Which of the following statements is/are correct? 1. Most of India's reserves is held in the form of foreign currency. 2. There is no cost of holding foreign currency as reserves by a nation. Select the correct answer using the code given below.
- A.1 only
- B.2 only
- C.Both 1 and 2
- D.Neither 1 nor 2
Correct answer
Explanation
The correct answer is A, 1 only. Foreign currency assets make up the largest part of India's foreign exchange reserves, but holding them is never free, so statement 2 is false. India's reserves, managed by the Reserve Bank of India under the RBI Act and FEMA, have four parts: foreign currency assets, gold, Special Drawing Rights and the reserve tranche position with the IMF. Foreign currency assets, held mostly as deposits and government securities of the US, Europe and Japan, form by far the largest share. Holding reserves has a real cost. They earn low returns abroad while the country may be borrowing at higher rates, an opportunity cost; and when the RBI buys dollars it releases rupees, which it often has to absorb through costly sterilisation. Option B is wrong because statement 2 is false. Option C is wrong because it includes the false statement 2. Option D is wrong because statement 1 is correct. Exam tip: four parts of forex reserves are FCA, gold, SDR and reserve tranche, with FCA the largest.
Practice Questions
View allThe Fourteenth Finance Commission assigned different weights to the following parameters for distribution of tax proceeds to the States :
1. Income distance
2. Population
3. Demographic changes
4. Area
Arrange the aforesaid parameters in descending order in terms of their weights.
- A.1-2-3-4
- B.1-2-4-3
- C.1-3-2-4
- D.4-3-2-1
Show answer
Income distance had the highest weight, followed by population, area and demographic change. The Fourteenth Finance Commission, chaired by Y.V.
Read the full explanation →Which one of the following statements for a firm's equilibrium in Perfect Competition is not correct ?
- A.The market price must be greater or equal to average variable cost in the short run.
- B.The market price must be equal to marginal cost.
- C.The market price must be equal to average cost in the long run.
- D.The marginal cost decreases at the equilibrium output.
Show answer
This statement is not correct, because at the equilibrium of a competitive firm marginal cost must be rising. A firm in perfect competition is a price taker, so the price it gets equals its marginal revenue.
Read the full explanation →Plan allocation in agriculture and irrigation as percentage of total plan outlay was highest in :
- A.Seventh Five-Year Plan
- B.Third Five-Year Plan
- C.First Five-Year Plan
- D.Second Five-Year Plan
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The First Plan (1951 to 1956) gave agriculture, community development and irrigation about a third of its outlay, the highest share in any Indian plan.
Read the full explanation →Which of the following is not included in the Capital Account of the Balance of Payments of a country?
- A.Foreign Direct Investment
- B.Commercial Borrowing
- C.Invisibles
- D.External Assistance
Show answer
Invisibles are part of the current account of the balance of payments, not the capital account. The balance of payments records all of a country's transactions with the rest of the world and has two main parts.
Read the full explanation →Which one among the following was the focus of the Twelfth Five-Year Plan?
- A.Sustainable and Inclusive Growth
- B.Social Justice and Equality
- C.Food, Work and Productivity
- D.Attainment of Self-reliance
Show answer
The Twelfth Five-Year Plan (2012-17) had the theme "Faster, More Inclusive and Sustainable Growth". It continued the inclusive-growth idea of the Eleventh Plan (2007-12), whose theme was "Towards Faster and More Inclusive Growth", and added sustainability as a stated goal.
Read the full explanation →