[Solutions] – The Tuesday Economy Quiz #2

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Please find the solutions of the Tuesday Economy Quiz #1. In case you have not solved the quiz, please visit the link below before reading the solution

• The Tuesday Economy Quiz #2 Questions

Solutions to the Tuesday Economy Quiz #2

 

Q1) Consider the following statements

1. When economy grows, market forces increase inequality at first
2. When economy grows, market forces ultimately decrease inequality

Which of the below curves represent the above hypothesis?

a) Phillips Curve
b) Kuznets Curve
c) Bell Curve
d) Lorenz Inequality Curve

Ans- b

Explanation-Kuznets curve graphs the hypothesis that as an economydevelops, market forces first increase and then decrease economic inequality. It is represented by a curve like this :

Curve implies that as a nation undergoes industrialization –the center of the nation’s economy shift to the cities. Internal migration by farmers looking for better-paying jobs causes a significant rural-urban inequality gap as income rise will be slow initially. Inequality decreases when a certain level of average income is reached and the processes of industrialization – democratization and the rise of the welfare state – allow for the trickle-down of the benefits from rapid growthand increases per-capita income.

Phillips curve represents the relationship between the rate of inflation and the unemployment rate.

Lorenz inequality curve is a graphical representation ofthe distribution of income or of wealth

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Q.2) What is the meaning of ‘take off stage’ in an economy?
a) hyper growth rate in an economy
b) economic growth takes place automatically
c) economy is de-linked from primary sector and growth is occurring in secondary sector
d) none of the above

Ans- b

Explanation-

Walt Rostow, US economist and a political theorist suggested that economy passes through following five stages before it becomes a developed economy.

These are:

1. Traditional society– This is an agricultural economy of mainly subsistence farming,
2. Pre-conditions for take-off– Agriculture becomes more mechanised and more output is traded.
3. Take-off– Manufacturing assumes greater importance, although the number of industries remains small. Political and social institutions develop . Economy becomes self reliant and growth take place automatically.
4. Drive to maturity– Industry becomes more diverse. Growth spread to different parts of the country as technology improves.
5. Age of mass consumption– Output grows, enabling increased consumer expenditure. There is a shift towards tertiary sector activity.

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Q.3) The price of any currency in international market is decided by the
1. World Bank
2. Demand for goods/services provided by the country concerned
3. Stability of the government of the concerned country
4. Economic potential of the country in question

Select the correct answer using the codes given below.
a) 2 and 3 only
b) 3 and 4 only
c) 1 and 4 only
d) 1, 2, 3 and 4

Ans-a

Explanation– The World Bank is a vital source of financial and technical assistance to developing countries around the world. It has no relation with price of currency in international market. So we can eliminate  option c and option d.

Price of any currency is determind like price of any other commodity i.e, by forces of demand and supply. Demand for a currency is created by two factors, its exports that is other countrieswho want to buy, or the investments that people want to make in that currency. Therfore, Option 2 is correct.

Stability of the government is very important factor too as an unstable govt may not be able to take effective economic decisions which will in turn affect export and import.

Considering all these option a is correct

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Q.4) The function of the Reserve Bank of India are:
1. Issuing all notes and coins
2. Distributing all notes and coins
3. Formulating monetary policy
4. Acting as agent of Government in respect of India’s membership of the IMF

Select the correct answer using the codes given below.
a) 1, 3 and 4
b) 2 and 3
c) 2, 3 and 4
d) 1, 2, 3 and 4

Ans- c

Explanation-All coins and one rupee note is printed by GoI. In fact GoI has the sole right to mint coins. Therefore option 1 is wrong. We can eliminate option a and option d.

Formulating monetary policy is one of the prime function of the RBI or any central bank of country. Distribution of all currency is done by RBI.

RBI also acts as an agent of GoI in respect of membership of the IMF. You can read RBI functions here.

Department of External Investments and Operations of RBI handles external transactions on behalf of GoI including transactions relating to International Monetary Fund (IMF). Thus option 4 is also correct.

Hence ans is option c

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Q.5) Regional rural banks:
1. Have limited area of operation
2. Have free access to liberal refinance facilities from NABARD
3. Are required to lend only to weaker sections

Select the correct answer using the codes given below.
a) 1 and 3 only
b) 2 and 3 only
c) 1 and 2 only
d) 1, 2 and 3

Ans-c

Explanation–

Sources of funds of RRBs comprise of owned fund, deposits, borrowings from NABARD, Sponsor Banks and other sources including SIDBI and National Housing Bank.

NABARD website says “Department of Refinance is vested with the core function of providing refinance in respect of term loan for both Farm Sector and Non – Farm Sector activities for a period upto 3-15 years and is released to only eligible institutions viz. SCARDBs, SCBs, Regional Rural Banks or Scheduled commercial banks or any other financial institution, approved by Reserve Bank of India (RBI) as defined under Section 25 of NABARD Act.”Therefore statement 2 is correct. We can eliminate option 1.

The area of operation of the RRBs is limited to notified few districts in a State. Therefore statement 1 is also correct.

The RRBs mobilise deposits primarily from rural/semi-urban areas and provide loans and advances mostly to small and marginal farmers, agricultural labourers , rural artisans and other segments of priority sector.Priority sector lending includes loans given to agriculture, micro, small and medium enterprises, education, housing, weaker sections, social infrastructure and renewable energy segments. Therefore, statement 3 is wrong as it says ‘only’ weaker sections which does not include PSL.

Thus, option c is correct.

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Q.6) The per capita income has been low in India because:
a) of population growth.
b) of inflation reducing the purchasing power of people.
c) of insufficient increase in total income.
d) of regional imbalances

Ans-a

Explanation-India is overpopulated country. Though India has made considerable progress in economy but due to high population per capita availability of resources and income are low

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Q.7) Consider the following statements
1. Inflation in every form is bad for the economic growth of a country.
2. Right monetary policy by the Central Bank control all inflation.

Select the Incorrect statements using the codes given below.

a) 1 only
b) 2 only
c) Both 1 & 2
d) Neither 1 nor 2

Ans- c

Explanation– Inflation in every form is not bad. Zero inflation is discouraging for the economy. Thus statement 1 is wrong.

Monetary policy alone no matter how much it is right with respect to economic environment may not control all kind of inflation. Fiscal policy support and intervention of the govt are also needed. Thus statement 2 is also wrong.

Hence ans is c.

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Q.8) Which of the following would be considered as tools of economic stimulus?
1. Increasing taxes so that government has more money to spend
2. Quantitative Easing
3. Decreasing Interest Rates

Select the correct statements using the codes given below:
a) 1 and 2 only
b) 1 and 3 only
c) 2 and 3 only
d) 1, 2 and 3

Ans-c

Explanation-An economic stimulus is the use of monetary or fiscal policy to stimulate lagging or struggling economy. Government can use tactics such as lowering interest rates, and quantitative easing mainly to achieve this.

Lowering taxes enables increase of consumer spending which helps economy to recover from the recession. Thus Option c