money supply, banking & financial institutions section 9 MCQ Questions & Answers Detailed Explanation

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.

Answer: (c)

Answer: (d)

One of the most famous axioms in economics is “bad money drives out good.” This rule has generally been attributed to Sir Thomas Gresham (1519–1579), an English financier who advised King Edward VI and Queen Elizabeth I with regard to financial matters, and it is popularly known as Gresham’s Law.

The key prerequisite is that there must be two forms of money or currency (with the same face value) in circulation simultaneously.

The acceptance of both currencies at the same face value is required by legal tender laws enacted by the government. One of the currencies is artificially overvalued, and the other currency is artificially undervalued.

In such situations, the bad money (the artificially overvalued one) tends to drive the good money (the artificially undervalued one) out of circulation. In other words, people spend the bad money and hoard the good money.

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.

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.

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.