09 October 2023

Q1. Money supply in the economy will increase if:

1. Money multiplier increases
2. Velocity of money increases

Which of the above is/are correct?

(a) 1 only 

(b) 2 only

(c) Both 1 and 2

(d) None

Explanation:

• Statement 1: The ratio between the money supply and the reserve money is called as money multiplier. Reserve money is basically currency with the public + high powered money issued by the Reserve Bank or Government. Banks receive this money from the public in form of deposits and lend it out repeatedly creating more money that they have actually received. This creates money out of nothing, and is known as credit creation. So, if money multiplier increases, with the same high-powered money, banks will be able to create more demand deposits, and thus a higher money supply. You will learn the exact mechanism in 12th NCERT macroeconomics. Statement 2: Velocity of money refers to the number of times the same currency exchanges hands. For e.g., if the 10 rupees note that you had yesterday was paid to a shopkeeper, who intern paid it to the wholesaler and similarly the process goes ahead; it results in repeated use of the same money. It means that the same money (Rs. 10) has helped people buy many different goods, which combinedly exceed Rs 10. Even if velocity of money increases, it simply means that the same money supply is now being used to consume a higher GDP. It does not raise money supply as such.

Q2. Securities and Exchange Board of India (SEBI) has jurisdiction over:

1. Registering and regulating the working of venture capital funds and collective investment schemes including mutual funds
2. Promoting investors’ education and training of intermediaries of securities markets
3. Promoting insider trading in securities
4. Regulating substantial acquisition of shares and take-over of companies

Select the correct answer using the codes below?

(a) 2 and 3 only

(b) 2 and 4 only

(c) 1 only

(d) 1, 2, 3 and 4

Explanation:

• It is a statutory body. The basic functions of the Securities and Exchange Board of India are to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto. In this light, the functions, powers and responsibilities of the board are regulating the business in stock exchanges and any other securities markets; Registering and regulating the working of stock brokers, sub-brokers etc. Registering and regulating the working of the depositories, participants, custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries as the Board may, by notification, specify in this behalf; Hence, statement 1 is not correct. Promoting and regulating self-regulatory organisations; prohibiting fraudulent and unfair trade practices relating to securities markets; prohibiting insider trading in securities. Hence, statement 3 is not correct. Regulating substantial acquisition of shares and take-over of companies; calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, mutual funds, other persons associated with the securities market intermediaries and self- regulatory organizations in the securities market

Q3. Participatory notes (PNs), sometimes seen in news, is associated with:

1. Inter-state investment in India
2. Foreign Institutional Investors (FIIs)
3. Foreign Direct Investment (FDI)

Select the correct answer using the codes below?

(a) 2 only 

(b) 1 and 3 only

(c) 2 and 3 only

(d) 1, 2 and 3 only

Explanation:

• Statement 1: In 1992, India allowed Foreign Institutional Investors (FIIs) to buy stocks listed on Indian exchanges.  However, all investors, whether institutions or individuals, were required to register themselves with the capital markets regulator SEBI.  To get around these restrictions, FIIs started to issue so-called participatory notes (or PNs) to investors who, for various reasons, wanted to remain anonymous.  Since PNs tracked the value of Indian stocks, their values rose or fell according to the movement of the markets. Initially, nobody showed concern, as FIIs generated a lot of business. This money fuelled the market boom from the early period of liberalisation. At their peak during 2007, the value of PNs constituted well over 50 per cent of the outstanding assets in the custody of FIIs.

Q4. Consider the following about E-Gold in India:

1. E-gold is held electronically in the demat form and cannot be freely converted into physical gold.
2. E-gold is offered by the National Spot Exchange Limited (NSEL)

Which of the above is/are correct?

(a) 1 only

(b) 2 only 

(c) Both 1 and 2

(d) None

Explanation:

• Statement 1: Demat is the account that holds all your shares in electronic or dematerialized form. • E-Gold is an alternative investment instrument to Gold Exchange traded funds (ETFs). • The advantage of buying e-gold, over ETFs, is cost effectiveness. • In e-gold, there are no recurring expenses such as management fee. This reduces the cost and increases returns year-on-year. Statement 2: Any investor can buy gold in small quantities on the NSEL and sell it after making a profit. He also has the option of taking physical delivery of the metal. It gives investors the option to invest in commodities such as gold, silver and platinum online.

Q5. Angel Investors, as they are known, generally

(a) Buy back failed firms for asset restructuring

(b) Give seed funding to new start-ups 

(c) Save banks and financial institutions from defaults

(d) Provide advisory services to mutual funds and other pooled funds

Explanation:

• Angel investors invest in small start-ups or entrepreneurs. Often, angel investors are among an entrepreneur’s family and friends. The capital angel investors provide may be a one-time investment to help the business propel or an ongoing injection of money to support and carry the company through its difficult early stages. Angel investors provide more favourable terms compared to other lenders, since they usually invest in the entrepreneur starting the business rather than the viability of the business. Angel investors are focused on helping start-ups take their first steps, rather than the possible profit they may get from the business. Essentially, angel investors are the opposite of venture capitalists.

Q6. Consider the following about Indian Depository Receipts (IDRs):

1. They are generally denominated in foreign currency convertible to rupees.
2. A foreign company can access Indian securities market for raising funds through issue of IDRs.
3. There is no size limit for the issue of IDRs.

Select the correct answer using the codes below?

(a) 1 and 2 only

(b) 2 only 

(c) 2 and 3 only

(d) 1 and 3 only

Explanation:

• Statement 1: An IDR is an instrument denominated in Indian Rupees in the form of a depository receipt created by a Domestic Depository (custodian of securities registered with the Securities and Exchange Board of India) against the underlying equity of issuing company to enable foreign companies to raise funds from the Indian securities Markets. Hence, statement 1 is not correct.Statement 2: The foreign company IDRs will deposit shares to an Indian depository. The depository would issue receipts to investors in India against these shares. The benefit of the underlying shares (like bonus, dividends etc.) would accrue to the depository receipt holders in India. Hence, statement 2 is correct.Statement 3: The size of an IDR issue shall not be less than Rs. 50 crores. Hence, statement 3 is not correct.Hence, option (b) is the correct answer.

Q7. The metaphorical “invisible hand” in Economics is used to refer to:

1. Forces of free market
2. Socialist orientation of state
3. Public private partnership

Select the correct answer using the codes below?

(a) 1 only 

(b) 2 and 3 only

(c) 1 and 3 only

(d) 2 only

Explanation:

• Classical economists observe that markets generally regulate themselves, when free of coercion. Adam Smith referred to this as a metaphorical “invisible hand,” which moves markets toward their natural equilibrium.So, classical thought is also known as the non-interventionist school. As per them, markets function best without government interference.In contrast to classical economics, Keynesian economics supports policies such as government intervention, deficit spending, control of the money supply, and a progressive income tax to counter recession and income inequality.

Q8.  Arbitrage in international foreign exchange market implies:

1. Earning profits out of selling and buying foreign currencies in different nations
2. Mounting speculative attacks on the Central Bank’s reserves

Which of the above is/are correct?

(a) 1 only 

(b) 2 only

(c) Both 1 and 2

(d) None

Explanation:

• Arbitrage is leveraging the price differences of the same product in different markets at the same time. For example, buying and selling any product, financial securities (as bonds) or foreign currencies in different markets/economies. As globalisation is promoting liberalised cross-border movement of goods and services around the world, arbitrage is prevalent today. To avoid arbitrage the WTO member countries (i.e.) the official countries in the process of globalisation) are under compulsion to chalk out homogenous economic policies—and a level-playing field at the international level is emerging. Statement 2: It is wrong. Even though arbitrage may involve an element of speculation, mounting a large speculative attack is not the domain of people earning from arbitrage.

Q9. ‘REER Index’ is known in the context of measuring?

(a) Corruption in the Central Government

(b) Preparedness for digital revolution

(c) Weighted average of Indian currency exchange rate 

(d) Innovation and technological evolution

Explanation:

• The real effective exchange rate (REER) is the weighted average of a country’s currency relative to an index or basket of other major currencies, adjusted for the effects of inflation. The weights are determined by comparing the relative trade balance of a country’s currency against each country within the index. This exchange rate is used to determine an individual country’s currency value relative to the other major currencies in the index, such as the U.S. dollar, Japanese yen and the euro. The REER takes into account any changes in relative prices and shows what can actually be purchased with a currency.

Q10. “Crowding out effect” of government borrowing in domestic markets is likely to reduce if:

1. Government reduces domestic borrowing and increases borrowing from abroad.
2. Domestic savings base is substantially increased.

Which of the above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2 

(d) None

Explanation:

• Crowding out effect describes the idea that large volumes of government borrowing push up the real interest rate, making it difficult or close to impossible for individuals and small companies to obtain loans. Governmental borrowing uses a larger and larger proportion of the total supply of savings available for investment. Because demand for savings increases while supply stays the same, the price of money (the interest rate) goes up. Statement 1: If the same money is sourced from abroad, domestic availability may be sufficient for private investors. Statement 2: If savings base is increased, it is possible that despite high government borrowing, enough funds are left for the private sector.