Indian Economy MCQs

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Interest rate risk refers to potential losses from fluctuations in interest rates. It is classified as a type of market risk. Changes in interest rates can directly impact the value of securities such as bonds. Market risk includes other elements such as equity risk and currency risk and is distinguished from credit risk, liquidity risk, or operational risk.

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In Keynesian macroeconomics, equilibrium national income is determined by aggregate demand, also called aggregate expenditure. At the equilibrium level, total planned spending equals output and income. Taxation can influence aggregate demand, but it is not the primary direct determinant in the basic income-determination model.

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The correct answer is the 11th Five Year Plan. Launched in 2007, it emphasized “Inclusive Growth” to address poverty and inequality in India. This plan aimed to enhance social and economic development, focusing on sectors like education, health, and rural development. The 11th Plan set a target of 9% GDP growth, which indicates the importance of inclusive policies for sustainable development.

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Road and railways are economic overheads as they provide essential infrastructure for transportation and movement of goods, stimulating economic activity. Hospitals, schools, and sanitation are social overheads, catering mainly to health, education, and hygiene rather than direct economic productivity.

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Qualitative or selective methods of credit control refers to those methods which limit the nature or variety of money supply rather than its quantity. Such methods include regulation of margin requirement, credit rationing, regulation of consumer credit and direct action. Open Market Operations is a quantitative method of credit control.

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Interest Rate Risk falls under Market Risk. Market risk encompasses the potential for financial loss due to fluctuations in market prices, including interest rates. Interest rate changes can affect the value of investments, particularly fixed-income securities. For example, when interest rates rise, the prices of existing bonds typically fall, leading to potential losses for investors. This risk is a critical consideration for financial institutions and investors alike.

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Under RBI capital adequacy norms, exposures backed by sovereign or approved government securities attract the lowest credit risk weight. This means they are treated as the safest category among the listed options for a bank. Housing loans carry credit risk, venture capital investments are far riskier, and loans against jewellery are also exposed to borrower and collateral risk. Hence, government approved securities are considered the most risk-free asset here.

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Economic growth results in higher disposable income available with the consumers which increases the overall demand along with the supply available for the consumers. This increase in demand spurs inflation, which eventually becomes a necessary evil for a growing economy.

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M3 consists of currency with the public, demand deposits, and time deposits with banks. The Reserve Bank of India identifies M3 as broad money. Since 1977, the RBI uses M3 as the main monetary aggregate. The RBI publishes weekly data on M3 in its statistical supplements as of 2023.

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The Reserve Bank of India applies the reciprocity principle to foreign banks operating in India. This allows foreign banks similar operating rights as Indian banks only if Indian banks receive comparable treatment in the respective foreign country. RBI norms on subsidiarization, updated in November 2013, emphasize this guideline for foreign banks. Indian-Singapore banking agreements in 2015 reflected application of this principle.