1. Which of the following are considered as High-Powered Money?
1. Currency notes and coins in circulation with the public
2. Vault cash of commercial banks
3. Deposits held by the Government of India with RBI
4. Deposits held by commercial banks with RBI
Select the correct answer using the code given below:
(a) 1 and 3 only
(b) 2, 3 and 4 only
(c) 1, 2 and 4 only
(d) 1, 2, 3 and 4
Answer: d
Explanation:
High Powered Money: The total liability of the monetary authority of the country, RBI, is called the monetary base or high-powered money. It consists of currency (notes and coins in circulation with the public and vault cash of commercial banks) and deposits held by the Government of India and commercial banks with RBI.
If a member of the public produces a currency note to RBI the latter must pay her value equal to the figure printed on the note. Similarly, the deposits are also refundable by RBI on demand from deposit holders. These items are claims which the general public, government or banks have on RBI and hence are considered to be the liability of RBI.
Therefore, the correct answer is d.
2. With reference to the Inflation-Indexed Bonds in India, consider the following statements:
1. They are issued by the Central government only.
2. They provide inflation protection only to the principal amount and not to interest payment.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Answer: d
Explanation:
They are thus designed to hedge the inflation risk of a bond. The first known inflation-indexed bond was issued by the Massachusetts Bay Company in 1780. The market has grown dramatically since the British government began issuing inflation-linked Gilts in 1981.
As of 2019, government-issued inflation-linked bonds comprise over $3.1 trillion of the international debt market. The inflation-linked market primarily consists of sovereign bonds, with privately issued inflation-linked bonds constituting a small portion of the market. So, statement 1 is not correct. It was in the year 1997 that inflation-linked bonds in the name of Capital Indexed Bonds (CIBs) were first issued. These provided protection only to principal and not to interest payment. However, in India, inflation was one of the major macroeconomic concerns of the economy during the period 2008-2013 where real interest rates were consistently negative. The period also was noted for the high current account deficit (CAD), which saw huge investment in the alternate instrument – gold – by the households, necessitating the heavy import of gold. To reduce the attractiveness of gold for investment and reduce the CAD, the Government of India launched Inflation-indexed bonds (IIB) on 4 June 2013.
In 2013, new bonds by the name of inflation-indexed bonds (IIBs) were issued which protected both principal and interest payments. The principal and interest payments of these bonds are usually linked to an inflation index such as WPI or CPI. So, statement 2 is not correct.
Therefore, the correct answer is d.
3. With reference to GDP Deflator, consider the following statements:
1. It can be used to track the monthly change in inflation.
2. It includes the prices of investment goods and the price of imports.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Answer: d
Explanation:
The Gross Domestic Product (GDP) deflator is a measure of general price inflation. It is calculated by dividing nominal GDP by real GDP and then multiplying by 100. Nominal GDP is the market value of goods and services produced in an economy, unadjusted for inflation (It is the GDP measured at current prices). Real GDP is nominal GDP, adjusted for inflation to reflect changes in real output (It is the GDP measured at constant prices).
However, WPI and CPI are available monthly whereas deflator comes with a lag (yearly or quarterly, after quarterly GDP data is released). Hence, the monthly change in inflation cannot be tracked using the GDP deflator, limiting its usefulness. So, statement 1 is not correct.
The GDP deflator includes the prices of investment goods, government services and exports, and excludes the price of imports. Changes in consumption patterns or the introduction of new goods and services or structural transformation are automatically reflected in the deflator which is not the case with other inflation measures. So, statement 2 is not correct.
Therefore, the correct answer is d.
Consider the following statements with reference to International Monetary Fund:
1. Its mandate includes all macroeconomic and financial sector issues that bear on global stability.
2. It oversees the international monetary system and monitors the economic and financial policies
of its member countries.
3. Under the Bretton Woods system, countries could be members of the International Bank for
Reconstruction and Development (IBRD) even if they were not members of the IMF.
Which of the statements given above is/are correct?
a) 1 only
b) 1 and 2 only
c) 2 and 3 only
d) None of the above
Answer: b
Explanation:
The International Monetary Fund (IMF) is an organization of 189 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. The IMF's primary purpose is to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other. The Fund's mandate was updated in 2012 to include all macroeconomic and financial sector issues that bear on global stability. So, statements 1 and 2 are correct.
Under the Bretton Woods system, countries were not eligible for membership in the International Bank for Reconstruction and Development (IBRD) unless they were members of the IMF. So, statement 3 is not correct.
Therefore, the correct answer is b.
5. With reference to the Production Linked Incentive (PLI) for Large Scale Electronics manufacturing
scheme, consider the following statements:
1. The benefits under the scheme are applicable only for Indian companies.
2. The scheme is applicable to all the segments in the electronics industry.
3. The incentives under the scheme per company will be applicable to incremental sales of manufactured goods over the base year.
Which of the statements given above is/are correct?
a. 1 only
b. 1 and 2 only
c. 2 and 3 only
d. 3 only
Answer: d
Explanation:
Under the Production Linked Incentive (PLI) for Large Scale Electronics Manufacturing scheme, the government initially plans to incentivise 10 firms — five global and five local. So, statement 1 is not correct.
The scheme is targeted at mobile phone manufacturing and specified electronic components and not all the segments under the electronics industry. This shall include contract manufacturers as defined in the FDI Policy Circular of 2017. So, statement 2 is not correct.
The incentive per company will be applicable to incremental sales of manufactured goods (as distinct from traded goods) over the base year. Financial Year 2019-20 shall be treated as the base year for computation of incremental investment and incremental sales.
So, statement 3 is correct. Therefore, the correct answer is d.