Indian Economy Mixed Quiz: Set 11

The correct answer is C, State Bank of India. The Imperial Bank of India had itself been created in 1921 by merging the three presidency banks, the Bank of Bengal of 1806, the Bank of Bombay of 1840 and the Bank of Madras of 1843. Acting on the recommendation of the All India Rural Credit Survey Committee, the government converted it into the State Bank of India on 1 July 1955 so that a state-owned bank could extend banking into the countryside.

Option A, the Reserve Bank of India, is the central bank and was created separately in 1935; before that the Imperial Bank had performed some central banking duties, which is why it appears as a distractor. Option B, the Punjab National Bank, was founded in 1894 as the first bank started with wholly Indian capital and management and has an independent history. Option D, the Bank of Baroda, was founded in 1908 under the patronage of the Maharaja of Baroda and was nationalised in 1969. The chain to remember is presidency banks, Imperial Bank, State Bank of India.

The correct answer is B, 1999. The Foreign Exchange Management Act was passed in 1999 and came into force on 1 June 2000, replacing the Foreign Exchange Regulation Act of 1973. The change of one word in the title tells the story: FERA regulated and restricted dealings in foreign exchange and treated a breach as a criminal offence, while FEMA manages them in an open economy and treats a breach as a civil matter with a monetary penalty. FEMA freed most current account transactions, kept capital account transactions under the control of the Reserve Bank, and is administered by the Directorate of Enforcement. Option A is wrong because 1988 has no link with this law. Option C is wrong because 2014 relates to later changes in foreign investment policy, not to FEMA's enactment. Option D is wrong because 1992 is the year of the SEBI Act and of the first big liberalisation of trade policy. Exam tip: FERA 1973 was criminal in approach, FEMA 1999 is civil, and it took effect in June 2000.

The correct answer is B, margin requirements. A margin requirement is the part of the value of a security that the borrower must fund from his own resources; by raising it for loans against a particular commodity the Bank can discourage credit flowing into speculation in that commodity without touching the total supply of credit. That is why it is called a qualitative or selective instrument.

Option A, open market operations, changes the quantity of money by the purchase or sale of government securities. Option C, the cash reserve ratio, changes the quantity of funds a bank can lend. Option D, the repo rate, changes the price of credit for the whole economy. All three act on the volume of credit and are therefore quantitative, while moral suasion, rationing of credit, consumer credit regulation and direct action join margin requirements on the qualitative side.

The correct answer is D, money. Consumer theory studies how a household decides to spend its money among the goods and services available to it.

The idea rests on three things: the wants of the consumer, the prices of goods, and the income in hand, which is the budget constraint. Since income is limited, the consumer chooses the basket that gives the greatest satisfaction, or utility, from the money spent, and is said to be in equilibrium when no rearrangement of spending can raise that satisfaction. The law of diminishing marginal utility, indifference curves and the law of demand all belong to this branch of microeconomics.

Option A is wrong because the use of time is studied separately as the labour-leisure choice. Option B is wrong because relations are social, not economic, choices. Option C is wrong because energy here has no economic meaning as a thing the consumer allocates.

Exam tip: consumer theory joins three things - wants, prices and income - and explains the demand curve.

The correct answer is A, two hundred crore rupees, of which one hundred and fifteen crore is in gold. Under the Minimum Reserve System, adopted in 1957 in place of the earlier proportional reserve system, the Reserve Bank has to hold assets worth at least two hundred crore rupees against the notes it issues, of which gold must account for one hundred and fifteen crore and the remaining eighty-five crore is held in foreign securities. Beyond that minimum the Bank may issue notes according to the needs of the economy.

Option B understates both the amount and the composition and ignores the foreign securities component. Options C and D invent figures and assets that have no place in the system; government bonds of the Indian government are not what the minimum reserve is defined in. The point of the change in 1957 was to free note issue from a fixed proportion of gold backing so that currency could grow with production and trade, and that reasoning is itself sometimes asked as a statement question.

The correct answer is D, 1977. IBM and Coca-Cola wound up their Indian operations in 1977 rather than dilute their holdings to 40 per cent. The Foreign Exchange Regulation Act, passed in 1973, required foreign companies to cut their equity in Indian subsidiaries to that level and to obtain permission for most dealings in foreign exchange. This was the high point of a closed, licence based economy, and the exit of two well known American firms became its symbol. Coca-Cola returned only after the reforms of 1991, and FERA itself was replaced by the milder Foreign Exchange Management Act of 1999. Option A is wrong because 1964 falls well before FERA was enacted. Option B is wrong because 1981 is after both companies had already left. Option C is wrong because 1956 is the year of the Industrial Policy Resolution, unrelated to this exit. Exam tip: remember FERA 1973, the IBM and Coca-Cola exit in 1977, liberalisation in 1991 and FEMA in 1999 as one chain.

The correct answer is B, the Finance Secretary. The one rupee note is not a Reserve Bank note at all: it is issued by the Government of India through the Ministry of Finance, is a legal tender note of the government and carries the signature of the Finance Secretary. All coins are likewise minted and issued by the government.

Option A is wrong for the one rupee note, though the Governor does sign every note of two rupees and above, which the Bank issues under Section 22 of its Act; the distinction is the whole point of the question. Option C is wrong because the Finance Minister signs no currency note. Option D is wrong because a Deputy Governor signs no currency note either, although Deputy Governors sign other instruments of the Bank and sit on the Monetary Policy Committee.

The correct answer is D, Gas and water supply. The Index of Industrial Production (IIP) covers only three sectors: mining, manufacturing and electricity. It is a monthly index released by the National Statistics Office under the Ministry of Statistics and Programme Implementation, and it shows how fast the volume of industrial output is rising or falling compared with a base year. Manufacturing carries by far the largest weight in the index, so a slowdown in factories pulls the IIP down quickly. Gas and water supply are counted in the wider industry sector of national income, together with electricity, but they are not part of the IIP basket, and that is the trap in this question. Option A is wrong because mining is one of the three sectors of the IIP. Option B is wrong because electricity is also a sector of the IIP. Option C is wrong because manufacturing is the biggest part of the index. Exam tip: IIP = mining + manufacturing + electricity; the index of eight core industries is a separate, smaller index.

The correct answer is A, 15. The language panel on the reverse of an Indian banknote carries the value of the note in 15 languages. Hindi and English are not part of that panel: they appear on the front of the note, so the total number of languages printed on a note comes to 17. The 15 in the panel are Assamese, Bengali, Gujarati, Kannada, Kashmiri, Konkani, Malayalam, Marathi, Nepali, Odia, Punjabi, Sanskrit, Tamil, Telugu and Urdu. Notes are issued by the Reserve Bank of India under the Reserve Bank of India Act, 1934, except the one rupee note, which is issued by the Government of India. Option B is wrong because 17 is the count of all languages on the note, including Hindi and English on the front. Option C is wrong because 10 is far fewer than the panel holds. Option D is wrong because 12 is also short of the actual number. Exam tip: remember 15 in the panel on the back and 17 on the whole note.

The correct answer is A, Morris D. Morris. The American economic historian Morris David Morris built the Physical Quality of Life Index in the 1970s for the Overseas Development Council, and set it out in his 1979 book on measuring the condition of the world’s poor. He wanted a simple measure of well-being that did not depend on income alone. The PQLI uses three indicators, each scored from 0 to 100 and given equal weight: basic literacy, infant mortality and life expectancy at age one. Their average gives a country a score out of 100. Kerala was often cited as a place where a high PQLI came with a low income. Option B is wrong because the UNDP publishes the Human Development Index, which came later, in 1990. Option C is wrong because Mahbub-ul-Haq designed the HDI, not the PQLI. Option D is wrong because the index has a known author, Morris D. Morris. Exam tip: PQLI, Morris D. Morris, 1979, three indicators; HDI, Mahbub-ul-Haq and the UNDP, 1990.

The correct answer is A. Under the minimum reserve system adopted in 1957 the Bank keeps assets of at least two hundred crore rupees against the notes it issues, of which gold must be worth at least one hundred and fifteen crore rupees and the rest is held in foreign securities. The system replaced the proportional reserve system, under which a fixed proportion of the notes in circulation had to be backed by gold and sterling, and it freed note issue from that limit.

Option B inverts the figures, taking the gold component as the total. Option C is wrong because the whole reserve is not in gold; only the smaller part is. Option D uses figures that belong to no stage of the system and is offered to catch a candidate who remembers only that the number is large.

The correct answer is A, whatever the change in price, there is absolutely no change in demand. Elasticity measures how strongly the quantity demanded reacts to price, and zero means no reaction at all. Price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. When it is zero, demand is perfectly inelastic and the demand curve is a vertical straight line. Life-saving medicines such as insulin come closest to this, since a patient buys the same dose whatever the price. At the other extreme, perfectly elastic demand, with infinite elasticity, gives a horizontal demand curve. Option B is wrong because any change in demand, however small, means the elasticity is above zero. Option C is wrong because a large response to a small price change means elastic demand, with elasticity greater than one. Option D is wrong because a small response to a large price change is relatively inelastic demand, between zero and one, but still not zero. Exam tip: elasticity zero gives a vertical curve; elasticity infinite gives a horizontal one.

The correct answer is A, Most people will expect the interest rate to rise in the future. When the rate of interest is already very low, people believe it can hardly fall further and must rise, so they hold cash instead of bonds. Keynes called this the speculative demand for money, and the extreme case, in which everyone prefers cash at a very low rate, is the liquidity trap. The reason lies in the link between bond prices and interest: when the rate rises, the price of existing bonds falls, so anyone holding bonds would suffer a capital loss. Option B is wrong because people avoid bonds at such a time for exactly that fear of loss. Option C is wrong because a further fall is what people stop expecting once the rate is near its floor. Option D is wrong because in a liquidity trap extra money is simply held as cash and leaves the interest rate unchanged. Exam tip: a very low interest rate means high speculative demand for money, which is the liquidity trap.

The correct answer is B, Both (A) and (B) are correct. Headline inflation is the change in the overall Consumer Price Index, which tracks the average price of a fixed basket of goods and services bought by a typical household, including food, fuel, clothing, housing and services. Core inflation removes the items whose prices swing the most, mainly food and fuel, to show the underlying trend in prices. The difference matters for policy: a jump in vegetable prices after a poor monsoon may fade in a few months, but a steady rise in core inflation tells the central bank that price pressure has spread across the economy. That is why the RBI's Monetary Policy Committee watches both numbers. In India the all-India CPI is compiled every month by the National Statistics Office. Option A is wrong because both statements are correct definitions. Option C is wrong because statement A is also correct. Option D is wrong because statement B is also correct. Exam tip: headline = the whole basket; core = the basket minus food and fuel.

The correct answer is A. A higher repo rate raises the cost at which banks borrow from the Reserve Bank, so they raise their own lending rates. Loans become dearer, households and firms borrow and spend less, the growth of credit and of money supply slows, and the pressure of demand on prices eases. This is called a dear money or contractionary policy.

Option B states the effect of a cut in the repo rate, the easy money policy used to support growth when inflation is low. Option C is wrong because the fiscal deficit is decided by the government's own taxing and spending; indeed dearer credit raises the government's interest bill. Option D is wrong because the statutory liquidity ratio is a separate instrument under the Banking Regulation Act and does not move automatically with the policy rate.

The correct answer is B, KC Neogy. Kshitish Chandra Neogy chaired the First Finance Commission, set up by the President in November 1951, which gave its report in 1952 for the period 1952 to 1957. The Finance Commission is a constitutional body under Article 280. It is formed every five years, or earlier if needed, with a chairman and four other members, and it recommends how the taxes collected by the Union are shared with the States and how grants-in-aid are given. The qualifications of its members are laid down in the Finance Commission (Miscellaneous Provisions) Act of 1951. Neogy had earlier been a member of the Constituent Assembly and a minister in Nehru's first Cabinet. A is wrong because Ashok Kumar Chanda chaired the Third Finance Commission. C is wrong because K Santhanam chaired the Second Finance Commission. D is wrong because PV Rajamannar chaired the Fourth Finance Commission. Exam tip: the first four chairmen in order are Neogy, Santhanam, Chanda, Rajamannar; Article 280 is the Finance Commission article.

The correct answer is B, interest rates were increased. A hawkish stand means the central bank is more worried about inflation than about slow growth, so it leans towards raising the policy rate and tightening money. Costlier loans cool down borrowing and spending, and prices rise more slowly. In India the Monetary Policy Committee, set up in 2016 under the amended RBI Act, has six members - three from the RBI and three named by the Centre - and it decides the repo rate by majority, with the Governor holding a casting vote. It has to keep retail inflation at 4 per cent, within a band of 2 to 6 per cent. Option A is wrong because cutting rates to support growth is the opposite, a dovish stand. Option C is wrong because leaving rates untouched is a neutral or wait-and-watch stance. Option D is wrong because increasing money supply is expansionary and again dovish. Exam tip: hawk fights inflation and raises rates, dove protects growth and cuts them.

The correct answer is B, Only two. The government bond market and the stock market deal in long-term funds, so they are capital markets; call money and treasury bills belong to the money market. The dividing line is maturity: the capital market handles funds for more than one year, and the money market handles funds for up to one year. Government bonds, or dated securities, run for 5 to 40 years, and shares have no maturity at all. Call money is overnight lending between banks, with notice money for 2 to 14 days, and treasury bills are short-term government borrowing for 91, 182 or 364 days. The capital market is regulated by SEBI, while the money market is regulated mainly by the RBI. Option A is wrong because both bonds and shares are capital market segments. Option C is wrong because it would add one short-term market. Option D is wrong because call money and treasury bills are money market segments. Exam tip: over one year is capital market, up to one year is money market; T-bills are 91, 182 and 364 days.

The correct answer is B, Rate at which RBI borrows money from commercial banks. The reverse repo rate is what the Reserve Bank pays banks when it takes their surplus cash for a short period. It is the mirror image of the repo rate, at which banks borrow from the RBI against government securities. When the RBI wants to pull extra money out of the system, it makes parking funds with the central bank more attractive; when it wants credit to flow, it does the opposite. The reverse repo rate is always kept below the repo rate, and both are decided by the six member Monetary Policy Committee headed by the RBI Governor. Since 2022 most of this absorption of cash is done through the Standing Deposit Facility. Option A is wrong because the RBI does not borrow from foreign banks through this window. Option C is wrong because the rate at which commercial banks borrow from the RBI is the repo rate. Option D is wrong because lending between commercial banks and foreign banks is not set by the RBI. Exam tip: repo means the RBI lends, reverse repo means the RBI borrows.

The correct answer is D, price stability. The Reserve Bank Of India Act, as amended in 2016, states that the primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. Under the inflation targeting framework the government, in consultation with the RBI, sets the target for consumer price inflation at four per cent with a band of two per cent on either side. A six member Monetary Policy Committee, three from the RBI including the Governor, who has the casting vote, and three appointed by the government, decides the policy repo rate, usually every two months. Option A is wrong because creating wealth is not a task of monetary policy. Option B is wrong because the RBI manages the exchange rate under FEMA, but only to curb sharp volatility, not as its main aim. Option C is wrong because growth is an objective the RBI must keep in mind, yet it comes after price stability in the law. Exam tip: price stability first, growth kept in mind, four per cent inflation target with a two per cent band.