Solution: (a)
Cheap money is a loan or credit with a low interest rate, or the setting of low interest rates by a central bank like the Federal Reserve. Cheap money is good for borrowers, but bad for investors, who will see the same low interest rates on investments like savings accounts, money market funds, CDs and bonds. Cheap money can have detrimental economic consequences as borrowers take on excessive leverage.
The process of curing inflation by reducing the money supply is called
(a) Cost-push inflation
(b) Demand-pull inflation
(c) Disinflation
(d) Reflation
Solution: (c)
Disinflation is a decrease in the rate of inflation – a slowdown in the rate of increase of the general price level of goods and services in a nation’s gross domestic product over time. It is the opposite of reflation. Disinflation occurs when the increase in the “consumer price level” slows down from the previous period when the prices were rising. Disinflation is the reduction in the general price level in the economy but for a very short period of time. Disinflation takes place only when an economy is suffering from recession.
Which one of the following is a developmental expenditure?
(a) Irrigation expenditure
(b) Civil administration
(c) Debt services
(d) Grant–in–aid
Solution: (a)
Public expenditure whether plans or non-plan or capital or revenue is classified into developmental and non-developmental expenditure. The expenditure which is incurred on activities directly related to economic development is called developmental expenditure. Hence, expenditure incurred on education, health care, scientific research; infrastructure and so on is developmental expenditure. Expenditure incurred on general essential services required for normal running of the government is termed as non-developmental expenditure. Therefore, expenditure incurred on services relating to general administration, police, defense, judiciary etc. is non-developmental expenditure.
Which one of the following statements is correct?
(a) Good money drives bad money out of circulation
(b) Bad money drives good money out of circulation
(c) Good and bad money cannot circulate together
(d) Cannot say
Solution: (b)
One of the most famous axioms in economics is “bad money drives out good.” This rule has generally been attributed to Sir Thomas Gresham (1519–1579), an English financier who advised King Edward VI and Queen Elizabeth I with regard to financial matters, and it is popularly known as Gresham’s Law. The key prerequisite is that there must be two forms of money or currency (with the same face value) in circulation simultaneously. The acceptance of both currencies at the same face value is required by legal tender laws enacted by the government. One of the currencies is artificially overvalued, and the other currency is artificially undervalued. In such situations, the bad money (the artificially overvalued one) tends to drive the good money (the artificially undervalued one) out of circulation. In other words, people spend the bad money and hoard the good money.
Full convertibility of a rupee means
(a) purchase of foreign exchange for rupees freely
(b) payment for imports in terms of rupees
(c) repayment of loans in terms of rupees
(d) determination of the rate of exchange between the rupee and foreign currencies freely by the market forces of demand and supply
Solution: (d)
The full convertibility of the Indian currency means that the rupee would be made freely exchangeable into other currencies and vice versa. The rupee was made partially convertible in 1994. Currently, it can be changed freely into foreign currency for business and trade expenses but not freely for activities like acquiring overseas assets. Full converted of the currency means the local currency can be exchanged to foreign currency without any governmental control. Presently, the issue of capital account convertibility is in the discussion stage.
