UPSC Static Quiz – Economy : 26 November 2024
Kartavya Desk Staff
UPSC Static Quiz – Economy : 26 November 2024 We will post 5 questions daily on static topics mentioned in the UPSC civil services preliminary examination syllabus. Each week will focus on a specific topic from the syllabus, such as History of India and Indian National Movement, Indian and World Geography, and more.We are excited to bring you our daily UPSC Static Quiz, designed to help you prepare for the UPSC Civil Services Preliminary Examination. Each day, we will post 5 questions on static topics mentioned in the UPSC syllabus. This week, we are focusing on Indian and World Geography.
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• Question 1 of 5 1. Question Consider the following statements regarding Federal Funds Rate (FFR). The FFR is the interest rate at which commercial banks in the US borrow from each other overnight. Like in India, where the RBI decides the repo rate, the Federal Reservedirectly specifies the Federal Funds Rate. When the Federal Reserve wants to raise the prevailing interest rates in the US economy, it reduces the money supply. How many of the above options are correct? a) Only one b) Only two c) All three d) None Correct Solution: b) Statement 2 is incorrect. What is the Federal Funds Rate (FFR) and how does the US Fed tweak it? The FFR is the interest rate at which commercial banks in the US borrow from each other overnight. Arguably, if banks borrow at higher rates from each other, they will also lend the money to consumers at a higher rate. Now, unlike in India, where the RBI decides what the repo rate (or the interest rate at which RBI lends money to banks) will be, in the US, the Fed can’t directly specify the FFR. Instead, it tries to “target” the FFR by controlling the money supply. So when the Fed wants to raise the prevailing interest rates in the US economy, it reduces the money supply. This forces every bank in the economy to charge higher interest rates. The process starts with commercial banks charging higher interest rates to lend to each other for overnight loans. Incorrect Solution: b) Statement 2 is incorrect. What is the Federal Funds Rate (FFR) and how does the US Fed tweak it? The FFR is the interest rate at which commercial banks in the US borrow from each other overnight. Arguably, if banks borrow at higher rates from each other, they will also lend the money to consumers at a higher rate. Now, unlike in India, where the RBI decides what the repo rate (or the interest rate at which RBI lends money to banks) will be, in the US, the Fed can’t directly specify the FFR. Instead, it tries to “target” the FFR by controlling the money supply. So when the Fed wants to raise the prevailing interest rates in the US economy, it reduces the money supply. This forces every bank in the economy to charge higher interest rates. The process starts with commercial banks charging higher interest rates to lend to each other for overnight loans.
#### 1. Question
Consider the following statements regarding Federal Funds Rate (FFR).
• The FFR is the interest rate at which commercial banks in the US borrow from each other overnight.
• Like in India, where the RBI decides the repo rate, the Federal Reservedirectly specifies the Federal Funds Rate.
• When the Federal Reserve wants to raise the prevailing interest rates in the US economy, it reduces the money supply.
How many of the above options are correct?
• a) Only one
• b) Only two
• c) All three
Solution: b)
Statement 2 is incorrect.
What is the Federal Funds Rate (FFR) and how does the US Fed tweak it?
The FFR is the interest rate at which commercial banks in the US borrow from each other overnight. Arguably, if banks borrow at higher rates from each other, they will also lend the money to consumers at a higher rate.
Now, unlike in India, where the RBI decides what the repo rate (or the interest rate at which RBI lends money to banks) will be, in the US, the Fed can’t directly specify the FFR. Instead, it tries to “target” the FFR by controlling the money supply. So when the Fed wants to raise the prevailing interest rates in the US economy, it reduces the money supply. This forces every bank in the economy to charge higher interest rates. The process starts with commercial banks charging higher interest rates to lend to each other for overnight loans.
Solution: b)
Statement 2 is incorrect.
What is the Federal Funds Rate (FFR) and how does the US Fed tweak it?
The FFR is the interest rate at which commercial banks in the US borrow from each other overnight. Arguably, if banks borrow at higher rates from each other, they will also lend the money to consumers at a higher rate.
Now, unlike in India, where the RBI decides what the repo rate (or the interest rate at which RBI lends money to banks) will be, in the US, the Fed can’t directly specify the FFR. Instead, it tries to “target” the FFR by controlling the money supply. So when the Fed wants to raise the prevailing interest rates in the US economy, it reduces the money supply. This forces every bank in the economy to charge higher interest rates. The process starts with commercial banks charging higher interest rates to lend to each other for overnight loans.
• Question 2 of 5 2. Question ‘Monetary Base’, managed by the Reserve Bank of India, consists of Deposits held by the Government of India with RBI Sum total of the capital of all financial institutions regulated by RBI Notes and coins in circulation with the public How many of the above statements is/are incorrect? a) Only one b) Only two c) All three d) None Correct Solution: a) Statement 2 is incorrect. Monetary Base is also called as 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. Incorrect Solution: a) Statement 2 is incorrect. Monetary Base is also called as 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.
#### 2. Question
‘Monetary Base’, managed by the Reserve Bank of India, consists of
• Deposits held by the Government of India with RBI
• Sum total of the capital of all financial institutions regulated by RBI
• Notes and coins in circulation with the public
How many of the above statements is/are incorrect?
• a) Only one
• b) Only two
• c) All three
Solution: a)
Statement 2 is incorrect.
Monetary Base is also called as 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.
Solution: a)
Statement 2 is incorrect.
Monetary Base is also called as 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.
• Question 3 of 5 3. Question ‘Money illusion’, a phrase coined by Keynes, is mainly caused by an ignorance of the real detrimental effect of a) high unemployment b) recession c) low interest rates d) inflation Correct Solution: d) Money illusion is an economic theory positing that people have a tendency to view their wealth and income in nominal dollar terms, rather than in real terms. In other words, it is assumed that people do not take into account the level of inflation in an economy, wrongly believing that a dollar is worth the same as it was the prior year. Money illusion is sometimes also referred to as price illusion. Incorrect Solution: d) Money illusion is an economic theory positing that people have a tendency to view their wealth and income in nominal dollar terms, rather than in real terms. In other words, it is assumed that people do not take into account the level of inflation in an economy, wrongly believing that a dollar is worth the same as it was the prior year. Money illusion is sometimes also referred to as price illusion.
#### 3. Question
‘Money illusion’, a phrase coined by Keynes, is mainly caused by an ignorance of the real detrimental effect of
• a) high unemployment
• b) recession
• c) low interest rates
• d) inflation
Solution: d)
Money illusion is an economic theory positing that people have a tendency to view their wealth and income in nominal dollar terms, rather than in real terms. In other words, it is assumed that people do not take into account the level of inflation in an economy, wrongly believing that a dollar is worth the same as it was the prior year.
Money illusion is sometimes also referred to as price illusion.
Solution: d)
Money illusion is an economic theory positing that people have a tendency to view their wealth and income in nominal dollar terms, rather than in real terms. In other words, it is assumed that people do not take into account the level of inflation in an economy, wrongly believing that a dollar is worth the same as it was the prior year.
Money illusion is sometimes also referred to as price illusion.
• Question 4 of 5 4. Question Consider the following statements regarding RBI’s Open Market Operations (OMOs). OMOs can be used to tame short-term inflation in the economy. They are to be mandatorily conducted once every year to adjust liquidity in the security markets. No intermediaries such as commercial banks are involved in OMOs. How many of the above statements is/are correct? a) Only one b) Only two c) All three d) None Correct Solution: a) Only Statement 1 is correct. OMOs are conducted by the RBI by way of sale or purchase of government securities (g-secs) to adjust money supply conditions. RBI carries out the OMO through commercial banks and does not directly deal with the public. The central bank sells g-secs to suck out liquidity from the system and buys back g-secs to infuse liquidity into the system. These operations are often conducted on a day-to-day basis in a manner that balances inflation while helping banks continue to lend. The RBI uses OMO along with other monetary policy tools such as repo rate, cash reserve ratio and statutory liquidity ratio to adjust the quantum and price of money in the system. When the RBI wants to increase the money supply in the economy, it purchases the government securities from the market and it sells government securities to suck out liquidity from the system. Incorrect Solution: a) Only Statement 1 is correct. OMOs are conducted by the RBI by way of sale or purchase of government securities (g-secs) to adjust money supply conditions. RBI carries out the OMO through commercial banks and does not directly deal with the public. The central bank sells g-secs to suck out liquidity from the system and buys back g-secs to infuse liquidity into the system. These operations are often conducted on a day-to-day basis in a manner that balances inflation while helping banks continue to lend. The RBI uses OMO along with other monetary policy tools such as repo rate, cash reserve ratio and statutory liquidity ratio to adjust the quantum and price of money in the system. When the RBI wants to increase the money supply in the economy, it purchases the government securities from the market and it sells government securities to suck out liquidity from the system.
#### 4. Question
Consider the following statements regarding RBI’s Open Market Operations (OMOs).
• OMOs can be used to tame short-term inflation in the economy.
• They are to be mandatorily conducted once every year to adjust liquidity in the security markets.
• No intermediaries such as commercial banks are involved in OMOs.
How many of the above statements is/are correct?
• a) Only one
• b) Only two
• c) All three
Solution: a)
Only Statement 1 is correct.
• OMOs are conducted by the RBI by way of sale or purchase of government securities (g-secs) to adjust money supply conditions.
• RBI carries out the OMO through commercial banks and does not directly deal with the public.
• The central bank sells g-secs to suck out liquidity from the system and buys back g-secs to infuse liquidity into the system.
• These operations are often conducted on a day-to-day basis in a manner that balances inflation while helping banks continue to lend.
• The RBI uses OMO along with other monetary policy tools such as repo rate, cash reserve ratio and statutory liquidity ratio to adjust the quantum and price of money in the system.
• When the RBI wants to increase the money supply in the economy, it purchases the government securities from the market and it sells government securities to suck out liquidity from the system.
Solution: a)
Only Statement 1 is correct.
• OMOs are conducted by the RBI by way of sale or purchase of government securities (g-secs) to adjust money supply conditions.
• RBI carries out the OMO through commercial banks and does not directly deal with the public.
• The central bank sells g-secs to suck out liquidity from the system and buys back g-secs to infuse liquidity into the system.
• These operations are often conducted on a day-to-day basis in a manner that balances inflation while helping banks continue to lend.
• The RBI uses OMO along with other monetary policy tools such as repo rate, cash reserve ratio and statutory liquidity ratio to adjust the quantum and price of money in the system.
• When the RBI wants to increase the money supply in the economy, it purchases the government securities from the market and it sells government securities to suck out liquidity from the system.
• Question 5 of 5 5. Question Consider the following statements regarding the Marginal Standing Facility (MSF). MSF functions as the last resort for banks to borrow short-term funds over and above that available under the Liquidity Adjustment Facility Window (LAF). MSF is an extraordinary rate at which banks can borrow money from the central bank by a much cheaper route than repo rate. Which of the above statements is/are correct? a) 1 only b) 2 only c) Both 1 and 2 d) Neither 1 nor 2 Correct Solution: a) Marginal standing facility (MSF) is a window for banks to borrow from the Reserve Bank of India in an emergency situation when inter-bank liquidity dries up completely. Banks borrow from the central bank by pledging government securities at a rate higher than the repo rate under liquidity adjustment facility or LAF in short. Under MSF, banks can borrow funds up to one percentage of their net demand and time liabilities (NDTL). Incorrect Solution: a) Marginal standing facility (MSF) is a window for banks to borrow from the Reserve Bank of India in an emergency situation when inter-bank liquidity dries up completely. Banks borrow from the central bank by pledging government securities at a rate higher than the repo rate under liquidity adjustment facility or LAF in short. Under MSF, banks can borrow funds up to one percentage of their net demand and time liabilities (NDTL).
#### 5. Question
Consider the following statements regarding the Marginal Standing Facility (MSF).
• MSF functions as the last resort for banks to borrow short-term funds over and above that available under the Liquidity Adjustment Facility Window (LAF).
• MSF is an extraordinary rate at which banks can borrow money from the central bank by a much cheaper route than repo rate.
Which of the above statements is/are correct?
• c) Both 1 and 2
• d) Neither 1 nor 2
Solution: a)
Marginal standing facility (MSF) is a window for banks to borrow from the Reserve Bank of India in an emergency situation when inter-bank liquidity dries up completely.
Banks borrow from the central bank by pledging government securities at a rate higher than the repo rate under liquidity adjustment facility or LAF in short.
Under MSF, banks can borrow funds up to one percentage of their net demand and time liabilities (NDTL).
Solution: a)
Marginal standing facility (MSF) is a window for banks to borrow from the Reserve Bank of India in an emergency situation when inter-bank liquidity dries up completely.
Banks borrow from the central bank by pledging government securities at a rate higher than the repo rate under liquidity adjustment facility or LAF in short.
Under MSF, banks can borrow funds up to one percentage of their net demand and time liabilities (NDTL).
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