S.Y B.COM
SEMESTER - 4
MACRO ECONOMIC ISSUES AND POLICIES
(MEIP)
EXAM PAPER – 26 FEB 2020
Q1. To produce new currency, RBI adopted ______ reserve system in the year ______.
A. Minimum, 1957
B. Minimum, 1956
C. Proportionate, 1957
D. Proportionate, 1956
Explanation:
Initially RBI followed the Proportional Reserve System.
Since 1957, RBI follows the Minimum Reserve System, under which it maintains minimum reserves of gold and foreign securities.
Q2. In order to understand the burden of public borrowings ________.
A. Rely upon government borrowing data
B. We should talk to World Bank and IMF
C. Classify borrowing into internal and external segment
D. Understand government expenditure external segments
Explanation:
Public debt is mainly divided into:
Internal Debt
External Debt
This classification helps understand the burden of public borrowing.
Q3. The credit creation by the commercial banks directly depends on ______.
A. Other Deposits with RBI and Bank Rate
B. Other Deposits with RBI and CRR
C. Primary Deposits and Bank Rate
D. Primary Deposits and CRR
Explanation:
Credit creation depends upon:
Primary Deposits (base for lending)
Cash Reserve Ratio (CRR), which determines how much banks must keep with RBI.
Higher CRR → Less lending.
Lower CRR → More lending.
Q4. According to Chakravarty Committee, which of the following is the main objective of Monetary Policy?
A. Increasing Employment Opportunities
B. Economic Growth
C. Equitable Distribution of National Income
D. Price Stabilization
Explanation:
The Chakravarty Committee recommended that the primary objective of monetary policy should be price stability, ensuring inflation remains under control while supporting economic growth.
Q5. Bank rate policy will fail if there are ______.
A. Integrated financial system
B. Elastic interest rates
C. Alternative sources of borrowing available
D. Conducive economic environment
Explanation:
If businesses can borrow from other financial institutions instead of commercial banks, changes in the Bank Rate will have little effect.
Hence Bank Rate Policy becomes ineffective.
Q6. Velocity of circulation of money refers to ______.
A. Circulation of money among people.
B. Rate of change in currency against deposit.
C. Average number of times a unit of currency changes hands.
D. Circulation of money between and people.
Explanation:
Velocity of Money means:
The average number of times one unit of money is used to purchase goods and services during a given period.
Higher velocity → Higher economic activity.
Lower velocity → Slower economy.
Q7. Which of the following is correct with reference to the money supply in India?
I. The share of currency in circulation is highest in the money supply.
II. The share of bank money is highest in the money supply.
III. CRR and credit money are inversely related.
A. I and III
B. II and III
C. I, II and III
D. I and II
Explanation: Statement I : Incorrect
In India, bank money (demand deposits) forms a larger share of the money supply than currency in circulation.
Statement II : Correct
Money supply mainly consists of:
Currency with the public
Demand deposits with banks
Demand deposits (bank money) generally have the largest share.
Statement III : Correct
CRR (Cash Reserve Ratio) and credit creation have an inverse relationship.
Higher CRR → Less lending
Lower CRR → More lending
Q8. Weighted Index Number is superior to Simple Index Number because ________.
A. Weights are assigned as per importance of commodities.
B. Weights are arbitrary to the extent of madness.
C. Weights are assigned as per choice.
D. Weights are generally uniform in nature.
Explanation
Weighted Index Numbers assign greater importance to commodities that consumers purchase more frequently.
For example: Rice has greater importance than pencils in calculating the Cost of Living Index.
Hence Weighted Index is more realistic.
Q9. If the initial deposit is ₹50,000 and CRR is 30%, find the credit multiplier.
A. 2.60
B. 2.33
C. 2.25
D. 2
Explanation
Formula
Credit Multiplier = 1 / CRR
CRR = 30%
= 30/100
= 0.30
Multiplier = 1 ÷ 0.30
= 3.33
However, in many university papers the expected answer is based on the credit creation multiplier (1 − CRR) / CRR:
Hence the expected answer is B. 2.33.
Multiplier = 1 ÷ 0.30
= 3.33
However, in many university papers the expected answer is based on the credit creation multiplier (1 − CRR) / CRR:
Hence the expected answer is B. 2.33.
OR
Formula
The Credit Multiplier (Cm) is: Credit Multiplier = 1−CRR/CRR
Calculation
CRR = 30% = 0.30
Cm = 1−0.30/0.30
= 0.70/0.30
= 2.33
Note: The initial deposit of ₹50,000 is not required to calculate the credit multiplier. It is needed only if the question asks for the total credit created.
Q10. One of the following is NOT a function of money.
A. Medium of Exchange
B. Difference of Payment
C. Measure of Value
D. Store of Value
Explanation
Functions of Money:
✔ Medium of Exchange
✔ Measure of Value
✔ Store of Value
✔ Standard of Deferred Payments
There is no function called Difference of Payment.
Q11. As an objective of monetary policy, price stability is contradictory to the objective of
A. Equity of income distribution
B. Reduction of unemployment
C. Removal of poverty
D. Exchange rate stability
Explanation
Sometimes reducing unemployment requires expansionary monetary policy.
Expansionary policy increases money supply.
Too much money supply may increase inflation.
Thus there is often a trade-off between:
Price Stability
Employment
Q12. In ______ order to adjust liquidity in the economy the RBI principally uses one of the following policies.
A. Income Policy
B. Fiscal Policy
C. Repo Rate Policy
D. Selective Credit Control Policy
Explanation
Repo Rate is the main monetary policy instrument used by RBI to regulate liquidity.
Higher Repo Rate
→ Less borrowing
→ Lower money supply
Lower Repo Rate
→ More borrowing
→ Higher liquidity
Q13. Match the Following
I. Stanley Withers | a. Conventional approach to money |
II. Milton Friedman | b. Chicago approach to money |
II. Gurley and Shaw | c. Weighted sum approach to money |
IV. Radcliffe Committee | d. Central bank approach to money |
A. (I-a) (II-b) (III-c) (IV-d)
B. (I-b) (II-a) (III-d) (IV-c)
C. (I-a) (II-c) (III-b) (IV-d)
D. (I-b) (II-a) (III-c) (IV-d)
B. (I-b) (II-a) (III-d) (IV-c)
C. (I-a) (II-c) (III-b) (IV-d)
D. (I-b) (II-a) (III-c) (IV-d)
Q14. Read the following statements and choose the correct option.
Statements
I. Currency coins are produced and circulated by the Government of India.
II. Currency coins are produced by the Government of India and circulated by RBI.
A. I is false and II is not true
B. I is true and II is not true
C. I is not true and II is not false
D. I is not false and II is false
Explanation
Coins are minted by the Government of India.
They are put into circulation through RBI.
Thus:
Statement I → False
Statement II → True
Q15. One of the following is NOT a type of budget deficit.
A. Revenue Deficit
B. Fiscal Deficit
C. Overhead Deficit
D. Primary Deficit
Explanation
Recognized budget deficits are:
Revenue Deficit
Fiscal Deficit
Primary Deficit
There is no concept of "Overhead Deficit" in public finance.
Q16. Over dependence on borrowing to meet deficit financing may lead the country to ______.
A. Debt Trap
B. Revenue Trap
C. Financial Trap
D. Deficit Trap
Explanation
If a government borrows continuously, it may eventually need new loans just to repay old loans and interest.
This situation is called a Debt Trap.
Q17. The commercial banks rush to purchase new securities and treasury bills because
A. Securities are not always available
B. Banks want to invest in low income
C. Securities can enhance capital
D. Banks will have to comply upon statutory requirements
Explanation:
Banks invest in Government Securities and Treasury Bills mainly to meet Statutory Liquidity Ratio (SLR) requirements prescribed by RBI.
These investments are safe, liquid, and help banks comply with banking regulations.
Q18. If we deduct the interest component from fiscal deficit, we will obtain ______.
A. Primary Deficit
B. Budget Deficit
C. Fiscal Deficit
D. Revenue Deficit
Explanation:
Formula: Primary Deficit = Fiscal Deficit − Interest Payments
Primary deficit shows the current year's borrowing requirement excluding interest payments on previous debt.
Q19. One of the following is not a source of non-tax revenue of the government.
A. External Grants
B. Profit of Public Sector Units
C. Dividend of the Company
D. Customs Duties
Explanation
Non-Tax Revenue includes:
External grants
Dividends
Profits from Public Sector Undertakings (PSUs)
Fees and fines
Customs Duty is a tax revenue, not a non-tax revenue.
Q20. Which of the following statements are not false with reference to the store of value function of money?
Statements
I. Production and consumption of goods and services are not instantaneous.
II. Certainty of life.
III. Accumulative nature of people.
IV. Uncertainty of life.
A. II, III and IV
B. I, III and IV
C. I, II and IV
D. I, II and III
Explanation
The store of value function means money can be saved for future use.
I Correct – Production and consumption happen at different times.
II Incorrect – Life is not certain.
III Correct – People like to accumulate wealth.
IV Correct – Uncertainty encourages saving.
Q21. Fisher's Equation of Quantity Theory is ______.
A. Based on Liquidity Preference
B. A Mathematical Truism
C. Related to Wealth of Wealth Holders
D. Related to Aggregate Savings
Explanation
Fisher's Equation:
where:
M = Money Supply
V = Velocity of Money
P = Price Level
T = Volume of Transactions
It is called a mathematical truism because it is an accounting identity.
Q22. Which of the following statements is/are true?
Statements
I. Currency coins are produced and circulated by the Government of India.
II. Currency coins are produced by the Government of India and circulated by RBI.
A. I is false and II is not true
B. I is true and II is not true
C. I is not true and II is not false
D. I is not false and II is false
Explanation
Coins are minted by the Government of India.
They are put into circulation through RBI.
Thus:
Statement I → False
Statement II → True
Q15. One of the following is NOT a type of budget deficit.
A. Revenue Deficit
B. Fiscal Deficit
C. Overhead Deficit
D. Primary Deficit
Explanation
Recognized budget deficits are:
Revenue Deficit
Fiscal Deficit
Primary Deficit
There is no concept of "Overhead Deficit" in public finance.
Q16. Over dependence on borrowing to meet deficit financing may lead the country to ______.
A. Debt Trap
B. Revenue Trap
C. Financial Trap
D. Deficit Trap
Explanation
If a government borrows continuously, it may eventually need new loans just to repay old loans and interest.
This situation is called a Debt Trap.
Q17. The commercial banks rush to purchase new securities and treasury bills because
A. Securities are not always available
B. Banks want to invest in low income
C. Securities can enhance capital
D. Banks will have to comply upon statutory requirements
Explanation:
Banks invest in Government Securities and Treasury Bills mainly to meet Statutory Liquidity Ratio (SLR) requirements prescribed by RBI.
These investments are safe, liquid, and help banks comply with banking regulations.
Q18. If we deduct the interest component from fiscal deficit, we will obtain ______.
A. Primary Deficit
B. Budget Deficit
C. Fiscal Deficit
D. Revenue Deficit
Explanation:
Formula: Primary Deficit = Fiscal Deficit − Interest Payments
Primary deficit shows the current year's borrowing requirement excluding interest payments on previous debt.
Q19. One of the following is not a source of non-tax revenue of the government.
A. External Grants
B. Profit of Public Sector Units
C. Dividend of the Company
D. Customs Duties
Explanation
Non-Tax Revenue includes:
External grants
Dividends
Profits from Public Sector Undertakings (PSUs)
Fees and fines
Customs Duty is a tax revenue, not a non-tax revenue.
Q20. Which of the following statements are not false with reference to the store of value function of money?
Statements
I. Production and consumption of goods and services are not instantaneous.
II. Certainty of life.
III. Accumulative nature of people.
IV. Uncertainty of life.
A. II, III and IV
B. I, III and IV
C. I, II and IV
D. I, II and III
Explanation
The store of value function means money can be saved for future use.
I Correct – Production and consumption happen at different times.
II Incorrect – Life is not certain.
III Correct – People like to accumulate wealth.
IV Correct – Uncertainty encourages saving.
Q21. Fisher's Equation of Quantity Theory is ______.
A. Based on Liquidity Preference
B. A Mathematical Truism
C. Related to Wealth of Wealth Holders
D. Related to Aggregate Savings
Explanation
Fisher's Equation:
where:
M = Money Supply
V = Velocity of Money
P = Price Level
T = Volume of Transactions
It is called a mathematical truism because it is an accounting identity.
Q22. Which of the following statements is/are true?
I. Increase in REPO Rate leads to increase in money supply.
II. Increase in REPO Rate leads to decrease in money supply.
III. Increase in REPO Rate leads to increase in interest rate.
IV. Increase in REPO Rate represents Tight Money Policy.
A. I and II
B. I, II and III
C. II, III and IV
D. I and III
Explanation
When the RBI increases the Repo Rate:
Borrowing becomes expensive.
Banks lend less.
Money supply decreases.
Interest rates increase.
This is called a Tight Money Policy.
Therefore:
I False
II True
III True
IV True
Q23. The Bank Rate Policy will be effective if there is ______.
A. Cordial relationship between banks and RBI
B. Favorable economic environment
C. Efficient banking system
D. All of the above
Explanation
For Bank Rate Policy to work effectively:
Banks should cooperate with RBI.
The banking system should be efficient.
Economic conditions should support policy transmission.
All these factors are necessary.
Q24. Which of the following are the basic limitations of commodity money?
I. Heterogeneity
II. Non-divisibility
III. Enforceability
IV. Difficult to store
A. I, II and III
B. I, III and IV
C. II, III and IV
D. I, II and IV
Explanation
Limitations of commodity money include:
Lack of uniformity (heterogeneity)
Difficulty in dividing
Difficulty in storage
Enforceability is not a limitation of commodity money.
Q25. The formula to calculate the Credit Multiplier (Cm) is ______.
A. Cm = (AID − AR) / AR
B. Cm = ACC / A
C. Cm = (1 − r) / r
D. All of the above
Explanation
These are different forms used in textbooks to express the concept of the credit multiplier, depending on the notation adopted.
The commonly used form is:
Hence, the expected answer is All of the Above.
Q26. According to Keynes, the following statement(s) are true.
I. Transaction Demand and Precautionary Demand are known and already determined.
II. The precautionary demand for money is volatile in nature.
III. If the interest rate is expected to increase, the speculators would hold more idle cash.
IV. Interest rate and bond prices are directly related.
A. I, III, IV
B. I, II, IV
C. I, II, III, IV
D. I, II, III
Explanation
I Transaction and precautionary demand mainly depend on income and are generally predictable.
II Precautionary demand can vary depending on uncertainty.
III If interest rates are expected to rise (and bond prices are expected to fall), people prefer to hold cash.
IV Incorrect. Interest rates and bond prices are inversely, not directly, related.
Q27. One of the following methods is used by the RBI to control the flow of credit in the economy towards desirable channels.
A. Open Market Operation
B. Bank Rate Policy
C. Margin Requirements
D. Variable Reserve Ratio
Explanation
The RBI uses Selective (Qualitative) Credit Control to direct credit to priority sectors.
Margin Requirement is a selective credit control method.
Quantitative methods include:
Open Market Operation
Bank Rate
Variable Reserve Ratio (CRR/SLR)
Therefore, the correct answer is C.
Q28. One of the following is not an objective of Fiscal Policy.
A. Exchange Rate Stability
B. Equality of Income Distribution
C. Price Stability
D. High Economic Growth
Explanation
Objectives of Fiscal Policy include:
Economic Growth
Price Stability
Employment
Reduction of Income Inequality
Exchange Rate Stability is mainly achieved through Monetary Policy and foreign exchange management, not fiscal policy.
Q29. Which of the following is/are the source of money supply in India?
A. RBI
B. Commercial Banks
C. Government of India
D. All of the Above
Explanation
Money supply comes from:
RBI (currency notes)
Commercial Banks (credit creation)
Government of India (coins and fiscal operations)
Hence, All of the Above.
Q30. Following statements are true about Government Expenditures.
I. Government expenditures are autonomous in nature and independent in character.
II. Government expenditure is induced in nature and depends upon the level of income.
III. Irrespective of the nature of investment, government expenditure is an injection into the economy.
A. II and III
B. I and II
C. I and III
D. I, II and III
Explanation
Statement I True
Statement II False (Government expenditure is generally autonomous, not induced.)
Statement III True (Government spending injects income into the economy.)
Therefore, the correct answer is C.
