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Economics MCQ- 07

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#1 With reference to the budget receipts of the government, consider the following statements: 1. Revenue receipts create liabilities for the government. 2. Interest receipts on account of loans by the central government fall under the capital receipts. Which of the statements given above is/are INCORRECT ??Solution (c)

Revenue receipts are receipts of the government which are non-redeemable, that is, they cannot be reclaimed from the government. All those receipts of the government which create liability or reduce financial assets are termed as capital receipts.

Interest receipts on account of loans by the central government fall under the non-tax revenue receipts of the central government. Other non-tax revenue consists of dividends and profits on investments made by the government, fees and other receipts for services rendered by the government. Cash grants-in-aid from foreign countries and international organisations are also included.

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#2 Consider the following statement about monetary policy in India 1. Primary objective of the monetary policy is to maintain price stability, while keeping in mind the objective of growth. 2. Failure to meet the inflation target will require RBI to send a report to the Central Government stating the reasons for failure to achieve the inflation target. Which of the statement is/are correct??Solution (c)

The Preamble in the RBI Act, as amended by the Finance Act, 2016, now provides that the primary objective of the monetary policy is to maintain price stability, while keeping in mind the objective of growth, and to meet the challenge of an increasingly complex economy.

If the average inflation is more than the upper tolerance level of 4% + 2%, that is, 6%, or less than the lower tolerance level of 4% – 2%, that is 2%, for any three consecutive quarters, it would mean a failure to achieve the inflation target.

Where RBI fails to meet the inflation target, in terms of the provisions of RBI Act, it shall set out a report to the Central Government stating the reasons for failure to achieve the inflation target; remedial actions proposed to be taken by RBI; and an estimate of the time-period within which the inflation target shall be achieved pursuant to timely implementation of proposed remedial actions.

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#3 What is crowding out effect? 1. Increase in interest rate due to increase in fiscal deficit which further leads to decrease in private investment. 2. Crowding out decreases the vulnerability of economy. Select the appropriate option-?Solution (a)

Reduction in private investment due to increase in interest rate which is due to fiscal deficit is called crowding out. If the interest rate increases due to monetary policy, then it is not crowding out. It increases the vulnerability of the domestic economy from economic shocks which adversely affects business or economic activity of the country.

Sometimes, government adopts an expansionary fiscal policy stance and increases its spending to boost the economic activity.

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#4 Sterilization of Foreign inflows is done by-?Solution (a)

RBI does Sterilization of foreign inflows with a view to control money supply and to control inflow of financial services in India.

Sterilization is a form of monetary action in which a central bank seeks to limit the effect of inflows and outflows of capital on the money supply. Sterilization most frequently involves the purchase or sale of financial assets by a central bank, and is designed to offset the effect
of foreign exchange intervention.

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#5 Consider the following statements with reference to the Masala Bonds 1. These can be issued outside India as well as within India. 2. These are rupee denominated bonds. 3. Both banks and corporate entities can issue these bonds. Which of the statements given above are correct??Solution (c)

Masala bonds are bonds issued outside India but denominated in Indian Rupees, rather than the local currency

Unlike dollar bonds, where the borrower takes the currency risk, masala bond makes the investors bear the risk.

As per RBI, corporates, Indian banks, Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) are eligible to issue these bonds.

NOTE-

The first Masala bond was issued by the World Bank backed International Finance Corporation (IFC) in November 2014 when it raised 1,000 crore bond to fund infrastructure projects in India

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