Here, you will find summaries, questions, answers, textbook solutions, pdf, extras etc. of (Nagaland Board) NBSE Class 12 (Arts/Commerce) Economics Chapter 9: Fiscal Policy and Monetary Policy. These solutions, however, should be only treated as references and can be modified/changed.
Introduction
Fiscal policy and monetary policy are the two main tools used by the government and the central bank respectively to influence aggregate demand in the economy. The aim is to maintain macroeconomic stability at full employment and potential output levels with reasonable price stability.
Fiscal policy involves the government’s decisions regarding taxation and public expenditure. Expansionary fiscal policy is followed when the aim is to increase aggregate demand to combat deficient demand. It includes measures like increasing government spending on development projects, reducing tax rates to increase disposable incomes, reducing public borrowings to increase private investment, and allowing deficit financing to inject purchasing power into the economy. Contractionary fiscal policy aims to decrease aggregate demand to control inflation. It involves reduced government expenditure, increased tax rates, higher public borrowings, and lower deficit financing. In India, the central and state governments design fiscal policies through their budgets.
Monetary policy refers to the central bank’s actions to regulate money supply and credit availability using various tools. Expansionary monetary policy aims to increase investment and aggregate demand by making credit cheap and easily available. This is done through lowered repo rates, open market purchase of securities, reduced cash reserve and statutory liquidity ratios, lower margin requirements for loans, and moral suasion of banks. Contractionary monetary policy works to decrease money supply and credit to control inflation. It involves increased repo rates, open market sale of securities, higher CRR and SLR, increased margin requirements, and discouraging bank lending through moral suasion. In India, the Reserve Bank of India formulates and implements monetary policy through interventions in the money market.
For macroeconomic stability, fiscal and monetary policies must work in a coordinated manner. Expansionary policies of one kind should be accompanied by contractionary policies of the other kind. The government and RBI have to cooperatively target full employment, potential output and reasonable price stability in the economy. Policy coordination between the fiscal and monetary authorities is essential for actualizing broader macroeconomic goals.
Textual questions and answers
A. Very short-answer questions (answer in one word/one sentence)
1. Who regulates the monetary policy?
Answer: Monetary policy of India is formulated by Reserve Bank of India to achieve specific objectives. It regulates money supply in the economy.
2. Who governs the fiscal policy?
Answer: Fiscal policy is a part of economic policy of the government which is related to government income and expenditure.
3. What is the current CRR?
Answer: The CRR is the percentage of a bank’s total deposits that must be kept as reserves with the Reserve Bank of India (RBI). The current Cash Reserve Ratio (CRR) is 4.50%.
4. What is the current SLR?
Answer: The SLR is the minimum percentage of deposits that a commercial bank must maintain in the form of liquid cash, gold, or other securities. The current Statutory Liquidity Ratio (SLR) is 18%.
5. Name two tools of fiscal policy.
Answer: Two tools of fiscal policy are public expenditure policy and taxation policy.
B. Short-answer questions-I (answer in 30-50 words)
1. Name the quantitative measures of monetary policy.
Answer: The quantitative measures of monetary policy include Bank Rate (or Repo Rate), Operation Market Operation, and Cash-Reserve Ratio. These measures influence the total volume of credit in the economy.
2. Define margin requirements.
Answer: Margin requirements refer to the Central Bank’s regulation of the amount of loan that can be taken against a given security. Increasing margin requirements discourage borrowing as it leads to businessmen taking less credit against their security.
3. Write tools of fiscal policy.
Answer: The tools of fiscal policy include public expenditure policy, taxation policy, public debt policy, and deficit financing. These tools aim at achieving objectives like rapid economic development and reduction in economic inequalities.
4. What is the meaning of repo rate?
Answer: Repo rate is the rate at which the Central Bank lends to commercial banks. Changes in repo rate influence the lending rates of commercial banks, thereby affecting the money supply in the economy.
5. Name the fiscal measures to control excess demand.
Answer: To control excess demand, contractionary fiscal policy is followed. It includes reduced public expenditure, increased taxes, increased public borrowings, and reduced deficit financing.
6. Name the quantitative measures of monetary policy.
Answer: The quantitative measures of monetary policy are Repo Rate, Open Market Operation, and Cash-Reserve Ratio. These measures are designed to influence the total volume of credit.
C. Short-answer questions-II (answer in 60-80 words)
1. How do changes in repo rates and cash reserve rates affect the excess demand?
Answer: Changes in repo rates and cash reserve rates are used to control excess demand in the economy. When the Central Bank increases the repo rate, commercial banks are discouraged from taking loans from it. This leads to higher lending rates for producers, reducing the money supply and aggregate demand. Similarly, by increasing the Cash Reserve Ratio (CRR), the lending capacity of banks is reduced, further decreasing the money supply and aggregate demand. These measures make credit costly and difficult to avail, thereby controlling excess demand.
2. What are the quantitative measures to control deficient demand?
Answer: To control deficient demand, the Central Bank can reduce the repo rate, enabling commercial banks to offer loans at lower interest rates. This increases the money supply and boosts aggregate demand. Additionally, the Central Bank can buy government bonds and securities from commercial banks, increasing their cash stock and lending capacity. These measures make credit cheaper and more easily available, thereby increasing aggregate demand.
3. What are the qualitative measures to control deficient demand?
Answer: Qualitative measures to control deficient demand include reducing the margin requirement for loans, which encourages borrowing. The Central Bank also uses moral suasion, persuading its member banks to be liberal in lending and expand credit facilities. Additionally, credit rationing can be adjusted to promote lending for specific business activities. These measures channelize credit into priority sectors and help in increasing aggregate demand.
D. Long-answer questions-I (answer in 90-120 words)
1. Discuss any three fiscal policy measures.
Answer: Three fiscal policy measures are:
Expenditure Policy (Reduce expenditure): In a situation like that of excess demand, the government should curtail its expenditure on public works such as roads, buildings, rural electrification, irrigation works, thereby reducing the money income of the people and their demand for goods and services.
Revenue (Taxation) Policy (Increase taxes): During inflation (excess demand), the government should raise rates of all taxes, especially on rich people because taxation withdraws purchasing power from the tax-payers and to that extent reduces effective demand.
Public Borrowing (Increase it): Additionally, the government should resort to large-scale public borrowing to mop up excess money with the public.
2. What are the quantitative measures of monetary policy?
Answer: The quantitative measures of monetary policy are:
Repo Rate (Reduce it): Repo rate is the rate at which the Central Bank lends to the commercial banks. The banks, in turn, increase or decrease lending rates of interest accordingly. To check depression, the Central Bank reduces rapo rate thereby enabling the commercial banks to take more loans from it and, in turn, give more loans to producers at a lower rate of interest.
Open Market Operation (Buy securities): The Central Bank buys the government bonds and securities from commercial banks by paying them in cash to increase their cash stock and lending capacity. The commercial banks lend money at low interest rate which increases people’s borrowing leading to more expenditure by the people. This helps reduce deflationary gap.
Cash Reserve Ratio (Reduce CRR): The Central Bank lowers rate of cash reserve ratio thereby increasing the bank’s capacity to give credit. Similarly, the Central Bank decreases Statutory Liquidity Ratio (SLR) to increase availability of credit.
E. Long-answer questions-II (answer in 130-200 words)
1. Write a note on monetary policy.
Answer: Monetary policy is the policy of the Central Bank of a country to control money supply and credit in the economy. Money supply implies stock of money (purchasing power) with the people. As a result of influencing the money supply, the demand of people is also influenced and hence, the aggregate demand. Measures of monetary policy may be quantitative and qualitative. According to the aim of monetary policy, there are two broad types: expansionary policy and contractionary policy.
Expansionary policy is followed when the aim of monetary policy in times of depression is to cause an increase in the investment expenditure by firms so as to solve the problem of excess supply.
Contradictory policy is followed when the aim of monetary policy is to cause a decrease in the investment expenditure by firms so as to solve the problem of excess demand.
2. How is controlling money supply helpful in dealing the various problems in economy?
Answer: Controlling the money supply is instrumental in addressing various economic issues. The Central Bank employs quantitative measures like lowering the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) to increase the bank’s capacity to give credit, effectively lifting the economy out of recession.
Additionally, qualitative measures are used to regulate credit for specific sectors. For example, the Central Bank can reduce the margin requirement of loans to encourage borrowing and use moral suasion to persuade banks to be liberal in lending. Fiscal policy tools such as deficit financing, which involves the printing of currency/notes, are encouraged to generate increased demand for goods and services.
An expansionary policy is followed when the aim is to increase aggregate demand, especially in situations of excess supply. Under this policy, the government should make large investments in public works and reduce taxes on personal and corporate incomes to encourage private consumption and investment.
These measures collectively help in controlling excess demand or supply and influence the aggregate demand in the economy.
3. Differentiate between fiscal policy and monetary policy.
Answer: Fiscal policy is the expenditure and revenue (taxation) policy of the government aimed at accomplishing desired objectives. It includes public expenditure policy, taxation policy, public debt policy, and deficit financing. The policy is aimed at influencing the level of aggregate demand to curb situations of excess demand and excess supply. There are two broad types of fiscal policy: expansionary and contractionary. Expansionary fiscal policy involves increased public expenditure, reduced taxes, and increased deficit financing. Contractionary fiscal policy involves reduced public expenditure, increased taxes, and reduced deficit financing.
On the other hand, monetary policy is the policy of the Central Bank of a country to control money supply and credit in the economy. It includes measures like reduced repo rate, buying of securities, reduced cash reserve ratio, and reduced margin requirements. Similar to fiscal policy, monetary policy also has two types: expansionary and contractionary. Expansionary monetary policy aims to increase investment expenditure by firms to solve the problem of excess supply. Contractionary monetary policy aims to decrease investment expenditure by firms.
4. Write a note on fiscal policy.
Answer: Fiscal policy is a part of the economic policy of the government, which is related to government income and expenditure. It includes public expenditure policy, taxation policy, public debt policy, and deficit financing. The policy is aimed at achieving certain objectives like rapid economic development, reduction in economic inequalities, and promoting capital formation. The fiscal policy of the government is aimed at influencing the level of aggregate demand so as to curb the situation of excess demand and excess supply. There are two broad types of fiscal policy: expansionary and contractionary.
Expansionary Fiscal Policy: This policy is followed when the aim is to increase the aggregate demand to solve the situation of excess supply. It includes increased public expenditure, reduced taxes, reduced public borrowings, and increased deficit financing.
Contractionary Fiscal Policy: This policy is followed when the aim is to reduce the aggregate demand to solve the situation of excess demand. It includes reduced public expenditure, increased taxes, increased public borrowings, and reduced deficit financing.
The fiscal policy is used to achieve targeted economic growth and balances the economy through different tools.
Additional/extra questions and answers
1. What is fiscal policy?
Answer: Fiscal policy is a part of economic policy of the government which is related to government income and expenditure.
2. Who formulates the monetary policy of India?
Answer: The monetary policy of India is formulated by the Reserve Bank of India.
3. What does the monetary policy of India regulate?
Answer: The monetary policy of India regulates the money supply in the economy.
4. What are the objectives of fiscal policy?
Answer: The fiscal policy aims at achieving certain objectives like rapid economic development, reduction in economic inequalities, promoting capital formation, and more.
5. List the measures of fiscal policy.
Answer: The measures of fiscal policy are:
- Expenditure Policy
- Revenue Policy
- Public Borrowing
- Deficit Financing
6. Define the two broad types of fiscal policy mentioned.
Answer: The two broad types of fiscal policy are expansionary policy and contractionary policy. Expansionary policy aims to increase aggregate demand, while contractionary policy aims to reduce it.
7. What measures does the government take under contractionary policy during excess demand?
Answer: Under contractionary policy, when there’s excess demand, the government takes measures such as:
- Reducing expenditure on public works.
- Raising rates of all taxes, especially on rich people.
- Resorting to large-scale public borrowing.
- Cutting down deficit financing.
8. How does the expenditure policy help during excess demand?
Answer: During excess demand, the government curtails its expenditure on public works, thereby reducing the money income of the people and their demand for goods and services. This includes expenditure on roads, buildings, rural electrification, and irrigation works. Wasteful expenditure is also reduced, thereby decreasing the budget deficit.
9. Explain how the revenue (taxation) policy functions during inflation.
Answer: The revenue (taxation) policy during inflation, which is a situation of excess demand, involves the government raising the rates of all taxes, especially targeting rich people. Taxation serves to withdraw purchasing power from the tax-payers, which subsequently reduces effective demand. It is essential that revenue-raising measures should be disinflationary, but at the same time, they shouldn’t adversely impact production and savings.
10. Why should the government resort to large-scale public borrowing during excess demand?
Answer: The government should resort to large-scale public borrowing during excess demand to mop up the excess money with the public. This strategy helps in withdrawing excessive money from the economy, which can help curb excess demand.
11. Discuss the role of deficit financing during excess demand and its effects.
Answer: Deficit financing, which involves the printing of currency/notes, should be cut down drastically during excess demand. An increase in deficit financing can lead to a rise in demand. By reducing deficit financing, the government’s ability to spend is limited, leading to a decrease in aggregate demand (AD) in the economy. To keep deficit financing within safe limits, the government can promote small savings methods like PPF, NSC, etc., by offering incentives.
12. What does the expansionary policy aim to achieve?
Answer: The expansionary policy aims to increase the aggregate demand so as to address the situation of excess supply.
13. What measures does the government take under expansionary policy during excess supply?
Answer: Under expansionary policy, during excess supply, the government takes measures such as:
- Increasing expenditure on public works.
- Reducing taxes on personal and corporate incomes.
- Encouraging deficit financing through the printing of currency/notes.
- Discouraging government borrowing from the public.
14. How does the expenditure policy help during excess supply?
Answer: During periods of deficiency in demand or excess supply, the government should invest heavily in public works like roads, bridges, buildings, railway lines, canals, and provide free education and health facilities. By doing so, more money is put into the hands of people, encouraging them to spend more. Keynes advocated for a deficit budget to boost aggregate demand.
15. How should the revenue policy be shaped during excess supply?
Answer: During excess supply, the revenue policy should involve reducing taxes on personal and corporate incomes, possibly abolishing tax on lower income groups. This enhances disposable income, prompting more spending. The government should also provide subsidies, old-age pensions, unemployment allowances, grants, interest-free loans, and instalment schemes to consumers to stimulate aggregate demand.
16. Why should deficit financing be encouraged during excess supply?
Answer: Deficit financing, which involves printing more currency/notes, should be encouraged during excess supply as the additional currency boosts demand for goods and services, fostering more investment in the economy.
17. What is monetary policy?
Answer: Monetary policy is the policy of the Central Bank of a country formulated to control the money supply and credit in the economy.
18. How does controlling money supply influence aggregate demand?
Answer: Controlling money supply influences the stock of money (purchasing power) with the people. Consequently, the demand of people is affected, which in turn, influences the aggregate demand. Monetary measures affect the cost of credit and its availability.
19. List the measures of monetary policy.
Answer: The measures of monetary policy are:
- Quantitative Measures: Bank Rate, Repo Rate, Operation Market Operation, Cash-Reserve Ratio
- Qualitative Measures: Margin Requirement, Moral Suasion
20. Explain the difference between quantitative and qualitative measures of monetary policy.
Answer: Quantitative measures of monetary policy influence the total volume of credit in the economy, while qualitative measures regulate the flow of credit for specific uses.
21. Define the two broad types of monetary policy mentioned.
Answer: The two broad types of monetary policy are expansionary policy and contractionary policy. Expansionary policy seeks to increase money supply and decrease interest rates, while contractionary policy aims to reduce money supply and increase interest rates.
22. What is the main objective of an expansionary policy during times of depression?
Answer: The main objective of an expansionary policy during times of depression is to cause an increase in the investment expenditure by firms so as to solve the problem of excess supply.
23. How does reducing the repo rate help during depression?
Answer: Reducing the repo rate enables the commercial banks to take more loans from the Central Bank, which allows them to offer more loans to producers at a lower rate of interest. This increases the money supply with the public and enhances aggregate demand.
24. What is the role of Open Market Operations in the expansionary policy?
Answer: In Open Market Operations, the Central Bank buys government bonds and securities from commercial banks. This infuses cash into the banks, increasing their lending capacity. As a result, banks lend at lower interest rates, leading to increased borrowing and expenditure by people, helping reduce the deflationary gap.
25. Describe the impact of the Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR) in expansionary monetary policy.
Answer: The Central Bank lowers the rate of the Cash Reserve Ratio (CRR), which amplifies the bank’s capacity to provide credit. Additionally, the Central Bank decreases the Statutory Liquidity Ratio (SLR) to further increase the availability of credit in the economy.
26. Among the three instruments of monetary policy mentioned, which one is more effective to lift the economy out of recession and why?
Answer: Among the three instruments of monetary policy, the instrument of repo rate is more effective to lift the economy out of recession. This is because the repo rate directly influences the commercial banks’ lending rates. A reduced repo rate encourages banks to take more loans from the Central Bank and provide more loans to producers at a reduced interest rate, thereby increasing the money supply and aggregate demand in the economy.
27. Elaborate on the qualitative credit control measures employed in the expansionary policy.
Answer: Qualitative credit control measures are employed to regulate credit for specific purposes. They help channel credit into priority sectors while restricting its use in undesirable sectors of the economy. These measures include:
- Margin requirement: The Central Bank reduces the margin requirement of loans during depression, encouraging borrowing. This allows businessmen to get more credit against their security.
- Moral suasion: The Central Bank employs moral suasion by persuading, requesting, appealing, or advising its member banks to be more liberal in lending and to expand credit facilities.
- Rationing of credit: This involves setting credit quotas for various business activities. By doing this, the Central Bank can promote social justice while combating depression.
- Direct action: The Central Bank might take direct action against banks that fail to adhere to its guidelines.
28. How does export promotion impact aggregate demand?
Answer: Export promotion leads to increased exports, which in turn has the effect of raising aggregate demand. A surge in aggregate demand helps in reducing the deflationary gap in the economy.
29. Describe the objective and methods of a contractionary policy.
Answer: The contractionary policy aims to reduce the investment expenditure by firms to address the issue of excess demand. To achieve this, credit is made costlier and less accessible. Methods include increasing the repo rate, which results in commercial banks borrowing less from the Central Bank and offering fewer loans to producers at higher interest rates. This reduces the money supply and aggregate demand. Other methods include the selling of securities in Open Market Operations to reduce banks’ cash stock and lending capacity and increasing both the Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR) to reduce credit availability.
30. What does Repo rate refer to?
Answer: Repo rate is the rate at which the Central Bank lends to the commercial banks.
31. How does the Central Bank use Open Market Operation to reduce the inflationary gap?
Answer: The Central Bank sells the government bonds and securities to commercial banks by receiving cash, decreasing their cash stock and lending capacity. This makes commercial banks lend money at higher interest rates, reducing people’s borrowing and expenditure.
32. What is the implication of an increase in the Cash Reserve Ratio (CRR) on banks’ lending capacity?
Answer: An increase in the Cash Reserve Ratio (CRR) by the Central Bank results in decreasing the bank’s capacity to give credit.
33. How do qualitative credit control measures regulate credit?
Answer: Qualitative credit control measures regulate credit for specific purposes. They channelise credit into priority sectors and impede its use in undesirable sectors of the economy.
34. Explain the effect of increasing the margin requirement of a loan on borrowing.
Answer: When the Central Bank increases the margin requirement of a loan, it discourages borrowing. This is because it necessitates businessmen to have more collateral to secure the same loan amount, leading to them taking less credit against their security.
35. In a situation of excess demand, how does the Central Bank advise its member banks regarding lending?
Answer: In a situation of excess demand, the Central Bank persuades, requests, appeals, or advises its member banks to be strict in lending and reduce credit facilities.
36. What is meant by “rationing of credit”? How does it relate to social justice?
Answer: Rationing of credit means the fixation of credit quotas for different business activities. Through credit rationing, the Central Bank can promote social justice by ensuring that essential sectors receive adequate credit and restricting credit to sectors that may not be as critical or may have an excess.
37. Describe the actions the Central Bank might take against banks not following its directions.
Answer: The Central Bank may resort to direct action against those banks which do not comply with its directions. This can involve penalties or other regulatory measures to ensure compliance.
38. What is the equilibrium level of national income?
Answer: The equilibrium level of national income is determined by the equality between aggregate demand and aggregate supply (or between savings and investment). An ideal situation for an economy is full employment equilibrium, where its aggregate demand and aggregate supply are in equilibrium at a point where all resources are fully employed.
39. In real-world scenarios, how does aggregate demand relate to aggregate supply at full employment, and what are its implications?
Answer: In real-world situations, aggregate demand either exceeds or falls short of aggregate supply at full employment. Excess demand results in inflation without an increase in output and employment, while deficient demand leads to unemployment and a decrease in output, income, and prices. Both scenarios have detrimental effects on the economy and require intervention through fiscal, monetary, and other measures.
Additional/extra MCQs
1. What is the primary purpose of fiscal policy?
A. Regulation of foreign trade B. Monitoring the stock market C. Influencing the level of aggregate demand D. Setting the country’s foreign exchange rate
Answer: C. Influencing the level of aggregate demand
2. Who formulates the monetary policy of India?
A. The Ministry of Finance B. The Securities and Exchange Board of India (SEBI) C. The Reserve Bank of India (RBI) D. The Parliament of India
Answer: C. The Reserve Bank of India (RBI)
3. Which measure is NOT a part of fiscal policy?
A. Expenditure Policy B. Revenue Policy C. Public Borrowing D. Regulation of foreign exchange rate
Answer: D. Regulation of foreign exchange rate
4. In the case of excess demand, what does a contractionary policy advise regarding expenditure?
A. Increase it B. No change C. Reduce it D. Double it
Answer: C. Reduce it
5. During inflation, what change is recommended in the revenue (taxation) policy under contractionary fiscal policy?
A. Decrease taxes on the rich B. Increase tax rates, especially on the wealthy C. Offer tax breaks for corporations D. Remove all taxes to stimulate demand
Answer: B. Increase tax rates, especially on the wealthy
6. What action does contractionary policy suggest in terms of public borrowing during times of excess demand?
A. Reduce it drastically B. Keep it at the current level C. Decrease it slightly D. Increase it
Answer: D. Increase it
7. What effect does deficit financing typically have on demand?
A. No effect B. Decreases demand C. Increases demand D. Demand fluctuates unpredictably
Answer: C. Increases demand
8. To maintain deficit financing at a safe limit, what may the government promote?
A. Large-scale foreign investments B. Small savings such as PPF, NSC, etc. C. Privatization of public enterprises D. Cutting down on infrastructure projects
Answer: B. Small savings such as PPF, NSC, etc.
9. What is the primary aim of an expansionary policy?
A. To decrease the aggregate demand B. To balance the budget C. To increase the aggregate demand D. To stabilize foreign trade
Answer: C. To increase the aggregate demand
10. During a period of deficient demand, what does the expansionary policy suggest regarding the Expenditure Policy?
A. Decrease expenditure on public works B. Maintain the current level of expenditure C. Increase expenditure on public works D. Expenditure is not relevant in this situation
Answer: C. Increase expenditure on public works
11. In an expansionary policy, how should the Revenue Policy be modified for the lower income groups?
A. Increase taxes on lower income groups B. Abolish taxes on lower income groups C. Implement a flat tax rate for all income groups D. Taxation on lower income groups remains unchanged
Answer: B. Abolish taxes on lower income groups
12. What is the effect of deficit financing in an expansionary policy?
A. Decreases demand for goods and services B. Stabilizes demand for goods and services C. Increases demand for goods and services D. Has no impact on the demand for goods and services
Answer: C. Increases demand for goods and services
13. How does monetary policy influence the aggregate demand?
A. By controlling foreign exchange rates B. By controlling stock market prices C. By controlling money supply and credit in the economy D. By controlling import and export policies
Answer: C. By controlling money supply and credit in the economy
14. Which type of measures in monetary policy affects the cost of credit and its availability?
A. Quantitative measures B. Qualitative measures C. Fiscal measures D. Budgetary measures
Answer: A. Quantitative measures
15. What are the two broad types of monetary policy based on their aim?
A. Expansionary policy and Stabilization policy B. Expansionary policy and Contractionary policy C. Stabilization policy and Normalization policy D. Contractionary policy and Normalization policy
Answer: B. Expansionary policy and Contractionary policy
16. What does the cash-reserve ratio determine in terms of monetary policy measures?
A. The amount of cash banks must keep with themselves B. The rate at which banks can borrow from the central bank C. The maximum amount banks can lend to customers D. The interest rate at which banks lend to the government
Answer: A. The amount of cash banks must keep with themselves
17. What is the primary goal of monetary policy during times of depression?
A. Reduce the aggregate demand B. Increase the investment expenditure by firms C. Stabilize the foreign trade balance D. Decrease public expenditure
Answer: B. Increase the investment expenditure by firms
18. How does the Central Bank intend to increase money supply when the repo rate is reduced?
A. By decreasing the borrowing capacity of commercial banks B. By making loans more expensive for producers C. By enabling commercial banks to borrow more from the Central Bank at a lower interest rate D. By selling government bonds and securities
Answer: C. By enabling commercial banks to borrow more from the Central Bank at a lower interest rate
19. What is the primary objective of the Open Market Operation when the Central Bank buys securities?
A. To decrease the lending capacity of commercial banks B. To sell more government bonds and securities C. To increase the cash stock of commercial banks and enhance their lending capacity D. To decrease the aggregate demand in the market
Answer: C. To increase the cash stock of commercial banks and enhance their lending capacity
20. Among the three instruments of monetary policy mentioned, which one is the most effective to lift the economy out of recession?
A. Open Market Operation B. Cash Reserve Ratio C. Repo Rate D. Statutory Liquidity Ratio
Answer: C. Repo Rate
21. What is the purpose of reducing the margin requirement during times of depression?
A. To discourage borrowing B. To make it harder for businessmen to get credit C. To encourage borrowing by allowing more credit against security D. To maintain the current credit conditions
Answer: C. To encourage borrowing by allowing more credit against security
22. Which qualitative measure involves the Central Bank persuading its member banks to expand credit facilities?
A. Margin requirement B. Moral suasion C. Rationing of credit D. Direct action
Answer: B. Moral suasion
23. How does promoting more exports influence the aggregate demand?
A. Decreases the aggregate demand B. Stabilizes the aggregate demand C. Increases the aggregate demand D. Has no effect on the aggregate demand
Answer: C. Increases the aggregate demand
24. What action might the Central Bank take against banks that do not follow its directions?
A. Increase the repo rate B. Engage in moral suasion C. Buy more securities from them D. Resort to direct action
Answer: D. Resort to direct action
25. During a contractionary monetary policy, how does the Central Bank influence the Repo Rate?
A. Reduces it B. Does not change it C. Increases it D. Abolishes it
Answer: C. Increases it
26. What action does the Central Bank take during a contractionary monetary policy concerning Open Market Operations?
A. Buys securities B. Keeps securities constant C. Sells securities D. Abandons securities
Answer: C. Sells securities
27. During a contractionary monetary policy, what happens to the Cash Reserve Ratio (CRR)?
A. Decreases B. Increases C. Remains unchanged D. Becomes zero
Answer: B. Increases
28. Why would the Central Bank increase the margin requirement during a contractionary monetary policy?
A. To encourage borrowing B. To maintain the current borrowing rate C. To discourage borrowing D. To stabilize the currency
Answer: C. To discourage borrowing
29. In a situation of excess demand, how does the Central Bank advise its member banks using moral suasion?
A. Be liberal in lending B. Be strict in lending C. Increase foreign trade D. Focus on saving rather than lending
Answer: B. Be strict in lending
30. What does rationing of credit involve?
A. Encouraging all businesses to borrow equally B. Fixation of credit quotas for different business activities C. Abolishing credit for large businesses D. Providing credit without any restrictions
Answer: B. Fixation of credit quotas for different business activities
31. What is the primary objective of contractionary fiscal policy?
A. To increase aggregate demand B. To reduce aggregate demand C. To stabilize the foreign exchange rate D. To boost exports
Answer: B. To reduce aggregate demand
32. During an expansionary fiscal policy, what is the stance on public borrowings?
A. Increased B. Decreased C. Unchanged D. Abolished
Answer: B. Decreased
33. Monetary policy primarily aims to control which of the following in the economy?
A. Exports and imports B. Employment levels C. Money supply and credit D. Public expenditure on infrastructure
Answer: C. Money supply and credit
34. During expansionary monetary policy, what is the intended action on the repo rate?
A. Increased B. Decreased C. Unchanged D. Doubled
Answer: B. Decreased
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