money supply, banking & financial institutions section 2 MCQ Questions & Answers Detailed Explanation

Answer: (c)

A supply shock is an unexpected event that suddenly changes the supply of a product or commodity, resulting in an unforeseen change in price. Supply shocks can be negative, resulting in a decreased supply, or positive, yielding an increased supply; however, they're often negative.

A supply shock inflation is caused because of the problem (negative supply shock) in the supply of goods and services rather than a change in demand.

If the exports from India increase because foreigners purchased more Indian products then it may result in a shortage in supply of that product in the domestic economy resulting in supply shock inflation.

Because of increased government expenditure, more money reaches the public resulting in increased demand and hence demand-pull inflation.

If there is more money/credit creation in the economy then it results in higher demand in the economy resulting in demand-pull inflation.

Answer: (d)

A Government Security (G-Sec) is a tradeable instrument issued by the Central Government or the State Governments. (G-Secs are issued through auctions conducted by RBI.

Auctions are conducted on the electronic platform called the E-Kuber, the Core Banking Solution (CBS) platform of RBI). G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments. (Govt. issues only debt securities). There are four kinds of government securities.

Government Securities (G-Sec)

1. Treasury Bills
2. Cash Management Bills
3. Dated Securities
4. State Dev. Loans

SDLs are allowed to be kept under SLR by banks. SDLs have a maturity of more than one year. In terms of Sec. 21A (1) (b) of the Reserve Bank of India Act, 1934, the RBI may, by agreement with any State Government undertake the management of the public debt of that State.

Accordingly, the RBI has entered into agreements with 29 State Governments and one Union Territory (UT of Puducherry) for management of their public debt.

Answer: (b)

Hot money or currency is a term that is most commonly used in financial markets to refer to the flow of funds (or capital) from one country to another in order to earn a short-term profit on interest rate differences and/or anticipated exchange rate shifts.

These speculative capital flows are called “hot money” because they can move very quickly in and out of markets, potentially leading to market instability.

Answer: (c)

Soft currency is a currency with a value that fluctuates as a result of the country's political or economic uncertainty which may be due to the balance of payments problem.

Currencies from most developing countries are considered to be soft currencies.

Often, governments from these developing countries will set unrealistically high exchange rates, pegging their currencies to a currency such as the U.S. dollar

Answer: (b)

Answer: (d)