Insights Static Quiz -204, 2018 –Economy

Solution: c)

Statement 1: PSL are administered independently of the CRR requirements. Banks must lend a portion of their deposits in form of PSL. The recent move was not related to PSL.

Statement 2: CRR is the proportion of deposits that banks have to keep as cash with the RBI. The

present requirement is only 4% of total demand deposits. But, as per the recent measure Banks

had to maintain 100% CRR for incremental deposits they received between September 16, 2016

and November 11, 2016. This is because over 2 lakh crores of cash was deposited in the banking

system. Lending this fund will create a massive rise in liquidity in the financial markets and lead to

inflation and volatility.

Solution: b)

Inflation can be controlled by increasing the supplies of goods and services and reducing money incomes in order to control aggregate demand.

Fiscal measures to control inflation:

The government should reduce unnecessary expenditure on non-development activities in order to curb inflation. (Statement 2)

To cut personal consumption expenditure, the rates of personal, corporate and commodity taxes should be raised (Statement 1)

Some protectionist measures (such as banning the export of essential items such as pulses, cereals and oils to support the domestic consumption, encourage imports by lowering duties on import items etc.). (Statement 3)

Solution: c)

Externalities occur when producing or consuming a good cause an impact on third parties not directly related to the transaction.

Externalities can either be positive or negative.

Positive Externality

A farmer grows apple trees. An external benefit is that he provides nectar for a nearby beekeeper who gains increased honey as a result of the farmers’ orchard. The beekeeper provides an external benefit to the apple grower because his bees help to fertilise the apple tree.

Negative Externality

Making furniture by cutting down rainforests in the Amazon leads to negative externalities to other people. Firstly it harms the indigenous people of the Amazon rainforest. It also leads to higher global warming as there are fewer trees to absorb carbon dioxide.

Solution: c)

Statement 1: Unnecessary revenue expenditure bloats the fiscal deficit, and since it forms the majority of government spending, its reduction has a very large effect on the fiscal deficit.

Statement 2: It will further increase the fiscal deficit.

Statement 3: Subsidies are a major component of government spending, and its reduction will cut down fiscal deficit.

Statement 4: It reduces tax revenue and thus increases fiscal deficit.

Solution: d)

Statement 1 – In the light of high NPAs, Banks tend to lower the interest rates on deposits on one hand and likely to levy higher interest rates on advances.

Statement 2 – The increased NPAs put pressure on recycling of funds and reduces the ability of banks for lending more and thus results in lesser interest income.

Statement 3 – As per Basel norms, banks are required to maintain adequate capital on risk-weighted assets on an ongoing basis. Every increase in NPA level adds to risk weighted assets which warrant the banks to shore up their capital base further.