money supply, banking & financial institutions section 10 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
(a) Boar
(b) Bison
(c) Bull
(d) Bear
The correct answers to the above question in:
Answer: (d)
A bear is a speculator who is wary of fall in prices and hence sells securities so that he may buy them at cheap prices in future.
He does not have securities at present but sells them at higher prices in anticipation that he will supply them business purchasing at lower prices in the future.
If the prices move down as per the expectations of the bear he will earn profits out of these transactions.
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Read more money and supply banking financial institutions Based Indian Economy Questions and Answers
Question : 1
Consider the following statement regarding ‘Market Stabilization Bonds’ (MSBs):
- These are Treasury bills and Dated securities
- RBI is empowered to issue MSBs
- The interest payment on these bonds is made by the government from its budgetary resources
a) (ii) only
b) (ii) & (iii) only
c) (i) only
d) All of the above
Answer »Answer: (d)
Market Stabilization Scheme is an instrument of sterilisation, which empowered the RBI to issue Government Treasury Bills and medium duration Dated Securities for the purpose of liquidity absorption.
This instrument of monetary management was introduced in 2004 to absorb surplus liquidity of a more enduring nature arising from large capital inflows.
The scheme worked by impounding/taking the proceeds of auctions of Treasury bills and Dated Government securities in a separate identifiable MSS cash account maintained and operated by the RBI.
At the same time, interest payments have to be given to the institutions that buy the Market Stabilization Bonds (MSB) (the Treasury bills and Dated securities of govt). Here, for the interest payment, the government allocates money from its budget to the RBI. This expenditure to service interest payment for MSBs is called carrying cost.
The amounts credited into the MSS cash account by selling MSBs are appropriated only for the purpose of redemption/buyback of the Treasury Bills/dated securities issued under the MSS.
Question : 2
Consider the following statements regarding purchasing power parity (PPP) exchange rates:
- If two countries have zero rates of inflation, their PPP exchange rates will be constant
- The prices of goods will be the same in both the countries when converted at PPP exchange rate
a) (ii) only
b) Both (i) & (ii)
c) (i) only
d) Neither (i) nor (ii)
Answer »Answer: (b)
Suppose Nominal Exchange Rate is $1 = Rs.60 and India and the US produces just burgers.
Burger Price -India : Rs. 30, US : $1
To calculate PPP exchange rate, we need to compare the prices of a basket of goods in India with US. In the above case by comparing the prices of burger in India and US, we will get $1 = Rs. 30
So, $1 = Rs. 30 is the PPP exchange rate.
It implies that, whatever Rs. 30 can purchase in India, $1 can purchase in US
i.e. purchasing power of Rs. 30 in India is equal to the purchasing power of $1 in US.
So, if the inflation rate is different in India and US, then the PPP exchange rate will change. But if there is no inflation (prices remain the same) or same inflation, then PPP exchange rates will remain the same i.e. constant. So, (i) the statement is true.
When we use the PPP exchange ($1 = Rs. 30) rate to convert the price of burgers in US in Indian currency then it is Rs. 30 in US which is the same as in India also. So, (ii) statement is also true.
Question : 3
Consider the following statements regarding ‘Alternative Investment Fund’ (AIF):
- Its privately pooled investment vehicle was established in India and regulated by SEB
- It collects funds from sophisticated investors from India or Foreign
- Venture capital comes under AIF
a) (i) & (ii) only
b) (iii) only
c) (i) only
d) All of the above
Answer »Answer: (d)
Alternative Investment Fund (AIF) means any fund established or incorporated in India which is a privately pooled investment vehicle that collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors.
AIFs are registered with and regulated by SEBI. Angel Investor Funds and Venture Capital Funds comes under AIF.
Question : 4
Consider the following statements.
- Bank rate is the rate of interest which RBI charges its clients on their short-term borrowing.
- Repo rate is the rate of interest which RBI charges its clients on their long-term borrowing.
a) Only 2
b) Neither 1 nor 2
c) Both 1 and 2
d) Only 1
Answer »Answer: (b)
Question : 5
Foreign Direct Investment in India under "Government Route" is approved by which of the following agency/body:
a) Department for Promotion of Industry and Internal Trade (DPIIT)
b) Reserve Bank of India (RBI)
c) Department of Economic Affairs
d) Respective administrative Ministry/ Department
Answer »Answer: (d)
Foreign Direct Investment can come through two routes viz. automatic and government approval routes. More than 95% of the FDI comes in India through the “Automatic Route” where no government approval is required and are subject to only sectoral laws. Certain sectors that are still under the “Government approval route” are scrutinised and cleared by the respective departments and ministries.
In respect of applications in which there is a doubt about the Administrative Ministry/Department concerned, DPIIT shall identify the Administrative Ministry/Department where the application will be processed.
In respect of proposals where the respective department/ ministry proposes to reject the proposals or in cases where conditions for approval are stipulated in addition to the conditions laid down in the FDI policy or sectoral laws/regulations, the concurrence of DPIIT shall compulsorily be sought by the said Ministry.
The Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry sets the rules for foreign investment and makes policy pronouncements on FDI through various Press Releases.
Question : 6
Consider the following statements regarding ‘money supply’:
- It can be increased by increasing the money multiplier
- It can be increased by increasing the monetary base
a) (ii) only
b) Both (i) & (ii)
c) (i) only
d) Neither (i) nor (ii)
Answer »Answer: (b)
Money supply = (Money Multiplier) X (Monetary Base)
From the above formula, the money supply can be increased by increasing the money multiplier or monetary base or both.
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