Daily Quiz: UPSC Prelims Marathon – March 13, 2018

Statement 1 is correct. Marginal Standing Facility is a liquidity support arrangement provided by RBI to commercial banks if the latter doesn’t have the required eligible securities above the SLR limit.

Statement 2 is correct. Bank rate is a higher rate, (1% higher than REPO rate) charged by RBI when it gives loans to commercial banks. Bank rate is different from MSF in the nature that Bank rate is long-term, applies for all commercial banks and there is no limitation like 2 percent of their respective Net Demand and Time Liabilities (NDTL).

Statement 1 is incorrect. The World Bank is classifying countries in terms of per capita income, into four categories i.e. Low-Income Countries (LICs), Lower Middle-Income Countries (LMICs), Upper Middle-Income Countries (UMICs) and High-Income Countries (HICs).

Statement 2 is correct. Low-income countries are those with a per capita income lower than $1005.

Statement 3 is incorrect. India has entered the middle-income position in 2008 and the per capita income is increasing slowly. The Per Capita Income of the country as per the World Bank’s 2016 estimate is $ 1670.

All of the above can be the sources of human capital formation.

Human capital refers to stock of ‘skill and expertise’ embodied in humans. Human capital is as important as physical capital for economic development. Human capital formation is the process of adding to stock of human capital over time. Human capital can be developed through creation of skilled, trained and efficient labour force by providing better education, health care facilities, etc.

Highly skilled people can create new ideas and methods of production. Thus, expenditure on education, on health and on on-job-training are key instruments of human capital formation. Expenditure on education is one of the most important way of enhancing and enlarging a productive workforce in the country. Expenditure on health can create more efficient and more productive human capital. Further, on-the-job-training helps workers to update skills. Training enhances the productivity and is expected to accelerate the process of human capital formation.

Statement 1 is correct. The MCLR methodology for fixing interest rates for advances was introduced by the Reserve Bank of India with effect from April 1, 2016. This new methodology replaces the base rate system introduced in July 2010.

MCLR aims to bring transparency in the methodology followed by banks for determining interest rates on advances. It also aims to ensure availability of bank credit at interest rates which are fair to borrowers as well as banks. Thus, statement 2 is incorrect.

Other aims behind the introduction of MCLR are:

1. To improve the transmission of policy rates into the lending rates of banks.
2. To enable banks to become more competitive and enhance their long-run value and contribution to economic growth.

The liquidity trap is the situation in which prevailing interest rates are low and savings rates are high, making monetary policy ineffective. In a liquidity trap, consumers choose to avoid bonds and keep their funds in savings because of the prevailing belief that interest rates will soon rise.

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.

Both the statements are correct. Gross value added is a measure of total output and income in the economy. It provides the rupee value for the amount of goods and services produced in an economy after deducting the cost of inputs and raw materials that have gone into the production of those goods and services. It also gives sector-specific picture like what is the growth in an area, industry or sector of an economy.

While GVA gives a picture of the state of economic activity from the producers’ side or supply side, the GDP gives the picture from the consumers’ side or demand perspective. Both measures need not match because of the difference in treatment of net taxes. This is one of the reasons that in the first quarter of 2015, GDP growth was stronger at 7.5%, while GVA growth was 6.1%.

Aggregate demand refers to the total demand for final goods and services in an economy. Aggregate demand is measured by the total expenditure of the community on goods and services and consists of ex-ante consumption, ex-ante investment, government spending etc. Thus, all are responsible for generating aggregate demand for final goods in an economy.