money supply, banking & financial institutions section 1 MCQ Questions & Answers Detailed Explanation

Answer: (a)

Increase in money supply may not necessarily lead to economic growth. But when the supply of money increases, the interest rate comes down (concept of demand and supply).

Answer: (b)

Answer: (a)

Devaluation reduces the export price in terms of foreign currencies in the world market.

As a result, the exports are increased so as to increase the revenue of the country. When the exports are increased all efforts are made to increase the production of the country.

However, the devaluation of currency is in relation to external currencies and external trade. It has effects on a country’s international trade by alluring traders. But, internal prices remain unaffected.

Answer: (c)

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.

In other words, inflation means a continuous decrease in the value of money due to the excess supply of money in the market. There are two types of inflation demand-pull and cost-push inflation.

Causes behind inflation are reduced taxes, rate decrease in saving, increase in the supply of goods, increase in the number of producers in the market.

To control inflation there should be an increase in the tax rate and an increase in the interest rate.

Answer: (b)

Inflation is an increase in the price of goods. It can be seen as a devaluation of the worth of money. A crucial feature of inflation is that price rises are sustained.

Once only an increase in the rate of, say, value-added tax, will immediately put up prices, but this does not represent inflation unless the indirect effects of the VAT rise have repercussions of prices in periods after the direct effects.

Accounts of the causes of inflation are numerous. The most popular arguments are that it is caused by excess demand in the economy (demand-pull inflation), that it is caused by high costs (cost-push inflation) and that it results from excessive increases in the money supply (monetarism).

Inflation affects all segments of the economy.

Answer: (a)

Suppose (Nominal) exchange rate is $1 = Rs. 60

Now if an Indian exporter exported a particular commodity (1 unit) in the international market whose price is $8,

then he will get $8 and after conversion in India, he will get ultimately Rs. 480.

But if the rupee is undervalued (means less valued) i.e. USD 1 = Rs. 64 then he can sell his product in the international market at a lesser price of $7.5 and can earn the same Rs. 480 after conversion.

(When a country devalues its currency, then exporters are able to sell their product in the international market at a lesser price without compromising their earnings.)

So, we also say that exporters become more competitive.