PTS 2024 Preparatory Test 7 Solutions Eng

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PTS 2024 | Preparatory Test 7 – Solutions |

Q.1)
Ans) b
Exp) Option b is the correct answer.
Price elasticity measures how much the supply or demand of a product changes based on a given change
in price.
Statement a is incorrect: The maximum amount a consumer is willing to pay for an additional unit of a
product is referred to as the Marginal Benefit and not Price Elasticity of Demand. Companies need to
take both concepts into consideration when manufacturing, pricing, and marketing a product.
Statement b is correct: Price elasticity of Demand measures how much the demand of a product
changes based on a given change in price. Generally, the demand for goods that are easily replaceable is
very volatile with respect to prices. A small increase in the price of such goods (termed as elastic goods)
reduces their demand and vice versa.
Statement c is incorrect: The change in demand for a good or service caused by a change in a
consumer's purchasing power resulting from a change in real income is termed as Income Elasticity,
not the Price Elasticity of Demand.
This change can be the result of a rise in wages etc., or because existing income is freed up by a decrease
or increase in the price of a good that money is being spent on.
Statement d is incorrect: In economics, the practice of setting the price of a product to equal the extra
cost of producing an extra unit of output is called Marginal Cost Pricing, and not Price Elasticity of
Demand. By this policy, a producer charges, for each product unit sold, only the addition to total cost
resulting from materials and direct labour.
Source: https://www.investopedia.com/terms/p/priceelasticity.asp#:~:text=Key%20Takeaways-
,Price%20elasticity%20of%20demand%20is%20a%20measurement%20of%20the%20change,supply%20t
o%20change%20very%20much.
https://www.investopedia.com/ask/answers/040615/how-does-price-elasticity-affect-
supply.asp#:~:text=Price%20elasticity%20of%20supply%20measures,decrease%20when%20its%20price
%20decreases.
https://www.investopedia.com/ask/answers/051815/what-difference-between-marginal-benefit-and-
marginal-cost.asp#:~:text=maximum%20amount%20a%20consumer
https://www.investopedia.com/terms/i/incomeeffect.asp
https://www.accountingtools.com/articles/marginal-cost-pricing
Q.2)
Ans) d
Exp) Option d is the correct answer.
A liquidity trap occurs when interest rates are very low, yet consumers prefer to hoard cash rather than
spend or invest their money in higher-yielding bonds or other investments.
Statement 1 is correct. Liquidity trap is a situation when expansionary monetary policy of the Central
Bank does not stimulate economic growth. An expansionary monetary policy is focused on increasing the
money supply, and hence investment and growth, in an economy.
During liquidity trap, interest rates fall so low that most people prefer to hoard cash rather than
put it into bonds and other debt instruments. Thus, consumers and investors hoard cash rather than
spending or investing it. This situation prevents monetary policymakers from stimulating growth by
increasing the money supply or lowering the interest rate further.
Statement 2 is correct. During a liquidity trap, consumers choose to avoid bonds and keep their funds in
cash savings. It is because of the prevailing belief that interest rates could soon rise, which would push
bond prices down. Because bonds have an inverse relationship to interest rates, many consumers do not
want to hold an asset with a price that is expected to decline.
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Statement 3 is correct. In case of Liquidity trap, a monetary policy carried out through open market
operations has no effect on either the interest rate, or the level of income.
Statement 4 is correct. In a liquidity trap situation, the interest rates in an economy are at extremely low
levels and savings rates are high.
Source: https://economictimes.indiatimes.com/definition/liquidity-trap
Q.3)
Ans) c
Exp) Option c is the correct answer
In an unregulated market, Price of a product is dependent on the interaction between demand and
supply of a product. Demand and supply represent the willingness of consumers and producers to
engage in buying and selling.
Option a is incorrect: A price ceiling is a government-imposed price control on how high a price is
charged for a product, commodity, or service. Thus, it is not determined by the market forces i.e,
demand and supply of the product.
Option b is incorrect: Maximum Retail Price (MRP) means such price at which the product shall be sold
in retail and such price shall include all taxes levied on the product. MRP is often determined by the
manufacturer/distributor of the products.
Option c is correct: It is true that Price Ceiling is the Government mandated maximum price beyond
which a product cannot be sold to consumers. A price ceiling is a government-imposed price control e.g.,
Government prohibiting sales of essential items beyond certain price and rent controls to protect
tenants.
Option d is incorrect: Floor price (not Price ceiling) sets a minimum purchase cost for a product or
service. It represents the lowest legal amount at which a good or service may be sold in the market.
Source: https://ncert.nic.in/ncerts/l/leec205.pdf
https://www.investopedia.com/terms/p/price-
ceiling.asp#:~:text=A%20price%20ceiling%2C%20aka%20a,or%20rising%20out%20of%20control.
Q.4)
Ans) a
Exp) Option a is the correct answer
Gross Domestic Product (GDP) is the value of all final goods and services produced within the
boundary of a nation for one year.
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Statement 1 is correct: At present, the Gross Domestic Product (GDP) is calculated based on the Market
Price (as opposed to earlier GDP based on Factor cost). Thus, GDP at Market Price includes taxes but
excludes subsidies.
GDP at Market Price = GDP at factor cost + Product taxes + Production tax – Product subsidies –
Production subsidies
Statement 2 is incorrect: The base year for the calculation of GDP was revised from 2004-05 to 2011-12.
The Ministry of Statistics and Programme Implementation (MOSPI) is considering changing of base year
for GDP calculation from 2011-12 to 2017-18, but not yet enforced by the Government of India. Thus, at
present the base year is 2011-12 (not 2017-18).
Statement 3 is incorrect: India’s GDP in terms of value has not increased steadily in the last decade for
instance it dropped in 2020 as compared to the previous year (2019).
Source: https://indianexpress.com/article/business/economy/govt-to-decide-new-base-year-for-
gdp-economic-slowdown-6104467/#:~:text=few%20months.%20The-,ministry,-
is%20considering%202017
https://blog.forumias.com/answered-explain-the-difference-between-computing-methodology-of-
indias-gross-domestic-product-gdp-before-the-year-2015-and-after-the-year-2015/
https://www.macrotrends.net/countries/IND/india/gdp-gross-domestic-product
Q.5)
Ans) a
Exp) Option a is the correct answer
Gross Domestic Product (GDP) is the final value of the goods and services produced within the
geographic boundaries of a country during a specified period of time, normally a year. GDP growth rate is
an important indicator of the economic performance of a country.
Option 1 is correct: Gross Domestic Product (GDP) measures the value of net exports of India. If India
exports more than its import in terms of value, then the same value will be added to GDP but if India
imports more than its exports then the same value will be deducted from GDP.
Option 2 is incorrect: GDP measures the value of all economic activities happening within the territory.
Thus, it does not capture the value of investments from Non-Resident Indians (NRIs).
Option 3 is incorrect: GDP does not measure the money earned from Black market as these money
are generated using illegal means, concealing money from tax administration and evading taxes.
The main consequence of black money/market is loss of money to the Government exchequer.
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Option 4 is incorrect: GDP does not capture the value of intermediary goods used to produce certain
products. GDP only measures the value of final goods for example it only measures the value of bread
sold to the consumer, not the value of intermediate goods such as wheat to produce bread.
Q.6)
Ans) c
Exp) Option c is the correct answer.
The term depreciation refers to an accounting method used to allocate the cost of a tangible or physical
asset over its useful life.
Statement 1 is correct: The monetary value of an asset decreases over time due to use, wear and tear or
obsolescence. This decrease is measured as depreciation. Depreciation represents how much of an
asset's value has been used, not the value of assets left unused.
Statement 2 is correct: It is true that both human as well as physical capital depreciate with time, but
the nature of depreciation differs. Continuous use of machines leads to depreciation and change of
technology makes a machine obsolete. In the case of human capital, depreciation takes place with ageing
but can be reduced, to a large extent, through continuous investment in education, health, etc
Statement 3 is correct: It is true that the depreciation rate in India is specified by the Income Tax Act,
1961 for various assets. For example, the act fixes 5% depreciation rate for buildings which are used
mainly for residential purposes except hotels and boarding houses.
Source: Ramesh Singh - Chapter 1
https://www.investopedia.com/terms/d/depreciation.asp#:~:text=much%20of%20an-,asset%27s,-
value%20has%20been
https://incometaxindia.gov.in/charts%20%20tables/depreciation%20rates.htm#:~:text=APPLICABLE%
20FROM%20THE-,ASSESSMENT,-YEAR%202003%2D04
https://ncert.nic.in/ncerts/l/keec105.pdf (pg no 86)
Q.7)
Ans) a
Exp) Option a is the correct answer.
Capital Adequacy Ratio (CAR) is the ratio of a bank’s capital in relation to its risk-weighted assets and
current liabilities.
Statement 1 is incorrect. Based on the recommendations of the Basel Committee (1988), banks are
required to maintain a specified minimum amount of capital relative to their assets. This is known as
capital adequacy ratio (CAR). While the percentage of cash required to be kept in reserves as against the
bank's total deposits, is called the Cash Reserve Ratio (CRR).
Statement 2 is incorrect. The Reserve Bank of India in 1992 introduced a risk asset ratio system for
banks (including foreign banks) in India as a capital adequacy measure in line with the Capital Adequacy
Norms prescribed by Basel Committee. As per RBI norms, Indian scheduled commercial banks and Indian
public sector banks are emphasized to maintain CAR.
Statement 3 is correct. Minimum capital adequacy ratios are critical in ensuring that banks have enough
cushion to absorb a reasonable amount of losses before they become insolvent and consequently lose
depositors’ funds. Generally, a bank with a high capital adequacy ratio is considered safe and likely to
meet its financial obligations.
Knowledge Base:
Capital Adequacy Ratio is = (Tier I + Tier II + Tier III (Capital funds)) /Risk weighted assets)
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Here, Tier I capital is a bank's core capital consisting of shareholders' equity and retained earnings; while
Tier II capital includes revaluation reserves, hybrid capital instruments, and subordinated term debt. Tier
III capital consists of Tier II capital plus short-term subordinated loans.
Source: https://www.business-standard.com/about/what-is-cash-reserve-
ratio#:~:text=Under%20cash%20reserve%20ratio%20(CRR,called%20the%20Cash%20Reserve%20Ratio.
https://egyankosh.ac.in/bitstream/123456789/21462/1/Unit-4.pdf
https://egyankosh.ac.in/bitstream/123456789/23553/1/Unit-10.pdf
https://economictimes.indiatimes.com/markets/stocks/news/what-is-capital-adequacy-ratio-for-
banks/articleshow/72979397.cms?from=mdr
https://economictimes.indiatimes.com/definition/capital-adequacy-ratio
Q.8)
Ans) b
The GDP deflator, also called implicit price deflator, is a measure of inflation. It is the ratio of the value
of goods and services an economy produces in a particular year at current prices to that of prices that
prevailed during the base year. GDP price deflator measures the difference between real GDP and
nominal GDP.
Statement 1 is correct: GDP Deflator helps show the extent to which the increase in gross domestic
product has happened on account of higher prices rather than increase in output. Since the deflator
covers the entire range of goods and services produced in the economy — as against the limited
commodity baskets for the wholesale price index — it is seen as a more comprehensive measure of
inflation.
Statement 2 is incorrect: The GDP deflator underestimates true inflation. The reason is that the GDP
deflator reflects the prices of all goods and services produced domestically in the country, whereas the
CPI reflects the prices of all goods and services bought by domestic Consumer (whether they are
produced in India or not is immaterial).
Statement 3 is correct: The GDP deflator reflects up-to-date expenditure patterns. GDP deflator is
available only on a quarterly basis along with GDP estimates, whereas CPI and WPI data are released
every month.
Source: https://www.thehindu.com/business/Economy/what-is-the-gdp-deflator/article24489279.ece
Ramesh Singh Chapter 7 INFLATION AND BUSINESS CYCLE
https://www.economicsdiscussion.net/gdp/underestimation-of-inflation-by-gdp-deflator-with-
calculation/15342
Q.9)
Ans) d
Exp) Option d is the correct answer
Gross Domestic Product (GDP) and Gross Value Added (GVA) are two of the most commonly used
measures of a country’s economy. They are calculated in a different ways
Statement 1 is incorrect: Both GDP and GVA measure the value of Goods and Services.
GVA is the output of the country (both goods and services) less the intermediate consumption, which is
the difference between gross output and net output.
GDP is the final value of the goods and services produced within the geographic boundaries of a country
during a specified period of time.
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Statement 2 is incorrect: Both GDP and GVA does not measure the value of Intermediate goods. GVA is
the value of output minus the value of intermediate consumption. GVA is a measure of the contribution
to GDP made by an individual producer, industry or sector.
Statement 3 is incorrect: If the taxes earned by the government are more than the subsidies it
provides, the GDP will be higher than GVA. But if subsidies granted by the Government are more than
the taxes earned, then GVA will be higher than GDP. Thus the value of GDP is not always be higher than
that of GVA.
https://indianexpress.com/article/explained/explained-economics/india-q2-gdp-data-explained-
udit-misra-8299332/#:~:text=earned%20by%20the-,government,-are%20more%20than
Q.10)
Ans) b
Exp) Option b is the correct answer
Non Banking Financial Companies (NBFCs) are companies registered under the Companies Act, 1956.
Statement 1 is incorrect: NBFCs are those financial institutions whose principal business does not
include agriculture activity, industrial activity, sale/purchase/construction of immovable property.
NBFCs are primarily engaged in the business of loans and advances, acquisition of shares/securities
issued by the government, insurance business, chit fund business etc.
Statement 2 is correct: NBFCs are not a part of the payment and settlement system and as such they
cannot issue cheques to its customers. On the other hand, commercial banks being a part of the
payment and settlement system can issue cheques to its customers.
Statement 3 is correct: It is true that NBFCs do not have to maintain any reserve ratio such as
Statutory Liquidity Ratio (SLR) or Cash Reserve Ratio (CRR), while banks must mandatorily maintain
these reserve ratios.
Source: Ramesh Singh - Chapter 12
https://www.bajajfinservmarkets.in/discover/journals/blogs/investment/how-do-nbfcs-differ-from-
banks/#:~:text=ratio%20such%20as-,Cash,-Reserve%20Ratio%20(CRR
Q.11)
Ans) c
Statement 1 is correct: In the wake of the banking crisis of early 20th century, world felt a need of central
banking body for the first time. Following the global clue, in India also such a body, the Reserve Bank of
India, was set up on April 1, 1935 in accordance with the provisions of the RBI Act, 1934, in Calcutta (got
shifted to Bombay in 1937). Set up under private ownership like a bank it was given two extra functions—
regulating banking industry and being the banker of the Government.
Statement 2 is correct: To better serve the purpose, during mid-1940s, a view emerged across the world
in favour of a government-owned central bank—and governments started taking them over. In India also,
in 1949 the RBI was nationalised. After nationalisation it stopped being a ‘bank’ in technical sense (as it
stopped accepting deposits from general public).
Statement 3 is correct: RBI as Monetary Authority: It includes formulation, implementation and
monitoring of the monetary policy. The broad objective is—maintaining price stability keeping in mind
the objective of growth. Today, under price stability it stabilises the wholesale price index (WPI) and
targets the consumer price index (CPI-C).
Statement 4 is incorrect: RBI as Currency Authority: It includes issuing of new currency notes (except
the currency of rupee one or its denominations, which are issued by Ministry of Finance itself). The
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Government of India is responsible for the designing and minting of coins in various denominations as
per the Coinage Act, 2011.
Statement 5 is correct: RBI as Regulator and Supervisor of Payment and Settlement Systems: It
includes functions like introducing and upgrading safe and efficient modes of payment systems in the
country to meet the requirements of the public at large. The objective is maintaining public confidence in
payment and settlement system.
Source: Ramesh Singh ch 12
Q.12)
Ans) b
Statement 1 is incorrect: Section 45ZB of the amended RBI Act, 1934 provides for an empowered six-
member monetary policy committee (MPC) to be constituted by the Central Government by notification
in the Official Gazette.
Statement 2 is incorrect: Governor of the Reserve Bank of India is ex- officio chairperson of the
Monetary Policy Committee. (And not the Union Finance Minister). Finance minister is in fact, not a part
of MPC.
Statement 3 is correct: The MPC determines the policy repo rate required to achieve the inflation target.
Statement 4 is correct: The MPC is required to meet at least four times in a year. The quorum for the
meeting of the MPC is four members.
Source: https://www.rbi.org.in/scripts/FS_Overview.aspx?fn=2752
Q.13)
Ans) b
Under the Special Data Dissemination Standards (SDDS) of the International Monetary Fund (IMF),
central banks undertake the responsibility of disseminating information under certain data categories,
such as, analytical accounts of the banking sector, analytical accounts of the central bank, balance of
payments, international reserves and exchange rates. The IMF requires that these data should be
available at regular intervals in public domain.
Statement 1 is correct: The Special Data Dissemination Standard (SDDS) was established in 1996 to
guide members that have/seek access to international capital markets in the provision of their
economic and financial data to the public.
Statement 2 is correct: India had subscribed to the IMF's Special Data Dissemination Standard in 1996.
More than 95 percent of IMF member countries participate in the e-GDDS, SDDS, or SDDS Plus. The
Reserve Bank of India is one of the earliest central bank signatories of SDDS.
Statement 3 is incorrect: In 2012, the Special Data Dissemination Standard (SDDS) Plus was created as
an upper tier of the IMF’s Data Standards Initiatives to help address data gaps identified during the global
financial crisis. The SDDS Plus is open to all SDDS subscribers, although it is principally aimed at
economies with systemically important financial sectors. In addition to the requirements under the
SDDS, the SDDS Plus emphasizes more ambitious data dissemination practices to enhance data
transparency and help strengthen the international financial system.
Knowledge Base:
The General Data Dissemination System (GDDS) was established in 1997 for member countries with less
developed statistical systems as a framework for evaluating their needs for data improvement and
setting priorities.
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Both the General Data Dissemination System (GDDS) and the SDDS are expected to enhance the
availability of timely and comprehensive statistics and therefore contribute to the pursuit of sound
macroeconomic policies; the SDDS is also expected to contribute to the improved functioning of financial
markets.
Source: https://www.imf.org/en/About/Factsheets/Sheets/2016/07/27/15/45/Standards-for-Data-
Dissemination
https://rbi.org.in/Scripts/SDDSview.aspx
Q.14)
Ans) b
The Cash Reserve Ratio (CRR) is the percentage of total deposits a bank must have in cash to operate risk-
free. The Reserve Bank of India decides the amount and is kept with them for financial security.
Statement 1 is correct: The amount specified as the CRR is held in cash and cash equivalents, is stored in
bank vaults or parked with the Reserve Bank of India. The aim here is to ensure that banks do not run out
of cash to meet the payment demands of their depositors. CRR is a crucial monetary policy tool and is
used for controlling money supply in an economy.
Statement 2 is incorrect: The bank cannot use the amount reserved as CRR for lending and investment
purposes and does not get any interest from the RBI.
Statement 3 is correct: CRR helps control inflation. In a high inflation environment, RBI can increase
CRR to prevent banks from lending more.
Knowledge Base: Other Key objectives of the Cash Reserve Ratio:
1) CRR serves as the reference rate for loans. Also known as the base rate for loans, the banks cannot
offer loans below this rate.
2) Since CRR regulates the money supply, it boosts the economy whenever required by lowering the
Cash Reserve Ratio.
Source: https://www.idfcfirstbank.com/finfirst-blogs/finance/what-is-crr
Q.15)
Ans) d
Gross domestic product, or GDP, measures the total output of the economy, including activity, stability,
and growth of goods and services; as such, it's seen as a proxy for the economy.
Statement 1 is incorrect: Economic growth (GDP growth) may mean that the quality of life increases
faster within the middle class than within the lower class. The lower class may not gain in the same
proportion as individuals who are placed in higher income groups.
Statement 2 is incorrect: The rising GDP may or may not lead to decline in inequality depending upon
the distribution of the income.
Statement 3 is incorrect: Gross domestic product (GDP) is the total monetary or market value of all the
finished goods and services produced within a country's borders. Sometimes it may happen that the
increase in GDP is not due to increase in volume of goods and services produced but merely due to
increase in inflation. Due to inflation, GDP increases and does not actually reflect the true growth in
an economy.
Statement 4 is incorrect: GDP and unemployment rates usually go together because a decrease in the
GDP is reflected in a decrease in the rate of employment. A rise in employment levels is a natural result of
increased GDP levels caused by an increase in consumer demands for goods and services. But we have
seen instances of jobless growth in India (constant unemployment despite rising GDP).
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Source: https://www.investopedia.com/articles/economics/10/jobless-growth-economy.asp
https://www.investopedia.com/ask/answers/060115/how-does-gross-domestic-product-gdp-affect-
standard-
living.asp#:~:text=Gross%20domestic%20product%2C%20or%20GDP,people%20living%20in%20the%20
country.
Q.16)
Ans) c
Statement 1 is correct: Repos or Repurchase Agreements are instruments which allow banks to borrow
money from the RBI to manage their short-term needs of liquidity. They borrow funds against the selling
of government securities with an agreement to repurchase the same government securities at a
predetermined date and rate. The rate at which the RBI lends to the banks is called Repo Rate.
An increase in repo rates means an increase in the cost of borrowing. This is because when the repo
rate rises, the borrowing cost for banking institutions also rises, which is passed on to account holders in
the form of higher loan and deposit interest rates.
Statement 2 is correct: Bank Rate is the rate at which the Reserve Bank is ready to buy or rediscount bills
of exchange or other commercial papers.
Managing the bank rate is a method by which central banks affect economic activity. Lower bank rates
can help to expand the economy by lowering the cost of funds for borrowers, and higher bank rates
help to reign in the economy when inflation is higher than desired.
Statement 3 is correct. Statutory Liquidity Ratio or SLR is a minimum percentage of deposits that a
commercial bank has to maintain in the form of liquid cash, gold or other securities.
As SLR is increased banks will have to keep more liquidity with themselves. So, the less amount of
funds will be available to the banks for credit creation. The total money supply in the economy will
decrease, this will lead to less demand.
Source: statement 1 and 3: Indian Economy by Ramesh singh , chapter on banking in India page no: 12.6
https://www.rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=12024
Statement 2: https://cleartax.in/g/terms/payment-banks
Q.17)
Ans) c
National Statistical Office acts as the nodal agency for planned development of the statistical system in
the country, lays down and maintains norms and standards in the field of statistics, involving concepts
and definitions, methodology of data collection, processing of data and dissemination of results.
Option a is incorrect: National Statistical Office is an autonomous body under the Ministry of Statistics
and Programme Implementation.
Option b is incorrect: National Statistical Office compiles and releases the Index of Industrial
Production (IIP) every month in the form of ‘quick estimates’; conducts the Annual Survey of Industries
(ASI); and provides statistical information to assess and evaluate the changes in the growth, composition
and structure of the organized manufacturing sector.
Whole-sale price index (WPI) in India is published by the Office of Economic Adviser, Ministry of
Commerce and Industry.
Option c is correct: NSO was formed on the recommendations of the Rangarajan Commission.
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Option d is incorrect: The National Statistical Office (NSO) consists of the Central Statistical Office
(CSO), the computer center and the National Sample Survey Office (NSSO). CSO and NSSO were merged
into NSO in 2019.
Source: https://blog.forumias.com/national-statistical-office-nso/
https://blog.forumias.com/wholesale-price-index-wpi/
Q.18)
Ans) b
Statement a is correct. The currency deposit ratio (CDR) is the ratio of money held by the public in
currency to that they hold in bank deposits. It shows the amount of money that people hold as a
proportion of aggregate deposits (bank deposits). It is the relationship between the amount of cash a
person holds and the amount of money she maintains in readily accessible bank accounts, such as
checking accounts. It reflects people's preference for liquidity.
Statement b is incorrect. The currency deposit ratio does not reflect people’s preference for savings.
On the contrary, it shows people’s preference for liquidity i.e., the amount they would hold in form of
currency in proportion to bank deposits.
Statement c is correct. An increase in cash deposit ratio leads to a decrease in money multiplier. An
increase in cash deposit ratio mean people holding cash more in hand and depositing less thus leading to
decrease in money multiplier.
While an increase in deposit rates will induce depositors to deposit more, thereby leading to a decrease
in Cash Deposit ratio. This will in turn lead to a rise in Money Multiplier.
Statement d is correct. The currency deposit ratio is a purely behavioural parameter which depends,
among other things, on the seasonal pattern of expenditure. For example, CDR increases during the
festive season as people convert deposits to cash balance for meeting extra expenditure during such
periods.
Source: Macroeconomics, NCERT XII, Chapter-3, Money & Banking, Pg. 39
https://economictimes.indiatimes.com/definition/currency-deposit-ratio
Q.19)
Ans) c
Statement 1 is correct. The act of nationalizing a bank involves the government purchasing a majority
share (more than 50%) in a bank that is currently owned by the private sector and converting it to public
ownership.
Statement 2 is correct. The expansion of banking into rural areas in order to guarantee financial
inclusion was one of the main goals of nationalizing banks. Initially, the banks were conservative and
established branches primarily in big towns and cities. The public sector banks established their branches
in those rural areas where the private sector banks were unsuccessful. Due to branch expansion to
remote areas, the government was able to mobilize rural savings.
Statement 3 is correct. The framework for regulating Indian banks is provided by the Banking
Regulation Act of 1949. This Act came into force on 16th March 1949.
Statement 4 is incorrect. The first bank to be nationalized was the Reserve Bank of India (RBI) and not
the State Bank of India. The Reserve Bank of India was nationalized on 1st January 1949 based on the
Reserve Bank of India (Transfer to Public Ownership) Act, 1948. All of the shares in the capital of the bank
is deemed transferred to the Government of India on payment of suitable compensation.
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Statement 5 is correct. A handful of influential business and industrial organizations initially had close
links with commercial banks. They exploited the resources provided by the bank and prevented new
companies from entering the market. Bank nationalization checked the monopoly of few leading
enterprises from expanding further.
Source: Ramesh Singh, Chapter-12
https://blog.forumias.com/answered-critically-analyse-the-accomplishments-achieved-through-
nationalisation-of-banks-in-india/
https://frontline.thehindu.com/economy/india-at-75-epochal-moments-1969-banks-
nationalised/article65721752.ece
https://www.outlookindia.com/business/when-nationalization-changed-the-face-of-indian-banking-
from-class-to-mass-news-211018
Q.20)
Ans) d
Priority Sector Lending (PSL): Priority Sectors are those sectors that the Indian government and reserve
bank believe are crucial for the development of the country's basic needs and should be given priority
over other sectors. The banks have a responsibility to provide sufficient and timely credit to support the
continued growth of these sectors. The mandatory target of lending to priority sectors must be followed
by all banks of India. The banks operating in India must comply with the PSL target in the following ways:
1) Target for Indian Banks: 40% of the total lending of Indian banks, both public sector banks and
private sector banks, must be for the priority sectors.
2) Target for Foreign Banks: Foreign banks have to deliver 40 per cent of net credit to priority sectors.
The sectors covered under the priority sector lending (PSL) scheme are:
1) Agriculture sector
2) Social Infrastructure
3) Small and medium Enterprises (SMEs)
4) Road and Water transport
5) Self-Help Groups (SHGs)
6) Retail trade
7) Small business
8) Export Credit
9) Software Industries
10) Education
11) Renewable Energy
12) Housing loan (less than 10 lakhs)
13) Weaker Sections
Source: Ramesh Singh, Chapter-12
https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11959#Categories
https://vikaspedia.in/agriculture/agri-credit/credit-institutions/priority-sector-lending
Q.21)
Ans) b
Option a is incorrect: A letter of credit is a letter from a bank guaranteeing that a buyer’s payment to a
seller will be received on time and for the correct amount. If the buyer is unable to make a payment on
Page 12 of 25

the purchase, the bank will be required to cover the full or remaining amount of the purchase. It may be
offered as a facility.
Option b is correct: The banker’s acceptance is a financial instrument that the bank (instead of the
account holder) guarantees for the payments at a future date. Banker’s Acceptance is a bill of Exchange
drawn on and 'accepted' by a bank as its commitment to pay a third party. The parties involved in a
banker’s acceptance are the Drawer (the bank’s customer), the Acceptor (a bank or an Acceptance House),
the Discounter (a bank which could be the accepting bank itself or a different bank or a discount house)
and the Re-discounter (another bank, discount house or the Central Bank). A Banker’s Acceptance is
accepted, when a Bank writes on the draft its agreement to pay it on maturity. The Bank becomes the
primary obligator of the draft or bill of exchange drawn on and accepted by it.
Option c is incorrect: Commercial Letter of Credit is a direct payment method in which the issuing
bank makes the payments to the beneficiary.
Option d is incorrect: Standby letter of credit is a secondary payment method in which the bank pays
the beneficiary only when the holder cannot. A standby letter of credit is a bank's commitment of
payment to a third party in the event that the bank's client defaults on an agreement.
Source: https://www.rbi.org.in/scripts/PublicationReportDetails.aspx?ID=190
https://www.investopedia.com/terms/l/letterofcredit.asp
Q.22)
Ans) a
Statement 1 is incorrect. P-notes are issued by registered foreign portfolio investors (FPIs) to overseas
investors who wish to be part of the Indian stock market without registering themselves directly.
Statement 2 is correct. Investments flowing through P-notes are considered as offshore derivative
investments (ODIs). Indian securities market regulator, SEBI issued the new Regulations for Foreign
Portfolio Investors, participatory notes where it got formally defined under the tag "Offshore Derivative
Instrument" (ODIs) in Section 2(1)(j) of the said regulation.
Statement 3 is incorrect. The P-notes holder does not enjoy any voting rights in relation to
security/shares referenced. Also, the investor in P-notes does not own the underlying Indian security,
which is held by the FII who issues the Participatory Notes. Thus, the investors in Participatory Notes
derive the economic benefits of investing in the security without actually holding it.
Source: https://economictimes.indiatimes.com/markets/stocks/news/p-notes-investment-climbs-to-
33-month-high-at-rs-91658-crore-in-feb/articleshow/81586273.cms?from=mdr
http://www.arthapedia.in/index.php?title=Participatory_Notes_(PNs)
Q.23)
Ans) b
Share capital refers to the amount of funding a company raises through the sale of stock to public
investors. This means the company grants shareholders a small ownership stake in the company in
exchange for monetary investment. Share capital constitutes the main source of equity financing and can
be generated through the sale of common or preferred shares.
Pair 1 is correct: The limits upto which shares can be issued by a company—is known as authorized
capital or nominal or registered capital. This is fixed in the Memorandum of Association (MoA) and the
article of association (AoA) of a company as required by the Companies Act (Law).
Pair 2 is incorrect: Issued capital is the amount which is sought by a company to be raised by issuing
shares which cannot exceed the authorised capital of the company.
Page 13 of 25

Paid-up capital is the amount of money a company has received from shareholders in exchange for shares
of stock.
Pair 3 is correct: Subscribed share capital is the value of shares that investors have promised to buy
when they are released.
Pair 4 is incorrect: The paid up capital is a part of the authorised capital of a company that has actually
been paid by shareholders.
The capital that has been distributed to the shareholders but is yet unpaid is referred to as issued share
capital.
Source: page 416 CHAPTER 14- SECURITY MARKET IN INDIA, Indian Economy by Ramesh Singh.
https://www.investopedia.com/ask/answers/072815/what-difference-between-issued-share-capital-
and-subscribed-share-capital.asp
Q.24)
Ans) a
Micro-Finance Institutions (MFIs) encompass a host of financial institutions engaged in advancing loans
to low-income groups. For example, Non-Banking Financing Companies (NBFC)- Micro-Finance
Institutions.
Statement 1 is incorrect. RBI regulates Non-Banking Financing Companies-MFIs. Some Non-profit MFIs
are registered as Societies or Trusts and are regulated by the respective Acts.
Statement 2 is correct. The overall Gross Loan Portfolio (GLP) of MFIs, i.e., outstanding amount of loans
extended to microfinance borrowers is around 32%. Further, NBFC-MFIs and Scheduled Commercial
Banks (SCBs) hold a major chunk of the microfinance portfolio, with a combined share of around 72 per
cent.
Statement 3 is incorrect. According to the Reserve Bank of India, a microfinance loan is defined as a
collateral-free loan given to a household having an annual household income of up to ₹3 lakh.
Source: https://www.nabard.org/auth/writereaddata/tender/SoMFI-2020-21.pdf
https://indianexpress.com/article/business/banking-and-finance/mfi-framework-plan-rbi-for-limit-
on-repayment-terms-no-rate-cap-7359314/
https://www.rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=19775#C1
Page 14 of 25

Q.25)
Ans) c
Security and Exchange Board of India (SEBI), the regulator of Indian stock market, was set up in 1988. It
was given a statutory status in 1992 under the Security and Exchange Board of India Act, 1992.
Options 1 and 2 are correct: The functions of Security and Exchange Board of India(SEBI) are as follows
1) promoting investors education and training of intermediaries of securities markets.
2) Regulating the business in stock exchanges and any other securities markets.
3) Registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to
an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio
managers, investment advisers and such other intermediaries who may be associated with securities
markets in any manner.
4) Promoting and regulating self-regulatory organizations.
Options 3 and 5 are correct: Some of the other functions of SEBI are as follows:
1) Inspection and audit of stock exchanges and various intermediaries
2) Prohibiting fraudulent and unfair trade practices relating to securities.
3) Registering and regulating the working of venture capital funds and collective investment schemes,
including mutual funds.
4) regulating substantial acquisition of shares and take over of companies
Option 4 is incorrect: Security and Exchange Board of India (SEBI) does not facilitate insider trading
rather it prohibits insider trading in securities.
Source: https://www.sebi.gov.in/powers-and-functions.html
CHAPTER 14- SECURITY MARKET IN INDIA, Indian Economy by Ramesh Singh.
Q.26)
Ans) b
In the last financial year 2021-2022, the money raised by IPOs has been greater than what has been raised
in any year in last decade by a large margin. Overall, during April-November 2021, `1.81 lakh crore has been
raised through equity issues through diverse modes viz., public offerings, rights, Qualified Institutional
Placements (QIP) and preferential issues.
Statement a is correct: A rights issue is an invitation to existing shareholders to purchase additional
new shares in the company. This type of issue gives existing shareholders securities called rights. With
the rights, the shareholder can purchase new shares at a discount to the market price on a stated future
date. Through the rights issue the company is giving shareholders a chance to increase their exposure to
the stock at a discount price.
Statement b is incorrect: An initial public offering (IPO) refers to the process of offering shares of a
private corporation to the public in a new stock issuance for the first time. It also denotes a transition
from a private to a public company. An IPO allows a company to raise equity capital from public
investors. IPOs provide companies with an opportunity to obtain capital by offering shares through the
primary market.
Statement c is correct: Qualified institutional placements (QIPS) are a way to issue shares to the public
without going through standard regulatory compliance. QIP is a designation of a securities issue given
by the Securities and Exchange Board of India (SEBI). QIP allows an Indian-listed company (public
company) to raise capital from domestic markets without the need to submit any pre-issue filings to
market regulators. QIPs were created to avoid dependency on foreign resources for raising capital.
Qualified institutional buyers (QIBs) are the only entities allowed to purchase QIPs.
Page 15 of 25

Statement d is correct: A buyback, also known as a share repurchase, is when a company buys its own
outstanding shares to reduce the number of shares available on the open market.
Source: https://www.indiabudget.gov.in/economicsurvey/doc/eschapter/echap04.pdf
https://www.investopedia.com/investing/understanding-rights-issues/
https://www.investopedia.com/terms/q/qip.asp
https://www.investopedia.com/terms/i/ipo.asp
Q.27)
Ans) d
The Reserve Bank of India has decided to merge the 28-day variable rate reverse repo (VRRR) auctions
with the fortnightly 14-day main auction in view of the moderation in surplus liquidity.
Statement 1 is incorrect: Reverse repo rate is the interest rate paid to commercial banks when they
deposit their excess funds in the central bank or when the central bank borrows money from them. In
other words, it is the rate at which the RBI borrows from the commercial banks. When banks have excess
funds but don’t have any other lending or investment options, they deposit/lend the surplus funds with
the RBI and earn interest on the deposited funds. It is always lower than repo rate.
Repo rate is the rate at which the central bank gives loans to commercial banks against government
securities.
Statement 2 is incorrect: The decision of Reserve Bank India (RBI) to conduct variable rate reverse repo
(VRRR) auctions aims to absorb excess liquidity from the banking system.
Source: https://www.indiabudget.gov.in/economicsurvey/doc/eschapter/echap04.pdf
https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=53127
https://www.thehindu.com/business/variable-rate-reverse-repo-auctions-indicate-monetary-
tightening-say-analysts/article35776458.ece
https://outlookmoney.com/magazine/story/variable-reverse-repo-rate-vrrr-
934#:~:text=Repo%20rate%20is%20the%20rate,banking%20system%20via%20VRRR%20auctions.
Q.28)
Ans) c
The unorganized financial market refers to the informal and unregulated sector of the financial market. It
is characterized by transactions that occur outside of the purview of government and regulatory bodies.
The unorganized financial market includes informal lenders, such as moneylenders, pawnbrokers, and
other informal financial institutions. These lenders offer credit to individuals and small businesses that
may not have access to formal banking channels.
Option 1 correct. Chit funds are a popular type of savings institutions in India. It is one of the main parts
of the unorganised money market industry. It refers to an agreement arrived at by a group of individuals
to invest a certain amount through periodic installments over a specified period of time. The chit fund
provides access to savings and borrowings for people with limited access to banking facilities. Chit funds
in India are managed, conducted, and regulated according to Chit Funds Act of 1982. They are governed
through central legislation while state governments are responsible for their administration.
Option 2 is correct. Nidhi Company is a type of Non-Banking Financial Company (NBFC). They are part of
unorganised money market. They are formed to borrow and lend money to its members. They inculcate
the habit of saving among its members and works on the principle of mutual benefit. They are not
required to receive the licence from the Reserve Bank of India (RBI). They are registered under the
Companies Act.
Page 16 of 25

Option 3 is incorrect. Organised money market includes- Treasury bills, Certificate of deposits,
Commercial Paper, Commercial Bill, Call Money Market, Money Market Mutual Fund and Repos and
Reverse Repo.
Options 4 and 5 are correct. The non-homogenous groups like Gujarati Shroffs, Multani or Shikarpuri
Shroffs, Marwari Kayas, and Chettiars are within the unorganized money market. Lenders constitute
the most localised form of money market in India and operate in the most exploitative way.
Q.29)
Ans) b
Treasury Bills are short-term (up to one year) borrowing instruments issued by the Government of India
or the central bank of the country.
Statement 1 is correct. Treasury bills are exclusively issued by the RBI on behalf of the Union
Government of India. State governments do not issue them.
Statement 2 is incorrect. Treasury Bills are distributed through auctions that the Reserve Bank of India
(RBI) holds on a regular basis. Banks, trusts, institutions, and individuals can buy it.
Retail investors have multiple channels to invest in treasury bills (T-Bills) and Government of India (GoI)
dated bonds in the primary market. Retail investors can place their orders through any one of the
following options available under the non-competitive bidding facility offered by NSE. Retail investors
can buy T-bills by setting up a "Retail Direct Scheme" account with the RBI.
Statement 3 is incorrect. Treasury bills or T-bills are short term debt instruments issued by the
Government of India and are presently issued in three tenures, namely, 91 day, 182 day and 364 day.
Statement 4 is correct. Treasury bills are zero coupon securities and pay no interest. Instead, they are
issued at a discount and redeemed at the face value at maturity. For example, a 91 day Treasury bill of
₹100/- (face value) may be issued at say ₹ 98.20, that is, at a discount of say, ₹1.80 and would be redeemed
at the face value of ₹100/.
https://www.rbi.org.in/commonperson/English/Scripts/FAQs.aspx?Id=711#26
Q.30)
Ans) b
A Certificate of Deposit (CD) is a money market instrument which is issued in a dematerialised form
against funds deposited in a bank for a specific period. India introduced Certificates of Deposit (CDs) in
1989 to increase the range of money market instruments in the country and thereby give investors
greater flexibility in terms of utilization of their short-term funds.
Statement 1 is correct. Certificate of Deposits (CDs) are the unsecured, negotiable money market
instruments.
Statement 2 is correct. It is issued by Banks and Financial Institutions (FIs) to raise short-term capital.
Statement 3 is incorrect. Banks can issue CDs for maturities from 7 days to one year whereas eligible
FIs can issue for maturities from 1 year to 3 years.
Knowledge Base:
Additional Information
1) It is important to note that banks and financial institutions cannot provide loans against Certificates of
Deposits.
2) Banks cannot buy their own Certificates of Deposits prior to the latter's maturity.
Page 17 of 25

3) Banks have to maintain the statutory liquidity ratio (SLR) and cash reserve ratio (CRR) on the price of a
Certificate of Deposit.
4) Certificates of Deposits can also be issued to Non-Resident Indians but on a non-repatriable basis
only.
https://www.financialexpress.com/money/your-money-how-negotiable-certificates-of-deposits-are-
traded-in-the-money-market/2262541/
Q.31)
Ans) c
'Call Money' is the borrowing or lending of funds for 1 day. Whereas when money is borrowed or lend for
period between 2 days and 14 days it is known as 'Notice Money'. And 'Term Money' refers to
borrowing/lending of funds for period exceeding 14 days.
Statements 1 and 2 are correct. Call Money Market is basically an inter-bank money market where funds
are borrowed and lent, generally, for one day. That is why this is also known as overnight borrowing
market (also called money at call).
https://www.idbibank.in/treasury-call-notice-term-
money.aspx#:~:text='Call%20Money'%20is%20the%20borrowing,for%20period%20exceeding%2014%20
days.
Q.32)
Ans) b
An exchange traded fund (ETF) is a cluster of different securities merged together in a single fund that
is traded on the stock exchange. It is a marketable security that tracks an index, a commodity, bonds, or
a basket of assets like an index fund. An exchange-traded fund is a type of pooled investment security
that operates much like a mutual fund. An ETF can be structured to track anything from the price of an
individual commodity to a large and diverse collection of securities. ETFs can even be structured to track
specific investment strategies.
Statement 1 is incorrect. An exchange traded fund (ETF) allows a person to invest in both debt and
equity instruments. Debt ETFs allow the investors to realise returns on their investments through
exposure to fixed-income securities. Debt ETFs in India are sometimes referred to as bond ETFs due to
their high exposure to bonds as the underlying asset.
Statement 2 is correct. Exchange-traded funds (ETFs) have higher liquidity than mutual funds, making
them not only popular investment vehicles but also convenient to tap into when cash flow is needed.
Statement 3 is correct: The main difference between ETF and Mutual Fund is that while ETFs can be
actively bought and sold on the stock exchanges, just like any other shares. But one can only purchase a
unit of a Mutual Fund from a fund house even though these can be listed on the exchanges.
Source: https://www.mutualfundssahihai.com/en/what-exchange-traded-fund-etf
https://www.mutualfundssahihai.com/en/what-exchange-traded-fund-etf
https://www.investopedia.com/terms/e/etf.asp
Q.33)
Ans) d
Page 18 of 25

The long-term financial market of an economy is known as the ‘capital market’. This market makes it
possible to raise long-term money (capital), i.e., for a period of minimum 365 days and above.
The capital market in India includes the following institutions:
1) Commercial Banks;
2) Insurance Companies (like LIC and GIC);
3) Specialized financial institutions like IFCI, IDBI, ICICI, SIDCS, SFCS, UTI etc.
4) Provident Fund Societies;
5) Merchant Banking Agencies;
6) Credit Guarantee Corporations;
7) State Level Financial Institutions (SLFIs) - State Finance Corporations (SFCs), State Industrial
Development Corporations (SIDCs);
8) Investment Institutions
9) Individuals who invest directly on their own in securities are also suppliers of funds to the capital
market.
Source: Ramesh Singh ch 14.
Q.34)
Ans) a
Pair 1 is correct. Broker is a registered member of a stock exchange who buys or sells shares/securities
on his client’s behalf. He charges a commission on the gross value of the deal—such brokers are also
known as commission brokers.
Pair 2 is incorrect. A jobber is a broker’s broker or one who specializes in specific securities catering to
the needs of other brokers.
Transfer agents record changes of security ownership, maintain the issuer's security holder records,
cancel and issue certificates, and distribute dividends.
Pair 3 is incorrect. A market maker is an individual participant or member firm of an exchange that buys
and sells securities for its own account. A market maker participates in the market at all times, buying
securities from sellers and selling securities to buyers.
Q.35)
Ans) b
The Over-The-Counter Exchange of India (OTCEI) is an electronic stock exchange based in India that
consists of small- and medium-sized firms aiming to gain access to overseas capital markets.
Statement 1 is correct. Over the Counter Exchange of India (OTCEI) is an organization which was
incorporated in 1989 under the Companies Act, 1956. The trading in OTCEI commenced in 1992 and is a
fully computerized, single window, and transparent exchange.
Statement 2 is incorrect. The purpose of the OTCEI is for smaller companies to raise capital, which
they cannot do at the national exchanges due to their inability to meet the exchange requirements.
Statement 3 is correct. Stocks that are listed on other exchanges will not be listed on the OTCEI and,
conversely, stocks listed on the OTCEI will not be listed on other exchanges.
Source: https://www.investopedia.com/terms/o/otcei.asp#:~:text=Key%20Takeaways-
,The%20Over%2DThe%2DCounter%20Exchange%20of%20India%20(OTCEI),to%20meet%20the%20exch
ange%20requirements.
Page 19 of 25

Q.36)
Ans) d
Gross National Product (GNP) is the GDP of a country added with its ‘income from abroad’. Here, the
trans-boundary economic activities of an economy are also taken into account. The items which are
counted in the segment ‘Income from Abroad’ are:
1) Private Remittances: This is the net outcome of the money which inflows and outflows on account of
the ‘private transfers’ by Indian nationals working outside of India (to India) and the foreign nationals
working in India (to their home countries). Hence option 1 is correct.
2) Interest on External Loans: The net outcome on the front of the interest payments, i.e., balance of
inflow (on the money lend out by the economy) and outflow (on the money borrowed by the economy)
of external interests.
3) External Grants: The net outcome of the external grants i.e., the balance of such grants which flow to
and from India. Hence option 3 is correct.
GNP refers to the value of final goods and services produced in a given year. Hence goods produced in
previous time period cannot be included in the GNP.
Other items excluded from GNP are:
1) Purely financial transactions, like sale and purchase of securities, bonds or transfer payments. Hence
option 2 is incorrect.
2) Non-market transactions, like services of housewife, kitchen gardening, leisure time activities.
3) Illegal activities.
Source: Chapter 2.pmd (ncert.nic.in)
Ramesh Singh 12th Edition Chapter 1
Q.37)
Ans) c
Statement 1 is correct. Law of Demand states that other things being equal, there is a negative relation
between demand for a commodity and its price. In other words, when price of the commodity increases,
demand for it falls and when price of the commodity decreases, demand for it rises other factors
remaining the same.
Statement 2 is correct. The Income elasticity of demand is the change in the consumption of goods
based on income. This means consumers will generally spend more if they experience an increase in
income, and they may spend less if their income drops. But the effect doesn't dictate what kind of goods
consumers will buy.
Statement 3 is correct. Retailers who generally sell cheaper items typically benefit from the
substitution effect. The substitution may occur when a consumer replaces cheaper or moderately priced
items with ones that are more expensive when a change in finances occurs.
The inverse is true when incomes decrease.
Source: https://ncert.nic.in/textbook/pdf/leec202.pdf
https://www.investopedia.com/ask/answers/041415/whats-difference-between-income-effect-and-
substitution-effect.asp
Q.38)
Ans) c
Page 20 of 25

Open market operations (OMOs) are an effective quantitative policy tool at the disposal of RBI. It helps in
maintaining the impact on inflation and interest rate levels.
Statement 1 is correct: OMOs refers to the purchase and sale of government securities(G-sec), done by
RBI on the government’s behalf. When G-sec is bought, it increases the liquidity or money supply in the
market on the other the hand when G-sec is sold, money supply is decreased, or liquidity is drained from
the market.
Statement 2 is correct: RBI carries out the OMO through commercial banks and does not directly deal
with the public. Eligible participants are required to key in their bids on RBI’s core banking electronic
solution platform E-Kuber.
Statement 3 is correct: Simultaneous purchase and sale of government securities under OMOs is
popularly known as Operation Twist. It involves buying long-end debt while selling short-tenor bonds to
keep borrowing costs down.
Operation Twist is a way employed by the central bank to manage yields in the market. It is a program of
quantitative easing used by the RBI that was first introduced by the Federal Reserves in US in 1961.
Since prices and yields move in opposite directions, by purchasing longer-term bonds, the RBI can help
drive the bond prices up and yields down. At the same time, selling shorter-term bonds should cause
their yields to go up (since their prices would fall). In combination, these two actions twist the shape of
the yield curve.
Source: Indian Economy by Ramesh Singh, chapter: Banking in India, pg no, 12.7
https://www.investopedia.com/terms/o/openmarketoperations.asp
https://www.investopedia.com/terms/o/operation-
twist.asp#:~:text=Key%20Takeaways,to%20buy%20longer%2Ddated%20ones.
Q.39)
Ans) b
Statement a is incorrect. Capital market is a place where buyers and sellers indulge in buying/selling of
financial securities like bonds, stocks (not necessarily less than 5 years). The long-term financial market
of an economy is known as the ‘capital market’. This market makes it possible to raise long-term money
(capital), i.e., for a period of minimum 365 days and above.
Statement b is correct. A primary market is one in which a company issues new securities on the stock
exchange. Whereas Secondary market deals with the exchange of prevailing or previously-issued
securities among investors.
Statement c is incorrect. Long term financial market includes commodity and stock purchases in both
primary market and secondary market. Primary market is the market for new shares or securities.
Statement d is incorrect. Commercial Bill is not part of long-term financial market. Commercial bills
are unsecured, short-term debt issued by a corporation, often times for the financing of short-term
liabilities and inventory. A higher yield acts as compensation for investors who choose the higher-risk
commercial bills.
Source: https://www.worldbank.org/en/publication/gfdr/gfdr-2016/background/long-term-
finance#:~:text=Definition,public%20and%20private%20equity%20instruments.
Ramesh Singh Indian economy page: 341 (pdf)
Q.40)
Ans) b
Page 21 of 25

Statement 1 is incorrect. Introduced in 2010 in India, funds raised via Cash Management Bill help the
government meet temporary mismatches in its cash flow. The government, in consultation with the
Reserve Bank of India introduced it.
Statement 2 is correct. The Cash Management Bills are issued by the Reserve Bank of India on behalf of
the government. Like T-bills, Cash Management Bills (CMBs) are also issued at a discount and
redeemed at face value on maturity. The tenor, notified amount and date of issue of the CMBs depend
upon the temporary cash requirement of the Government. The tenors of CMBs are generally less than 91
days.
Knowledge Base:
The Cash Management Bills have the generic character of Treasury Bills as the CMBs are issued at a
discount and redeemed at face value at maturity.
They are tradable and qualify for ready forward facility. They are part of Statutory Liquidity Ratio (SLR).
Source: https://www.thehindubusinessline.com/money-and-banking/auction-of-84-day-goi-cash-
management-bill-receives-healthy-response/article31693362.ece
Q.41)
Ans) a
Ways and Means Advances (WMA) Scheme was introduced in 1997. Its objective is to meet mismatches in
the receipts and payments of the government.
Statement 1 is correct: Ways and Means Advances (WMA) Scheme was introduced in 1997. These are
temporary loan facilities provided by the Reserve Bank of India (RBI) to the central and state
governments to meet mismatches in the receipts and payments. The limits for WMA are decided by the
government and RBI mutually and revised periodically.
Statement 2 is incorrect: There are two types of WMAs —1. Normal Ways and Means Advances; and 2.
Special Drawing Facilities against government securities/Special WMA
The rate of interest applicable for Normal WMA funding from RBI is the repo rate. However, the interest
levied for special WMAs could be lower than the repo rate due to the backing of government
securities.
Special WMA or Special Drawing Facility is provided against the collateral of the government securities
held by the state. After the state has exhausted the limit of SDF, it gets normal WMA. The interest rate
for SDF is generally one percentage point less than the repo rate.
Statement 3 is incorrect: WMA funding is much cheaper than borrowings from markets as it is charged
at the repo rate. WMA can be an alternative to other tools of borrowing like raising longer-tenure funds
from the markets, issue of State government securities or borrowing from financial institutions for short-
term funding.
Source: https://blog.forumias.com/ways-and-means-advances/
Q.42)
Ans) b
Statement 1 is incorrect. Mutual Fund is an investment vehicle made up of a pool of money collected
from public investors. Mutual fund managers invest the money on their behalf in securities including both
debt and equity. The pooled money is used to buy other securities by professional money managers. It
charges a small fee for managing the money.
Statement 2 is correct. Securities and Exchange Board of India is the regulatory body to control and
regulate the mutual funds in India.
Page 22 of 25

Statement 3 is correct. An Infrastructure Investment Trust (InvITs) is like a mutual fund, which enables
direct investment of small amounts of money from possible individual/institutional investors in
infrastructure to earn a small portion of the income as return. InvITS are like mutual funds in structure.
Source: https://groww.in/mutual-funds
https://economictimes.indiatimes.com/definition/infrastructure-investment-trusts
Q.43)
Ans) a
Statement 1 is incorrect. The Financial Stability and Development Council (FSDC) was set up by the
Government as the apex level forum in December 2010. It is a non-statutory body.
The objective of FSDC is to strengthen and institutionalize the mechanism for maintaining financial
stability, enhancing inter-regulatory coordination and promoting financial sector development.
Statement 2 is incorrect. The Chairperson of FSDC is Union Finance Minister of India.
The members include (a) Heads of all Financial Sector Regulators (RBI, SEBI, PFRDA & IRDA)
(b) Finance Secretary, Department of Economic Affairs (DEA)
(c) Secretary, Department of Financial Services (DFS) and
(d) Chief Economic Adviser.
Statement 3 is correct. Functions of the FSDC:
1) It focuses on financial literacy and financial inclusion.
2) It aims strengthening and institutionalizing the mechanism of financial stability and development.
3) It monitors macro-prudential supervision of the economy.
4) It assesses the functioning of large financial conglomerates.
5) It addresses intra regulatory coordination issues.
Knowledge Base: The FSDC was first proposed under the recommendations of Raghuram Rajan
committee (2008) on financial sector reforms.
In 2018, Government had reconstituted FSDC to include (a) Minister of State responsible for the
Department of Economic Affairs (DEA) (b) Secretary of the Department of Electronics and Information
Technology (c) Chairperson of the Insolvency and Bankruptcy Board of India (IBBI) and (d) Revenue
Secretary.
Source: https://blog.forumias.com/financial-stability-and-development-councilfsdc/
Q.44)
Ans) c
Option a is incorrect. Reverse repo rate is the rate at which the central bank of a country (Reserve Bank
of India in case of India) borrows money from commercial banks within the country. It is a monetary
policy instrument which can be used to control the money supply in the country.
Option b is incorrect. Base Rate is the interest rate below which Scheduled Commercial Banks (SCBs) will
lend no loans to its customers—its means it is like prime lending rate (PLR) and the benchmark prime
lending Rate (BPLR) of the past and is basically a floor rate of interest.
Option c is correct. A bank rate is the interest rate a nation's central bank charges to its domestic banks
to borrow money. The rates central banks charge is set to stabilize the economy. The interest rate which
the RBI charges on its long-term lending’s is known as the Bank Rate. The clients who borrow through
this route are the Government of India, state governments, banks, financial institutions, co-operative
banks, NBFCs, etc.
Page 23 of 25

Option d is incorrect. Reverse Repo Rate is the rate of interest the RBI pays to its clients who offer
short-term loan to it. At present (March 2020) the rate is at 4.00 per cent. It is reverse of the repo rate
and this was started in November 1996 as part of Liquidity Adjustment Facility (LAF) by the RBI.
Source: 12th Edition India Economy Ramesh Singh page 356 (pdf)
Q.45)
Ans) a
Asset Reconstruction Company (ARC) is a specialized financial institution that buys the Non-Performing
Assets (NPAs) from banks and financial institutions. It helps banks in cleaning up their balance sheets by
buying their bad loans.
Option a is incorrect. The Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest (SARFAESI) Act, 2002 provides the legal basis to set up the Asset Reconstruction
Company.
Asset Reconstruction Company (ARC) is a company registered under the Companies Act and registered
with Reserve Bank of India under section 3 of The Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest (SARFAESI) Act, 2002.
Option b is correct. ARCs are regulated by RBI as a Non-Banking Financial Company [NBFC] (under
RBI Act, 1934). They function under the supervision and control of the Reserve Bank of India (RBI).
Option c is correct. ARCs are not permitted to undertake lending activities. One ARC can be a sponsor
or investor in another ARC or it can acquire debt from another ARC.
Option d is correct. The ARCs also have to maintain a capital adequacy ratio (CAR) of 15% of its risk-
weighted assets.
Capital Adequacy Ratio is also known as Capital to Risk (Weighted) Assets Ratio (CRAR)
A high CAR indicates that a bank has an adequate amount of capital to deal with unexpected losses. A
lower CAR means, a bank is at a higher risk of failure.
Source: https://blog.forumias.com/asset-reconstruction-company-concepts-simplified-prelims-
capsules-2021/
Q.46)
Ans) a
Exp) option a is the correct answer.
Option a is correct: Special Mention Accounts (SMA) are those assets/accounts that shows symptoms of
bad asset quality in the first 90 days itself or before it being identified as NPA. Types of SMA –
1) SMA-0 loans, where the repayment overdue is between 1-30 days
2) SMA-1 where the repayment overdue is between 31-60 days
3) SMA-2 where the repayment overdue is between 61-90 days
Source:
https://economictimes.indiatimes.com/industry/banking/finance/banking/rbi-clears-fog-on-special-
provisioning/articleshow/75563230.cms
Q.47)
Ans) d
Option 1 is correct: Rise in market Interest Rates, will cause a fall in bond prices, as the higher interest
rate will give investors better returns in bank deposits rather than the returns offered by the bonds. And
Page 24 of 25

as Bond Prices and Bond Yields are inversely related, a fall in Bond Prices would mean a rise in Bond
Yields, as market rates increase.
Option 2 is correct: Fiscal Deficit of the government represents the amount of borrowings that the
government has undertaken. An increase in Fiscal Deficit would mean that the government plans to
spend more than its revenues by increasing its borrowing from the market. This leaves lesser capital for
other economic players, making loans costlier (through an increase in interest rates). And as Interest
Rates and Bond Yields are directly related (as explained above), there is an increase in bond Yields when
there is an increase in Fiscal Deficit.
Option 3 is correct:
If there is a rise in inflation in the economy, the central bank will most likely follow a Dear Money policy
and increase policy rates for other banks. Thus, making loans expensive, in order to suck out money from
the economy. Thus, the result of increase in inflation, will be increasing interest rates. As interest rates
and bond yields are directly related, an increase in inflation will cause a rise in bond yields too.
Option 4 is incorrect: If there is a rise in foreign investments in the country, it means an increase in
investors’ demand for the country's assets including bonds. As the demand for government/ corporate
bonds increase, the bond price will also increase. This will lead to a decrease in the bond yield as bond
price and bond yield are inversely related to each other. Thus, the increased demand for the bond
results in rising bond prices—and falling bond yields.
Source: https://www.investopedia.com/ask/answers/why-interest-rates-have-inverse-relationship-
bond-prices/
https://www.investopedia.com/ask/answers/061715/how-bond-yield-affected-monetary-
policy.asp#:~:text=A%20bond%27s%20yield%20is%20based,and%20bond%20yields%20to%20rise.
Q.48)
Ans) d
Oligopoly refers to a market situation in which there are a few firms selling differentiated products. In
India, markets for automobiles, cement, steel, aluminium, etc., are the examples of oligopolistic market.
1) Each firm produces a significant portion of the total output. There exists severe competition among
different firms and each firm try to manipulate both prices and volume of production to outsmart
each other.
2) Every seller influences and is influenced by the behaviour of other firms.
3) Firms under oligopoly are interdependent. A firm considers the action and reaction of the rival firms
while determining its price and output levels. A change in output or price by one firm evokes reaction
from other firms operating in the market. For example, market for cars in India is dominated by few
firms (Maruti, Tata, Hyundai, Ford, Honda, etc.). A change by any one firm in any of its vehicle will
induce other firms to make changes in their respective vehicles.
Knowledge Base:
Other features:
1) There are barriers to entry in oligopoly market. Patents, requirement of large capital, control over
crucial raw materials, etc., are some of the reasons, which prevent new firms from entering into
industry.
2) The oligopoly is likely to lie somewhere between the two extremes of monopoly and perfect
competition.
Source: Microeconomics, NCERT XI, Chapter-6, Pg. 99
https://www.yourarticlelibrary.com/oligopoly-market/the-oligopoly-market-example-types-and-
features-micro-economics/9140
Page 25 of 25

Q.49)
Ans) b
Purchasing Power Parity (PPP) is a theory that compares the purchasing powers of currencies from
different countries around the world. PPP theory aims to look at differing world economies as if they
were on a single currency, creating parity between different world currencies. PPP can be used to
determine how much more or less expensive it can be to live in another country.
Statement 1 is incorrect: Purchasing Power Parity does not consider differences in the quality of goods
between countries. The same product, for example, can have a different quality in different countries.
Thus, it is difficult for us to determine identical baskets of goods and services.
Consumer tastes and preferences also vary across countries. Often, manufacturers use a differentiation
approach rather than product standardization. They adapt their offerings to local tastes in each country.
And purchasing power parity does not capture such a difference.
Statement 2 is correct: Purchasing Power Parity accounts for non-traded goods. GDP measures a
country’s economic productivity as it relates to the sale of tangible, internationally traded goods.
However, PPP accounts for the cost of non-traded goods and services—like haircuts or massages—which
also speaks to the productivity of a given economy.
Statement 3 is correct: Purchasing power parity (PPP) allows for economists to compare economic
productivity and standards of living between countries. Purchasing Power Parity provides real-world
examples of living costs and standards. Every year, The Economist releases a comparative list of what
55 countries around the world charge for a McDonald’s Big Mac called the Big Mac Index. This example
of PPP uses a recognizable good as a point of comparison between the living costs around the world,
which is similar to the research of the ICP. Laypeople can look at the PPP of different goods in different
places, and get a sense of how expensive or affordable their current home economy is.
Source: https://penpoin.com/purchasing-power-parity/
https://www.masterclass.com/articles/purchasing-power-parity-explained
Q.50)
Ans) b
Statement 1 is correct: State Development Loans are bonds that are issued by the state government to
manage their state finances and fund their fiscal deficit. Each state is allowed to issue securities up to a
certain limit per year. SDLs are traded at a spread above the benchmark G-sec security of the same tenor.
The spread is based on the state finances.
Statement 2 is correct: State Development Loans are issued in the primary market through normal
auctions conducted by the Reserve Bank of India and traded in the secondary market. Interest on state
development loan is serviced at half-yearly intervals and the principal is repaid on the maturity date.
Statement 3 is incorrect: SDLs qualify for Statutory Liquidity Ratio (SLR) status, that is a proportion of
deposits to be maintained in liquid sovereign securities. So investors are mainly nationalised banks, who
on account of their huge deposit base have a large SLR requirement.
Source: https://economictimes.indiatimes.com/wealth/invest/5-things-to-know-about-state-
development-loans/articleshow/90609281.cms
https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=51712
https://www.fisdom.com/what-are-state-development-loans-sdl-why-are-they-issued/

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PTS 2024 | Preparatory Test 7 – Solutions |

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