UPSC Prelims 2013 Analysis

Explanation

Most liquid assets are the currency assets since they can be used anytime.

The least liquid assets are the time deposits, which are the deposits for a fixed time period and can only be used upon their maturity.

Demand deposits are more liquid than saving deposits because they can be demanded by the holder from the bank at any time.

Explanation

In India, deficit financing is used to raise resources for meeting the government's expenditure requirements when its revenue or receipts fall short of its planned expenditures. In other words, deficit financing is a way for the government to finance its budget deficit to stimulate economic growth.

Explanation

The Reserve Bank of India (RBI) regulates commercial banks in all of the following matters

Liquidity of assets The RBI uses various tools like Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) to ensure banks maintain a certain level of liquid assets to meet withdrawal demands and facilitate smooth functioning of the financial system.

Branch expansion The RBI grants licenses to banks for opening new branches to ensure wider access to banking services across the country, particularly in underserved areas.

Merger of banks Mergers can be a way to strengthen the banking sector. The RBI carefully evaluates proposed mergers to ensure financial stability and protect depositors' interests.

Winding-up of banks In case a bank experiences severe financial difficulties and poses a risk to the system, the RBI, in consultation with the government, can initiate the process of winding up the bank to protect depositors and maintain financial stability.

Explanation

The capital account and the current account are the two main components of a nation's balance of payment.

Whereas the current account reflects a nation's net income, the capital account reflects the net change in ownership of assets.

• Thus, it is clear that private remittances are part of the current account .

• On the other hand, foreign Loans, FII (Foreign Institutional Investor) and FDI (Foreign Direct Investment) are part of the capital account .

• Remittances fall under Current Account .

Explanation

Disguised unemployment, means that more people are engaged in a job that can be done with fewer people, normally seen in agriculture where the whole family is involved. It means extra people can be removed without affecting the productivity, i.e. their marginal productivity is zero.

Explanation

In India, Open Market Operations involve the Reserve Bank of India buying or selling government securities to regulate liquidity and interest rates.

When the RBI buys securities, it injects money into the market, lowering interest rates and stimulating the economy.

Conversely, selling securities absorbs money from the market, raising interest rates, and managing inflation. OMOs are a vital tool for the RBI to achieve monetary policy goals and foster economic growth.

Explanation

With an increase in demand for money, people will deposit less money in banks. Hence, banks will increase the rate of interest to attract people to deposit money in the bank. Or,

Supply remains the same, increase in demand for money will lead to more options to lend money for the banks. Thus, banks will lend money at greater rate of interest to earn more money as there are more customers for the same amount of money.

Explanation

The National income of a country for a given period is defined as the total monetary value of all final goods and services produced within the geographical boundaries of the country during that period. Here are the key points to remember

It does not include the total value of goods and services produced by the nationals (option A) as it may include the production outside the country.

It is not the sum of total consumption and investment expenditure (option B) as it excludes the value of intermediate goods and services.

It is also not the sum of personal income of all individuals (option C) as it includes the income from production and not just personal income.

Therefore, the correct answer is the money value of final goods and services produced (option D).

Explanation

Internally capital formation takes place when a country does not spend all its current income on consumption, but saves a part of it and uses it for investment to increase further production. This act of saving and investment is described as capital accumulation or capital formation .

Capital formation This refers to investments in physical and human capital, such as building new factories, improving infrastructure, and educating the workforce. Increased capital allows for greater production and innovation.

Explanation

Creating new money to finance a budget deficit will be the most inflationary effect. Because it increases the money supply without any increase in the production of goods and services.

Explanation

India's foreign-exchange reserves include

Foreign currency assets (FCAs) This is the largest component, consisting of deposits and holdings in major currencies like US Dollars, Euros, and Yen.

Gold reserves India holds a significant amount of gold bullion as part of its foreign exchange reserves.

Special drawing rights (SDRs) These are international reserve assets created by the International Monetary Fund (IMF) that supplement official foreign reserves.

Reserve position in the IMF This refers to India's quota or shareholding position in the IMF, which can be a source of additional foreign currency if needed.

Explanation

The balance of payment records the transaction in goods, services, and assets between residents (and not governments) of one country with the rest of the world.

Explanation

It a direct application based question.

1st statement is correct as increase in money supply will cause inflation.

2nd and 3rd statement are obviously correct as they represent supply and demand side of products.

Explanation

Bank rate is the rate charged by the central bank for lending funds to commercial banks.

To curb liquidity, the central bank can resort to raising the bank rate and vice versa.

An increase in rate points toward a tight money policy is being followed by the RBI.

Explanation

Inflation redistributes wealth from creditors to debtors i.e., lenders suffer and borrowers benefit out of inflation.

• Bondholders - This person has lent money (to the debtor) and received a bond in return. So, he is the lender, he suffers.

Therefore, Answer choice is (A) 1 only (Debtor benefits from inflation).

Explanation

1 and 3 only (Regional Rural Banks and Land Development Banks) provide direct credit to rural households.

While NABARD refinances rural financial institutions, it doesn't directly lend to households.