money supply, banking & financial institutions section 5 MCQ Questions & Answers Detailed Explanation

Answer: (d)

Through this scheme, the households will be able to deposit their gold/ jewellery with the banks which they will melt and convert into gold bars and could sell these gold bars to jewellers.

The depositors of gold will earn a fixed interest rate (denominated in terms of gold) and they will get their gold back after the maturity period or cash whatever they want.

Through this scheme, the government wants to mobilize the gold jewellery lying with the households for productive purposes. This will also help in reducing the gold imports and Current Account Deficit (CAD).

Answer: (b)

Answer: (b)

Those transactions come under Capital Account (BoP) which creates future obligations/ liabilities or changes in assets/liabilities. For example, loans, shares, deposits etc.

Global Depository Receipts (GDRs) are basically shares issued abroad by a domestic company. International Trade Credit means credit/loan given for trade purposes abroad.

Securities are basically financial assets, so they will always be included in Capital Account.

So, all are part of the Capital Account of BoP

Answer: (d)

Dear Money, also known as tight money, is money that has to be borrowed at a high-interest rate, and so restricts expenditure by companies.

This situation can be a result of a restricted money supply, causing interest rates to be pushed up due to the forces of supply and demand. Businesses may have a tough time raising capital during a period of dear money.

Answer: (d)

Gresham’s law is an economic principle that states:

“When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation.”

It is commonly stated as: “Bad money drives out good.”

Answer: (b)

Cost-push inflation occurs when businesses respond to rising costs, by increasing their prices to protect profit margins.

There are many reasons why costs might rise:

1. Component costs,
2. Rising labour costs and
3. higher indirect taxes imposed by the government.

So, direct taxes should be increased when an economy is going through inflationary pressures.