money supply, banking & financial institutions section 9 MCQ Questions & Answers Detailed Explanation
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The following question based on Money Supply, Banking and Financial Institutions topic of indian economy mcq
- They are regulated by respective Real Estate Regulatory Authorities (RERA) of every State
- It will make the real estate sector accessible to small investors
(a) (ii) only
(b) Both (i) & (ii)
(c) (i) only
(d) Neither (i) nor (ii)
The correct answers to the above question in:
Answer: (a)
A “Real estate investment trust" is a trust registered under the Indian Trusts Act, 1882 which manages a fund/ corpus where the funds are invested in real estate property.
REITS are mutual fund like institutions that enable investment into the real estate sector by pooling small sums of money from a multitude of individual investors. REITS are regulated by the Securities and Exchange Board of India (SEBI).
Most middle-class investors presently do not invest in commercial real estate because of the big size of the investment. This entry barrier will be removed through REITs as it will make the expensive real estate sector accessible to the middle-class investor (min. investment limit is Rs. 2 lac).
REITS will also help the real estate industry which is currently plagued with problems such as weak demand, cash constraints, stuck projects etc. Now, the developers will be able to sell their property to REITs and move on to the execution of new projects.
SEBI has also approved Infrastructure Investment Trusts (InvITs) along with REITs which are very similar to REITs but are for the infrastructure sector.
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Read more money and supply banking financial institutions Based Indian Economy Questions and Answers
Question : 1
Which of the following may have an inflationary impact on the economy?
- Forex swap
- Increase in the inflow of foreign capital
- General elections
a) (ii) only
b) (ii) & (iii) only
c) (i) only
d) All of the above
Answer »Answer: (d)
In the case of a forex swap, RBI may give rupees to banks and can take dollars, which leads to an increase in rupee liquidity in the economy, resulting in inflation. Of course, forex swaps can also be used to take out the excess liquidity in the economy (RBI giving dollars to banks and taking rupees).
An increase in foreign capital inflow leads to an increase in money supply leading to inflation. General elections lead to higher spending levels by the government increasing inflation.
Question : 2
The price of government securities is influenced by which of the following?
- Interest rate in the economy
- Liquidity in the market
- Developments in forex, money and capital markets
a) (ii) only
b) (i) & (ii) only
c) (i) only
d) All of the above
Answer »Answer: (d)
When the interest rate moves up in the economy, government securities (bonds) prices go down. If the liquidity in the economy is surplus, the interest rate comes down in the economy resulting in higher bond prices.
Developments in money, capital and forex markets also impact the interest rates and liquidity in the domestic economy resulting in changes in government securities prices.
Question : 3
Consider the following statements regarding the transactions happening at the international level for trade and financial flows.
- There is an international authority with the power to force the use of a particular currency
- There is a basket of currencies which can only be used to settle international transactions
- Currencies which maintain a stable purchasing power are generally accepted
- Freely convertible currencies are generally accepted
a) (ii) & (iv) only
b) (iii) & (iv) only
c) (i) only
d) (ii), (iii) & (iv) only
Answer »Answer: (b)
There is no international authority that directs that trade between two countries should happen only with some specific currencies. Any two countries are free to transact with any currency if they are willing.
Generally, any country will accept that currency for its trade (exports), if that currency is not losing value (less inflation) and it is stable and it is freely convertible in other currencies.
Question : 4
Which of the following measures would result in an increase in the money supply in the economy?
- Purchase of government securities from the public by the Central Banks.
- Deposit of currency in commercial banks by the public.
- Borrowing by the government from the Central Bank.
- Sale of government Securities to the public by the Central Bank.
a) 2 and 4
b) 1, 2 and 3
c) 1 and 3
d) 1, 2, 3 and 4
Answer »Answer: (c)
Question : 5
Consider the following taxes:
- VAT paid during purchase of a tyre tube for a vehicle
- Service Tax paid while making payments of dinner in a restaurant
- Duty paid while importing machinery from abroad
a) 1 & 2
b) Only 1
c) 1, 2 & 3
d) None of them
Answer »Answer: (d)
Question : 6
Consider the following statements regarding the “Currency Swap Agreement” between two companies:
- It is used to obtain foreign currency loans at a cheaper interest rate
- It removes the exchange rate risk
a) (ii) only
b) Both (i) & (ii)
c) (i) only
d) Neither (i) nor (ii)
Answer »Answer: (b)
Currency Swap Agreement: US India $1 = Rs. 70 In US, the US company can raise loans at 6%, but for an Indian company doing business in US, the loan rate is 8%.
So, the US company will raise a loan of $1 billion at 6% and give it to the Indian company working in US.
The Indian company will keep on paying the interest rate at 6% and after the term ends, it will give back the $1 billion amount to the US company.
In India, the Indian company can raise loans at 9%, but for a US company doing business in India, the loan rate is 11%.
So, the Indian company will raise a loan of Rs. 70 billion at 9% and give it to the US company working in India. The US company will keep on paying the interest rate 9% and after the term ends, it will give back the Rs. 70 billion amount to the Indian company.
A currency swap is an agreement in which the two parties (multinational· corporations/governments) exchange the principle amount of a loan (and the interest) in one currency for the principle and interest in another currency.
At the start of the swap, the equivalent principle amounts are exchanged at the prevailing rate. At the end of the swap period, the principle amounts are swapped back at either the· prevailing rate or at a pre-agreed rate such as the rate of the original exchange of principle amount.
Currency swaps are used to obtain foreign currency loans at a better interest rate or· as a method of hedging transaction risk on foreign currency loans. Currency swap agreements can be at the government and the company level both.
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