Daily Quiz: UPSC Prelims Marathon – December 12

Statements 2 and 4 are incorrect. Decrease in SLR means banks will have more cash. Similarly taking away of CRR will also mean more cash with the banks. This in turn would mean lending by banks to customers will become cheaper, and will possibly have an inflationary effect.

RBI releasing new bonds will suck out money from the market. Increase in bank rate means borrowing for banks from RBI becomes expensive, and in turn the rate of loans to customers will also increase. This will reduce inflation.

Statement 1 is correct. Revenue deficit is the excess of total revenue expenditure of the government over its total revenue receipts. It is related to only revenue expenditure and revenue receipts of the government.

Statement 3 is correct. It is an indicator of the fact that the government or the organization in consideration is not raising enough money to meet its basic needs and the provisions of schemes and services extended by it. Revenue deficit results in borrowing.

Statement 2 is incorrect. FRBM review committee chaired by NK Singh recommended it to be reduced to 0.80 % of GDP by 2023.

All the above statements are correct.

The Gross Domestic Product (GDP) deflator is a measure of general price inflation. It is calculated by dividing nominal GDP by real GDP and then multiplying by 100.

There are other measures of inflation too like Consumer Price Index (CPI) and Wholesale Price Index (or WPI); however, GDP deflator is a much broader and comprehensive measure. Since Gross Domestic Product is an aggregate measure of production, being the sum of all final uses of goods and services (less imports), GDP deflator reflects the prices of all domestically produced goods and services in the economy whereas, other measures like CPI and WPI are based on a limited basket of goods and services, thereby not representing the entire economy (the basket of goods is changed to accommodate changes in consumption patterns, but after a considerable period of time). Another important distinction is that the basket of WPI (at present) has no representation of services sector. The GDP deflator also includes the prices of investment goods, government services and exports, and excludes the price of imports.

WPI and CPI are available on monthly basis whereas deflator comes with a lag (yearly or quarterly, after quarterly GDP data is released). Hence, monthly change in inflation cannot be tracked using GDP deflator, limiting its usefulness.

Statement 1 is incorrect.  Nominal GDP reflects both the quantities and price of goods and services the economy is producing.

Statement 2 is incorrect.  Real GDP reflects only the changes in the quantities of the goods and services produced in an economy.

Statement 3 is correct.  The GDP deflator measures the current level of prices relative to the level of prices in the base year, giving the changes in the prices of the goods and services and not their quantities.

Statement 1 is incorrect. If RBI buys securities, more money will flow into the market and inflation will increase.

Statement 3 is incorrect. Increasing the CRR and SLR means that banks are required to park greater amount of their assets with the Central Bank. This reduces the bank’s ability to lend to the clients. Thus, overall money supply in the economy reduces.If bank decrease CRR and SLR, the reverse will happen.

Statement 2 is incorrect. Increasing the fiscal deficit may signify that consumption expenditure has been increased by the government. This can also increase the amount of money in the economy.

Statement 4 is correct. If RBI increases the Reverse Repo rate, it means RBI wants to contract credit. When RBI gets loan from banks at high rate of interest, more and more banks will supply to central bank because it is safe and earning is more. Effect of this will on financial market. Supply of money in financial market will decrease.

Statement 1 is correct. Increasing MSF reduces money supply for speculation which in turn strengthens rupee value in international market. So it affects the value of rupee in international market.

Statement 2 is correct. The purpose of marginal standing facility is to reduce volatility in the overnight lending rates in the interbank market and to enable smooth monetary transmission in the economy.

Statement 3 is incorrect. MSF, being a penal rate, is always fixed above the repo rate. The MSF would be the last resort for banks once they exhaust all borrowing options including the liquidity adjustment facility by pledging through government securities, which has lower rate of interest in comparison with the MSF.

Statement 1 is correct. Currency depreciation makes exports cheaper and hence can increase export.

Statement 2 is incorrect. Increase in NRI deposits leads to currency appreciation.

Statement 3 is correct. RBI can intervene in foreign exchange market by selling dollars to prevent depreciation of rupee.