Q1. Consider the following statements
1. The Governor of the Reserve Bank of India (RBI) is appointed by the Central Government.
2. Certain provisions in the Constitution of India give the Central Government the right to issue directions to the RBI in public interest.
3. 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
Solution C
Statement 1 is Correct: According to Section 8 of the RBI Act, 1934- A Governor and not more than four Deputy Governors are to be appointed by the Central Government.
Statement 2 is not correct. According to Section 7 of the RBI Act, 1934 – The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest. There is no such provision in the constitution of India.
Statement 3 is correct. According to Section 7 of the RBI Act, 1934 – The Governor and, in his absence, the Deputy Governor nominated by him in this behalf, shall also have powers of general superintendence and direction of the affairs and the business of the Bank, and may exercise all powers and do all acts and things which may be exercised or done by the Bank.
Q2. With reference to casual workers India employed in consider the following statements:
1. All casual workers are entitled employees Provident Fund for coverage.
2. All casual workers are entitled for regular working hours and overtime payment.
3. The government by can a notification specify that an establishment or industry shall pay wages only through its bank account.
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
Solution: D
Supreme Court Ruling in Pawan Hans Limited & Ors. Vs Aviation Karmachari Sanghatana: Holding that an employer cannot differentiate between contractual and permanent employees, the Supreme Court has ruled that casual workers are also entitled to social security benefits under the Employees’ Provident Funds and Miscellaneous Provisions Act.
Also, Code on Social Security, 2020: provides for Social Security Fund for unorganized workers, gig workers, and platform workers. Hence Statement 1 is correct.
Code on Wages, 2020, Section 6 & 7: Section 6 & 7 are related to the number of regular working hours and Weekly day of rest & overtime provisions respectively. Hence statement 2 is correct.
The Payment of Wages Act, 1936 (Amendment): The Payment of Wages Act, 1936 has been amended by the Payment of Wages (Amendment) Act, 2017 (effective from 28.12.2016) to enable the employers to pay wages to their employees by:
(a) cash
(b) cheque
(c) crediting to their bank account.
The amendment in the Act also enables the appropriate Government to specify the industrial or other establishment, by notification in the Official Gazette, which shall pay to every person employed in such industrial or other establishment, the wages only by cheque or by crediting in his bank account. Hence statement 3 is correct.
Q3. 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
Solution B
Recession: It is a situation characterized by a negative growth rate of GDP in two successive quarters.
Some indicators of a recession include:
1. Slowdown in the economy
2. Fall in investments
3. Fall in the output of the economy
If an economy experiences a recession and GDP falls, tax revenues also fall, as firms and households pay lower taxes when they earn less.
It is prudent for the government and the central bank to follow Expansionary fiscal and monetary policy respectively to stimulate the economy, but keeping in mind the inflationary pressure. The steps that can be taken is as follows:
1. Cut in Tax Rates Accompanied by Increase in Interest Rate: Increase in interest rate results in a credit crunch in the economy, which is not desirable during a recession.
2. Increase in Expenditure on Public Projects: This is one tool to stimulate the economy at the time of recession, as it triggers a virtuous cycle of investment, leading to an increase in GDP (production of goods & services) and income in the economy. This, in turn, increases demand and thus completes the virtuous cycle.
3. Increase in Tax Rates Accompanied by Reduction of Interest Rate: Increasing the tax rate is not desirable during a recession, as income is falling in the economy.
4. Reduction of Expenditure on Public Projects: This is also not desirable during a recession, as it leads to less government expenditure, thereby not contributing much to output.
Conclusion:
Hence, option (b), “Increase in expenditure on public projects,” is the correct answer, as it aligns with strategies that are typically used to stimulate the economy during a recession.
Q4. Consider the following statements:
Other things remaining unchanged, market demand for a good might increase if
1. price of its substitute increases
2. price of its complement increases
3. the good is an inferior good and income of the consumers increases
4. its price falls
Which of the above statements are correct?
(a) 1 and 4 only
(b) 2, 3 and 4
(c) 1, 3 and 4
(d) 1, 2 and 3
Solution A
Statement 4 is correct: Law of Demand – Law of Demand states that other things being equal, there is a negative relation between demand for a commodity and its price. In other words, when the price of the commodity increases, demand for it falls, and when the price of the commodity decreases, demand for it rises, other factors remaining the same.
The quantity of a good that the consumer demands can increase or decrease with the rise in income depending on the nature of the good. For most goods, the quantity that a consumer chooses increases as the consumer’s income increases and decreases as the consumer’s income decreases. Such goods are called Normal Goods. Thus, a consumer’s demand for a normal good moves in the same direction as the income of the consumer.
Statement 3 is not correct. – There are some goods the demands for which move in the opposite direction of the income of the consumer. Such goods are called Inferior Goods. As the income of the consumer increases, the demand for an inferior good falls, and as the income decreases, the demand for an inferior good rises. Examples of inferior goods include low-quality food items like coarse cereals.
Statement 2 is not correct: The quantity of a good that the consumer chooses can increase or decrease with the rise in the price of a related good depending on whether the two goods are substitutes or complementary to each other. Goods which are consumed together are called complementary goods. Examples of goods which are complement to each other include tea and sugar, shoes and socks, pen and ink, etc. Since tea and sugar are used together, an increase in the price of sugar is likely to decrease the demand for tea and a decrease in the price of sugar is likely to increase the demand for tea. Similar is the case with other complements. With the increase in price of complement, demand reduces.
Statement 1 is correct. In contrast to complements, goods like tea and coffee are not consumed together. In fact, they are substitutes for each other. Since tea is a substitute for coffee, if the price of coffee increases, the consumers can shift to tea, and hence, the consumption of tea is likely to go up. On the other hand, if the price of coffee decreases, the consumption of tea is likely to go down. The demand for a good usually moves in the direction of the price of its substitutes.
Q5. With reference to ‘Urban Cooperative banks’ in India, consider the following statements:
1. They are supervised and regulated by local boards set up by the State Governments.
2. They can issue equity shares and preference shares.
3. They were brought under the purview of the Banking Regulation Act, 1949 through an Amendment in 1966.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Solution B
Statement 3 is correct: Large cooperative banks with paid-up share capital and reserves of Rs.1 lakh were brought under the purview of the Banking Regulation Act 1949 with effect from 1st March, 1966, and within the ambit of the Reserve Bank’s supervision. This marked the beginning of an era of duality of control over these banks. Banking-related functions (viz. licensing, area of operations, interest rates, etc.) were to be governed by RBI, and registration, management, audit, and liquidation, etc., were governed by State Governments as per the provisions of respective State Acts.
Statement 1 is not correct. The recent Banking Regulation (Amendment) Act 2020 enables the RBI to get all the powers, including those hitherto exclusively with the registrar of cooperative societies.
While the amendment gives the required powers to the RBI to take timely action and steps to prevent UCBs from failing so that depositors’ monies are protected, which was the main purpose of the amendment, it also enjoins upon the central bank to make regulations under the BR Act without compromising on the cooperative nature and cooperative principles of the banks.
Statement 2 is correct: The Reserve Bank has given new guidelines allowing primary urban cooperative banks (UCBs) to augment capital through the issuance of equity shares, preference shares, and debt instruments.
Q6. Indian Government Bond Yields are influenced by which of the following?
1. Actions of the United States Federal Reserve
2. Actions of the Reserve Bank of India
3. 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
Solution D
Bond yield is the return an investor gets on that bond or on a particular government security. It depends on the price of the bond, which is impacted by its demand. The major factors affecting the yield are the monetary policy of the Reserve Bank of India, especially the course of interest rates, the fiscal position of the government and its borrowing program, global markets, economy, and inflation.
Statement 1 is correct: Actions of the United States Federal Reserve can impact the investments flowing in India. The investments by foreign players in government securities can be affected by this. This will lead to a change in the demand for government securities and thereby impact its yield.
Statement 2 is correct: Actions of the Reserve Bank determine the liquidity and also the cost of funds available in the economy through its various inflation management tools. The cost of funds will directly impact the demand for government securities in the market and thereby influence its yield.
Statement 3 is correct: Inflation and short-term rates determine the purchasing capacity of the people in the economy. Therefore, this also has an impact on the demand and price of the government securities, thereby influencing the yield.
Q7. Consider the following:
1. Foreign currency convertible bonds
2. Foreign institutional investment with certain conditions
3. Global depository receipts
4. Non-resident external deposits
Which of the above can be included in Foreign Direct Investments?
(a) 1, 2 and 3
(b) 3 only
(c) 2 and 4
(d) 1 and 4
Solution A
In the Capital Account of the Balance of Payment, we can classify into
Investment,
Borrowings,
External Assistance.
Investment includes Equity flow in the economy.
Foreign Currency Convertible Bonds (FCCB), Foreign Institutional Investment with certain conditions (subject to the overall limit of 24%), and Global Depository Receipts (GDR) are the instruments for foreign investment in India. Hence Statements 1, 2, and 3 are correct.
Statement 4 is not correct: Non-Resident external deposits are a ‘debt-creating’ flow in balance of payments accounts and therefore, not part of Foreign Direct investments.
Q8. Consider the following statements:
The effect of devaluation of a currency is that it necessarily
1. improves the competitiveness of the domestic exports in the foreign markets.
2. increases the foreign value of domestic currency.
3. improves the trade balance.
Which of the above statements is/are correct?
(a) 1 only
(b) 1 and 2
(c) 3 only
(d) 2 and 3
Solution A
Devaluation means official lowering of the value of a country’s currency within a fixed exchange rate system. Devaluation of a currency happens in countries with a fixed exchange rate (or also where it is managed floating rate).
Statement 2 is not correct: Example: Let us assume that the prevailing exchange rate of $1 is 10 rs. So currently, 1 rs is worth $0.1. If devaluation of currency is done and now the exchange rate of $1 is 20 rs, this means 1 rs is worth $0.05. So the value of domestic currency (rs) is decreased in terms of the value of foreign currency ($).
Statement 1 is correct: Let us take another example to understand statement 1: If a shirt costs $8 in the US and Rs 400 in India, the rupee-dollar exchange rate should be Rs 50. To see why, at any rate higher than Rs 50, say Rs 60, it costs Rs 480 per shirt in the US but only Rs 400 in India. In that case, all foreign customers would buy shirts from India. So devaluation of currency improves the competitiveness of domestic exports (India) in the foreign markets.
Statement 3 is not correct: Balance of Trade (BOT) is the difference between the value of exports and the value of imports of goods of a country in a given period of time. Regarding the third statement, with the devaluation of currency, the competitiveness of export improves, but the trade balance depends upon both export and imports, and it is not necessarily true that devaluation of currency improves the trade balance. (Let us take a possibility in the Indian economy; our economy is heavily dependent upon the import of crude oil, and at the time of devaluation of currency, export increases, but for the same period, demand for crude oil also increases due to increased growth in the economy, and the value of this increase in import is more than the value of the increase in export. So, in this scenario again, we have a deficit trade balance).
Q9. 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 previous stones, jewellery, gold, etc.
(c) Large donations to political parties and growth of regionalism
(d) Loss of revenue to the State Exchequer due to tax evasion
Solution: D
Black Money – There is no official definition of black money in economic theory, with several different terms such as parallel economy, black money, black incomes, unaccounted economy, illegal economy and irregular economy all being used more or less synonymously. The simplest definition of black money could possibly be money that is hidden from tax authorities. That is, black money can come from two broad categories: illegal activity and legal but unreported activity.
Statements given in options a, b, and c are ways of creation of black money. Option d is the effect of creation of black money.
Q10. 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
Solution D
Borrowing from public and banks will lead to a decrease in the money supply in the market, as in both the options, money in hand is reduced for the public and money to lend is reduced for banks. Hence, it is anti-inflationary.
Option (d) is the correct answer. Creation of new money to finance a budget deficit will have a more inflationary effect than repayment of debt, as it will lead to an increase in the total money supply in the market.