• All the options are correct.
• The Fiscal Responsibility and Budget Management (FRBM) Act was enacted in 2003 which set targets for the government to reduce fiscal deficits.
• The objective of the Act is to ensure inter-generational equity in fiscal management, long run macroeconomic stability, better coordination between fiscal and monetary policy, and transparency in fiscal operation of the Government.
• It requires for the presentation of the following documents before the Parliament-the Medium Term Expenditure Framework Statement (MTEF), Medium-Term Fiscal Policy Statement, Fiscal Policy Strategy Statement and Macroeconomic Framework Statement.
• The introduction of Outcome Budget is an executive action by the government. From the year 2017-18 onwards, it has been decided that the output and outcomes of the schemes of 68 Ministries and Departments will be available along with the financial outlays as a part of the Budget documents, so that clearly defined objectives and goals for each scheme can be seen by all.

Statement 2 and 3 are correct. Statement 1 is incorrect.
Monetary transmission to bank lending interest rates is impacted by the following factors:
Long Maturity Profile of Deposits at Fixed Interest Rates: Long maturity profile of deposits in itself does not impede monetary transmission provided interest rates on such deposits move in line with the policy rate. However, almost all bank deposits are at fixed interest rates. Hence statement 2 is correct.
Competitive Pressures – Mutual Funds and Small Savings Schemes: Interest rates on small savings are administered by the government. The interest rates on small savings schemes are on average up to 100 basis points higher than the rates prevailing in the market from commercial banks.
The returns on small saving schemes, viz., 5-year time deposit, public provident fund (PPF), national savings certificate, and senior citizens’ savings scheme, as well as debt and equity mutual funds receive favorable tax treatment vis-à-vis bank time deposits. Bankers have been complaining that high rates on small savings schemes prohibit them from cutting deposit rates. This makes Monetary Policy transmission ineffective. Hence statement 1 is incorrect.
Asset Quality of Banks: A healthy bank with low default risk in its loan portfolio will be able to pass on interest rate changes by the central bank symmetrically to its deposits and loans. On the other hand, a bank faced with a high level of non-performing assets (NPA) is likely to build up provisions by loading credit risk premia on its performing loans, thereby pushing up the lending rates. Hence statement 3 is correct.

• Statements 1 and 3 are incorrect. Statement 2 is correct.
• Statement 1 is incorrect. Dis-inflation is a temporary slowing of the pace of price inflation. It is used to describe instances when the inflation rate has reduced marginally over the short term. It should not be confused with deflation, which can be harmful to the economy. Disinflation is a temporary slowing of the pace of price inflation. Thus, unlike inflation and deflation, which refer to the direction of prices, disinflation refers to the rate of change in the rate of inflation.
• Statement 2 is correct. Deflation is the general decline of the price level of goods and services. It is typically associated with a contraction in the supply of money and credit in the economy. During deflation, the purchasing power of currency rises over time.
• Statement 3 is incorrect. Stagflation is said to happen when an economy faces stagnant growth as well as persistently high inflation. With stalled economic growth, unemployment tends to rise and existing incomes do not rise fast enough and yet, people have to contend with rising inflation.

Statement 2 is correct. Statement 1 and 3 are incorrect.
Standing Deposit Facility (SDF) :In 2018, the amended Section 17 of the RBI Act empowered the Reserve Bank to introduce the SDF – an additional tool for absorbing liquidity without any collateral.
By removing the binding collateral constraint on the RBI, the SDF strengthens the operating framework of monetary policy.
The SDF is also a financial stability tool in addition to its role in liquidity management.
The SDF will replace the fixed-rate reverse repo (FRRR) as the floor of the liquidity adjustment facility corridor.
This concept, first recommended by the Urjit Patel committee report in 2014, may soon become part of the central bank’s toolkit to manage liquidity. Hence statement 1 is incorrect.
A standing deposit facility is a remunerated facility that will not require the provision of collateral for liquidity absorption. Hence statement 2 is correct.
Banks, at different points in time, may be short of funds or flush with money.
When they need money for the short-term, they borrow from the RBI (Repo Rate) for which they pledge government securities.
When banks have excess funds they lend it to the RBI at the reverse repo rate that is lower than the repo rate. Hence statement 3 is incorrect.

Statement 1 is correct. Statement 2 is incorrect.
Stagflation was first recognized during the 1970s, where many developed economies experienced rapid inflation and high unemployment as a result of an oil shock.
Stagflation refers to an economy that is experiencing a simultaneous increase in inflation and stagnation of economic output.
It is a period of rising inflation and unemployment but falling output.
Stagflation is a combination of stagnant economic growth, high unemployment, and high inflation. Hence statement 1 is correct.
This scenario, of course, directly contradicts the theory behind the Philips curve. Hence statement 2 is incorrect.
Stagflation was long believed to be impossible because the economic theories that dominated academic and policy circles ruled it out of their models by construction.
In particular, the economic theory of the Phillips Curve portrayed macroeconomic policy as a trade-off between unemployment and inflation.

https://www.economicshelp.org/blog/1364/economics/phillips-curve-explained/
The theory claims that economic growth comes with inflation, which in turn should lead to more jobs and less unemployment. However, the concept has been somewhat disproven empirically due to the occurrence of stagflation in the 1970s, when there were high levels of both inflation and unemployment.

• Statement 1, 2, and 3 are incorrect. Statement is correct.
• To combat inflation, the RBI must raise the SLR. When the SLR is raised, banks are required to keep a larger amount in safe and liquid assets. As a result, the bank’s ability to lend to the market declines, lending rates rise.
• To combat inflation, the RBI must raise the CRR. When the CRR is raised, banks are required to keep a larger amount of cash with the RBI.
• To combat high levels of inflation, the RBI raises the reverse repo rate. It encourages banks to park funds with the RBI (more certainty of return + higher interest rate) rather than lend to the private sector.
• To combat higher levels of inflation, the RBI drains the market of excess liquidity by selling government securities. Banks lend money to the RBI by borrowing government securities. Hence statement 1 is incorrect.
• In order to combat inflation, the RBI may impose higher margin requirements on loan amount, raising the cost of credit availability. As a result of less loan disbursement and less private investment, there is less demand and thus less inflation. Hence statement 2 is incorrect.
• Fiscal Measures:
o Fiscal policy is the policy by which a country’s government controls the flow of tax revenues and public expenditures in order to navigate the economy.
o In the event of high inflation, the government may raise personal or corporate taxes in order to reduce household expenditure/private investment. Increased taxation means that people have less money to spend (and private players for investment). Hence statement 3 is incorrect.
o When inflation is high, the government reduces government spending. A decrease in public spending has an impact on private investment, resulting in a decrease in aggregate demand. Hence statement 4 is correct.

• Statement 1 and 5 are correct. Statement 2, 3 and 3 are incorrrect.
• Causes of Demand-Pull Inflation:
• A growing economy or increase in the supply of money – When consumers feel confident, they spend more and take on more debt. This leads to a steady increase in demand, which means higher prices.
• Asset inflation or Increase in Forex reserves– A sudden rise in exports forces a depreciation of the currencies involved.
o Government spending or Deficit financing by the government – When the government spends more freely, prices go up.
o Due to fiscal stimulus.
o Increased borrowing.
o Depreciation of rupee.
o Low unemployment rate.
• Cost-Push Inflation:
o Increase in price of inputs
o Hoarding and Speculation of commodities
o Defective Supply chain
o Increase in indirect taxes
o Depreciation of Currency
o Crude oil price fluctuation
o Defective food supply chain
o Low growth of Agricultural sector
o Food Inflation
o Interest rates

• Statements 1 and 3 are correct. Statement 2 is incorrect.
• Inflation is the rate at which prices increase over a given period. Typically, in India, the inflation rate is calculated on a year-on-year basis. In other words, if the inflation rate for a particular month is 10 per cent, it means that the prices in that month were 10 per cent more than the prices in the same month a year earlier.
• When prices increase globally, it will lead to higher imported inflation. In other words, everything that India and Indians import will become costlier leading to an increase in inflation.
• In general, when interest rates are low, the economy grows, and inflation increases. Conversely, when interest rates are high, the economy slows and inflation decreases. A country’s central bank typically hikes the interest rates in the economy to contain inflation.
• By doing so, it incentivises people to spend less and save more because saving becomes more profitable as interest rates go up. As more and more people choose to save, money is sucked out of the market and the inflation rate moderates. Hence only 2 is correct option.
• A devaluation of currency leads to a decline in the value of a currency making exports more competitive and imports more expensive.
• Generally, a devaluation is likely to contribute to inflationary pressures.

• Both statements are correct. (Asked incorrect)
• Deflation is a decline in general price levels throughout an economy, typically associated with a contraction in the supply of money and credit in the economy. Deflation is the opposite of inflation, which represents widespread price increases of goods and services in an economy.
• Disinflation is a temporary slowing of the pace of price inflation. Unlike deflation, which refers to the direction of prices, disinflation refers to the rate of change in the rate of inflation. Hence statement 1 is correct.
• Deflation is mainly caused by shifts in supply and demand. Disinflation, on the other hand, shows the rate of change of inflation over time. The inflation rate is declining over time, but it remains positive.
• During times of deflation, since the money supply is tightened, there is an increase in the value of money, which increases the real value of debt.
• Inflation increases the price of goods and services over time, effectively decreasing the number of goods and services one can buy with a dollar in the future as opposed to a dollar today.
• This effectively decreases the time value of money. Since inflation is positive during disinflation, the value

• Statements 1 and 3 are incorrect. Statement 2 is correct.
• Under Section 45ZB of the amended (in 2016) RBI Act, 1934, the central government is empowered to constitute a six-member Monetary Policy Committee (MPC). Statements 1 is incorrect.
• Objective: Further, Section 45ZB lays down that “the Monetary Policy Committee shall determine the Policy Rate required to achieve the inflation target”. Statement 2 is correct.
• The decision of the Monetary Policy Committee shall be binding on the Bank.
• Composition: Section 45ZB says the MPC shall consist of 6 members: Statements 3 is incorrect.
o RBI Governor as its ex officio chairperson,
o Deputy Governor in charge of monetary policy,
o An officer of the Bank to be nominated by the Central Board,
o Three persons to be appointed by the central government.
• This category of appointments must be from “persons of ability, integrity and standing, having knowledge and experience in the field of economics or banking or finance or monetary policy.