Q1. Consider the following statements:
- The Governor of the Reserve Bank of India (RBI) is appointed by the Central Government.
- Certain provisions in the Constitution of India give the Central Government the right to issue directions to the RBI in public interest.
- The Governor of the RBI draws his power from the RBI Act.
Which of the above statements are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Ans: (c)
Explanation:
- Statement 2 is wrong.
- Statement 2: According to Section 7 of the RBI Act, the Central Government may occasionally give the Bank any instructions it deems necessary in the public interest, after consulting with the Bank’s Governor. The Indian Constitution makes no mention of the Central Government’s authority to direct the RBI in the public interest.
Q2. Which among the following steps is most likely to be taken at the time of an economic recession?
(a) Cut in tax rates accompanied by increase in interest rate
(b) Increase in expenditure on public projects
(c) Increase in tax rates accompanied by reduction of interest rate
(d) Reduction of expenditure on public projects
Ans: (b)
Explanation:
- During an economic recession, policymakers often implement measures to stimulate the economy and counter the negative effects of the recession. In this context, the option that is most likely to be taken is (b) Increase in expenditure on public projects
- Increasing expenditure on public projects, often referred to as fiscal stimulus, is a common approach to boost economic activity during a recession. This can create jobs and increase demand in the economy, helping to mitigate the effects of the recession.
Q3. Indian Government Bond Yields are influenced by which of the following?
- Actions of the United States Federal Reserve
- Actions of the Reserve Bank of India
- Inflation and short-term interest rates
Select the correct answer using the code given below.
(a) 1 and 2 only
(b) 2 only
(c) 3 only
(d) 1, 2 and 3
Ans: (d)
Explanation:
Indian Government Bond Yields are influenced by the following factors:
- Actions of the United States Federal Reserve: The actions of the U.S. Federal Reserve, such as changes in its interest rates and monetary policy, can have an impact on global financial markets and, in turn, affect Indian bond yields. When the U.S. Federal Reserve adjusts its policy, it can lead to changes in foreign capital flows, affecting the Indian bond market.
- Actions of the Reserve Bank of India: The Reserve Bank of India (RBI) directly influences the Indian bond market. It sets the policy rates in India, and changes in these rates can impact bond yields. The RBI’s actions, such as changes in the repo rate, can influence the overall interest rate environment in India, affecting bond yields.
- Inflation and short-term interest rates: Inflation and short-term interest rates play a crucial role in determining bond yields. Higher inflation expectations and short-term interest rates can lead to higher bond yields to compensate investors for the reduced purchasing power and opportunity cost of holding bonds. Inflation is also a key concern for bond investors, as it erodes the real return on fixed-income securities.
- So, the correct answer is:
- (d) 1, 2, and 3
Q4. Which one of the following effects of creation of black money in India has been the main cause of worry to the Government of India?
(a) Diversion of resources to the purchase of real estate and investment in luxury housing
(b) Investment in unproductive activities and purchase of precious stones, jewelley, gold, etc.
(c) Large donations to political parties and growth of regionalism
(d) Loss of revenue to the state exchequer due to tax evasion
Ans: (d)
Explanation:
- Black money, which is income not declared for tax purposes, leads to a significant loss of tax revenue for the government. This loss of revenue can have a detrimental impact on the government’s ability to fund public services, infrastructure development, and welfare programs. Therefore, addressing tax evasion and the generation of black money is a top concern for the government.
Q5. Which one of the following is likely to be the most inflationary in its effects?
(a) Repayment of public debt
(b) Borrowing from the public to finance a budget deficit
(c) Borrowing from the banks to finance a budget deficit
(d) Creation of new money to finance a budget deficit
Ans: (d)
Explanation:
- The creation of new money to finance a budget deficit is likely to be the most inflationary in its effects.
- When a government creates new money to finance its budget deficit, it effectively increases the money supply in the economy. This can lead to demand-pull inflation, as there is more money in circulation chasing the same amount of goods and services. This excess money can drive up prices.
