# Static Quiz- April 22, 2022

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``` 22 April 2022 Time limit: 0 Quiz-summary 0 of 10 questions completed Questions: 1 2 3 4 5 6 7 8 9 10 Information 22 April 2022 Static Quiz for UPSC Prelims You have already completed the quiz before. Hence you can not start it again. Quiz is loading... You must sign in or sign up to start the quiz. You have to finish following quiz, to start this quiz: Results 0 of 10 questions answered correctly Your time: Time has elapsed You have reached 0 of 0 points, (0) Average score     Your score     Your result has been entered into leaderboard Loading Name: E-Mail: Captcha: 1 2 3 4 5 6 7 8 9 10 Answered Review Question 1 of 10 1. Question 2 points The total market value of all finished goods and services produced within a country in a set time period is Gross National Income (GNI) Gross national product (GNP) Gross Domestic product (GDP) Gross Value Added (GVA) Correct Correct Answer : C Gross National Income (GNI) GNI is the total amount of money earned by a nation’s people and businesses. It is used to measure and track a nation’s wealth from year to year. The number includes the nation’s gross domestic product plus the income it receives from overseas sources. GNI is an alternative to gross domestic product (GDP) as a means of measuring and tracking a nation’s wealth and is considered a more accurate indicator for some nations. Understanding GNI GNI calculates the total income earned by a nation’s people and businesses, including investment income, regardless of where it was earned. It also covers money received from abroad such as foreign investment and economic development aid. GDP is the total market value of all finished goods and services produced within a country in a set time period. Hence, option (c) is correct. GNI is the total income received by the country from its residents and businesses regardless of whether they are located in the country or abroad. GNP includes the income of all of a country’s residents and businesses whether it flows back to the country or is spent abroad. It also adds subsidies and taxes from foreign Converting GDP to GNI To convert a nation’s GDP to GNI, three terms need to be added to the former: 1) Foreign income paid to resident employees, 2) Foreign income paid to residential property owners and investors, and 3) net taxes minus subsidies receivable on production and imports. Incorrect Correct Answer : C Gross National Income (GNI) GNI is the total amount of money earned by a nation’s people and businesses. It is used to measure and track a nation’s wealth from year to year. The number includes the nation’s gross domestic product plus the income it receives from overseas sources. GNI is an alternative to gross domestic product (GDP) as a means of measuring and tracking a nation’s wealth and is considered a more accurate indicator for some nations. Understanding GNI GNI calculates the total income earned by a nation’s people and businesses, including investment income, regardless of where it was earned. It also covers money received from abroad such as foreign investment and economic development aid. GDP is the total market value of all finished goods and services produced within a country in a set time period. Hence, option (c) is correct. GNI is the total income received by the country from its residents and businesses regardless of whether they are located in the country or abroad. GNP includes the income of all of a country’s residents and businesses whether it flows back to the country or is spent abroad. It also adds subsidies and taxes from foreign Converting GDP to GNI To convert a nation’s GDP to GNI, three terms need to be added to the former: 1) Foreign income paid to resident employees, 2) Foreign income paid to residential property owners and investors, and 3) net taxes minus subsidies receivable on production and imports. Question 2 of 10 2. Question 2 points Which of the following was/were the policy reforms under Washington Consensus? Interest rate liberalisation Liberalisation of FDI inflows Fiscal discipline Secure property rights Select the correct answer using the code given below: 1, 2 and 3 only 2, 3 and 4 only 1, 2 and 4 only 1, 2, 3 and 4 Correct Correct Answer : D   Washington consensus The term ‘Washington Consensus’ was coined by the US economist John Williamson (in 1989) under which he had suggested a set of policy reforms which most of the official in Washington   (i.e., International Monetary Fund and World Bank) thought would be good for the crisis- driven Latin American countries of the time. The policy reforms included ten propositions: (i) Fiscal discipline (ii) A redirection of public expenditure priorities toward fields offering both high economic returns and the potential to improve income distribution, such as primary health care, primary education, and infrastructure. (iii) Tax reform (to lower marginal rates and broaden the tax base) (iv) Interest rate liberalisation (v) A competitive exchange rate (vi) Trade liberalisation (vii) Liberalisation of FDI inflows (viii) Privatisation (ix) Deregulation (in the sense of abolishing barriers to entry and exit) (x) Secure property rights All the above are correct. However, in coming times, the term became synonymous to neo-liberalism (in Latin America), market fundamentalism (as George Soros told in 1998) and even globalization across the It has often been used to describe an extreme and dogmatic commitment to the belief that markets can handle everything. Incorrect Correct Answer : D   Washington consensus The term ‘Washington Consensus’ was coined by the US economist John Williamson (in 1989) under which he had suggested a set of policy reforms which most of the official in Washington   (i.e., International Monetary Fund and World Bank) thought would be good for the crisis- driven Latin American countries of the time. The policy reforms included ten propositions: (i) Fiscal discipline (ii) A redirection of public expenditure priorities toward fields offering both high economic returns and the potential to improve income distribution, such as primary health care, primary education, and infrastructure. (iii) Tax reform (to lower marginal rates and broaden the tax base) (iv) Interest rate liberalisation (v) A competitive exchange rate (vi) Trade liberalisation (vii) Liberalisation of FDI inflows (viii) Privatisation (ix) Deregulation (in the sense of abolishing barriers to entry and exit) (x) Secure property rights All the above are correct. However, in coming times, the term became synonymous to neo-liberalism (in Latin America), market fundamentalism (as George Soros told in 1998) and even globalization across the It has often been used to describe an extreme and dogmatic commitment to the belief that markets can handle everything. Question 3 of 10 3. Question 2 points Consider the following statements regarding consumer durables Goods like food and clothing, and services like recreation that are consumed when purchased by their ultimate consumers are called consumer durables. They undergo wear and tear with gradual use and often need to be preserved, maintained and renewed. Which of the statements given above is/are correct? 1 only 2 only Both 1 and 2 Neither 1 nor 2 Correct Correct Answer : B Answer Justification : Of the final goods, we can distinguish between consumption goods and capital goods. Goods like food and clothing, and services like recreation that are consumed when purchased by their ultimate consumers are called consumption goods or consumer Hence, statement 1 is incorrect. (This also includes services which are consumed but for convenience we may refer to them as consumer goods.) Then there are other goods that are of durable character which are used in the production process. These are tools, implements and machines.   While they make production of other commodities feasible, they themselves don’t get transformed in the production process. They are also final goods yet they are not final goods to be ultimately consumed. Unlike the final goods that we have considered above, they are the crucial backbone of any production process, in aiding and enabling the production to take These goods form a part of capital, one of the crucial factors of production in which a productive enterprise has invested, and they continue to enable the production process to go on for continuous cycles of production. These are capital goods and they gradually undergo wear and tear, and thus are repaired or gradually replaced over time. The stock of capital that an economy possesses is thus preserved, maintained and renewed partially or wholly over time and this is of some importance in the discussion that will follow.   We may note here that some commodities like television sets, automobiles or home computers, although they are for ultimate consumption, have one characteristic in common with capital goods – they are also durable. That is, they are not extinguished by immediate or even short period consumption; they have a relatively long life as compared to articles such as food or even clothing. They also undergo wear and tear with gradual use and often need repairs and replacements of parts, i.e., like machines they also need to be preserved, maintained and renewed. That is why we call these goods consumer durables. Of the total production taking place in the economy a large number of products don’t end up in final consumption and are not capital goods either. Such goods may be used by other producers as material inputs. Examples are steel sheets used for making automobiles and copper used for making utensils. These are intermediate goods, mostly used as raw material or inputs for production of other commodities. These are not final goods. Incorrect Correct Answer : B Answer Justification : Of the final goods, we can distinguish between consumption goods and capital goods. Goods like food and clothing, and services like recreation that are consumed when purchased by their ultimate consumers are called consumption goods or consumer Hence, statement 1 is incorrect. (This also includes services which are consumed but for convenience we may refer to them as consumer goods.) Then there are other goods that are of durable character which are used in the production process. These are tools, implements and machines.   While they make production of other commodities feasible, they themselves don’t get transformed in the production process. They are also final goods yet they are not final goods to be ultimately consumed. Unlike the final goods that we have considered above, they are the crucial backbone of any production process, in aiding and enabling the production to take These goods form a part of capital, one of the crucial factors of production in which a productive enterprise has invested, and they continue to enable the production process to go on for continuous cycles of production. These are capital goods and they gradually undergo wear and tear, and thus are repaired or gradually replaced over time. The stock of capital that an economy possesses is thus preserved, maintained and renewed partially or wholly over time and this is of some importance in the discussion that will follow.   We may note here that some commodities like television sets, automobiles or home computers, although they are for ultimate consumption, have one characteristic in common with capital goods – they are also durable. That is, they are not extinguished by immediate or even short period consumption; they have a relatively long life as compared to articles such as food or even clothing. They also undergo wear and tear with gradual use and often need repairs and replacements of parts, i.e., like machines they also need to be preserved, maintained and renewed. That is why we call these goods consumer durables. Of the total production taking place in the economy a large number of products don’t end up in final consumption and are not capital goods either. Such goods may be used by other producers as material inputs. Examples are steel sheets used for making automobiles and copper used for making utensils. These are intermediate goods, mostly used as raw material or inputs for production of other commodities. These are not final goods. Question 4 of 10 4. Question 2 points Consider the following statements regarding consumer durables Goods like food and clothing, and services like recreation that are consumed when purchased by their ultimate consumers are called consumer durables. They undergo wear and tear with gradual use and often need to be preserved, maintained and renewed. Which of the statements given above is/are correct? 1 only 2 only Both 1 and 2 Neither 1 nor 2 Correct Correct Answer : B Answer Justification : Of the final goods, we can distinguish between consumption goods and capital goods. Goods like food and clothing, and services like recreation that are consumed when purchased by their ultimate consumers are called consumption goods or consumer Hence, statement 1 is incorrect. (This also includes services which are consumed but for convenience we may refer to them as consumer goods.) Then there are other goods that are of durable character which are used in the production process. These are tools, implements and machines.   While they make production of other commodities feasible, they themselves don’t get transformed in the production process. They are also final goods yet they are not final goods to be ultimately consumed. Unlike the final goods that we have considered above, they are the crucial backbone of any production process, in aiding and enabling the production to take These goods form a part of capital, one of the crucial factors of production in which a productive enterprise has invested, and they continue to enable the production process to go on for continuous cycles of production. These are capital goods and they gradually undergo wear and tear, and thus are repaired or gradually replaced over time. The stock of capital that an economy possesses is thus preserved, maintained and renewed partially or wholly over time and this is of some importance in the discussion that will follow.     It is aimed at reducing the cost of business operations and cascading effect of various taxes on consumers. It has also reduced the overall cost of production, which will make Indian products/services more competitive in the domestic and international markets. It will also result into higher economic growth as GDP is expected to rise by about 2%. Compliance will also be easier as all tax payment related services like registration, returns, payments are available online through a common portal gst.gov.in. It has expanded the tax base, introduced higher transparency in the taxation system, reduced human interface between Taxpayer and Government and is furthering ease of doing business. All the above statements are correct. Incorrect Correct Answer : B Answer Justification : Of the final goods, we can distinguish between consumption goods and capital goods. Goods like food and clothing, and services like recreation that are consumed when purchased by their ultimate consumers are called consumption goods or consumer Hence, statement 1 is incorrect. (This also includes services which are consumed but for convenience we may refer to them as consumer goods.) Then there are other goods that are of durable character which are used in the production process. These are tools, implements and machines.   While they make production of other commodities feasible, they themselves don’t get transformed in the production process. They are also final goods yet they are not final goods to be ultimately consumed. Unlike the final goods that we have considered above, they are the crucial backbone of any production process, in aiding and enabling the production to take These goods form a part of capital, one of the crucial factors of production in which a productive enterprise has invested, and they continue to enable the production process to go on for continuous cycles of production. These are capital goods and they gradually undergo wear and tear, and thus are repaired or gradually replaced over time. The stock of capital that an economy possesses is thus preserved, maintained and renewed partially or wholly over time and this is of some importance in the discussion that will follow.     It is aimed at reducing the cost of business operations and cascading effect of various taxes on consumers. It has also reduced the overall cost of production, which will make Indian products/services more competitive in the domestic and international markets. It will also result into higher economic growth as GDP is expected to rise by about 2%. Compliance will also be easier as all tax payment related services like registration, returns, payments are available online through a common portal gst.gov.in. It has expanded the tax base, introduced higher transparency in the taxation system, reduced human interface between Taxpayer and Government and is furthering ease of doing business. All the above statements are correct. Question 5 of 10 5. Question 2 points Which of the following are benefits/potential benefits of Goods and Service Tax (GST)? It will result into higher economic growth as GDP is expected to rise by about 2%. It has expanded the tax base and introduced higher transparency in the taxation system. It has facilitated the freedom of movement of goods and services and created a common market in the country. Which of the statements given above are correct? 1 and 2 only 2 and 3 only 1 and 3 only 1, 2 and 3 Correct Correct Answer : D   Goods and Service Tax (GST) is the single comprehensive indirect tax, operational from 1 July 2017, on supply of goods and services, right from the manufacturer/ service provider to the It is a destination-based consumption tax with facility of Input Tax Credit in the supply chain. It is applicable throughout the country with one rate for one type of goods/service. It has amalgamated a large number of Central and State taxes and cesses. It has replaced large number of taxes on goods and services levied on production/sale of goods or provision of service. GST has simplified the multiplicity of taxes on goods and services. The laws, procedures and rates of taxes across the country are standardized. It has facilitated the freedom of movement of goods and services and created a common market in the country.   It is aimed at reducing the cost of business operations and cascading effect of various taxes on consumers. It has also reduced the overall cost of production, which will make Indian products/services more competitive in the domestic and international markets. It will also result into higher economic growth as GDP is expected to rise by about 2%. Compliance will also be easier as all tax payment related services like registration, returns, payments are available online through a common portal gst.gov.in. It has expanded the tax base, introduced higher transparency in the taxation system, reduced human interface between Taxpayer and Government and is furthering ease of doing business. All the above statements are correct. Incorrect Correct Answer : D   Goods and Service Tax (GST) is the single comprehensive indirect tax, operational from 1 July 2017, on supply of goods and services, right from the manufacturer/ service provider to the It is a destination-based consumption tax with facility of Input Tax Credit in the supply chain. It is applicable throughout the country with one rate for one type of goods/service. It has amalgamated a large number of Central and State taxes and cesses. It has replaced large number of taxes on goods and services levied on production/sale of goods or provision of service. GST has simplified the multiplicity of taxes on goods and services. The laws, procedures and rates of taxes across the country are standardized. It has facilitated the freedom of movement of goods and services and created a common market in the country.   It is aimed at reducing the cost of business operations and cascading effect of various taxes on consumers. It has also reduced the overall cost of production, which will make Indian products/services more competitive in the domestic and international markets. It will also result into higher economic growth as GDP is expected to rise by about 2%. Compliance will also be easier as all tax payment related services like registration, returns, payments are available online through a common portal gst.gov.in. It has expanded the tax base, introduced higher transparency in the taxation system, reduced human interface between Taxpayer and Government and is furthering ease of doing business. All the above statements are correct. Question 6 of 10 6. Question 2 points Which of the following is/are the components used to derive Personal Income (PI)? National Income (NI) Undistributed profits Net interest payments made by households Corporate tax Transfer payments Select the correct answer using the code given below: 1, 2 and 4 only 2, 3 and 4 only 2, 3 and 5 only 1, 2, 3, 4 and 5 Correct   Correct Answer : D NNP at factor cost o National Income (NI) = NNP at market prices – (Indirect taxes – Subsidies) = NNP at market prices – Net indirect taxes (Net indirect taxes o Indirect taxes – Subsidies) We can further subdivide the National Income into smaller categories. Let us try to find the expression for the part of NI which is received by households. We shall call this Personal Income (PI). First, let us note that out of NI, which is earned by the firms and government enterprises, a part of profit is not distributed among the factors of production. This is called Undistributed Profits (UP). Personal Income (PI) = NI – Undistributed profits – Net interest payments made by households – Corporate tax + Transfer payments to the households from the government and firms. All the above are correct. However, even PI is not the income over which the households have complete say. They have to pay taxes from PI. If we deduct the Personal Tax Payments (income tax, for example) and Non-tax Payments (such as fines) from PI, we obtain what is known as the Personal Disposable Thus Personal Disposable Income (PDI) = PI – Personal tax payments – Non-tax Personal Disposable Income is the part of the aggregate income which belongs to the They may decide to consume a part of it, and save the rest. Notice that the ratio of nominal GDP to real GDP gives us an idea of how the prices have moved from the base year (the year whose prices are being used to calculate the real GDP) to the current year. Hence, statement 2 is incorrect. In the calculation of real and nominal GDP of the current year, the volume of production is Therefore, if these measures differ it is only due to change in the price level between the base year and the current year. The ratio of nominal to real GDP is a well-known index of This is called GDP Deflator. Incorrect   Correct Answer : D NNP at factor cost o National Income (NI) = NNP at market prices – (Indirect taxes – Subsidies) = NNP at market prices – Net indirect taxes (Net indirect taxes o Indirect taxes – Subsidies) We can further subdivide the National Income into smaller categories. Let us try to find the expression for the part of NI which is received by households. We shall call this Personal Income (PI). First, let us note that out of NI, which is earned by the firms and government enterprises, a part of profit is not distributed among the factors of production. This is called Undistributed Profits (UP). Personal Income (PI) = NI – Undistributed profits – Net interest payments made by households – Corporate tax + Transfer payments to the households from the government and firms. All the above are correct. However, even PI is not the income over which the households have complete say. They have to pay taxes from PI. If we deduct the Personal Tax Payments (income tax, for example) and Non-tax Payments (such as fines) from PI, we obtain what is known as the Personal Disposable Thus Personal Disposable Income (PDI) = PI – Personal tax payments – Non-tax Personal Disposable Income is the part of the aggregate income which belongs to the They may decide to consume a part of it, and save the rest. Notice that the ratio of nominal GDP to real GDP gives us an idea of how the prices have moved from the base year (the year whose prices are being used to calculate the real GDP) to the current year. Hence, statement 2 is incorrect. In the calculation of real and nominal GDP of the current year, the volume of production is Therefore, if these measures differ it is only due to change in the price level between the base year and the current year. The ratio of nominal to real GDP is a well-known index of This is called GDP Deflator. Question 7 of 10 7. Question 2 points Consider the following statements regarding CPI and GDP deflator The weights are constant in both CPI and GDP deflator. The goods purchased by consumers (CPI) do not represent all the goods which are produced in a country. GDP deflator does not include prices of imported goods. Which of the statements given above are correct? 1 and 2 only 2 and 3 only 1 and 3 only 1, 2 and 3 Correct Correct Answer : B   CPI (and analogously WPI) may differ from GDP deflator because The goods purchased by consumers do not represent all the goods which are produced in a country. GDP deflator takes into account all such goods and services. Hence, statement 2 is correct. CPI includes prices of goods consumed by the representative consumer; hence it includes prices of imported goods. GDP deflator does not include prices of imported The weights are constant in CPI – but they differ according to production level of each good in GDP deflator. Incorrect Correct Answer : B   CPI (and analogously WPI) may differ from GDP deflator because The goods purchased by consumers do not represent all the goods which are produced in a country. GDP deflator takes into account all such goods and services. Hence, statement 2 is correct. CPI includes prices of goods consumed by the representative consumer; hence it includes prices of imported goods. GDP deflator does not include prices of imported The weights are constant in CPI – but they differ according to production level of each good in GDP deflator. Question 8 of 10 8. Question 2 points Consider the following statements regarding Gross Domestic product (GDP) If the GDP of the country is rising, the welfare will rise as a consequence. Many activities in an economy are not evaluated in monetary terms and hence, they are not included in calculating GDP.   Which of the statements given above is/are correct? 1 only 2 only Both 1 and 2 Neither 1 nor 2 Correct Correct Answer : B Answer Justification : GDP is the sum total of value of goods and services created within the geographical boundary of a country in a particular year. It gets distributed among the people as incomes (except for retained earnings). So we may be tempted to treat higher level of GDP of a country as an index of greater well-being of the people of that country (to account for price changes, we may take the value of real GDP instead of nominal GDP).   But there are at least three reasons why this may not be correct. Distribution of GDP – how uniform is it: If the GDP of the country is rising, the welfare may not rise as a consequence. Hence, statement 1 is incorrect. This is because the rise in GDP may be concentrated in the hands of very few individuals or firms. For the rest, the income may in fact have fallen. In such a case the welfare of the entire country cannot be said to have increased. Non-monetary exchanges: Many activities in an economy are not evaluated in monetary terms. For example, the domestic services women perform at home are not paid for. The exchanges which take place in the informal sector without the help of money are called barter exchanges. In barter exchanges, goods (or services) are directly exchanged against each other. But since money is not being used here, these exchanges are not registered as part of economic activity. Externalities: Externalities refer to the benefits (or harms) a firm or an individual causes to another for which they are not paid (or penalised). Externalities do not have any market in which they can be bought and sold. Incorrect Correct Answer : B Answer Justification : GDP is the sum total of value of goods and services created within the geographical boundary of a country in a particular year. It gets distributed among the people as incomes (except for retained earnings). So we may be tempted to treat higher level of GDP of a country as an index of greater well-being of the people of that country (to account for price changes, we may take the value of real GDP instead of nominal GDP).   But there are at least three reasons why this may not be correct. Distribution of GDP – how uniform is it: If the GDP of the country is rising, the welfare may not rise as a consequence. Hence, statement 1 is incorrect. This is because the rise in GDP may be concentrated in the hands of very few individuals or firms. For the rest, the income may in fact have fallen. In such a case the welfare of the entire country cannot be said to have increased. Non-monetary exchanges: Many activities in an economy are not evaluated in monetary terms. For example, the domestic services women perform at home are not paid for. The exchanges which take place in the informal sector without the help of money are called barter exchanges. In barter exchanges, goods (or services) are directly exchanged against each other. But since money is not being used here, these exchanges are not registered as part of economic activity. Externalities: Externalities refer to the benefits (or harms) a firm or an individual causes to another for which they are not paid (or penalised). Externalities do not have any market in which they can be bought and sold. Question 9 of 10 9. Question 2 points Which of the following forms the part of assets of any bank? Reserves Loans Deposits Which of the statements given above are correct? 1 and 2 only 2 and 3 only 1 and 3 only 1, 2 and 3 Correct Correct Answer : A   Banks can lend simply because they do not expect all the depositors to withdraw what they have deposited at the same time. When the banks lend to any person, a new deposit is opened in that person’s name. Thus money supply increases to old deposits plus new deposit (plus ) Let us take an example. Assume that there is only one bank in the country. Let us construct a fictional balance sheet for this bank. Balance sheet is a record of assets and liabilities of any firm. Conventionally, the assets of the firm are recorded on the left-hand side and liabilities on the right-hand side. Accounting rules say that both sides of the balance sheet must be equal or total assets must be equal to the total liabilities. Assets are things a firm owns or what a firm can claim from others. In case of a bank, apart from buildings, furniture, , its assets are loans given to public. When the bank gives out loan of Rs 100 to a person, this is the bank’s claim on that person for Rs 100. Another asset that a bank has is reserves. Reserves are deposits which commercial banks keep with the Central bank, Reserve Bank of India (RBI) and its cash. These reserves are kept partly as cash and partly in the form of financial instruments (bonds and treasury bills) issued by the RBI. Reserves are similar to deposits we keep with banks. We keep deposits and these deposits are our assets, they can be withdrawn by us. Similarly, commercial banks like State Bank of India (SBI) keep their deposits with RBI and these are called Reserves. Assets = Reserves + Loans Liabilities for any firm are its debts or what it owes to others. For a bank, the main liability is the deposits which people keep with it. Hence, statement 3 is incorrect. Liabilities = Deposits Incorrect Correct Answer : A   Banks can lend simply because they do not expect all the depositors to withdraw what they have deposited at the same time. When the banks lend to any person, a new deposit is opened in that person’s name. Thus money supply increases to old deposits plus new deposit (plus ) Let us take an example. Assume that there is only one bank in the country. Let us construct a fictional balance sheet for this bank. Balance sheet is a record of assets and liabilities of any firm. Conventionally, the assets of the firm are recorded on the left-hand side and liabilities on the right-hand side. Accounting rules say that both sides of the balance sheet must be equal or total assets must be equal to the total liabilities. Assets are things a firm owns or what a firm can claim from others. In case of a bank, apart from buildings, furniture, , its assets are loans given to public. When the bank gives out loan of Rs 100 to a person, this is the bank’s claim on that person for Rs 100. Another asset that a bank has is reserves. Reserves are deposits which commercial banks keep with the Central bank, Reserve Bank of India (RBI) and its cash. These reserves are kept partly as cash and partly in the form of financial instruments (bonds and treasury bills) issued by the RBI. Reserves are similar to deposits we keep with banks. We keep deposits and these deposits are our assets, they can be withdrawn by us. Similarly, commercial banks like State Bank of India (SBI) keep their deposits with RBI and these are called Reserves. Assets = Reserves + Loans Liabilities for any firm are its debts or what it owes to others. For a bank, the main liability is the deposits which people keep with it. Hence, statement 3 is incorrect. Liabilities = Deposits Question 10 of 10 10. Question 2 points Consider the following statements regarding Open Market Operations Open Market Operations refers to buying and selling of bonds issued by the Government in the open market. Selling of a bond by RBI leads to increases in the total amount of reserves in the economy and thus increases the money supply. Which of the statements given above is/are correct? 1 only 2 only Both 1 and 2 Neither 1 nor 2 Correct Correct Answer : A Answer Justification : Open Market Operations refers to buying and selling of bonds issued by the Government in the open market. This purchase and sale is entrusted to the Central bank on behalf of the Government. When RBI buys a Government bond in the open market, it pays for it by giving a cheque. This cheque increases the total amount of reserves in the economy and thus increases the money supply. Selling of a bond by RBI (to private individuals or institutions) leads to reduction in quantity of reserves and hence the money supply. Hence, statement 2 is incorrect. There are two types of open market operations: outright and repo. Outright open market operations are permanent in nature: when the central bank buys these securities (thus injecting money into the system), it is without any promise to sell them later. Similarly, when the central bank sells these securities (thus withdrawing money from the system), it is without any promise to buy them later. As a result, the injection/absorption of the money is of permanent nature. However, there is another type of operation in which when the central bank buys the security, this agreement of purchase also has specification about date and price of resale of this This type of agreement is called a repurchase agreement or repo. The interest rate at which the money is lent in this way is called the repo rate. Similarly, instead of outright sale of securities the central bank may sell the securities through an agreement which has a specification about the date and price at which it will be repurchased. This type of agreement is called a reverse repurchase agreement or reverse repo. The rate at which the money is withdrawn in this manner is called the reverse repo rate. Incorrect Correct Answer : A Answer Justification : Open Market Operations refers to buying and selling of bonds issued by the Government in the open market. This purchase and sale is entrusted to the Central bank on behalf of the Government. When RBI buys a Government bond in the open market, it pays for it by giving a cheque. This cheque increases the total amount of reserves in the economy and thus increases the money supply. Selling of a bond by RBI (to private individuals or institutions) leads to reduction in quantity of reserves and hence the money supply. Hence, statement 2 is incorrect. There are two types of open market operations: outright and repo. Outright open market operations are permanent in nature: when the central bank buys these securities (thus injecting money into the system), it is without any promise to sell them later. Similarly, when the central bank sells these securities (thus withdrawing money from the system), it is without any promise to buy them later. As a result, the injection/absorption of the money is of permanent nature. However, there is another type of operation in which when the central bank buys the security, this agreement of purchase also has specification about date and price of resale of this This type of agreement is called a repurchase agreement or repo. The interest rate at which the money is lent in this way is called the repo rate. Similarly, instead of outright sale of securities the central bank may sell the securities through an agreement which has a specification about the date and price at which it will be repurchased. This type of agreement is called a reverse repurchase agreement or reverse repo. The rate at which the money is withdrawn in this manner is called the reverse repo rate. ```
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