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
- 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
The correct answers to the above question in:
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.
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Read more money and supply banking financial institutions Based Indian Economy Questions and Answers
Question : 1
Consider the following statements:
- Deficit financing essentially involves public expenditure in excess of public revenue
- In Deficit financing, the new currency replaces the old currency
a) Only 2 is correct
b) Only 1 is correct
c) Both are correct
d) Both are incorrect
Answer »Answer: (b)
Question : 2
Consider the following statements:
- A Foreign Portfolio Investor can maximum invest 10 per cent in an Indian Company
- When Foreign Investment in an Indian company is more than 10 per cent it is treated as FDI
a) (ii) only
b) Both (i) & (ii)
c) (i) only
d) Neither (i) nor (ii)
Answer »Answer: (b)
Government has accepted the international practice regarding the definitions of FDI and FPI. Where the investor's stake is 10 per cent or less in a company it will be treated as FPI and, where an investor has a stake of more than 10 per cent, it will be treated as FDI.
A single foreign portfolio investor can invest a maximum of up to 10 per cent in an Indian company and all FPIs on an aggregate basis can maximum invest up to 24% or the sectoral cap/ statutory ceiling as applicable for that sector under foreign investment.
Government now specifies composite cap/ceiling for foreign investors (rather than separate limits for FDI and FPI) in various sectors under which all kinds of foreign investments are allowed.
Foreign Investment in an unlisted company irrespective of threshold limit may be treated as FDI. An investor may be allowed to invest below the 10 per cent threshold and this can be treated as FDI subject to the condition that the FDI stake is raised to 10 per cent or beyond within one year from the date of the first purchase. The obligation to do so will fall on the company.
If the stake is not raised to 10% or above, then the investment shall be treated as portfolio investment. In case an existing FDI falls to a level below 10 per cent, it can continue to be treated as FDI, without an obligation to restore it to 10% or more.
In a particular company, an investor can hold the investments either under the FPI route or under the FDI route, but not both.
Question : 3
Which of the following grants/ grant direct credit assistance to rural households?
- Regional Rural Banks
- National Bank for Agriculture and Rural Development
- Land Development Banks
a) Only 2
b) All of these
c) 1 and 3
d) 1 and 2
Answer »Answer: (c)
Question : 4
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 : 5
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 : 6
Consider the following statements regarding "Real Estate Investment Trusts (REITs):
- 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)
Answer »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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