateralized Borrowing and Lending Obligation: It is an RBI-approved Money Market instrument that represents an obligation between a borrower and a lender. The instrument works like a bond where the lender buys the CBLO and a borrower sells the money market instrument with interest. CBLO was conceived and developed by Clearing Corporation of India Ltd.(CCIL).
• Certificate of Deposit (CD): Introduced in 1989, the CD was used by banks and issued to the depositors for a specified period ranging less than one year—they are negotiable and tradable in the money market. Since 1993 the RBI allowed the financial institutions to operate in it— IFCI, IDBI, IRBI (IIBI since 1997) and the Exim Bank—they can issue CDs for the maturity periods above one year and upto three years.
• Commercial Paper (CP): It was introduced in 1990. It is used by the corporate houses in India (which should be a listed company with a working capital of not less than Rs. 5 crore). The CP issuing companies need to obtain a specified credit rating from an agency approved by the RBI (such as CRISIL, ICRA, etc).
Sovereign Gold Bonds (SGBs) are not typically traded in the money market. Instead, they are traded in the secondary market through stock exchanges.

● Statement 1 is incorrect: Increasing Inflation in the Economy benefits the debtors/borrowers in the economy. The borrowers benefit from unanticipated inflation because the money they pay back is worth less than the money they borrowed. They gain in real terms. High rates of inflation can make it easier to pay back outstanding debt. On the contrary creditors/lenders are hurt as the money they get paid back has less purchasing power than the money they loaned out.
● Statement 2 is correct: The real estate investments fare better than others in a highly inflationary economy. The real estate rents and values tend to increase during inflation. This supports REIT dividend growth and provides a reliable stream of income even during inflationary periods; thus, REITs tend provide protection against inflation.
● Statement 3 is correct: Very low inflation usually signals demand for goods and services is lower than it should be, and this tends to slow economic growth and depress wages. This low demand can even lead to a recession with increases in unemployment – as we saw during COVID-19 induces slowdown leading to technical recession in economies and same was the case during the 2008 Great Recession.

● Statement 1 is incorrect: The Inflation rate of India has been fluctuating in the past five years.
● Statement 2 is correct: A recession is a significant, widespread, and prolonged downturn in economic activity. A common rule of thumb is that two consecutive quarters of negative gross domestic product (GDP) growth mean recession, although more complex formulas are also used. A depression is a severe and prolonged downturn in economic activity.
Severe and prolonged recession leads to Depression. In more precise sense, depression may be defined as an extreme recession that lasts three or more years or which leads to a decline in real gross domestic product (GDP) of at least 10% in a given year.
● Statement 3 is correct: Since deficit financing raises aggregate expenditure and, hence, increases aggregate demand, the inflation can increase too and therefore, Deficit Financing is inherently inflationary in nature.

● Statement 1 is incorrect: Deflation is a sign of a weakening economy. Many economists fear deflation because falling prices lead to lower consumer spending. The reduced consumer spending will affect economic growth negatively. Companies respond to falling prices by slowing down their production, which leads to layoffs and salary reductions. This also further reduces the spending capacity of the economy.
● Statement 2 is correct: Higher income tax will diminish the taxpayer's disposable income and leave consumer's wants unattended and therefore reduce the overall spending in the economy. This will cause a fall in aggregate demand which will eventually lead to a lower rate of inflation.
● Statement 3 is correct: When inflation is low, it is easier to predict future costs, prices and wages. The stability of low inflation encourages them to take on riskier investment; this can lead to higher growth in the long-term. Overall, low inflation contributes towards economic stability by encouraging savings and investment.

Participants in the call money market include Scheduled Commercial Banks – except Regional Rural Banks, Cooperative banks (other than land development banks), and primary dealers (both as borrowers and lenders). The Land development banks are essentially co-operative institutions. Non-Banking Financial Institutions are not participants in the call money market. Hence, option 1 and 3 are incorrect and option 2 is correct.

Statement 1 is correct : The money market is a market for short-term funds, which deals in financial assets whose period of maturity is upto one year. It should be noted that money market does not deal in cash or money as such but simply provides a market for credit instruments such as bills of exchange, promissory notes, commercial paper, treasury bills, etc. These financial instruments are close substitute of money. These instruments help the business units, other organisations and the Government to borrow the funds to meet their short-term requirement.
The Indian money market consists of Reserve Bank of India, Commercial banks, Co-operative banks, and other specialised financial institutions. The Reserve Bank of India is the leader of the money market in India. Some Non-Banking Financial Companies (NBFCs) and financial institutions like LIC, GIC, UTI, etc. also operate in the Indian money market. These commercial banks, regional rural banks etc. that give short-term funds are well regulated by RBI. Hence, statements 2 and 3 are incorrect.

There are many ways to categorise poverty. In one such way people who are always poor and those who are usually poor but who may sometimes have a little more money (example: casual workers) are grouped together as the chronic poor.
Another group are the churning poor who regularly move in and out of poverty (example: small farmers and seasonal workers) and the occasionally poor who are rich most of the time but may sometimes have a patch of bad luck. They are called the transient poor. And then there are those who are never poor and they are the non-poor.

Open Market Operation (OMO) is an instrument of monetary policy under which sale /purchase of government Treasury Bills and bonds take place. It is used as a means of controlling the money supply in the market.

GDP vs. GNP:
Gross domestic product (GDP) is the value of a nation’s finished domestic goods and services during a specific time period. A related but different metric, the gross national product (GNP), is the value of all finished goods and services owned by a country’s residents over a period of time.
Both GDP and GNP are two of the most commonly used measures of a country’s economy, both of which represent the total market value of all goods and services produced over a defined period. Hence, statement 1 is correct.
There are differences between how each one defines the scope of the economy. While GDP limits its interpretation of the economy to the geographical borders of the country, GNP extends it to include the net overseas economic activities performed by its nationals. Hence, statement 2 is incorrect.
• Gross domestic product (GDP) and gross national product (GNP) are both widely used measures of a country’s aggregate economic output.
• GDP measures the value of goods and services produced within a country’s borders, by citizens and non- citizens alike.
• GNP measures the value of goods and services produced by only a country’s citizens but both domestically and abroad.
• GDP is the most commonly used by global economies. The United States abandoned the use of GNP in 1991, adopting GDP as its measure to compare itself with other economies.
GDP highlights the strength of the country’s economy while GNP highlights the contribution of the residents to the development of the economy. Hence, statement 3 is correct.

• GNP is known as gross national product and represents the total value of goods and services produced by the residents of a country during a financial year.
•It takes the income earned by the citizens of the country present within or outside the country into consideration. It excludes the income generated by the foreign nationals who are residing in the country. It can be calculated as:
•Statement II is true : GNP = GDP + NR – NP
•Where,
oGDP = Gross domestic product
oNR = Net income receipts
oNP = Net outflow to foreign assets
Statement I is false : Gross National Product is mostly lower than the Gross Domestic Product. If the income earned by domestic firms in overseas countries exceeds the income earned by foreign firms within the country, only then, GNP is higher than the GDP.

The capital market plays a significant role in the national economy. A developed, dynamic and vibrant capital market can immensely contribute to speedy economic growth and development.
o Following are the main features of the capital market:
Dealing in long term securities: Capital market deals in securities for long and medium term like shares, debentures and bonds. It does not deal with channelising saving for less than one year or short term funds. Hence, statement 1 is correct and 3 is incorrect.
Dealing in marketable and non-marketable securities: Capital market deals in both marketable and non-marketable securities. Marketable securities are those which can be transferred e.g. shares, debentures etc. Non-marketable securities are those which cannot be transferred e.g. term deposits with banks, loans and advances of banks and financial institutions.
Includes both individual and institutional investors: capital market comprises both individual and institutional investors. Individual investors are general public and institutional investors include mutual funds, pension funds, LIC etc.
Includes both primary and secondary markets: primary market relates to issue of fresh securities in the market and secondary market deals with sale and purchase of existing securities through stock exchange. Hence, statement 2 is not correct.
Utilises intermediaries: operations in the capital market is conducted with the help of intermediaries like merchant bankers, underwriters, brokers, sub-brokers, collection bankers etc.

Purchase of Government Securities by the RBI from the banks will involve payment made by the RBI to the banks, thereby increasing liquidity with the banks, hence expansionary monetary policy. Sale of Government Securities by the RBI to the banks will absorb banks’ liquidity. An increase in the Government Securities (Higher SLR) minimum requirement will leave fewer funds with banks for giving loans. Repurchase of the government securities sold to the RBI by the banks last month at a higher repurchase price than earlier means higher Repo Rate. It will encourage banks to keep more reserves with them and hence less lending to the public. Therefore, the correct answer is (A).

Gross Domestic Product at Market Prices (GDPMP) : GDP is the market value of all final goods and services produced within a domestic territory of a country measured in a year.
• All production done by the national residents or the non-residents in a country gets included, regardless of whether that production is owned by a local company or a foreign entity. Hence, option (A) is correct.
Gross National Product at Market Prices (GNPMP)
• GNPMP is the value of all the final goods and services that are produced by the normal residents of India and is measured at the market prices, in a year.
• GNP refers to all the economic output produced by a nation’s normal residents, whether they are located within the national boundary or abroad.
GNP at Factor Cost (GNPFC)
• GNP at factor cost measures value of output received by the factors of production belonging to a country in a year.
NNP at Factor Cost (NNPFC)
• NNP at factor cost is the sum of income earned by all factors in the production in the form of wages, profits, rent and interest, etc. belonging to a country during a year.
• It is the National Product and is not bound by production in the national boundaries. It is the net domestic factor income added with the net factor income from abroad.

In the foreign exchange market, it is a situation when a domestic currency loses its value in front of a foreign currency if it is market-driven. It means depreciation in a currency can only take place if the economy follows the floating exchange rate system. Thus, statement 1 is correct.
If a free-floating domestic currency increases its value against the value of a foreign currency, it is appreciated. In the domestic economy, if a fixed asset has seen an increase in its value it is also known as appreciation. Appreciation rates for different assets are not fixed by any government as they depend upon market mechanism. Thus, statement 2 is correct.
When the exchange rate of a domestic currency is cut down by its government (and not driven by market forces) against any foreign currency, it is called devaluation. It means official depreciation is devaluation. Thus, statement 3 is incorrect.
Devaluation is when a government increasing the exchange rate of its currency against any foreign currency. It is official appreciation. Thus, statement 4 is correct.

Statement 1 is correct: National income includes net factor income from abroad (difference between factor income earned by our residents in rest of the world and factor incomes earned by non residents in our country) whereas domestic income does not include net factor income from abroad.
Statement 2 is correct: National Income is the sum total of factor incomes generated by residents of a country no matter where this income is generated- within a domestic territory or in the rest of the world.Whereas, domestic income is sum total of factor incomes generated within domestic territory of a country no matter who generates this income- resident or non-resident.
Statement 3 is incorrect: National income is the sum total of factor incomes earned by the normal residents of a country within and outside its economic territory. Therefore, National Income = Domestic Income + Factor Income received from the rest of the world – Factor payments made to the rest of the world. The national income is not always greater than the domestic income.

Nominal GDP is an assessment of economic production in an economy but includes the current prices of goods and services in its calculation. Hence, statement 1 is incorrect.
GDP is typically measured as the monetary value of goods and services produced. Since nominal GDP doesn't remove the pace of rising prices when comparing one period to another, it can inflate the growth figure.
Real gross domestic product (real GDP) is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year (expressed in base-year prices). and is often referred to as “constant-price,” “inflation-corrected”, or “constant dollar” GDP.
Real GDP makes comparing GDP from year to year and from different years more meaningful because it shows comparisons for both the quantity and value of goods and services.
Real GDP is calculated by dividing nominal GDP over a GDP deflator. The GDP deflator, also called implicit price deflator, is a measure of inflation. It is the ratio of the value of goods and services an economy produces in a particular year at current prices to that of prices that prevailed during the base year. This ratio helps show the extent to which the increase in gross domestic product has happened on account of higher prices rather than increase in output. The ratio of nominal to real GDP is a well known index of prices. This is called GDP Deflator. Hence, statement 2 is correct.
GDP deflator is an index number which measures inflation.Hence, statement 3 is correct.

Statement 1 is incorrect. GDP Deflator is an index representing the ratio of Nominal GDP to Real GDP. Thus GDP Deflator can be represented as, GDP Deflator = (Nominal GDP)/ (Real GDP).
Statement 2 is correct. The ratio of Nominal GDP to Real GDP gives an idea of how the prices have moved from the base year (the year whose prices are being used to calculate the Real GDP) to the current year.
Statement 3 is correct. In the calculation of the GDP Deflator, the Real and Nominal GDP of the current year is considered at the fixed volume of production. Therefore, if these measures differ, it is only due to change in the price level between the base year and the current year and not because of change in the volume of production. Thus, the volume of production is considered constant calculating the GDP Deflator.

All the above statements are correct.
Issues With GDP As An Indicator of Development
• Rising GDP of a country does not necessarily mean the rise in the welfare of citizens. This is because the rise in GDP may be concentrated in the hands of very few individuals or firms. Hence, statement 1 is correct.
• GDP does not reflect inequality present within the economy. Economic inequality is not revealed by GDP figures.
• Non-monetary exchanges: Many activities in an economy are not evaluated in monetary terms. For example, domestic services women perform at home are not paid for. This is a case of underestimation of GDP. GDP ignores voluntary and charitable work, social service as it is unpaid. Hence, statement 2 is correct.
• Externalities: Externalities refer to the benefits (or harms) a firm or an individual causes to another for which they are not paid (or penalized). Externalities do not have any market in which they can be bought and sold. For example, output of oil refinery is taken into GDP calculation but pollution and ill effects are not deducted from GDP. This is the case of overestimation of GDP.
• Underground Economy: The underground economy (or black market) refers to cash and barter transactions that are not formally recorded and are often used to support the trade of illegal goods and services (i.e., drugs, weapons etc). Some nations’ economic output may be understated by GDP.
• GDP does not value intangibles like leisure, quality of life etc.
• GDP does not take into account the economic value of the environment. Rather it neglects services provided by ecosystems and incentivizes economic activities causing environmental degradation by counting them. Hence, statement 3 is correct.

Statement 1 is not correct: Bank Rate is the rate at which the commercial bank gets loans and advances from the central bank.
o Statement 2 is correct: Easy Money Policy is a policy by which Central Bank seeks to make money plentiful and available at low interest rate in market. Decreasing the Bank Rate decreases rate of loans and advances for consumers in market. The rise in the bank rate by the central bank increases the interest rate on loans and advances by commercial banks. This makes the borrowing of money expensive for general public.
Statement 3 is not correct: The bank rate is the interest rate on which the central bank (RBI in India) provides loans to commercial banks for a longer duration. The repo rate is the rate at which RBI securities provide loans to banks for short-term.

Statement 2 is not correct: Fiscal consolidation is a reduction of fiscal deficit. So, by increasing revenues and decreasing expenditure, we can undertake fiscal consolidation. While getting more loans/increased public borrowing may increase receipts, it will not help in fiscal consolidation as that loan has to be repaid back along with interest. So loans add more to the expenditure than it contributes to receipts.
Statement 1 and 3 are correct: Increasing taxes and reducing subsidies will of course increase revenues and decrease expenditure respectively contributing to fiscal consolidation.

The sequence of these increasing order of liquidity is:
1. Time deposits with the banks
2. Savings deposits with the banks
3. Demand deposits with the banks
4. Currency

Commercial Banks accept deposits from the public and lend out this money to interest- earning investment projects. The rate of interest offered by the bank to deposit holders is called the “borrowing rate” and the rate at which banks lend out their reserves to investors is called the “lending rate”. The difference between the two rates is called “spread”. It is the profit that is appropriated by the banks.

LAF is a facility extended by the Reserve Bank of India to the scheduled commercial banks (excluding RRBs) and primary dealers to avail of liquidity in case of requirement or park excess funds with the RBI in case of excess liquidity on an overnight basis against the collateral of Government securities including State Government securities. Repo or repurchase option is a collaterised lending i.e. banks borrow money from Reserve bank of India to meet short term needs by selling securities to RBI with an agreement to repurchase the same at predetermined rate and date. The rate charged by RBI for this transaction is called the repo rate. Repo operations therefore inject liquidity into the system. Reverse repo operation is when RBI borrows money from banks by lending securities. The interest rate paid by RBI is in this case is called the reverse repo rate. Reverse repo operation therefore absorbs the liquidity in the system. Hence, statement 1 is not correct.
Through LAF, banks are permitted to borrow only a certain percentage of its Net Demand and Time Liabilities (NDTL). In case the Bank requires more funds, beyond what is permissible under LAF, it can access another window called Marginal Standing Facility (MSF). Hence, statement 2 is not correct.
o The collateral used for repo and reverse repo operations comprise of primarily Government of India securities. In fact, Reverse Repos and Repos can be undertaken in all SLR-eligible transferable Government of India dated Securities/Treasury Bills. Hence, statement 3 is correct.

It is also known as the Population trap.
It is the consistent unsustainability of improvements in a society’s standard of living because of population growth.
Malthus suggested that while technological advances could increase a society’s supply of resources, such as food, and thereby improve the standard of living, the resource abundance would encourage population growth, which would eventually bring the per capita supply of resources back to its original level.
Continuation of extreme poverty in modern world indicates that the Malthusian trap continues to operate.
Malthus argued that society has a natural propensity to increase its population, a propensity that causes population growth to be the best measure of the happiness of a people: “The happiness of a country does not depend, absolutely, upon its poverty, or its riches, upon its youth, or its age, upon its being thinly, or fully inhabited, but upon the rapidity with which it is increasing, upon the degree in which the yearly increase of food approaches to the yearly increase of an unrestricted population.”

Liquidity, at any given point of time, refers to the net fund (fund borrowed minus fund deposited with RBI) borrowed by banks and Primary Dealers (PDs) under LAF. Liquidity shortage refers to a situation where net fund borrowed from RBI is positive. In other words, banks and PDs have to resort to RBI for overnight borrowings as there is liquidity crunch in the market.
Similarly, excess liquidity refers to an opposite situation where net fund borrowed from the RBI is negative. Basically, banks and PDs have more than enough liquidity with them so they turn to the RBI to park their excess fund to earn interest.

● Statement 1 is correct: The Laspeyres Price Index is a consumer price index used to measure the change in the prices of a basket of goods and services relative to a specified base period weighting. A key differentiator between the Laspeyres Price Index and other indices (Paasche Price Index, Fisher Price Index, etc.) is that it uses weights taken from a base period. The Index is used for calculation of WPI, CPI, IIP.
● Statement 2 is correct: When inflation rises, the purchasing power goes down. If inflation outpaces the interest one earns on their savings, it will feel like losing money as the amount one saves or invests from the income every month may not rise at the same rate.
● Statement 3 is incorrect: The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services. It measures price changes from the perspective of a retail buyer.
There are four types of CPI:CPI for Industrial Workers (IW), CPI for Agricultural Labourer (AL), CPI for Rural Labourer (RL) and CPI (Rural/Urban/Combined).

Inflation can be controlled by adopting the tight, near and hawkish monetary policy and increasing the interest rate thereby controlling the demand and the inflation. Other measures too can be taken up by the government to increase the supply of goods in the economy, some of the measures for same can be:
The easing of import restrictions to allow greater imports of commodities and hence creating a match between demand and supply.
It can also be increased by banning the exports of items that are showing signs of inflation to match the supply with demand.
It can be increased by providing good quality decentralized cold storage facilities so that wastage of perishable commodities is minimized and hence their supply is maintained.

According to United Nations, “Economic territory is a geographical territory administered by the government within which the persons, goods and capital circulate freely”.
Domestic territory/Economic territory of an economy includes the following:
(i) Territory lying within the political frontiers including territorial waters of a country.
(ii) Embassies, Consulates and Military establishment of the country located abroad. For ex. the Indian Embassy in the USA, is a part of domestic territory of India.
(iii) Ships, fishing vehicles, aircraft, oil and natural gas rigs and floating platforms owned by the residents of the country in the international waters or engaged in the extraction in areas in which the country has the exclusive right of exploitation. For ex. the fishing boats operated by the Indian fishermen in the international waters of the Indian ocean are part of the economic/domestic territory of India.

The monetary transmission mechanism is the process by which asset prices and general economic conditions are affected as a result of monetary policy decisions. Such decisions are intended to influence the aggregate demand, interest rates, and amounts of money and credit in order to affect overall economic performance. The traditional monetary transmission mechanism occurs through interest rate channels, which affect interest rates, costs of borrowing, levels of physical investment, and aggregate demand. Additionally, aggregate demand can be affected through friction in the credit markets, known as the credit view. In short, the monetary transmission mechanism can be defined as the link between monetary policy and aggregate demand.
Statement 1 is correct : Monetary transmission refers to the process by which a central bank”s monetary policy decisions are passed on, through financial markets, to businesses and households.
Statement 2 is correct : Rising Non Performing Assets (NPAs) and higher returns on small savings schemes are potential factors that could hinder effective monetary transmission in India.
Statement 3 is correct : Lowering the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements can indeed help ensure more effective monetary transmission.

In 1969, the Tamil Nadu Government (DMK) appointed a three-member committee under Dr P V Rajamannar to examine the entire question of Centre-State relations and to suggest amendments to the Constitution so as to secure utmost autonomy to the states. The important recommendations of the committee are as follows:
(i) An Inter-State Council should be set up immediately;
(ii) Finance Commission should be made a permanent body;
(iii) Planning Commission should be disbanded, and its place should be taken by a statutory body;
(iv) Articles 356, 357 and 365 (dealing with President’s Rule) should be totally omitted;
(v) The provision that the State Ministry holds office during the pleasure of the Governor should be omitted;
(vi) Certain subjects of the Union List and the Concurrent List should be transferred to the State List;
(vii) the residuary powers should be allocated to the States; and
(viii) All-India services (IAS, IPS and IFS) should be abolished. So Option (A) is correct.

The Coefficient of Human Inequality, introduced in the 2014 HDR as an experimental measure, is a simple average of inequalities in health, education and income. The average is calculated by an unweighted arithmetic mean of estimated inequalities in these dimensions.
When all inequalities are of a similar magnitude, the coefficient of human inequality and the loss in HDI differ negligibly, when inequalities differ in magnitude, the loss in HDI tends to be higher than the coefficient of human inequality.

In a jobless growth economy, unemployment remains stubbornly high, even as the economy grows. This tends to happen when a relatively large number of people have lost their jobs, and the subsequent recovery is insufficient to absorb the unemployed, under-employed, and those first entering the workforce. Therefore, the correct answer is (B).

All the options are correct.
FUNCTIONS OF MONEY :
• The first and foremost role of money is that it acts as a medium of exchange.
• Money also acts as a convenient unit of account. The value of all goods and services can be expressed in monetary units.
• Money is not perishable and its storage costs are also considerably lower. It is also acceptable to anyone at any point of time. Thus money can act as a store of value for individuals. Wealth can be stored in the form of money for future use. However, to perform this function well, the value of money must be sufficiently stable. A rising price level may erode the purchasing power of money. It may be noted that any asset other than money can also act as a store of value, e.g. gold, landed property, houses or even bonds (to be introduced shortly).

Features of money market instruments:
● High liquidity
● Minimal transaction cost
● Deal in short-term investments
● Helps in fiscal mobility, etc.

Option 1 is correct : Banks maintain a minimum cash balance out of the deposits they receive. The RBI monitors the banks in actually maintaining cash balance.
Option 2 is correct : Similarly the RBI sees that the banks give loans not just to profit-making businesses and traders but also to small cultivators, small scale industries, to small borrowers etc.
Periodically, banks have to submit information to the RBI on how much they are lending, to whom, at what interest rate, etc.
Option 3 is correct : Banks need to report spurious transactions to Financial Intelligence Unit. The norms are regulated by RBI. More on this later.

Statement 1 is correct : Stagflation occurs when an economy experiences stagnant economic growth, high unemployment and high price inflation. This scenario, of course, directly contradicts the theory of the Phillips curve.
Stagflation is an economic phenomenon characterized by a combination of stagnant economic growth, high unemployment, and high inflation. According to the traditional Phillips curve, there should be an inverse relationship between inflation and unemployment, suggesting that when inflation increases, unemployment should decrease, and vice versa.
However, during periods of stagflation, both inflation and unemployment rise simultaneously, which goes against the typical expectations of the Phillips curve. This scenario was notably observed in the 1970s when many advanced economies faced stagflation due to various factors, including oil price shocks and supply-side constraints.
The emergence of stagflation challenged the Phillips curve's ability to fully explain macroeconomic conditions and led economists to reevaluate their understanding of the relationship between inflation and unemployment. It highlighted the importance of considering other factors, such as supply-side shocks, expectations, and the interaction between different economic variables.
Statement 5 is correct : Phillip’s Curve: The Phillips curve is an economic concept that represents the inverse relationship between the unemployment rate and the inflation rate in an economy. It was originally proposed by economist A.W. Phillips in 1958 based on his empirical observations of data from the United Kingdom.
The general idea behind the Phillips curve is that when the unemployment rate is low, there is upward pressure on wages as businesses compete for a smaller pool of available workers. As wages increase, the cost of production for goods and services also rises, leading to higher prices (inflation). On the other hand, when the unemployment rate is high, there is less upward pressure on wages, leading to slower growth in prices or even deflation.
Graphically, the Phillips curve is often depicted as a downward-sloping curve, with inflation on the vertical axis and the unemployment rate on the horizontal axis. The curve suggests that as the unemployment rate decreases, inflation increases, and vice versa.
Statement 2 is not correct : Laffer’s Curve: Increase in tax rate increases the collection of revenue, but beyond a certain point increase in tax rate reduces the revenue collection.
Statement 3 is not correct : Lorenz Curve: Inequality increases with the increase in national income.
Statement 4 is not correct : Engel’s Law: People generally spend a smaller share of their budget on food as their income increases.

Statement 1 is correct. Capital goods continue to serve us through different cycles of production. Thus, capital goods or consumer durables once produced, is not considered for wearing out or getting consumed in a delineated time period, that is, for the specified single cycle of production.
Statement 2 is incorrect. The already existing capital stock suffers wear and tear and needs maintenance and replacement. This value of wear and tear and maintenance and replacement needs to be subtracted from gross investment for arriving at the measure for net investment. Thus, to calculate the net investment, depreciation is considered as an annual allowance for wear and tear of a capital good as well as obsolescence.
Statement 3 is correct. The final goods consist of both consumer and capital goods. The totalproduction of final goods can be either in the form of consumption or investment and there isthus a trade-off. Thus, if an economy, out of its current production of final goods, producesmore consumer goods, it produces fewer investment goods and vice-versa.

The National Bank for Agriculture and Rural Development (NABARD) was set up on 12 July 1982 as an apex body to coordinate the activities of all institutions involved in the rural financing system under the jurisdiction of Ministry of Finance. Hence, Statement 1 is not correct.
It is established by an act by the parliament of India. Hence, Statement 4 is correct.
The Green Revolution was a harbinger of major changes in the credit system as it led to the diversification of the portfolio of rural credit towards production oriented lending. Hence, Statement 2 is correct.
• The Reserve Bank of India (RBI) has sold its entire stakes in the National Bank for Agriculture & Rural Development (NABARD).
• The decision to divest its entire stake was taken based on the recommendations of the second Narasimham Committee.
• It was established based on the recommendations of the Committee set up by the Reserve Bank of India (RBI) under the chairmanship of Shri B. shivaraman. Hence, Statement 3 is not correct.

Statements 1 and 2 are correct: Its activities are focused on the developing countries. It works for human development (education, health), agriculture and rural development (irrigation, rural services), environmental protection (pollution reduction, establishing and enforcing regulations), infrastructure (roads, urban regeneration, electricity) and governance (anti-corruption, development of legal institutions). It provides loans and grants to the member-countries. In this way, it exercises enormous influence on the economic policies of developing countries.
It is often criticised for setting the economic agenda of the poorer nations, attaching stringent conditions to its loans and forcing free market reforms.
Statement 3 is correct : Linked to the United Nations through special agreements, the separate, autonomous specialized agencies of the UN family set standards and guidelines, help formulate policies, provide technical assistance, and other forms of practical help in virtually all areas of economic and social endeavour such as World Bank, ILO, WHO etc.

Statement 1 is not correct : Physical capital is the variety of inputs required at every stage during production, such as machinery. They can be very well organized and maintained for e.g. at different factory locations.
Statement 2 is not correct : Every production is organised by combining land, labour, physical capital and human capital, which are known as factors of production.
Statement 3 is not correct : Physical capital can be sold in the open market like any other commodity. However, human capital cannot be traded. It is the service that is sold.

Statement 1 is correct: Stagflation is characterised by slow economic growth and relatively high unemployment—or economic stagnation—accompanied by inflation. Stagflation can be alternatively defined as a period of high inflation combined with a decline in the gross domestic product (GDP).
● Statement 2 is incorrect: Since, stagflation is combination of high unemployment and inflation it results in a decrease in consumer spending power i.e. the purchasing power of a consumer is affected by Stagflation.
● Statement 3 is correct: Stagflation results in three things:
(1) high inflation,
(2) stagnation, and
(3) High unemployment.
● In other words, stagflation creates an economy characterised by quickly rising prices and no economic growth (and possibly an economic contraction), which brings about high unemployment.

Statement 3 is not correct : All members have equal voting rights and all decisions are taken unanimously but the major economic powers such as the US, EU and Japan have managed to use the WTO to frame rules of trade to advance their own interests.
Statement 1 is correct : The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments.
The WTO has 164 members (including European Union) and 23 observer governments (like Iran, Iraq, Bhutan, Libya etc).
From the early days of the Silk Road to the creation of the General Agreement on Tariffs and Trade (GATT) and the birth of the WTO, trade has played an important role in supporting economic development and promoting peaceful relations among nations.
The General Agreement on Tariffs and Trade (GATT) traces its origins to the 1944 Bretton Woods Conference, which laid the foundations for the post-World War II financial system and established two key institutions, the International Monetary Fund (IMF) and the World Bank.
The conference delegates also recommended the establishment of a complementary institution to be known as the International Trade Organization (ITO), which they envisioned as the third leg of the system.
In Havana in 1948, the UN Conference on Trade and Employment concluded a draft charter for the ITO, known as the Havana Charter, which would have created extensive rules governing trade, investment, services, and business and employment practices.
The Havana Charter never entered into force, primarily because the U.S. Senate failed to ratify it. As a result, the ITO was stillborn.
Meanwhile, an agreement as the GATT signed by 23 countries in Geneva in 1947 came into force on Jan 1, 1948 with the following purposes:
to phase out the use of import quotas
and to reduce tariffs on merchandise trade,
Statement 2 is correct : The GATT became the only multilateral instrument (not an institution) governing international trade from 1948 until the WTO was established in 1995.

Capital Account and Current account are two primary components of balance of payments. Balance of Payment (BoP) of a country is the Systematic record of all economic transactions between the residents of a foreign country.
All transactions that create or release debt is considered in the capital account. So, A is correct.
So, where the current account reflects a nation’s net income, the capital account reflects net change in ownership of national assets.

Statement 1 is correct : Total foreign trade (exports + imports) as a proportion of GDP is a common measure of the degree of openness of an economy. An open economy trades with other nations in goods, services and at times in financial assets. First, when a nation buys foreign goods, this spending escapes as a leakage from the circular flow of income decreasing aggregate demand. Second, our exports to foreigners enter as an injection into the circular flow, increasing aggregate demand for domestically produced goods.
Statement 2 is not correct : Even a closed economy can be a fast growing economy.
Statement 3 is not correct : Number or depth of financial institutions does not show how open an economy is. However, with more openness, one can expect that FIs grow large in number and have deeper penetration of the economic system.

Statement 1 is correct : The Gross Domestic Product (GDP) deflator is a measure of general price inflation. It is calculated by dividing nominal GDP by real GDP and then multiplying by 100. Nominal GDP is the market value of goods and services produced in an economy, unadjusted for inflation (It is the GDP measured at current prices). Real GDP is nominal GDP, adjusted for inflation to reflect changes in real output (It is the GDP measured at constant prices). Simply put, it is the ratio of the value of goods and services an economy produces in a particular year at current prices to that at prices prevailing during any other reference (base) year. This ratio basically shows to what extent an increase in GDP or gross value added (GVA) in an economy has happened on account of higher prices, rather than increased output.
There are other measures of inflation too like Consumer Price Index (CPI) and Wholesale Price Index (or WPI); however, GDP deflator is a much broader and comprehensive measure. Since Gross Domestic Product is an aggregate measure of production, being the sum of all final uses of goods and services (less imports), GDP deflator reflects the prices of all domestically produced goods and services in the economy whereas, other measures like CPI and WPI are based on a limited basket of goods and services, thereby not representing the entire economy (the basket of goods is changed to accommodate changes in consumption patterns, but after a considerable period of time). Another important distinction is that the basket of WPI (at present) has no representation of services sector. The GDP deflator also includes the prices of investment goods, government services and exports, and excludes the price of imports. Changes in consumption patterns or the introduction of new goods and services or structural transformation are automatically reflected in the deflator which is not the case with other inflation measures.
Statement 2 is correct : However, WPI and CPI are available on monthly basis whereas deflator comes with a lag (yearly or quarterly, after quarterly GDP data is released). Hence, monthly change in inflation cannot be tracked using GDP deflator, limiting its usefulness.
If GDP at current prices is equal to the GDP at constant prices, GDP deflator will be one, implying no change in price level.
The GDP deflator measures the prices of all goods and services produced, whereas the CPI or RPI measures the prices of only the goods and services bought by consumers.
Statement 3 is correct : The CPI or RPI assigns fixed weights to the prices of different goods, whereas the GDP deflator assigns changing weights. In other words, the CPI or RPI is computed using a fixed basket of goods, whereas the GDP deflator allows the basket of goods to change over time as the composition of GDP changes.

Increase in Bank Rate is indicative of Dear Money policy/ Tight Money policy. Fall in market interest rate in an indication of expansion in money supply/ easy money supply, which demands a decrease in Bank rate. Thus, option C is the correct answer.

Central bank
Central Bank is a very important institution in a modern economy. Almost every country has one central bank.
India got its central bank in 1935. Its name is the ‘Reserve Bank of India’.
Central bank has several important functions.
It issues the currency of the country.
It controls money supply of the country through various methods, like bank rate, open market operations and variations in reserve ratios.
It acts as a banker to the government.
It is the custodian of the foreign exchange reserves of the economy.
It also acts as a bank to the banking system.
From the point of view of money supply, its function of issuing currency. This currency issued by the central bank can be held by the public or by the commercial banks, and is called the ‘high-powered money’ or ‘reserve money’ or ‘monetary base’ as it acts as a basis for credit creation.

Increasing MSF reduces money supply for speculation which in turn strengthens rupee value in international market. Hence, statement 1 is incorrect.
The purpose of marginal standing facility is to reduce volatility in the overnight lending rates in the interbank market and to enable smooth monetary transmission in the economy. Hence, statement 2 is correct.
MSF, being a penal rate, is always fixed above the repo rate. The MSF would be the last resort for banks once they exhaust all borrowing options including the liquidity adjustment facility by pledging through government securities, which has lower rate of interest in comparison with the MSF. The MSF would be a penal rate for banks and the banks can borrow funds by pledging government securities within the limits of the statutory liquidity ratio. The scheme has been introduced by RBI with the main aim of reducing volatility in the overnight lending rates in the inter-bank market and to enable smooth monetary transmission in the financial system. Hence, statement 3 is incorrect.

● Statement 1 is correct: Inflation can happen if the money supply grows faster than the economic output under otherwise normal economic circumstances. Inflation, or the rate at which the average price of goods or services increases over time, can also be affected by factors beyond the money supply.
● Statement 2 is correct: An inflationary gap exists when the demand for goods and services exceeds production due to factors such as higher levels of overall employment, increased trade activities, or elevated government expenditure.
Statement 3 is incorrect: Policies that can reduce inflation include reductions in government spending, tax increases, bond and securities issues, interest rate increases, and transfer payment reductions.

• CASA stands for Current Account Saving Account. CASA ratio of a bank is the ratio of deposits in current and saving accounts to total deposits. A higher CASA ratio indicates a lower cost of funds because banks do not usually give any interest on current account deposits and the interest on saving accounts is usually very low 3-4%, Hence better financial health. A low CASA ratio means the bank relies heavily on costlier wholesale funding, which can hurt its margins. Hence statement 1 is not correct.
• Basel Norms are the norms issued by the Basel Committee on Banking Supervision (BCBS) for the international banking regulations to strengthen the banking system. Accordingly, RBI stipulates that banks are required to maintain a minimum capital to risk-weighted assets ratio of 9%. Non-bank subsidiaries are required to maintain the capital adequacy ratio prescribed by their respective regulators. Hence statement 3 is not correct.
• The capital adequacy ratio (CAR) is a measurement of a bank”s available capital expressed as a percentage of a bank”s risk-weighted credit exposures. Also known as the capital-to-risk weighted assets ratio (CRAR), it is used to protect depositors and promote the stability and efficiency of financial systems around the world. Empirical results show that banks with higher capital to risk-weighted assets ratio (CRAR) raise funds at a lower cost. Additionally, banks with higher CRAR transmit monetary policy impulses smoothly, while stressed assets in the banking sector hinder transmission. Hence statement 2 is correct.

Assets are things a firm owns or what a firm can claim from others. In case of a bank, apart from buildings, furniture, etc., its assets are loans given to public.
When the bank gives out loan of Rs 100 to a person, this is the bank’s claim on that person for Rs 100.
Another asset that a bank has is reserves. Reserves are deposits which commercial banks keep with the Central bank, Reserve Bank of India (RBI) and its cash.
These reserves are kept partly as cash and partly in the form of financial instruments (bonds and treasury bills) issued by the RBI. Reserves are similar to deposits we keep with banks. We keep deposits and these deposits are our assets, they can be withdrawn by us.
Similarly, commercial banks like State Bank of India (SBI) keep their deposits with RBI and these are called Reserves.
Assets = Reserves + Loans
Hence, both statement 1 and 2 are incorrect.
Liabilities for any firm are its debts or what it owes to others. For a bank, the main liability is the deposits which people keep with it.
Liabilities = Deposits

As per the RBI Act 1934, Section 25, “the design, form and material of bank notes shall be such as may be approved by the Central Government after consideration of the recommendations made by the Central Board of RBI.”

The Kuznets curve is a hypothetical curve that graphs economic inequality against income per capita over the course of economic development. Simon Kuznets hypothesized that as an economy develops, market forces first increase then decrease the overall economic inequality of the society, which is illustrated by the inverted U- shape of the Kuznets curve.
The environmental Kuznets curve is a hypothesized relationship between environmental quality and economic development: various indicators of environmental degradation tend to get worse as modern economic growth occurs until average income reaches a certain point over the course of development.

Normal residents of a country may be defined as such persons who ordinarily reside in that country where their centre of economic interest lies.
The term “normal residents” is a comprehensive term and includes both individuals and institutions, It includes both nationals (such as Indians living in India) and foreigners (non-nationals) residing in a host country (such as Nepalese holding Nepalese passports and citizenship, settled and living in India and having their economic interests in India).
“Centre of Economic Interest” implies two things:
The resident lives or is located within the Domestic Territory; and
The resident carries out basic economic activities of earnings, spending and accumulation from that location.
Following are not included under the category of Normal residents:
Foreign tourists and visitors who visit a country for recreation, holidays, medical treatment, study, sports, conferences, etc. Foreign staff of Embassies, officials, diplomats and members of the armed forces of a foreign country, located in the given country;
International organizations like UNO, WHO, etc. are not considered as normal residents of the country in which they operate. They are treated as the normal residents of international area.
Employees of international organizations are considered as residents of the countries to which they belong and not of the international area. For example, an American working in UNO office located in India will be treated as normal resident of America.
However, if the employees are working for more than one year in such International Institutions, then they become the normal resident a country in which such institutions are located. It means, in the given example, if the American is working in UNO office in India for more than one year, then he will be treated as normal resident of India.
Crew members of foreign vessels, commercial travelers and seasonal workers, provided their stay is less than one year.
Border workers who live near the international border and cross the border on a regular basis to work in the other country. They are treated as normal residents of the country where they live, and not where they work. Besides, Indians living abroad will also be regarded as normal residents of India if their economic interest is in India and their stay in foreign countries is of, less than one year. Thus, normal residents can be of three types.
They are: (i) Nationals of a country residing in the country of which they are the nationals, such as Indians living in India. (ii) Nationals of a country living abroad temporarily (for less than one year) but their interest lie in the country of which they are the nationals such as Indians living temporarily in the foreign countries. (iii) Foreigners living in a country for more than one year.

If the GDP at current price is equal to the GDP at the constant price, GDP deflator will be 1. This situation implies that the rate of inflation in the economy is zero i.e. no change in the price level.

External aids are the most suitable means to fulfil government’s deficit requirements even if it comes with soft interest.
External borrowings are next best way to manage fiscal deficit if they are available at lower interest rate and for a longer period of time. However, external loans are considered as an erosion in the nations sovereign decision making process.
Internal borrowings create “crowding out effect” i.e. government borrowings from banks hampers the investment prospects of private sector. Ultimately, economy heads for lower investment and lower demands.
Printing currency is the last resort for the government in managing its deficit. But it cannot be used for the expenditures which are to be made in the foreign currency. It increases inflation proportionally.

An inflationary gap is a macroeconomic concept that describes the difference between the current level of real GDP and the anticipated GDP that would be experienced when an economy is at full employment, also referred to as the potential GDP. For the gap to be considered inflationary, the current real GDP must be the higher of the two metrics.

RBI carries out the general banking business of the governments through its own offices and commercial banks, both public and private, appointed as its agents (called Agency Banks).
Section 45 of the Reserve Bank of India Act, 1934, provides for appointment of scheduled commercial banks as agents at all places or at any place in India. A network comprising the Government Banking Division of RBI and branches of agency banks appointed under Section 45 of the RBI Act carry out the government transactions.
At present all the public sector banks and select private sector banks act as RBI’s agents. Only designated branches of agency banks can conduct government banking business.

Basis of International Trade :
o Difference in national resources: The world”s national resources are unevenly distributed because of differences in their physical make up i.e. geology, relief soil and climate.
o Size of population: Densely populated countries have large volume of internal trade but little external trade because most of the agricultural and industrial production is consumed in the local markets.
Standard of living of the population determines the demand for better quality imported products because with low standard of living only a few people can afford to buy costly imported goods.
o Extent of foreign investment: Foreign investment can boost trade in developing countries which lack in capital required for the development of mining, oil drilling, heavy engineering, lumbering and plantation agriculture. By developing such capital intensive industries in developing countries, the industrial nations ensure import of food stuffs, minerals and create markets for their finished products.
This entire cycle steps up the volume of trade between nations.
o Population factors: The size, distribution and diversity of people between countries affect the type and volume of goods traded.
o Transport: In olden times, lack of adequate and efficient means of transport restricted trade to local areas. Only high value items, e.g. gems, silk and spices were traded over long distances. With expansions of rail, ocean and air transport, better means of refrigeration and preservation, trade has experienced spatial expansion.

National Disposable Income= Net National Product at market prices + other current transfers from rest of the world.
Current transfers are current account transactions in which a resident entity in one nation provides a non resident entity with an economic value, such as a real resource or financial item, without receiving something of economic value in exchange. Current transfers are transactions where the originator does not receive a “quid pro quo” in return; this absence of economic value on one side is represented in the balance of payments by one-sided transactions called transfers. Current transfers affect the current account and are separate and distinct from capital transfers, which are included in the capital and financial account. Current transfers include workers” remittances, donations, tax payments, foreign aid and grants.
National disposable income is the sum of the disposable incomes of all resident institutional units/sectors. National Disposable Income may be derived from National Income by adding all current transfers in cash receivable by resident institutional units from non-resident units and subtracting all current transfers in cash payable by resident institutional units to nonresident units.
Hence, Remittances, gifts, donations and amount received in aid(cash) are all part of current transfers, which when added to NNP(market price) would make national disposable income.
Surplus of merchandise export is a part of capital account.

● Statement 1 is correct: Cash Reserve Ratio (CRR) is one of the main components of the RBI’s monetary policy, which is used to regulate the money supply, level of inflation and liquidity in the country. The higher the CRR, the lower is the liquidity with banks and vice-versa.
● During high levels of inflation, attempts are made to reduce the flow of money in the economy. Thus, RBI can increase CRR, lowering the loanable funds available with the banks.
● Statement 2 is Incorrect: Statutory Liquidity Ratio (SLR) is essentially a control measure that refers to the amount a commercial bank must keep in the form of gold or securities before providing loans to consumers.
● In case of a lower SLR, the banks have higher amounts to give as credit. Since credit becomes available at a lower rate of interest and puts money in the hands of the people, the demand for goods rises. This may lead to inflation, when people have more cash in their hands than the goods produced in the market.
● Statement 3 is correct: Repo rate is the interest rate levied when commercial banks borrow funds from RBI and any shift in the repo rate determines the relative shift in rates for the loans and deposits. When the repo rate increases, the borrowing cost for the commercial banks rises which is passed on to the retail investors and vice versa. Increase in repo rates thus, squeeze the liquidity in the market and is a tool to check the rising inflation.

In government finance, it is the amount of export earnings needed to meet annual interest and principal payments on a country”s external debts.
o In corporate finance, the Debt-Service Coverage Ratio (DSCR) is a measure of the cash flow available to pay current debt obligations. The ratio states net operating income as a multiple of debt obligations due within one year, including interest, principal, sinking-fund and lease payments.

Currencies and coins are fiat money because they derive their value from government “fiat”/ order. If the coin is melted then it will not fetch the same value in the market and the paper of which the currency note is made of does not have any value in the market. Hence, Currency notes and coins are called fiat money and they do not have intrinsic value.
They are also called legal tenders as they cannot be refused by any citizen of the country for settlement of any kind of transaction. Cheques drawn on savings or current accounts, however can be refused by anyone as a mode of payment. Hence cheques are not legal tenders.

Demand-pull inflation arises due to higher demand for goods and services over the available supply. Higher demand for goods and services arises due to an increase in income of the people, increase in money supply and change in the taste and performance of people etc.
Following are the factors responsible for the demand-pull inflation:
(A) Increase in money supply
(B) Lower interest rates
(C) Increase in disposable income
(D) Cheap monetary policy
(E) Increase in public expenditure
(F) Repayment of public debt
(G) Rising real wages etc.

Underemployment is a measure of employment and labor utilization in the economy that looks at how well the labor force is being utilized in terms of skills, experience and availability to work.
Labor that falls under the underemployment classification includes those workers who are highly skilled but working in low paying jobs, workers who are highly skilled but working in low skill jobs and parttime workers who would prefer to be full time. This is different from unemployment in that the individual is working but is not working at his full capability.

Statement 1 is not correct: FDI or Foreign Direct Investment is an investment that a parent company makes in a foreign country, therefore it is sector specific. On the contrary, FII or Foreign Institutional Investor invests in the markets of a foreign nation, thus increases capital availability in market.
Statement 2 is correct: The FII is also known as hot money as the investors have the liberty to sell it and take it back. But in FDI, this is not possible. In simple words, FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter and exit that easily. Hence, FDI is considered to be more stable than FII.
Statement 3 is correct: FDI helps bring better management skills and technology, while FII only brings in the capital.

Openness is measured as, Exports + Imports of goods and services of a country as a percentage of its GDP.
So, (D) is correct.
Trade balance means Exports – Imports.

Macroeconomic Vulnerability Index (MVI), which adds up the rate of inflation, current account deficit and fiscal deficit of a country, is quite helpful in comparing countries across years. In developing countries, the MVI is determined by various structural conditions which expose an economy to financial shocks.

Financial Inclusion results in increase of savings in formal bank accounts. This leads to increase in the savings rate. Hence statement 1 is correct.
o Financial inclusion is widely acknowledged to play an important in poverty alleviation. This is because it helps access and availability of credit, insurance and social security schemes. Hence statement 2 is correct.
o Under CRR a certain percentage of the total bank deposits has to be kept in the current account with RBI and not the net amount. While financial inclusion may result in an increase in the net deposits with banks, it is unlikely to have an impact on the percentage of deposits to be parked with RBI unless the central bank decides otherwise. Hence statement 3 is not correct.

Stagflation is a time of economic stagnation combined with inflation. This type of inflation can lead to economic adversity: combining poor economic growth, high unemployment, and high inflation rate all in one.

In economics, the stock of unsold finished and semi-finished goods along with raw material which a firm carry from one year to next year called inventory. Inventory is a stock variable. It may have a value at the beginning of the year; it may have higher value at the end of the year.
o Change in inventory stock during an accounting year = Inventory of stock at the end of the year Inventory stock at the at beginning of the accounting year.
o However, stock of fixed assets of the producers during an accounting year is known as fixed investment.
o Expenditure by the producers on purchase of intermediate goods during an accounting year is known as intermediate consumption.

Statement 1 is correct: NDP is obtained by excluding the value of depreciation (i.e. wear and tear that a fixed asset goes, in the process if its use) from GDP. As it is impossible to make depreciation zero, they can never be equal in values.
Statement 2 is incorrect: The rate of depreciation is higher in developing economies. Thus, the difference between their GDP and NDP is high (not low).
Statement 3 is incorrect: Gross Domestic Product (GDP) and Net National Product (NNP) are both measures used to assess the economic performance of a country, but they focus on different aspects of the economy. GDP reflects the total economic activity within a country's borders, NNP accounts for capital depreciation to provide a more accurate measure of economic well-being, and per capita income gives an average income figure per person in the country.

Statement 1 is incorrect : Rupee is authorised as a medium of exchange by the RBI on behalf of the government based on law. As per Indian law, no other individual or organisation is allowed to issue currency. Hence, it is widely accepted as a medium of exchange. It does not have an intrinsic value since its production cost is not related to its value. For e.g. a 2000 Rupee’s intrinsic value (production cost) is not even a fraction of its actually value in market.
Statement 2 is incorrect : While rupee currency notes can theoretically be printed on a large scale, but this is not the reason why it is accepted as a medium of exchange. Many commodities in India can be supplied on a large scale, for e.g. water. Wide supply of a commodity does not necessarily lead to its establishment as the medium of exchange of the country.
Statement 3 is incorrect : No individual in India can legally refuse a payment made in rupees. Hence this rupee is widely accepted as a medium of exchange.

Money supply is money with the public either in cash form or in deposit form (demand and time both) with the bank (and Post offices). Securities like bonds and shares are tradable instruments and their prices fluctuate and hence are not part of money supply.

Banks are mandated to keep only a fraction of the deposits as reserves, rest they can lend and this lending creates money in the system.
For example, If I had Rs. 100 cash with me which I deposited in a bank, and say the bank kept Rs. 20 in reserves and rest i.e. Rs. 80 it lent to someone else. Now, money with me is Rs. 100 (in deposit form) and money with the other person is Rs. 80. So, now total money in the system is Rs. 180, while earlier it was only Rs. 100. And this became possible just because the person deposited the money in the bank and the bank kept only a fraction in the reserve and the rest it lent to someone else. This is called fractional reserve banking.
In the above case monetary base is Rs. 100 and money supply is Rs. 180.
Money multiplier = Money Supply/Monetary Base =180/100 = 1.8
Another case, if I would have only Rs. 50, which I deposited in the bank and the bank kept 20% reserves i.e. Rs. 10 and the rest Rs. 40 it lent then, Money multiplier = 90/50 = 1.8
If banks are mandated to keep all the deposited money i.e. Rs. 100 as reserves then banks would not have lent and no new money would have been created in the system. And then; Money multiplier would have been = 100/100 = 1
Fractional Reserve Banking: Commercial banks create money through a process known as fractional reserve banking. When you deposit money in a bank, the bank is required to hold only a fraction of those deposits as reserves. The rest can be lent out, effectively creating new money in the form of loans. This expansion of the money supply is a key driver of economic activity.
Central Bank Monetary Policy: Central banks, such as the Federal Reserve in the United States or the European Central Bank, have the authority to create money. They can do this through a process called open market operations, where they buy financial assets (such as government bonds) from banks. This injects money into the banking system, increasing the money supply.
Loans and Credit Creation: When individuals and businesses borrow from banks, they create new money in the process. Banks don't need to have the full amount of the loan in reserves; they only need to maintain a fraction of it. This allows them to lend out more money than they actually have on hand, effectively creating new money in the economy.

Impact of British rule on Indian economy:
The economic policies followed by the British led to the rapid transformation of India’s economy into a colonial economy whose nature and structure were determined by needs of the British economy.
● Commercialisation of agriculture – Large scale cultivation of cash crops like Indigo, Cotton, Tea, etc. due to good market prices led to a shortage in food grains leading to various famines. It was opposed by people as evident from the Indigo revolt, Champaran Satyagraha.
● Rise of new landlordism – There was a rise of new intermediaries and absentee landlordism was promoted through – Permanent Settlement, Mahalwari and Ryotwari.
● Impoverishment of peasantry – The peasants were evicted from ownership of their lands on being unable to pay the demanded revenue. They were exploited through forced labour by making them landless labourers and plantation workers.
● Ruin of the traditional handicrafts industry – Cheap imports of machine-made goods from Britain destroyed the local industry which was unable to cope with the low prices.
● Raw material was exported from India and finished goods were imported for Indian market.
● No Technological advancement of agriculture – British did not invest in machinery required for agriculture rather used the cheap labour available in India in huge plantations.
● Increase in agricultural production – Though there was a rise in the quantity of cash crops being produced, however, foodgrains production declined.

Both visible and invisible items together make up the current account. Interest on loans, tourist expenditure, banking and insurance charges, software services etc., are similar to visible trade since receipts from selling such services to the foreigners are very similar in their effects to the receipts from sales of goods; both provide income to the people who produce the goods or services.
o Thus, Balance of payments on current account is more comprehensive in scope than balance of trade. It includes not only imports and exports of goods which are visible items but also invisible items such as foreign travel, transportation (shipping, air transport etc.), insurance, tourism, investment income (e.g. interest on investments), transfer payments i.e. donations, gifts, software services, etc.

The nominal effective exchange rate (NEER) is an unadjusted weighted average rate at which one country”s currency exchanges for a basket of multiple foreign currencies. In economics, the NEER is an indicator of a country”s international competitiveness in terms of the foreign exchange (forex) market. Hence, Statement 1 is correct.
Forex traders sometimes refer to the NEER as the trade-weighted currency index.
o The NEER adjusted to compensate for the inflation rate of the home country relative to the inflation rate of its trading partners results in the real effective exchange rate (REER).
•It is a measure of the value of a currency against a weighted average of several foreign currencies. An increase in NEER indicates an appreciation of the rupee. Hence, Statement 3 is correct.

Statement 1 is not correct: While earlier the Reserve Bank of India used WPI inflation to manage monetary policy expectations, it is now the CPI inflation which is taken into account. Under the RBI Act, the Central Government, in consultation with the RBI, determines the inflation target in terms of the Consumer Price Index (CPI), once in every five years.
Statement 2 is not correct: If the inflation is too high, Reserve Bank of India (RBI) is likely to reduce the money supply in the economy to control inflation. Thus, RBI sells the government securities so as to suck the excess of money supply from the economy and to control the inflation.
Statement 3 is correct: The Reserve Bank of India intervenes in the currency market to support the rupee as a weak domestic unit can increase a country’s import bill. There are a variety of methods by which RBI intervenes. It can intervene directly in the currency market by buying and selling dollars. If RBI wishes to prop up rupee value, then it can sell dollar and when it needs to bring down rupee value, it can buy dollars.
Statement 4 is correct: When the US raises its domestic interest rates, this tends to make India less attractive for the currency trade. As a result, some of the money may be expected to move out of the Indian markets and flow back to the US, therefore decreasing the value of India’s currency against the US dollar. Thus, if interest rates in the USA or European Union were to fall, the value of rupee against the dollar increases and that is likely to induce RBI to buy dollars.

Disinvestment increases autonomy in the management of enterprises, and thus, it increases efficiency and overall work culture. It also exposes the enterprises to market discipline and new technologies and professionalism increases.
Labour Welfare and employment is not concerned with Disinvestment rather it is achieved when more PSUs are setup.

Statement 1 is incorrect. Disinvestment and Privatization are two different terms in technical sense, though both involve the sale of Government”s share in the Public Sector Undertakings. Privatisation involves Change in ownership while Disinvestment results only in dilution of assets.
Statement 2 and 3 are incorrect. The term privatization is used for a stake sell in which there is a transfer of 51% or more equity to the private players. In disinvestment, the government sells only a part of the equity which is essentially less than 51% so that ownership and management rights can be held by the Government itself, However in certain cases Disinvestment may result in change of management.

When people deposit money in banks (public deposits), then banks keep only a certain portion with them and the rest they lend. Whatever they keep with themselves is considered as reserves.
The portion that they keep as reserves can be in the form of cash or gold or they can purchase government securities (bonds) or they can also deposit with RBI.
So only (ii), (iii) & (iv) statements are true.

RBI earns income in a variety of ways : RBI invests Forex to purchase US govt. bonds and lend to other Central Banks and earns interest. It also earns interest on Indian Govt securities (OMO) and it earns interest by lending to banks (Repo Operations).
• Open market operations, wherein the central bank purchases or sells bonds in the open market in order to regulate money supply in the economy, are a major source of income for the RBI.
Apart from the interest received from these bonds, the RBI may also profit from favourable changes in bond prices.
While the RBI is responsible for the issuance of currency notes and coins in India, it does not directly generate revenue from the printing and minting process. Instead, the cost of printing and minting currency is an expenditure for the RBI. The central bank covers these costs as part of its operations.

Statement 1 is incorrect : RBI is the central bank of India, responsible for formulating and implementing the country's monetary policy, regulating and supervising the banking sector, managing the exchange rate, and maintaining financial stability.
Statement 2 is correct : While RBI operates with a degree of independence, its autonomy is not absolute and is subject to certain constraints: Section 7, RBI Act 1934 says “The Central Government may from time to time give such directions to RBI as it may, after consultation with the governor of the RBI, consider necessary in the public interest”.
Statement 3 is incorrect : Section 30, RBI Act 1934 says that, “If RBI fails to carry out any of the obligations imposed on it under the RBI Act, then Central government can supersede the Central Board” of RBI.
Statement 4 is correct : The Reserve Bank of India (RBI) acts as an agent of the Government of India in matters related to the country's membership in the International Monetary Fund (IMF). Overall, the RBI's role as an agent of the Indian government in relation to the IMF underscores the importance of international economic cooperation and ensures that India's interests and policies are effectively represented and coordinated within the global economic community.

Mergers and Acquisitions of commercial banks require the approval of Competition Commission of India (CCI) and Reserve Bank of India (RBI) both.