SCOT) 4 Banking ? Multiple Choice Questions (MCQ) on Assertion-Reasoning Type Read the following statements-Amertion (A) and Reason (R), and select the correct alternative in ach caret (a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A). (6) Both Assertion (A) and Reason (R) are tue bat Reason (R) isnot the correct explanation of Assertion (A) (Q Assertion (A) is trac but Reason(R) is false. (d) Assertion (A) is false but Reason(R) is truce 1, Assertion (A): Currency created by the Central Bank Is called bank Money. Reason (R): Cencral Bank of @ country has monopoly ever the currency issue. Ic has the sole responsibility of printing and pucting in circulation all ypes of currency nowes (with a few exceptions). 2. Assertion (A): An increase in Legal Reserve Deposit Ratio increases the credit creation power of the commercial banks (banking system) Reason (R): Credit creation = Primary deposits x / Legal Reserve Ratio 3. Assertion (A): Currency notes and coins are called fiat money. Reason (R): RBI is responsible for giving the bearer of the currency equl purchasing power. 4, Assertion (A): Currency notes and coins are called legal tenders Reason (R); They cannot be refused by any citizen of the country for settlement of any kind of wansaction. 5. Assertion (A): Money supply isa low variable. Reason (R): Money supply is the total stock of money in cliculation among the public poinc of time. 6. Assertion (A): Statutory liquidity ratio is the ratio of demand deposits of a commercial bank which it has co keep in the form of specified liquid ascers, Reason (R): Statutory liquidity ratio is «component of legal reserve ratio, which affects the credit creation in the omy. 7. Assertion (A): Reverse repo rate isthe rate ar which the Central Bank lends fands to banks. Reason (R): When Reverse Repo Rave is raised, it encourages the commercial banks to park theie funds with the central bank 8. Assertion (A): To increase the money sfpply inthe economy, Central Banke reduces the margin requirement. Reason (R): Decrease in margin requirements enhances the bortowing capacity of public, which raises che money supply in the economy. 9. Assertion (A): Demand deposits are not legal tenders Reason (R): Demand deposits are the deposits which can be easily withdrawable on demand, by cheque or otherwise, by the deposizor from his/her banke account.10. Assertion (A): In a modern economy, money comprises cash and bank deposits. Reason (R): Money supply includes currency held by the public and net demand deposits held by commercial banks. 11. Assertion (A): Besides central bank, commercial banks are the other type of institutions which are a part of the money-creating system of the economy. Reason (R): Commercial banksaccept deposits from the public and lend our part of these funds to those who want to borrow. 12. Assertion (A): Quantitative toals include persuasion by the central bank in order to make commercial banks discourage or encourage lending. Reason (R): Quantitative tools control the extent of money supply by changing the Cash Reserve Ratio (CRR) or Statutory Liquidity Ratio (SLR) or Bank Rate or Repo Rate or Reverse Repo Rate, or through Open market operations (OMO). 13. Assertion (A): Qualitative credit control tools contro! the extent of money supply. Reason (R): Qualitative tools discourage or encourage lending which is done through margin requirement, moral suasion, etc. 14. Assertion (A): M1 measure of money supply is defined as follows: M1 = CU +DD,where CU is Currency (notes plus coins) held by the public and DD is ‘net’ demand deposits held by commercial banks. The word ‘net’ here implies that only deposits of the public held by the banks are to be included in money supply. Reason (R): The interbank deposits, which a commercial bank holds in other commercial banks, are not to be regarded as part of money supply. 15. Assertion (A): Credit creation is inversely related to the legal reserve ratio. Reason (R): Credit creation = Initial Deposits x /LRR Any increase in LRR will decrease the credit creation power of the commercial banks (banking system). 16. Assertion (A): Credit creation is inversely related to money multiplier. Reason (R); Credit creation = Initial deposits x Money Multipler (1/LRR) ‘With the same initial deposit total credit creation decreases with a decrease in the value of money multiplier, iia 1. (@) 2. «) 3. @) 4 @) 5. (a) 6. (d) 7. td) 8. @) 9. (b) 10. (a) 11. (@) 12. td) 13. (d) 14. @) 15. (a) 16. (d)Government Budget and the Economy Multiple Choice Questions (MGQ) on Assertion-Reasoning Type Read the following statements-Assertion (A) and Reason (R), and select the correct alternative in each case: (@ Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A). (b) Both Assertion (A) and Reason (R) are true but Reason (R) is not the correct explanation of Assertion “ (© Assertion (A) is true but Reason(R) is false. (@) Assertion (A) is false but Reason(R) is true. 1. Assertion (A): Government budget is an important monetary policy instrument. Reason (R): Government Budget is a financial statement of budgetary receiprs and budgetary expenditure of the government during a fiscal year. 2. Assertion (A): Expendicure on Ujiwals Yojana launched by the Government is an example of revenue expenditure Reason (R): Icis the expendi 3. Assertion (A): Government budget is an annual statement showing actual receipts and actual payments of the government for the last fiscal year. Reason (R): Government budget is an important fiscal policy instrument of the government. 4. Assertion (A): Fiscal deficit indicates the toral borrowing requirements of the government from all sources. Reason (R): Fiscal deficit is financed through borrowings. From the financing side: Fiscal defi borrowing at home + Borrowing from RBI + Borrowing fiom abroad 5. Assertion (A): Revenue deficit is a part of fiscal deficit. Reason (R): Fiscal deficit = Revenue deficit ~ capital expenditure + Non debt creating capital receipts. of the Government. ch neither created assets nor reduced Net6. Assertion (Ay Revenue deficit increases whan government fails to recover loans forwarded to different nations. Reason (Rj: Recovery of loans is non debr creating capital receipt. It does not affect che revenue receipts. 7% Assertion (Als Defence servives expenditure isa revenue expenditure Reason (R)s Defence services expenditure is a revenue expenditure because it neither creates any asset nor reduces any liability of the govern ment. 8 Assertion (A): Tazation isan effective tool to reduce the inequalities oF income. Reason (R): Generally, the government collects higher taxes from the rich people and spend it on the welfare of the poor. Thereby. reducing the inequalities of income, 9, Assertion (Aj: Increase in revenue deficit will always lead to higher Fiscal deficit. Reason (RR): Fiscal deficit = Revenue deficit + Capital expenditure ~ Non-debt creating capital receipts. 10, Assertion (A): Provision of public goods is the sime as public production Reason (Rj: Provision of public goods means that the public goods like aw and order, defonce, parks, roads, ete, are financed through the budget. These goods may be produced directly by the government or it can encourage the private sector by giving them tax concessions and subsides. LL. Assertion (A): Through changes in its expenditure and taxes, the govemment brings eeonomic stability. Reason (R)x In case of deflation (or unemployment), the government can give tax concession or increase expenditure to leave more disposable income in the hands of people. In case of inflation, government can reduce its own expenditure of increase ta. 12, Assertion (A): Construction of flyovers is a revenue expenditure of the government Reason (R}: Capital expenditure leads to creation of physical assets of the government 13, Assertion (A): Personal income tax and corporation tax ave indirect taxes, Reasoa (Rj: The liability to pay and burden of an indirect tax lie on. different personsientities 14, Assertion (A): PSU disinvestment is an example of non-debt creating capital receipts. Reason (Rt): PSU disinvestment reduces the financial assets of the government. However, it does not give rise to debt. 15. Assertion (A): Primary deficie = Fiscal deficit Not interest liabilities Reason (RR): Net interest liabilities consist of interest payments minus interest receipts by the government on net domestic Lending, 16. Assertion (A): Fiscal deficits are always inflationary. Reason (Rs Fiscal deficit equals borrowings of the govemment. Such borrowings are generally financed by issuing new currency which may lead to inflation. Assertion (A)s Receipts of Post-ofice Savings Accounts, National Savings Certificates, etc. are capital receipts Reason (R)s Small savings of people (Postoffice Savings Accounts, National Savings Certificates, etc.) are capital receipts for the government because these receipts create a liability of repayment on government, 18. Assertion (A): Government budget can be used as an effective tool in the process af employment generation Reason (RR): Investment in infrastructural projects like construction of flyovers, bridges, expansion of roads etc sreatas jobs for different sections of the workforce. In ruraldarban areas government can provide jobs through various employment generation schemes like MGNREGA. SISRY, PMRY ete. 19. Assertion (Aj: The Government Budget of a country cannot have fiscal deficit without the existence of revenue deft Reason (R)s Fiscal deficit can exist without revenue deficit, if Capital Budget isin deficit with balanced Revenue Budget or if Capital Budget is in deficit in greater proportion ro Surplus Revenue Budget. 20, Assertion (As Government has started spending more on providing free services like education and health to the poor: It will help in reduction in income inequalities. Reason (R): Spending on free services to the poor raises their standard of living and at the same time helps in reduction in income inequalities. Italso helps in raising production potential of the country by raising the efficiency level of the working class among the pocr.21. Assertion (AA): Through ies budgetary policy government allocates resources in accordance with the requirements of the country. Reason (R): The govemment reallocates resources with a view to balance the goals of profit maximisation (by firms) and social welfare (by government), Production of goods which are injurious to health is discouraged through tazation. On the contrary, production of socially useful goods is encouraged through subsidies. IF the private sector does not take initiative in cemain activities, govemment directly controls them like water supply; 22, Assertion (Ade Public goods must be provided by the government. Reasoa (R): Public goods are those goods or services that are collectively consumed. Iris not possible to exclude anyone from enjoying their benefits and one person’s consumption does not reduce the availability to others. 23, Assertion (Ale "Borrowings' is an example of a capital receipt Reason (R)i It neither leads to increase in liability of repayment on govemment nor reduction of assets 24, Assertion (Ae Taxes received by the govemment are net revenue receipts. Reason (R): Recanse taxes neither create any lability nor reduce any asset of the government. 1d) 2 @ 3. 4. 5.1) 6 @) 7 @ 8. (a) 9. (dy 10. éd) ul 12. (dd 13. di 14. fad 15. tb) 16. td) 17. (a) 18. (a) 19. fd 20. fa) 21. 22. (a) 23.) 24. td Flee Re i Payments2 Multiple Choice Questions (MCQ) on Assertion-Reasoning Type Read the following statements-Assertion (A) and Reason (R), and select the correct alternative in each case: (a) Both Assertion (A) and Reasoa (R) are true and Reason (R) is the correct explanation of Assertion (A). (b) Both Assertion (A) and Reason (R) are true but Reason (R) is not the correct explanation of Assertion (A) (©) Assertion (4) is true but Reason(R) is false. (d) Assertion (A) is false but Reason(R) is true. 1. Assertion (A), ‘Managed Floating Exchange Rate is decided by market forces but remains within a specific range as decided by central bank. Reason (R): Exchange rate is determined by the forces of demand and supply of foreign exchange, but the Central Banik intervenes to buy or sell foreign currency to moderate the exchange rate fluctuations. 2, Assertion (A): Under 2 managed floating exchange rate system, the Government ditectly controls the exchange nite Reason (R)s Managed floating exchange rate is decided by market forces (the float part) but remains within specific range as decided by central bank: (the managed part). 3. Assertion (A): When there is a trade deficit and current account deficit, there will always be BoP deficit. Reason (R)s When there is a trade deficit and current account deficit but a capital account surplus (i.e. a net capital inflow), there may be Balaneed BoP or Bop surplus. 4. Assertion (A): Managed floating exchange rate system isa mixture of a flexible exchange rate system and a fixed rate system, Reason (Rs Under managed floating exchange rate system, the exchange rate is determined by the market forces of demand and supply of Foreign. exchange (the float part) but the central banks need to intervene to buy and sell foreign currencies in an attempt to moderate exchange rate movements. 5. Assertion (A), Difference between value of exports and imports of goods and services is called trade balance. Reason (Rj Tiade balance is the difference between value of exports of goods and imports of goods only. It does not indude exports and imports of services. 6. Assertion (A); In balance of payments, repayment of loans by Indian govemment to US Government will be recorded on the credit side of current account. Reason (R): Repayment of loans by Indian govemment to US Government will be recorded in the capital account on the debit side as it will lead to ourflovr of foreign exchange, 7. Assertion (A); Profits received from investments abroad is recorded in capital account. Reason (Rs Profits received from investments abroad is recorded in the current account sinee it is an investment income (factor income). It-will be recorded on the credit side of the current account since it leads to inflow of foreign exchange. 8. Assertion (A): Import of machines is recorded in current aconunt. Reason (R)s All imports and exports of goods are recorded in the current account, because it is simply import export of a good. 9. Assertion (A): ‘Foreign investment in Indis’ will be recorded on. the credit side of the Capital account in the Balance of Payment account. Reason (R)s ‘Foreign investment in Indi’ is of capital nature (increasing. the assets of the country).It leads to inflow of foreign currency of the country. 10. Assertion (A): Current account in Balance of Payments records only the exports and imports of goods and Reason (R)e Curent Account of Balance of Payments records unilateral transfers along with exports and imports cf goods and services,LL, Assertion (A): Borrowings from abroad are recorded in the Capital Account of the Balance of Payments on the debit side. Reasoa (R): Bomowings from abroad are recorded in the Capital Account of Balance of Payments on the credit side as it results in an inflow of foreign currency in the economy: 12, Assertion (A): A country may face a situation of CAD, even if the country has trade surplus, with greater negative balances on account of services and unilateral tran fers. Reason (R): Trade Deficit must exist Fa country is facing a situation of Current Account Deficit. 13. Assertion (A): Trade deficit is always a great cause of worry for an economy. Reasoa (Rj: Trade deficit is a lesser cause of worry if it reflects a rise in investment which will build the capital stock and increase the future output in an economy. 14, Assertion (A) Indians Investing in assets abroad will be recorded under debit side of capital account in Balance of Payments. Reasoa (R)s Indians investing in assets abroad will lead to an outflow of foreign currency, it will be recorded under debit side oF capital account in balance of payments. 15. Assertion (A): Demand for damestic goods and services’ and “Domestic demand for goods and services’ are one and the same thing. Reason (Rj: The demand for domestic goods and services is the sum total of demand for goods and servioss by both the domestic and foreign countries;whereas, domestic damand for goods and services is the sum otal of domestic demand for domestic as well a foreign goods. 16. Assertion (A): A country with trade deficit cannot have current account surplus in its Balance of Payments Reason (Rj: Tide deficit occurs when value of goods/visibles imported is more than the value of goods!visibles exported. Current Account Surplus in this situation will arise when the deficit on trade account is less than the surphuson account of invisibles. 17. Assertion (A) Profits received from investments abroad on the aredit side of the curent account of Balance of | Payments. Reasoa (R)i It is recorded in the current ascount since it is an investment income (factor income), It will be reconded on the credit side of the current account since it leads to inflow of foreign exchange. 18. Assertion (A): ‘Make in Indi¢ Programme will have favourable effect on Balance of Payments position of India. Reason (R)i “Make in India will increase supply (inflow) of foreign exchange in India, causing improvement in the balance of payments position. 19. Assertion (A): "Import of Pulses'will have favourable effect on Balance of Payments position of India. Reasoa (R); Import of pulses will lead to outflow of foreign exchange from the country, causing adverse effect on balance of payment position. 20, Assertion (A): An increase in foreign income improves the trade balance. Reason (R): An increase in foreign income leads to increased exports. Thus, trade balance (= exports of goods — imports of goods) increases. 21, Assertion (A): Tiade balance is the difference between value of exports of goods and imports of goods only. It docs not inchide exports and imports of services. Reason (R)s Difference between value of exports and imports of goods and services is called trade balance. 22, Assertion (A): External assistance is recorded in the capital account of the Balance of Payments. Reason (R): External assisiance is recorded in the current account of the Bolance of Payments. 23. Assertion (A): Export and import of machines are recorded in capital account of the balance of payments account. Reason (R): Export and import of machines is the export and import of goods. Therefore, itis recorded in the Current account of the Balance of Payments account. 24, Assertion (As Foreign investments are recorded in the capital account of balance of payments, Reason (R)s Foreign investmenis, e.g, foreign direct investment are the international transactions of assets during a fiscal year. Therefore, foreign investments are recorded in the capital account of balance of payments.25. 26. 2. 28, 29. 31. 33. 37. Assertion (A): In balance of payments, repayment of loans by Indian government to US Government will be recorded on the credit side of current account. Reason (R)+ It will be recorded in the capital account since loan from US Government is an international liability: The repayment of loans results in outflow of foreign exchange. Therefore, it will be recorded on the debit side. Assertion (A)s Profits received from investments abroad is recorded in capital account. Reason (Rj Profits received from investments abroad is recorded in the curent account sinee itis an investment income (factor income). Factor income includes net international eaming of factors of production. It will be recorded on the credit side of the current account since it leads to inflow of foreign exchange. Assertion (A)e Borrowing and lending money in international money market is a part of capital account in BoP, Reason (R): Bortowing and lending money in international money market isa part oF current account in BoP. Assertion (A): Purchase of shares of a foreign company are included in credit side of Capital account, Reason (Rye It is recorded on the debit side of capital account of BoP as there will be outflow of foreign exchange. Assertion (A): Curent Account Defidt (CAD) is financed entirely by selling assets or by borrowing abroad, the country is said to be in Balance of Payments equilibrium. Reason (R)s Current Account Deficit (CAD) is financed entirely by a capital account surplus, that is, a net capital inflows without any official reserve sale. So, Current account + Capital Account = 0,Hence, the country is said to be Balance of Payments equilibrium. Assertion (A)sWhen there is a trade deficit and current account defict, there will abways be BoP deficit. Reason (R)s When there is a trade deficit and current account deficit but a capital account surplus (i.e. a net capital inflow), there may be Balanced BoP or Bop surplus. Assertion (A)s A country with trade deficit cannot have current account surplus in its Balance of Payment. Reason (R)x Current Account Surplus (CAS) in this situation may arise when there is a surplus on account of Invisibles and this surplus exceeds trade deficit, Assertion (A)s Deficitin curent account indicates deficit in balanee of payments also, Reason (IR): Deficit in current account may be compensated by the surplus in the capital account resulting: in BoP surplus. Assertion (A)s Managed floating exchange rate system is a mixture of a flexible exchange rate system and a fixed rate system. Reason (IR): Under managed floating exchange rate system. the exchange rate is determined by the market forces of demand and supply of foreign exchange (the float part) but the central banks need to intervene to buy and sell foreign currencies in an attempt to moderate exchange rate movements whenever they feel that such. actions are appropriate (the managed part). Assertion (A)s A rise in price of foreign exchange will increase demand for imports. Reason (Ri A rise in price of freign exchange will increase the cost (in terms of rupees) of purchasing a Foreign good. This reduces demand for imports: other things remaining constant. Assertion (A)s A rise in price of foreign exchange increases India’s exports, Reason (R): A tise in price of foreign exchange will reduce the Foreigners cost (in terms of USD) while purchasing products from India other things remaining constant this increase India’s exports. Assertion (A)e USA has accused China of currency devaluation to promote its exports. Reason (R): Devaluation of currency makes Chinese goods cheaper in the international market. Thus. it promotes exports of Chinese goods and may adversely impact the production and sale of importing country. (USA) Assertion (A)s An increase in demand for imported goods raises the Foreign exchange rate. Reason (R)+ Demand for foreign exchange will increase in order to make the payment for imported goods. Sup ply of foreign exchange remaining unchanged, increase in demand will cause the exchange rate to rise,ML 16. a. al. @) 2 @ 3. @ 4 @) 3. @ @ 7. @) 8. @ 9. @) 10. «@) @ 12. ©) 13. (d) 1. fa) 15. (d) @ 17. @) 18. (a) 19. (dy 20. fa) o 2. ©) 23. (@) a4. &) 25. d) @ 27. (6) 28. @) 2. 4) 30. 4a) @ 2. @) 33. (@) 4 @) 35. (@) @ 37. @)