The correct answer is Option 2 i.e. Capitalist economy

Key Points

Capitalist economy

• Capitalism is an economic system in which private individuals or businesses own capital goods.
• Laissez-faire is the belief that economies and businesses function best when there is no interference by the government. It comes from the French, meaning to leave alone or to allow to do. It is the guiding principle of capitalism and a free market economy.

Additional Information

Socialist Economy

• Socialist economy means the system under which the economic system is controlled and regulated by the government so as to ensure the welfare and equal opportunity to the people in a society. Here Goods and services are produced directly for use.
• The idea of socialism is first introduced by Karl Marx and Fredric Engles in their book, ‘The Communist Manifesto’.

 Mixed Economy

• A mixed economic system is a system that combines aspects of both capitalism and socialism. A mixed economic system protects private property and allows a level of economic freedom in the use of capital, but also allows for governments to interfere in economic activities in order to achieve social aims.
• Mixed economies typically maintain private ownership and control of most of the means of production, but often under government regulation.
• Mixed economies socialize select industries that are deemed essential or that produce public goods.
• Ex. India

Closed Economy

• The closed economy is self-sufficient, which means no imports come into the country and no exports leave the country.
• The purpose of a closed economy is to provide domestic consumers with everything they need from within the country's borders.
• Example: Brazil

The correct answer is Mixed.

• India is considered a mixed economy: the private and public sectors coexist and the country takes advantage of international trade.
  • The economy of India is a middle income developing market economy.
  • It is the fifth largest economy in the world by nominal GDP and the third largest by purchasing power parity. 

Additional Information

• Types of economic systems:
  • Capitalist Economy:
    • In a capitalist system, manufactured products are divided among people, not according to what they want but on the basis of purchasing power, which is the ability to buy products and services.
  • Socialist Economy:
    • This economy system accepts the three inquiries in a different way.
    • In a socialist society, the government determines which products are to be manufactured according to the needs of the society.
    • It is believed that the government understands what is fair to the citizens of the country. 
  • Mixed Economy:
    • Mixed systems have the characteristics of both a command and a market economic system.
    • For this purpose, mixed economic systems are also known as dual economic systems.

Option 3 is correct, Investment Expenditure.

• Investment Expenditure-
  • The general meaning of investment Expenditure is that they raise production capacity.
  • It is not related to the immediate consumption expenditure or expenses which are exhausted during production.
• Capital expenditure-
  • Capital expenditure basically is the money spent by a business or organization in order to acquire or maintain a fixed asset, such as land or any other equipment.
  • Preliminary expenses are examples of Capital expenditure as these are the investments done before the commencement of business. Example- Logo and survey report.
• Revenue Expenditure-
  • Revenue expenditure is an expenditure in which neither productivity increases in the country nor the government ever earns from it.
    This expenditure is non-developmental.
  • Revenue expenditure includes subsidies given by the government, interest payments, expenditure on government departments and government schemes, and grants to state governments.

• Cost push inflation is inflation caused by an increase in prices of inputs like labour, raw material, etc. The increased price of the factors of production leads to a decreased supply of these goods. Ex: Gold price goes up because of the shortage of gold deposits in the world.

The correct answer is Option 1.

Key Points

• Crowding Out Effect
  • This refers to a phenomenon where increased borrowing by the government to meet its spending needs causes a decrease in the number of funds that are available to meet the investment needs of the private sector.
  • In other words, when the government is increasing its expenditure, private expenditure comes down. Hence, Option 1 is correct.
  • Sometimes, the government adopts an expansionary fiscal policy stance and increases its spending to boost economic activity.
  • This leads to an increase in interest rates. Increased interest rates affect private investment decisions.
  • A high magnitude of the crowding-out effect may even lead to lesser income in the economy.
  • With higher interest rates, the cost for funds to be invested increases and affects their accessibility to debt financing mechanisms.
  • This leads to lesser investment ultimately and crowds out the impact of the initial rise in the total investment spending.
  • Usually, the initial increase in government spending is funded using higher taxes or borrowing on part of the government.
  • Some believe that government spending does not always lead to a crowding out of private investment in the economy.
  • They instead argue that government demand for funds can compensate for the lack of private demand for funds during economic depressions, thus helping to prop up aggregate demand.

Additional Information

• Skewflation
  • It means that some sectors are facing inflation while other sectors of the economy do not.
• GDP Deflator
  • It is a measure of general price inflation.
  • It is calculated by dividing nominal GDP by real GDP and then multiplying by 100.
  • Nominal GDP is the market value of goods and services produced in an economy, unadjusted for inflation.

The correct answer is Increase in money supply and Fall in production.

Key Points

• Inflation is a caused when there is an increase in money supply and fall in production.
• Also occurs due to rising prices of goods and services in an economy.
• When inflation occurs it leads to higher prices for basic necessities such as food, it can have a negative impact on society.
• Inflation: Inflation in general terms refers to the persistent rise in the general price level in the country over a period of time.
  • During inflation, there is an increase in the money supply.
• Causes of Inflation: 
  1. ​​A mismatch between demand and supply.
  2. When demand exceeds supply.
  3. Increase in money supply and fall in production.
  4. Due to changes in demand-side or supply-side or both.
• Types of Inflation:
  • ​Creeping Inflation: Slows and on predictable lines.
  • Galloping Inflation: Very high.
  • Hyper Inflation: Large and accelerating.
  • Bottleneck Inflation: When supply falls drastically and demand remains the same.
• Measures of Inflation:
  • ​Wholesale Price Index.
  • GDP deflator.
  • Consumer Price Index.

The correct answer is all final goods and services.

Key Points

• Gross Domestic Product (GDP)
  • It is the sum of the money of all the final goods and services produced solely within the boundaries of a country, at a specific time.
  • GDP includes the income of foreigners staying in the country.
  • It excludes the income of nationals of the country staying abroad and also excludes the remittances sent from abroad.

Additional Information

• Gross National Product (GNP) 
  • It is the sum of the money of all the final goods and services produced both within and outside of a country by nationals during a specific period of time.
  • GNP includes remittances (money sent from abroad)
  • It excludes income generated locally by non-nationals.
• National Income: It is defined as the total net earnings of a country from the production of goods and services over a period of time (usually one year).
• ​National Income is measured by:
  • Gross National Product (GNP)
  • Gross Domestic Product (GDP)
  • Gross National Income (GNI)
  • Net National Product (NNP)
  • Net Domestic Product (NDP)
  • Net National Income (NNI)
  • Per-Capita Income (PCI)

The intermediate good is not included in calculation of GDP because its value is already accounted for and added in the final value of the good or service. Adding it again inflates the GDP distorting its true value.

The correct answer is Capital Goods.

• Capital goods:- Goods that are bought not for meeting the immediate need of the consumer but for producing other goods

Key Points

• Capital goods:- Goods that are bought not for meeting the immediate need of the consumer but for producing other goods
• Final goods:- These are those which are used for:
  • Personal consumption (like bread purchased by consumer household), or
  •  Investment or capital formation (like building, machinery purchased by a firm)
• Intermediate goods:- These are those, which are used for:
  •   Further processing (like sugar used for making sweets), or
  •   Resale in the same year (If car purchased by a car dealer for resale).
• Consumption goods:- Those goods which satisfy the wants of consumers directly.

The correct answer is Neither 1 nor 2.

Key Points

• Flows  
  • Flows are defined over a period of time.
  • The income or output or profits are concepts that make sense only when a time period is specified.
  • Therefore we need to delineate a time period to get a quantitative measure of these concepts.
  • Since a lot of accounting is done annually in an economy, many of these are expressed annually like annual profits or production.
  • For eg., the Profits of Tata Ltd. for  2020 is $2 bn.
• Stocks
  • Stocks are defined at a particular period of time.
  • The capital goods or consumer durables once produced do not wear out or get consumed in a delineated time period. In fact capital goods continue to serve us through different cycles of production.
  • The buildings or machines in a factory are there irrespective of the specific time period. There can be addition to, or deduction from, these if a new machine is added or a machine falls in disuse and is not replaced. These are called stocks.
  • For eg., Mittal industries have machines worth $20mn as on 2 February 2020.
• For Example, A tank is being filled with water coming from a tap. The amount of water which is flowing into the tank from the tap per minute is a flow. But how much water there is in the tank at a particular point of time is a stock concept.

• Hot money is the flow of funds from one country to another in order to earn a short-term profit on interest rate differences.
• A global depositary receipt (GDR) is a bank certificate issued in more than one country for shares in a foreign company.
• Foreign direct investment is an investment in the form of a controlling ownership in a business in one country by an entity based in another country.
• Foreign portfolio investment is the entry of funds into a country where foreigners deposit money in a country's bank or make purchases in the country's stock and bond markets. In FPI, the investor does not have direct control over the securities or businesses.
• Hot money is generally referred to as FPI.

The correct answer is NRI Accounts

Key Points

• The Forms of Foreign Capital Flowing into India include NRI deposits made in profitable foreign currency accounts.
• Further, the various Forms of foreign capital flows into India are portfolio flow of capital made by institutional foreign investors that make investments in India's debt and stock markets.
• Foreign Capital Flowing into India also include investments that are being made by the foreign investors in the commercial banks of India.

Therefore, the correct answer is NRI Accounts.

Important Points

FDI:

• A foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country.
• Generally, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets in a foreign company.
• FDI capital can flow through the NRE account. A Non-Resident External (NRE) account is a rupee-dominated account opened by an NRI to facilitate the deposit of foreign currency earnings.

The correct answer is Net investment = Gross investment - depreciation.

Key Points

• The addition to the capital stock in an economy is measured by net investment or new capital formation, which is expressed as Net investment = Gross investment - depreciation.
• Gross Investment is referred to as the total expenditure that is made for buying capital goods over a time period, without accounting for depreciation.
  • In other words, gross investment is the amount that a company has invested in particular assets or the business as a whole without considering depreciation for the same.
• Net Investment, on other hand, is the actual addition that is made to the capital stock in a given period.
  • Net Investment takes into account the depreciation and is calculated by subtracting the depreciation from the gross investment.

The correct answer is Net Factor Income from abroad.

Key Points

• Gross Domestic Product (GDP) is the aggregate value of goods and services produced within the domestic territory of a country.
• GDP includes the replacement investment of the depreciation of capital stock.
• The total amount of goods and services generated in a country throughout a financial year is referred to as GDP.
• The GDP accounts for the purchases of newly generated goods and services during a given time period.
• When measuring GDP, the total value of products and services produced within the country's boundaries is taken into account, regardless of whether the value addition is due to citizens or non-residents.
• It highlights the strength of the country’s economy.
• Gross National Product (GNP) is the sum of GDP and Net Factor Income from Abroad.
• GNP includes the aggregate income made by all citizens of the country, whereas GDP includes incomes by foreigners within the domestic economy and excludes incomes earned by the citizens in a foreign economy.
• Net factor income from abroad is the main difference between GDP and GNP.
  • It considers the income earned by citizens of the country, whether they live within or outside the country.
  • It does not include money made by foreign nationals living in the country.
  • It highlights the contribution of the residents to the development of the economy.

• Depreciation is an annual allowance for wear and tear of a capital good. In other words, it is the cost of the good divided by a number of years of its useful life.
• While calculating depreciation unexpected or sudden destruction or disuse of capital as can happen with accidents, natural calamities or other such extraneous circumstances are not taken into account.
• As an accounting term, depreciation is an expired cost or expense, charged against the revenue of a given accounting period.
• It is the diminution in the intrinsic value of the asset due to use and/or lapse of time.

Key Points

• Rupee depreciation badly affects importers or those who wish to visit foreign countries for holidays as they need more local currency to get the same service or product.
• When rupee depreciates exporters from India are benefited. (Eg: Software companies, seafood exporters etc.)
• Depreciation of rupee benefits the overseas Indians as those who are working abroad will gain more on remitting money to their homeland. Hence, Option 4 is the correct answer.

The correct answer is Depreciation.

Key Points

• Depreciation​
  • “Depreciation” means a decline in the value of fixed assets due to use, the passage of time or obsolescence. 
  • Depreciation is an accounting term used to determine the value of fixed assets.
  • If a business enterprise procures a machine and uses it in a production process then the value of the machine declines with its usage.
  •  Even if the machine is not used in the production process, we can not expect it to realise the same sales price due to the passage of time or the arrival of a new model.
  • Fixed assets are subject to depreciation.
  • Depreciation has a significant effect in determining and presenting the financial position and results of operations of an enterprise.
  • Hence, Depreciation is NOT included in the circular flow of Income in a simple economy.

Important Points

•  The Net National Product of an economy is the GNP after deducting the loss due to depreciation.
  • NNP = GNP – Depreciation
  • NNP = GDP + income from abroad - Depreciation
• Net Domestic Product (NDP) is GDP estimated after deducting the loss due to depreciation
• This is essentially the net version of GDP, i.e, GDP minus the total value of the wear and tear (depreciation) that occurred in the assets while the products and services were created.
  • NDP = GDP - Depreciation.

Leakage:

1. In economics, leakage refers to capital or income that diverges from some kind of iterative system.
2. Leakage is usually used in relation to a particular depiction of the flow of income within a system, referred to as the circular flow of income and expenditure, in the Keynesian model of economics.
3. Within this depiction, leakages are the non-consumption uses of income, including saving, taxes, and imports.

1. This particular Keynesian model of the flow of income is usually depicted as a circle, and the components include national income, output, consumption, and factor payments.
2. Non-consumption uses of income—savings, taxes, and imports—are "leaked" out of the main flow.
3. This reduces the money available throughout the rest of the economy.
4. This theory of Keynesian economics purports that when leakage causes a shortage of capital, governments might have to take steps to stimulate their economies by injecting cash into their systems.
5. This injection of funds can be achieved by increasing the level of exports to foreign nations, or by borrowing funds from investors or foreign governments.

Therefore, Leakages, which have a negative impact on the process of income generation in the economy are savings, imports, and taxes by the government.

The correct answer is Net Import.

• Net Import is not the component of GNP Expenditure.

Key Points

• Gross National Product (GNP) is the total value of all finished goods and services produced by a country's citizens in a given financial year, irrespective of their location.
• GNP also measures the output generated by a country's businesses located domestically or abroad.
• It can be defined as a piece of economic statistic that comprises Gross Domestic Product (GDP), and income earned by the residents from investments made overseas.
• The formula for GNP = GDP + Net factor income from abroad
  GNP = C + I + G + X + Z
  Where C is consumption, I is investment, G is government, X is net exports, and Z is net income earned by domestic residents from overseas investments minus net income earned by foreign residents from domestic investments.

Additional Information

Net Import

• A net import is any trade condition where a country has more imports than exports.
• A country that has more trade going out is called a net import country. 
• A country that has more trade going out than imported is a net exporter.
• The condition of being a net importer is called a negative trade balance, and it is considered to be a drag on a country's economy.

Investment 

• Investment is the value of fixed capital assets produced in an economy over a period of time.
• Investment refers to the creation of capital goods.
• Investment spending is an injection into the circular flow of income.
• Investment is an asset acquired or invested in to build wealth and save money from the hard-earned income or appreciation.
• Investment is primarily made to obtain an additional source of income or gain profit from the investment over a specific period of time.

Net exports 

• Net exports are a measure of a country's total trade of goods and services.
• It is also known as the balance of trade.
• It is after deducting the nation's import value from the export value and calculated for a specific period.
• The value of a nation's total export goods and services minus the value of all the goods and services it imports equal its net exports.

Consumptions

• Consumption is defined as spending for the acquisition of utility, is a major concept in economics, and is also studied in many other social sciences.
• It is seen in contrast to investing, which is spending for the acquisition of future income. 

The correct answer is Expansion fiscal policy will help in reducing the deficit.

Key Points

• Fiscal policy measures that can be used to reduce excess demand in an economy are:
  • Government expenditure: A cut in expenditure acts like a withdrawal from the circular flow of income of the economy. It is required to correct excess demand.
  • Taxes: Government increases taxes in order to correct a situation of inflationary gap or excess demand.
  • Public borrowing: Borrowing from the public by the government is increased in the situation of excess demand.
  • Borrowing from RBI: Borrowing from RBI is increased to fight the inflationary gap.
• So among all the options, option one is incorrect regarding fiscal policy.
• Expansionary policy leads to higher budget deficits.

Important Points

• The policy that determines how much the government will spend and how much taxes the citizens have to pay is called the Fiscal Policy.
• These two things help the government proactively monitor and influence the economy of the country.
• The government uses Fiscal Policy either to curb recession and unemployment or to decrease inflation.
• Most of the time, Fiscal Policy is used in conjunction with Monetary Policy.

The correct answer is 2005.

Key Points

• VAT came into effect on April 1, 2005.
• VAT is an indirect tax. It was introduced in India in 1986 and was called MODVAT (modified value-added tax).

• VAT is applicable all over India, except Andaman and Nicobar Islands and Lakshadweep.
• MODVAT allowed manufacturers to obtain a reimbursement of the excise duties paid on goods. It was in effect till 1994.
• Initially confined to raw materials and components, the scope of MODVAT was subsequently extended to include capital goods in 1994.
• In April 2000, MODVAT was rechristened CENVAT (Central value-added tax).

Additional Information

• GST is a value-added tax system levied on most goods and services that are sold for domestic consumption.
• It is paid by the consumers while it remitted to the Government by the businesses offering goods and services.
• The GST council has fitted over 1300 goods and 500 services under four tax slabs of 5%, 12%, 18%, and 28% under GST.

• All the above-given methods are used for calculating national income
• National income is the total money value of goods and services produced by a country in a period of time.
• Methods used for calculating national income are - Value-added method (also called net output method), Income method, (also known as factor income method) and, the Expenditure method (also known as final product method).

The correct answer is value-added.

Key Points

• The term that is used to denote the net contribution made by a firm is called its value-added.
• Value added is the difference between gross output and intermediate inputs and represents the value of labour and capital used in producing gross output. 

Additional Information

• Gross Value Added is defined as the amount of output minus the value of intermediate consumption and is a measure of the contribution to growth made by an individual producer, industry, or sector.
• It provides the rupee value for the number 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.
• Gross Value Added = GDP + subsidies on products - taxes on products.

The logic followed here is:

• An increase in demand can be met through an increase in supply.
• Similarly, an increase in consumption can be met through an increase in production.

Hence, the correct answer is Consumption.

Key Points

• 'Supply' is related to 'Demand' in the same way as 'Production' is related to 'Consumption'.
• Production is the process of merging numerous material and immaterial inputs (plans, information) to create a consumable item (output).
• It is the process of producing a valuable product, such as a good or service, that adds to people's utility.
• Production theory, which is interwoven with the consumption (or consumer) theory of economics, is a branch of economics that focuses on production.
• The output and production process are intimately related to the productive use of the original inputs (or factors of production).

Additional Information

• Land, labour, and capital are considered the three fundamental production inputs and are referred to as primary producer commodities or services. In the output phase, these fundamental inputs are not greatly changed, and they do not form a complete component of the result.
• Materials and energy are classified as secondary elements in classical economics since they are bi-products of land, labour, and capital.
• A consumer's desire to purchase a commodity is characterised as demand for goods or services.
• The overall availability of a commodity in the market is the supply of commodities or services.

The correct answer is Building.

• The assets which are easier to convert into cash are known as current assets. 
• It is used to fund day-to-day operations and pay the ongoing expenses of a company. 
• The most common current assets include sundry debtors, inventories, cash, and bank balances, loans, and advances.
  • Inventories are goods that are in different stages of production and have not yet been sold. As such, they could be finished or semi-finished products. Inventories would also include packaging material. 
  •  Sundry debtors- In simple terms, debtors are persons who owe money to the company. The reason sundry debtors are recorded as assets to a company is that the money belongs to the company, which it expects to receive within a short period.
    • Note- The two main types of assets are current assets and non-current assets.
• Non-current assets are assets whose value will not be realized within a period of one year since they are not easily converted into cash.

The correct answer is Increase in expenditure on public projects.

Key Points

• An economic recession is typically defined as a decline in the gross domestic product (GDP) for two or more consecutive quarters. 
• High-interest rates are a cause of recession because they limit liquidity, or the amount of money available to invest. Hence statements 1 and 3 are not correct
• Inflation refers to a general rise in the prices of goods and services over a period of time. As inflation increases, the percentage of goods and services that can be purchased with the same amount of money decreases.
• An increase in public expenditure rises GDP by the same amount, other things equal.
• Moreover, since income is an important determinant of consumption, that increase in income will be followed by a rise in consumption.
• Public expenditure plays four main roles:
  • It contributes to current effective demand;
  • It expresses a coordinated impulse on the economy, which can be used for stabilization, business cycle inversion, and growth purposes;
  • It increases the public endowment of goods for everybody;
  • It gives rise to positive externalities to the economy and society as a whole (or in specific sectors and geographical areas), the more so through its capital component. Hence statement 2 is correct.

The correct answer is Roads.

Key Points

• Context of Natural Capital in India:
  • India suffered a cost of $550 billion, about 8.5% of GDP, due to air pollution, according to a World Bank report.
  • The cost of externalities such as water pollution and land degradation were possibly far higher.
  • Through commodity exports, we effectively transfer natural capital to our trade partners, raising the risk of desertification and land being degraded significantly.
  • Within a century, our food production could see a loss of 10-40% if these trends continue.
  • So when we crow about GDP growth, we should also consider the decline in natural capital in our national accounts.
  • Ecosystem services science (ESS) is inherently an integrated, transdisciplinary science that is concerned with the way these four forms of capital assets (built, human, social and natural) contribute to human well-being and the synergies and trade-offs among them.
  • The challenge in ecosystem services analysis and valuation is to assess the relative contribution of the natural capital stock in this interaction and to balance our assets to enhance sustainable human well-being.

Additional Information

• India’s current national accounts incorporate such environmental considerations in a limited fashion.
• GDP includes the value of minerals extracted; timber, fuelwood and non-timber forest products; natural growth of cultivated assets for some crops; and the output from dung manure.
• In addition, ‘gross fixed capital formation contains output estimates from the improvement of land along with irrigation works and flood control projects'.
• However, even in GDP estimates of timber value, there is significant under-estimation, non-monetised goods and services provided from timber forests are not considered.
• Interaction between built, social, human and natural capital required to produce human well-being.
• Built and human capital (the economy) are embedded in society which is embedded in the rest of nature.
• Ecosystem services are the relative contribution of natural capital to human well-being, they do not flow directly.
• It is therefore essential to adopt a broad, transdisciplinary perspective in order to address ecosystem services.

Banks are the institutional bodies that accept deposits and grant credit to the entities and play a major role in maintaining the economic stature of a country.  

• In India, the Reserve Bank of India (RBI) is the apex banking institution that regulates the monetary policy in the country.
• The banking sector of India can be broadly divided into two major groups’ i.e. scheduled banks and Non-Scheduled Banks.
• Banks that have been included in the second schedule of the RBI Act, 1934 are called the scheduled bank while non scheduled banks are not included in the second schedule of the RBI Act,1934.

Scheduled banks are covered under the 2nd Schedule of the Reserve Bank of India Act, 1934. To qualify as a scheduled bank, the bank should conform to the following conditions:

• A bank that has a paid-up capital of Rs. 5 Lakh and above qualifies for the schedule bank category
• A bank requires to satisfy the central bank that its affairs are not carried out in a way that causes harm to the interest of the depositors
• A bank should be a corporation rather than a sole-proprietorship or partnership firm

Hence, it is clear that Scheduled Banks have to be registered with the Reserve Bank of India (RBI).

1. SEBI- The Securities and Exchange Board of India was established on April 12, 1992, in accordance with the provisions of the Securities and Exchange Board of India Act, 1992. 

• It regulates the business in stock exchanges and any other securities markets
• registering  and  regulating  the  working  of  stockbrokers,  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
• registering   and   regulating   the   working   of [venture   capital   funds   and   collective investment schemes], including mutual funds
• promoting and regulating self-regulatory organizations
• prohibiting fraudulent and unfair trade practices relating to securities markets
• promoting investors‘ education and training of intermediaries of securities markets
• prohibiting insider trading in securities.

2. Finance Ministry: 

• The Ministry of Finance is an important ministry within the Government of India concerned with the economy of India, serving as the Indian Treasury Department.
•  In particular, it concerns itself with taxation, financial legislation, financial institutions, capital markets, center and state finances, and the Union Budget.

3. SBI: 

• State Bank of India is an Indian multinational, public sector banking and financial services statutory body headquartered in Mumbai, Maharashtra. SBI is ranked 236th in the Fortune Global 500 list of the world's biggest corporations of 2019.

Money is the commonly accepted medium of exchange.

Key Points

Economic exchanges without the mediation of money are referred to as barter exchanges or barter systems.

• They presume the rather improbable double coincidence of wants. 
• For example, an individual who has a surplus of rice which she wishes to exchange for clothing. She may not be able to find another person who has the demand for rice with a surplus of clothing to offer in exchange.
• The search costs may become prohibitive as the number of individuals increases.
• Thus, It makes the exchange of things difficult.
• In order, to smoothen the transaction, an intermediate good is necessary which is acceptable to both parties.
• Such a good is called money.
• The individuals can then sell their produces for money and use this money to purchase the commodities they need.
• Though facilitation of exchanges is considered to be the principal role of money, it serves other purposes as well.

Hence, the correct answer is It is a trade in which goods are exchanged without the use of money.

According to Keynes, there are three motives behind the desire of the public to hold liquid cash:

(1) the transaction motive,

(2) the precautionary motive, and

(3) the speculative motive.

Additional Information

• The Liquidity Preference Theory says that the demand for money is not to borrow money but the desire to remain liquid. In other words, the interest rate is the 'price' for money.
• John Maynard Keynes created the Liquidity Preference Theory in to explain the role of the interest rate by the supply and demand for money.
• In his “General Theory of Employment, Interest and Money” (Keynes 1936), Keynes distinguishes three reasons for holding money: the transaction motive, the precautionary motive, and the speculative motive.
• Money held under the transaction motive are balances which are needed to carry out planned expenditures.

Hence we can say that J.M. Keynes has introduced liquidity preference theory into 3 motives.

The correct answer is Option 1.

Key Points

• Fiat money is a currency that lacks intrinsic value.
  • It is a promise from a government or central bank that the currency is capable of being exchanged for its value in goods.
• It is established as a legal tender by government regulation.
• Unlike traditional money, it is not supported by any physical commodity like gold and silver, but by the faith of its holders and the credibility of the issuing government.
• For its success, the government must protect it against counterfeiting and manage the money supply responsibly.
• The value of fiat money depends on supply and demand.
  • It also depends on how a country’s economy is performing, how the country is governing its economic policies. 
• Most modern paper currencies are fiat currencies, including the U.S. dollar, the euro, and other major global currencies.
• Fiat money, in a broad sense, is all kinds of money that are made legal tender by a government decree or fiat.
• The term is, however, usually reserved for legal-tender paper money or coins that have face values far exceeding their commodity values and are not redeemable in gold or silver. 
• Fiat currency or real currency, real money, or national currency is distinguished from Virtual currency or digital currency.
• Fiat currency is the coin and paper money of a country that is designated as its legal tender.

• Fiat money is currency that government has declared to be a legal tender, but it may or may not be backed by any physical commodity.
• The value of fiat money is solely decided by law of demand and supply rather than the value of material from which it is made.
• It does not have any intrinsic value however it cannot be refused while settling a debt.
• Indian Rupee, US dollar etc. are example of Fiat money.

NDTL is sum of demand deposit (Saving and current Deposits) and time deposits (Recurring & Fixed Deposits) of banks with public and other banks wherein assets with other banks is subtracted to get net liability of other banks.

NDTL = Demand and time liabilities (deposits) – deposits with other banks

• Legal Tender is that money which is valid payment for all debts i.e. that cannot be refused to settle a debt.
• Bank notes & coin are recognized as legal tenders.
• Credit cards, Personal cheque, e-PAYMENT etc. are not defined as legal tenders.
• Every transaction can take place with these legal tenders.

Money Supply:

• Reserve Bank of India calculates four components of money supply, M1, M2, M2, M4.
• In macroeconomics, the money supply is the total value of money available in an economy at a point in time. There are several ways to define "money", but standard measures usually include currency in circulation and demand deposits.
• M1 and M2 are known as narrow money. M3 and M4 are known as broad money. M1 is the most liquid and easiest for transactions whereas M4 is the least liquid of all. M3 is the most commonly used measure of the money supply. It is also known as aggregate monetary resources.

M1 & M3  are the most relevant, Therefore Option 4 is the correct answer.

The correct option is M1 = currency held by the public + demand deposits of the public 

 Important Points

• Money supply, like money demand, is a stock variable. The total stock of money in circulation among the public at a particular point in time is called money supply. RBI publishes figures for four alternative measures of money supply, viz. M1, M2, M3, and M4. They are defined as follows
  • M1 = CU + DD
  • M2 = M1 + Savings deposits with Post Office savings banks
  • M3 = M1 + Net time deposits of commercial banks
  • M4 = M3 + Total deposits with Post Office savings organizations (excluding National Savings Certificates)
• M1 is the money supply that is composed of currency, demand deposits, other liquid deposits—which includes savings deposits.
  • M1 includes the most liquid portions of the money supply because it contains currency and assets that either is or can be quickly converted to cash.
• Where CU is currency (notes plus coins) held by the public and DD is net demand deposits held by commercial banks.
  • The word ‘net’ implies that only deposits of the public held by the banks are to be included in the money supply.
  • The interbank deposits, which a commercial bank holds in other commercial banks, are not to be regarded as part of the money supply.
• M1 and M2 are known as narrow money.
  • M3 and M4 are known as broad money.
  • These gradations are in decreasing order of liquidity.
  • M1 is the most liquid and easiest for transactions whereas M4 is the least liquid of all.
  • M3 is the most commonly used measure of the money supply. It is also known as aggregate monetary resources1.

Money supply, like money demand, is a stock variable. 

• The total stock of money in circulation among the public at a particular point of time is called money supply. RBI publishes figures for four alternative measures of money supply, viz. M1, M2, M3, and M4. 
• The interbank deposits, which a commercial bank holds in other commercial banks, are not to be regarded as part of the money supply. 
• M1 and M2 are known as narrow money. M3 and M4 are known as broad money. 
  • These gradations are in decreasing order of liquidity. 
  • M1 is the most liquid and easiest for transactions whereas M4 is the least liquid of all.
  • M3 is the most commonly used measure of the money supply. 

Additional Information

• The measures of money supply in India are classified into four categories M1, M2, M3, and M4 along with M0.
• This classification was introduced in April 1977 by the Reserve Bank of India.
• Reserve Money (M0): It is also known as High-Powered Money, monetary base, base money etc.
  • M0 = Currency in Circulation + Bankers’ Deposits with RBI + Other deposits with RBI.
• It is the monetary base of the economy.
  • Narrow Money (M1):
    • M1 = Currency with public + Demand deposits with the Banking system (current account, saving account) + Other deposits with RBI
    • M2 = M1 + Savings deposits of post office savings banks
    • Broad Money (M3)
    • M3 = M1 + Time deposits with the banking system
    • M4 = M3 + All deposits with post office savings banks 

The money supply is the total amount of currency and other liquid assets in a nation's economy on the day examined. The money supply consists of mainly cash and deposits that may be utilised almost as readily as cash.                                                                                       Important Points

• Various monetary aggregates, such as M0, M1, and M2, are used to classify the money supply.
• M0 is the monetary base.
• M0 is equivalent to coin currency, physical paper, and central bank reserves.

Additional Information

• M1 is referred to as narrow money since it only consists of 100% liquid deposits.
• M2 covers M1 as well as savings account deposits at post offices.
• M3 is known as broad money because, in addition to liquid deposits, it also contains time deposits, providing a broad definition of money. 
• M4 covers M3 as well as total deposits held by post offices.

Hence M0 is the measure of money supply known as monetary base.

The correct answer is All of the given options.

Key Points

• The money supply is all the currency and other liquid instruments in a country's economy on the date measured.
• The money supply roughly includes both cash and deposits that can be used almost as easily as cash.
• Governments issue paper currency and coin through some combination of their central banks and treasuries.
• Factors responsible to determine the stock of money in a bank:
  1. ​The Monetary Base
  2. Individuals preference for currency versus checking deposits
  3. The Reserve Deposit Ratio

Additional Information

• The Monetary Policy Committee (MPC) is a committee of the Reserve Bank of India to fix the interest rate to contain inflation.
• The Monetary Policy Committee is defined by the Reserve Bank of India Act, 1934 and is constituted by the same Act.
• The MPC replaced the earlier system where the RBI governor had complete control over monetary policy decisions.
• The Monetary Policy Committee would be entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level.

The correct answer is the Currency deposit ratio.

• Currency Deposit Ratio:
  • ​The currency deposit ratio shows the amount of currency that people hold as a proportion of aggregate deposits.
  • And this monetary tool does not use by the Reserve Bank of India to manage liquidity.

Key Points

• Cash Reserve Ratio​
  • The Cash Reserve Ratio (CRR) refers to the share of Net Demand and Time Liabilities that banks have to hold as balances with the RBI.
  • The objective of CRR is to keep inflation under control.
  • During high inflation in the economy, the central bank raises the CRR to lower the bank’s loanable funds.
  • The current Cash Reserve Ratio is 4 %.
  • The Central bank has the authority to regulate monetary policies.
  • The Ministry of Finance has the authority to regulate fiscal policies.
• Repurchase obligation (Repo)​
  • Repo rate is the rate at which RBI lends money to commercial banks in the event of any shortfall of funds.
• Open market operations
  • Open market operations (OMO) refers to the buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system, facilitated by the Federal Reserve.

The correct answer is Central bank buys and sells government securities in the financial market to influence money supply in the economy.

Key Points

•  Open Market Operations (OMOs) are market operations conducted by RBI by way of sale/purchase of government securities to/from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis.
• If there is excess liquidity, RBI resorts to the sale of securities and sucks out the rupee liquidity.
• Similarly, when the liquidity conditions are tight, RBI buys securities from the market, thereby releasing liquidity into the market.
• It is one of the quantitative (to regulate or control the total volume of money) monetary policy tools that are employed by the central bank of a country to control the money supply in the economy. 

• The ratio of money held by the public in currency to that they hold in bank deposits is the Currency Deposit Ratio (CDR). This reflects liquidity in the system. 
• The proportion of the total deposits commercial banks keep as reserves are the Reserve Ratio. It includes 

  Cash Reserve Ratio	It is the fraction of money that banks must deposit with the RBI. Banks do not earn any interest on this amount.
  Statutory Liquidity Ratio	It is the fraction of the total deposits of a bank that must be kept in a liquid form. Banks can use this money to purchase Government Securities (G-Sec).

Reserve Bank of India

• The Reserve Bank of India is India's central bank and regulatory body under the jurisdiction of the Ministry of Finance, Government of India. It is responsible for the issue and supply of the Indian rupee and the regulation of the Indian banking system.
• Key functions of RBI are, banker's bank, the custodian of the foreign reserve, controller of credit and manage the printing and supply of currency notes in the country.

Major functions of the RBI are as follows:

• Issue of Bank Notes
• Banker to Government
• Custodian of Cash Reserves of Commercial Banks
• Custodian of Country's Foreign Currency Reserves
• Lender of Last Resort
• Central Clearance and Accounts Settlement
• Controller of Credit (Controlling Inflation)
• Banking Supervision

Since RBI does not directly control/monitor employment and related activities. Therefore controlling employment in the country is not one of the functions of RBI.

● Electrification is not a part of the non-plan expenditure of central government.

● Non-plan expenditure is the revenue expenditure of the government which also includes capital expenditure.

The correct answer is Customs Duty.

Key Points

• Customs duty refers to the tax imposed on goods when they are transported across international borders.
• In simple terms, it is the tax that is levied on the import and export of goods.
• The central government uses this duty to raise its revenues, safeguard domestic industries, and regulate the movement of goods.
• Customs duty in India is defined under the Customs Act, 1962, and all matters related to it fall under the Central Board of Excise & Customs (CBEC).
• Types of custom duty
  • Basic Customs Duty (BCD)
  • Countervailing Duty (CVD)
  • Additional Customs Duty or Special CVD
  • Protective Duty
  • Anti-dumping Duty

Additional Information

• Taxes imposed by Central Government include Income tax, Custom Duty, Excise Duty, Corporation Tax.
• Taxes imposed by State Government include Electricity Duty, Value Added Tax (VAT), Sales Tax, Entertainment Tax, Toll Road Tax, Land Revenue, Registration Fee.
• India has two types of taxes, namely Direct Tax and Indirect Tax.​

• Among the tax revenues of the Union Government, Corporation Tax is the largest source.
• It is a tax imposed on the taxable profits of limited companies and other organizations such as associations, clubs and unorganised entities.
• Both private and public companies who are registered under the Companies Act of 1956 are liable to pay Corporate tax.
• It is levied on all relevant entities at the end of each accounting year.

The correct answer is Inferior good.​

• As the income of the consumer increases, the demand for an inferior good falls, and as the income decreases, the demand for an inferior good rise.
• Inferior goods include low-quality food items like coarse cereals.
• Inferior goods demand is inversely proportional to the income of consumers.

Additional Information

The correct answer is consumption decisions. 

Key Points

• Ricardian Equivalence Proposition (REP) states that forward-looking consumers, who are also assumed to be perfectly rational and perfectly capable, internalize the government’s fiscal choices when making their consumption decisions.
• The survey highlights that a possible link from higher incremental debt to lower growth rate is based on potential crowding out of private investment and the Ricardian Equivalence Proposition (REP).

Additional Information

Although, the application of REP rests on a number of assumptions including

1. the representative citizen pays taxes;
2. taxes are non-distortionary and are collected as a lump-sum;
3. perfect capital markets with no borrowing constraints;
4. future flows of income and future tax liabilities are certain;
5. representative citizen is infinite living, rational, and forward-looking.

However, it is seen that REP may or may not hold in economies due to strict assumptions made by it. 

Exchange Rate refers to the price of one currency in terms of another currency.

Crawling Peg System is used by countries to make small but frequent exchange rate adjustments to promote their balance of payment. This system allows appreciation and depreciation in the exchange rate to happen gradually.

Hybrid of Fixed and Floating Exchange Rate System:

• The hybrid exchange rate system combines the characteristics of both fixed and floating exchange rate system.
• It involves some currencies, whose values float freely and some currencies whose values are determined by a combination of the market and government intervention.
• A system of exchange rate adjustment in which a currency with a fixed exchange rate is allowed to fluctuate within a narrow band is known as the Crawling Peg system. 

Therefore, 'Crawling Peg System' means a Hybrid of Fixed and Floating Exchange Rate System.

Fixed Exchange Rate System:

• When a government or central bank decides the value of its currency at a certain level against another currency then it is known as a Fixed Exchange Rate System.
• The central bank may buy or sell currencies to maintain a particular exchange rate and can also revaluate or devaluate the price of a rupee.

Floating Exchange Rate System:

• When the currency price of a nation is determined by the foreign exchange market based on the demand and supply relative to other countries then it is known as the Floating Exchange Rate System.
• A floating exchange rate is not restrained by the government or other trade limits.

The correct answer is the Reserve Bank of India

Key Points

• The Indian Rupee is the official currency of the Republic of India and is issued by the Reserve Bank of India.
• The symbol for the Indian Rupee was officially adopted in 2010 after a design competition, and derives from the Devanagari letter “Ra.”
• The reverse side of Rupee banknotes shows amounts in 15 of India’s 22 official languages (the obverse side shows English and Hindi).
• Neighboring countries Nepal and Bhutan peg their currencies to the Rupee and accept it as Legal Tender.

Therefore, the Reserve Bank of India issues the currency notes in India.