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

Answer: (b)

Answer: (c)

Investments depend essentially on the real interest rates. It is the difference in the lending rate and inflation. For businessmen, it is this cost i.e. the real interest rate which matters. If it is high, businessmen will not borrow and invest.

For example, if inflation is 6% and the lending rate is 10%, then the real interest rate for businessmen is 4%. For businessmen, it is the real interest rate of 4% that matters. If the real interest is high then it deters investment.

If in the economy, capacity utilization is high that means factories are running at full utilization and then the businessmen plan for an increase in capacity so that in future they are able to supply the goods and services in case there is an increase in demand.

But, if the existing capacity is not fully utilized, then businessmen defer new investments.

Answer: (d)

NEER stands for Nominal Effective Exchange Rate which represents the relative value of a home country’s currency compared to the other major currencies being traded (U.S. dollar, Japanese yen, euro, etc.). It also represents the approximate relative price a consumer will pay for an imported good.

Answer: (b)

Typically, higher inflation is caused by strong economic growth. If Aggregate demand in an economy expanded faster than aggregate supply, we would expect to see a higher inflation rate.

If demand is rising faster than supply, then this suggests that economic growth is higher than the long-run sustainable rate of growth.

Answer: (d)

Local authorities are city corporations, municipalities and port trusts.

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.