money supply, banking & financial institutions section 7 MCQ Questions & Answers Detailed Explanation

Answer: (d)

One of the reasons of rising in the prices of goods and services is due to increase in the money supply. An increase in money supply can be caused to the government increasing the expenditure or the government increasing the salaries. When RBI purchases government security from the public it pays money to the public and ultimately increases the money supply.

So, all the statements are true.

Answer: (b)

In international transactions, generally dollars and some other stable/hard currencies like Euro, Pound, Yen etc. are used/accepted. So, if there is a problem of international liquidity then it means non-availability of these hard currencies.

Answer: (a)

A creditor is a party (e.g. person, organization, company, or government) that has a claim to the services of a second party. It is a person or institution to whom money is owed. The second party is frequently called a debtor or borrower.

An incorporated entity is a separate legal entity that has been incorporated through a legislative or registration process established through legislation. Both bondholders and stockholders are creditors of a corporation.

Answer: (b)

Answer: (c)

Answer: (a)

Suppose Nominal Exchange Rate is $1 = Rs.60

Burger Price - India : Rs. 30, US : $1 Whether India will export burgers to US or not depends on three parameters/prices

Price of Burger in US (directly proportional, i.e. if it increases, exports to US will increase)

Price of Burger in India (indirectly proportional, i.e. if it increases exports to the US $ will decrease)

Nominal Exchange Rate (directly proportional, i.e. if it increases exports to US $ will increase)

And all the three parameters are captured in Real Exchange Rate

Real Exchange Rate = $\text"Price in US X Nominal Exchange Rate"/\text"Price in India"$

= ${1 X 60}/30$ = 2

Till Real Exchange Rate > 1, India will continue to export its burgers to the US. If Real Exchange Rate becomes equal to 1, then export & import will stop. If Real Exchange Rate is < 1, then the US will start exporting its burgers to India. So Real Exchange Rate determines export competitiveness between two countries.

But if India wants to measure its export competitiveness with all its trading partners then it calculates the Real Effective Exchange Rate which is a weighted average (weights being the shares in foreign trade with respective countries) of the Real Exchange Rates of its different trading partners.

If the real effective exchange rate appreciates that means it moves from 2 to 1 (in the example above) which means the export competitiveness of Indian products will start reducing.