Static Quiz 20 October 2023 (Indian Economy)

Solution: d)
Justification: MFs are polled funds of various investors, managed by an active fund manager. There are various type of mutual funds in the market. Income Funds invest in corporate bonds, government bonds and money market instruments with long maturities. Money market funds invest in short-term fixed income securities such as government bonds, treasury bills, bankers’ acceptances, commercial paper and certificates of deposit. There are MFs dedicated to each of these instruments or handling a mixture of these instruments.

Solution: d)
Justification: Since it allows specialization of production, (a) is correct. Option (b) is a natural consequence of more producers of the same product or service. Since exporters can tap domestic as well as foreign markets, they can produce more, reduce costs and thus reap economies of scale. So, (c) is also correct. Option (d) is not a valid argument out of the all four. Globalization along with free trade can adversely affect the economies of developing countries by not giving equal playing field by imposing conditions which are unfavourable. With the development of transport and communication systems goods and services can travel faster and farther than ever before. But free trade should not only let rich countries enter the markets, but allow the developed countries to keep their own markets protected from foreign products.

Solution: c)
Justification: Historically, the RBI had been sterilizing the effects of significant capital inflows on domestic liquidity by offloading parts of the stock of Government Securities held by it. The MSS was devised since continuous resort to sterilization by the RBI depleted its limited stock of Government Securities and impaired the scope for similar interventions in the future. Under this scheme, the GoI borrows from the RBI (such borrowing being additional to its normal borrowing requirements) and issues Treasury-Bills/Dated Securities that are utilized for absorbing excess liquidity from the market. Therefore, the MSS constitutes an arrangement aiding in liquidity absorption, in keeping with the overall monetary policy stance of the RBI, alongside tools like the Liquidity Adjustment Facility (LAF) and Open Market Operations (OMO). The securities issued under MSS, termed as Market Stabilization Scheme (MSS) Securities/Bonds, are issued by way of auctions conducted by the RBI and are done according to a specified ceiling mutually agreed upon by the GoI and the RBI.

Solution: b)
Justification: Option B: For a Flexible exchange rate system to work, the inflow and outflow of foreign currency should be largely uninhibited. When this is severely curtailed, the system can’t work. This is because for the exchange rate to be determined, there must be free buying and selling of the domestic currency in the international market. CAC means inflow and outflow of foreign currency for the purpose of trade, remittances etc. is freely allowed. When CAC is stopped, the buying and selling of currency is stopped, and hence its value determination. Flexible exchange rate system becomes dysfunctional.
Option A, C and D: In rest of the options, this movement of currency is not stopped, and it continues, hence the flexible exchange rate system remains intact

Solution: a)
Justification: Statement 1 and 2: Our economy is in the process of allowing full capital account convertibility, and options 1 and 2 come under capital account. Option 3 comes under current account. For e.g. Indian corporate are allowed full convertibility in the automatic route up to $ 500 million overseas ventures (Investment by Ltd. companies in foreign countries allowed). Indian corporate are allowed to prepay their external commercial borrowings (ECBs) via automatic route if the loan is above $ 500 million. As in 2015, Indian Individuals were allowed to invest in foreign assets, shares, etc., up to the level of $2, 50,000 per annum. Statement 3: In recent years, the imports of Gold have tripled from $5 billion to $15 billion. In view of this, the Government has restricted the import of gold. For e.g. India has restricted all forms of gold imports from South Korea on the grounds that it is not a gold producing country. However, the commerce department is against the use of any such measure across the board.