Answer the following Multiple Choice Questions on Economics
The national income of a country is–
(1) Government annual revenue
(2) Total productive income
(3) Surplus of the public sector enterprise
(4) Export—(Loan) Import
Solution: (2)
National income measures the monetary value of the flow of output of goods and services produced in an economy over a period of time. National Income is the total economic activity (production of finished goods and services calculated in monetary value) within the economic territory of a country by its residents during the year of accounting. In other words National Income of a country is the Net National Product at factor cost.
Under the minimum reserve system, the Reserve Bank of India as the sole authority of note issue is required to maintain assets worth not less than
(1) 115 crores of rupees
(2) 85 crores of rupees
(3) 200 crores of rupees
(4) 210 crores of rupees
Solution: (3)
Originally, the assets of the Issue Department were to consist of not less than two-fifths of gold coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40 crore in value. The remaining three-fifths of the assets might be held in rupee coins, Government of India rupee securities, eligible bills of exchange and promissory notes payable in India. Due to the exigencies of the Second World War and the post-war period, these provisions were considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold and foreign exchange reserves of Rs. 200 crore (2 billion), of which at least Rs. 115 crore should be in gold and Rs. 85 crore in the form of Government Securities. The system as it exists today is known as the minimum reserve system.
One of the objectives of Industrial Licensing Policy in India was to ensure :
(1) creation of adequate employment opportunities.
(2) free flow of foreign capital in Indian industries.
(3) use of modern technology.
(4) balanced industrial development across regions
Solution: (4)
In India, there are some regulations and restrictions with regard to establishing industries in certain categories. This is done by making it mandatory to obtain licenses before setting up such an industry. The Licence Raj which continued till 1991 (liberalization was introduced) was a result of India’s decision to have a planned economy where all aspects of the economy are controlled by the state and licences are given to a select few. Up to 80 government agencies had to be satisfied before private companies could produce something and, if granted, the government would regulate production. The Industrial Policy Resolution 1956 aimed at the removal of regional disparities through development of regions with low industrial base. The Indian economy was then guided by the socialistic model of planned development rather than being guided by profit.
The type of note issue system followed in India is:
(1) Maximum fiduciary system
(2) Minimum reserve system
(3) Proportional fiduciary system
(4) Fixed fiduciary system
Solution: (2)
In terms of Section 22 of the Reserve Bank of India Act, the RBI has been given the statutory function of note issue on a monopoly basis. The note issue in India was originally based upon “Proportional Reserve System”. When it became difficult to maintain the re-serve proportionately, it was replaced by “Minimum Reserve System “. According to the RBI Amendment Act of 1957, the bank should now maintain a minimum reserve of Rs.200 crore worth of gold coins, gold bullion and foreign securities of which the value of gold coin and bullion should be not less than Rs.115 crore.
Inflation is caused by:
(1) Increase in supply of goods
(2) Increase in cash with the government
(3) Decrease in money supply
(4) Increase in money supply
Solution: (4)
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.
Which from the following is not true when the interest rate in the economy goes up ?
(1) Return on capital increases
(2) Lending decreases
(3) Cost of production increases
(4) Savings increases
Solution: (1)
Interest rates are the main determinant of investment on a macroeconomic scale. The current thought is that if interest rates increase across the board, then investment decreases, causing a fall in national income. However, the Austrian School of Economics sees higher rates as leading to greater investment in order to earn the interest to pay the depositors. Higher rates encourage more saving and thus more investment and thus more jobs to increase production to increase profits. Higher rates also discourage economically unproductive lending such as consumer credit and mortgage lending.
Open market operation refers to
(1) borrowing by commercial banks from the R.B.I.
(2) lending by scheduled banks to non-scheduled banks
(3) purchase and sale of Government securities by the R.B.I.
(4) purchase and sale of bonds and securities by the Central Govt
Solution: (3)
Open Market Operations (OMO) is the buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. Purchases inject money into the banking system and stimulate growth while sales of securities do the opposite. OMOs are the market operations conducted by the Reserve Bank of India by way of sale/ purchase of Government securities to/ from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis.
Which is the first Public Sector Corporation of independent India?
(1) Hindustan Steel Corporation, Bhilai
(2) State Trading Corporation of India
(3) Food Corporation of India
(4) Damodar Valley Corporation
Solution: (4)
Damodar Valley Corporation is a thermal and hydro power generating public organization of India. It emerged as a culmination of attempts made over a whole century to control the wild and erratic Damodar River. By April 1947, full agreement was practically reached between the three Governments of Central, Bengal and Bihar on the implementation of the scheme and in March 1948, the Damodar Valley Corporation Act (Act No. XIV of 1948) was passed by the Central Legislature, requiring the three governments – the Central Government and the State Governments of West Bengal and Bihar (now Jharkhand) to participate jointly for the purpose of building the Damodar Valley Corporation. The Corporation came into existence on 7 July, 1948 as the first multipurpose river valley project and the first Public Sector Corporation of independent India
Which one of the following is not considered as an infrastructure investment?
(1) Power project
(2) Railways project
(3) Telecommunication
(4) Automobile industry
Solution: (4)
Infrastructure is basic physical and organizational structures needed for the operation of a society or enterprise, or the services and facilities necessary for an economy to function. The term typically refers to the technical structures that support a society, such as roads, bridges, water supply, sewers, electrical grids, telecommunications, and so forth, and can be defined as “the physical components of interrelated systems providing commodities and services essential to enable, sustain, or enhance societal living conditions.” Viewed functionally, infrastructure facilitates the production of goods and services, and also the distribution of finished products to markets, as well as basic social services such as schools and hospitals; for example, roads enable the transport of raw materials to a factory. So an investment in infrastructure does not include automobile industry which is a capital-based industry.
Which of the following functions as a controller of credit in India?
(1) The Central Government
(2) The Reserve Bank of India
(3) The State Bank of India
(4) The Planning Commission
Solution: (2)
Credit Control is an important tool used by Reserve Bank of India, a major weapon of the monetary policy used to control the demand and supply of money (liquidity) in the economy. Central Bank administers control over the credit that the commercial banks grant. Such a method is used by RBI to bring “Economic Development with Stability”. It means that banks will not only control inflationary trends in the economy but also boost economic growth which would ultimately lead to increase in real national income with stability.
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