All Statements are Correct:
Intermediate goods or producer goods or semi-finished products are goods, such as partly finished goods, used as inputs in the production of other goods including final goods. A firm may make and then use intermediate goods, or make and then sell, or buy then use them. In the production process, intermediate goods either become part of the final product, or are changed beyond recognition in the process.This means Intermediate goods are sold among industries for resale.

Examples of Intermediate Goods:
-Steel used in production of cars
-Wood used in furniture like sofa, dining table and so on.
-Refrigerator and milk used by ice cream shop owner
-Glass used for making spectacles
-Vegetables used by restaurant owner
-Gold and silver used for making ornaments
-Cotton used for making clothes

Option D is Incorrect:
Under Floating Exchange Rate,the exchange rate is determined in well-functioning foreign exchange markets with no government interference.The exchange rate reflects the true value of the domestic currency which helps in establishing the trust among foreign investor.

Under this system, the market is allowed to determine the value of exchange rate freely.
The exchange rate is determined by the forces of demand and supply.

If due to any reason exchange rate fluctuates, the government never intervenes and allows the market to function and determine the true value of exchange rate.
The only demerit of floating exchange rate system is that exchange rate fluctuates a lot on day to day basis.

The advantages of such a system are: the exchange rate is determined in well-functioning foreign exchange markets with no government interference.
The exchange rate reflects the true value of the domestic currency which helps in establishing the trust among foreign investor.

A country can easily access funds/ loans from IMF and other international institutions if the exchange rate is market determined.

Both Statements are Correct:
Banker’s bank And Lender of Last Resort:
RBI acts as a banker to other banks. It provides financial assistance to scheduled banks and state co-operative banks in the form of rediscounting of eligible bills and loans and advances against approved securities.

RBI acts as a lender of last resort. It provides funds to the bank when they fail to get it from any other source.

It also acts as a clearing house. Through RBI, banks make inter-banks payments.

Manages Exchange Rate and Is Custodian of the Foreign Exchange Reserve:
RBI has the responsibility of removing fluctuations from the exchange rate market and maintaining a competitive and stable exchange rate.

RBI functions as custodian of nations foreign exchange reserves.

It has to maintain a fair external value of Rupee.

RBI achieves its objective through appropriate monetary and exchange rate policies.

Both Statements are Correct:
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire- purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.

A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).

Difference between NBFC and Banks
The major differences between NBFCs and Banks are as follows:
NBFC cannot accept demand deposits (they can accept term deposits)
NBFCs do not form part of the payment and settlement system.

Statement 2 is Incorrect:
There is no defined relation between repo rate and currency deposit ratio.

The Currency Deposit Ratio:
The Currency Deposit Ratio (cdr) is the ratio of money held by the public in currency to that they hold in bank deposits.
cdr = CU/DD.

If a person gets Re. 1 she will put Rs. 1/(1 + cdr) in her bank account and keep Rs. cdr/(1 + cdr) in cash.

It reflects people’s preference for liquidity. It is a purely behavioral parameter which depends, among other things, on the seasonal pattern of expenditure. For example, CDR increases during the festive season as people convert deposits to cash balance for meeting extra expenditure during such periods.

All Statements are Correct:
Following can lead to a higher fiscal deficit :
High levels of tax avoidance and tax evasion – the former is legal (e.g. people and businesses taking advantage of tax loopholes, tax relief, choosing to pay declared taxes in low-tax countries etc) but the subject of fierce media and popular criticism. The deliberate evasion of tax is illegal – in some countries governments are less effective than they might be in countering shadow markets where no tax is paid or in tracking down agents who are not paying the tax that is due.

High levels of income and wealth inequality – some economists argue that highly unequal societies also end up with a worsening fiscal position for the government. The uber-rich are liable for higher taxes in a progressive system (and top rate taxpayers in the UK clearly pay a high % of total revenues) but they also have an incentive to use all of the legal tax avoidance schemes open to them. At the bottom end of the labour market, if millions of people are in low-paid, insecure work, many will not earn enough to pay much in tax and even more may remain dependent on top-up welfare benefits, adding to the pressure on government spending.

Demographic pressures – these can affect the fiscal position too, for example an ageing population will cause an increase in government spending on the state pension; a fast-growing population (perhaps boosted by net inward migration) will also put more pressure on the government to fund essential public and merit goods.

Government inefficiency – if the state sector is relatively less efficient in supplying public services, then value for money will be lower and more will have to be spent in total to provide the cover that people need. Free market economists favour a smaller government sector with many activities outsourced or privatised to the private sector to supply.
High levels of government subsidy / financial support – over time, total government spending can rise because of the many competing demand placed upon politicians and the effects of lobbying by (often influential / powerful) pressure groups. In some countries, public spending is bloated by very generous systems of farm / food / energy subsidies that are politically hugely difficult to remove. The state might also get locked into providing financial support for loss-making businesses and industries such as airlines.

All Statements are Correct:
The benefits of financial inclusion can be subdivided into two sub categories : macro benefits and micro benefits
Major macro benefits are :
(i) higher and better productivity ;

(ii) faster growth in economy ;

(iii) reduction In income inequalities;

(iv) widespread development breaking the barrier of location specific and centers specific development ;

(v) global admiration and recognition ; reduction in poverty ;

(vi) likely increase in national income ;

(vii) increase in employment and income opportunities ;

(viii) help in more effective distribution of subsidies ;

(ix) helpful in implementation of social security schemes, such as old age pensions, window pensions and so on ;

(x) helpful in shifting to direct distribution of subsidies by way of crediting bank account of targeted beneficiary rather than indirect distribution of subsidies ;

(xi) helpful in plugging the leakage through distribution channels.

Major micro level benefits are :

(i) smoothing consumption ;

(ii) buffer against avoidable expenditure ;

(iii) safety of assets from major disruptions ;

(iv) better incomes ;

(v) rational utilization of saving ;

(vi) freedom from clutches of moneylenders;

(vii) increase in risk taking ability;

(viii) enlarges livelihood opportunities;

(ix) saving of time in collection of periodic social security payments by state and central governments ;

(x) improved self esteem and sense of elevation.

Statement 1 is Incorrect:
What is MUDRA Bank and what is its role in the MUDRA Yojna?
– MUDRA Bank = Micro Units Development and Refinance Agency Bank
– The Rs 20,000 crore MUDRA Bank aims to provide refinancing to small and medium enterprises, particularly those from SC & ST
– The idea is to refinance micro-finance institutions through Pradhan Mantri Mudra Yojana
– This bank would be responsible for regulating and refinancing all MFIs which are in the business of lending to MSME

Tikdam:
Wordplay:
You are expected to know the full form of MUDRA if you have been following CA. So how can a Refinance agency be involved in direct lending? Thus, we can eliminate statement 1. If you are doubtful about statement 2, still you are left with a 50:50 situation.

Statements 2 and 3 are Incorrect:
Payments banks are a new model of banks conceptualised by the Reserve Bank of India (RBI) to meet government’s financial inclusion target.

It will be set up as a differentiated bank and will confine its activities to acceptance of demand deposits, remittance services, Internet banking and other specified services but cannot undertake lending services.

Payments banks can accept deposits up to Rs. 1 lakh per account from individuals and small businesses. They can issue ATM/debit cards but not credit cards. They can also issue other prepaid payment instruments.

They can distribute non-risk sharing simple financial products like mutual funds and insurance products. Non-resident Indians (NRIs) are not be allowed to open accounts in payment banks. This new model of banking allows mobile firms, supermarket chains and others to cater to banking requirements of individuals and small businesses.

Option C is Incorrect:
Quantitative Easing aims to increase banks lending capacity.

Quantitative easing (QE), also known as large-scale asset purchases, is an expansionary monetary policy whereby a central bank buys predetermined amounts of government bonds or other financial assets in order to stimulate the economy and increase liquidity. An unconventional form of monetary policy, it is usually used when inflation is very low or negative, and standard expansionary monetary policy has become ineffective.

A central bank implements quantitative easing by buying specified amounts of financial assets from commercial banks and other financial institutions, thus raising the prices of those financial assets and lowering their yield, while simultaneously increasing the money supply.This differs from the more usual policy of buying or selling short-term government bonds to keep interbank interest rates at a specified target value.

GDP doesn’t cover following:
– Underground Economy
– Non-Marketed Activities (Mom cooking food for home)
– Barter Exchanges (Rice given for oranges)
– Negative Externality (Acid rain)
– Opportunity cost lost (kids not going to school which could have made difference in future – Human Dev)- (HDI)
Income Inequality (Gini Coefficient)

Statement 1 is Incorrect:
Inflation harms creditors, as they lose in real terms

Effects of Inflation on Different Sections:
Creditor/lender : Inflation harms creditors, as they lose in real terms.

For example : A 1000 Rupees lent @ 5%, will pay an interest rate of 50. If inflation rises to 10%, the price of goods will be 1100, but after interest, the return will only be 1050.

Debtor/Borrower : Inflation benefits the Debtor as they gain in real terms.

Pensioner : Inflation harms the pensioners, if their pensions are not indexed to inflation, and loses money.

Producers : They stand to gain by inflation since the price of goods and services rise faster than the cost of production as wages take time lag to react.

Wealth Holders : They stand to lose due to inflation, as their real returns fall due to rise in prices.

Option C is Correct:
National Income at Factor Cost
National Income from Factor Cost is also called National Income of a country.
National Income means the sum of all incomes earned by the citizens in the form of Rent, Wages, Interest and Profits.

The difference between National Income at Factor Cost and National Income at Market Price (NNPMP) arises from the fact that indirect taxes and subsidies cause the market price to be different from the factor income received by the citizens.

Example, A mobile handset of Rs10,000 purchased by you includes a GST of 12%. In this case, while the market price of RS 10,000 includes the GST. The factor of production used to produce mobile handset will only get RS 8800. Thus, the difference between market price and factor cost is the tax.

Similarly, a subsidy results in the market price of a product to be less than the factor cost.
Therefore, while calculating National Income, we must deduct indirect taxes and add subsidies into Net National Product at Market Price.
NNPFC = NNPMP – Indirect Taxes + Subsidies.

Both Statements are Incorrect:
Headline inflation includes food and fuel items.

Core inflation is used by government as tool for framing long-term policy targeting inflation.

Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, Each unit of currency buys fewer goods and services.

Headline Inflation versus Core Inflation:
Headline inflation reflects prices of all the tradeables within an economy including those commodities or items that experience sudden inflationary spikes such as food or energy. On the other hand, Core Inflation is a measure which excludes transitory or temporary price volatility as in the case of some commodities such as food items, energy products etc.

Since headline inflation includes everything, it may not present an accurate picture of the current state of the economy. On the other hand, the core inflation shows long term trends and is focused by Central Banks because it reflects the demand side pressure in the economy. It is also used as tool for framing long-term policy. In recent years, due to the these reasons, RBI has inclined from headline to core inflation which shows a more correct trend in inflation.

Statement 2 is Incorrect:
CPI includes both consumer goods and Consumer services.

Consumer Price Indices (CPI) measure changes over time in general level of prices of goods and services that households acquire for the purpose of consumption. CPI numbers are widely used as a macroeconomic indicator of inflation, as a tool by governments and central banks for inflation targeting and for monitoring price stability, and as deflators in the national accounts.

CPI is also used for indexing dearness allowance to employees for increase in prices. CPI is therefore considered as one of the most important economic indicators.

All Options are Correct:
Broadly speaking, there are two types of methods of controlling credit.
1.Quantitative Methods

Bank Rate Policy:
Bank rate is the minimum rate at which the central bank of a country provides a loan to the commercial bank of the country.
Bank rate is also called discount rate because the central bank provides finance to commercial banks by rediscounting bills.
The RBI uses bank rate to control credit in the economy.
For instance, in an inflationary scenario, the RBI increases the Bank Rate, which increases the cost of borrowing for commercial banks, this would discourage the commercial bank from borrowing from the RBI, hence lending in the economy will fall along with increase in lending rates by commercial bank, increase in lending rate will discourage investment and hence Aggregate Demand will fall. A fall in AD will reduce income and output in the economy. Thus, Inflation will Subside.

Cash Reserve Ratio:
Banks in India are required to keep certain proportions of their deposits in the form of cash with themselves as reserves.
If the legal CRR is 10%, then the bank will have to keep Rs 100 as reserves against the deposit of Rs 1000.
If at any time, the RBI decides to increase the CRR from 10 to 20%, then bank have to keep Rs 200 as reserves against the deposit of Rs 1000. This will reduce the credit in the economy as the banks now have less money to lend (800 in our example), less lending means less borrowing and investment and hence reduction in income and aggregate demand.
Similarly, a reduction in CRR from 10 to 5%, will reduce the reserve requirement and hence increases the lending capacity of the banks. Increased lending will lead to increased investment, increase investment will increase AD and Income.

Statutory Liquidity Ratio:
SLR is that percentage of the deposits which the banks have to hold with themselves in highly liquid government securities.
SLR is one of the many arrows in the RBI’s monetary policy quiver. These are used, sometimes in isolation, sometimes in combination, to manage the money supply, interest rates and credit availability in the country.
The SLR is an important tool of monetary policy, and its primary aim is to ensure that banks always have enough liquidity (cash and cash equivalent securities) to honour depositor’s demands and that they don’t lend away all their funds.

2.Qualitative Methods

Credit Rationing:
Central Bank fixes credit amount to be granted. Credit is rationed by limiting the amount available for each commercial bank. This method controls even bill rediscounting. For certain purpose, the upper limit of credit can be fixed, and banks are told to stick to this limit. This can help in lowering banks credit exposure to unwanted sectors.

Moral Suasion:
It implies to pressure exerted by the RBI on the Indian banking system without any strict action for compliance with the rules. It is a suggestion to banks. It helps in restraining credit during inflationary periods. Commercial banks are informed about the expectations of the central bank through monetary policy. Under moral suasion, central banks can issue directives, guidelines and suggestions for commercial banks regarding reducing credit supply for speculative purposes.

Consumer Credit Regulation:
Under this method, consumer credit supply is regulated through hire-purchase and instalment sale of consumer goods. Under this method, the down payment, instalment amount, loan duration, etc., is fixed in advance. This can help in checking the credit use and then inflation in a country.

Statement 2 is Incorrect:
RBI extends LAF facility only to commercial banks (excluding RRBs) and Primary dealers.

Liquidity Adjustment Facility (LAF) is the primary instrument of Reserve Bank of India for modulating liquidity and transmitting interest rate signals to the market. It refers to the difference between the two key rates viz. repo rate and reverse repo rate. Informally, Liquidity Adjustment Facility is also known as Liquidity Corridor.

How Liquidity Adjustment Facility works :
As mentioned above, the two components of LAF are repo rate and reverse repo rate. Under Repo, the banks borrow money from RBI to meet short term needs by putting government securities (G-secs) as collateral. Under Reverse Repo, RBI borrows money from banks by lending securities. While repo injects liquidity into the system, the Reverse repo absorbs the liquidity from the system. RBI only announces Repo Rate. The Reverse Repo Rate is linked to Repo Rate and is 100 basis points (1%) below repo rate. RBI makes decision regarding Repo Rate on the basis of prevalent market conditions and relevant factors.

Banks participating in LAF auctions:
All the Scheduled Commercial Banks are eligible to participate in auctions except the Regional Rural Banks. Further, the Primary Dealers (PDs) having Current Account and SGL Account (Subsidiary General Ledger Account ) with Reserve Bank, Mumbai are also eligible to participate in the Repo and Reverse Repo auctions.

Statement 3 is Incorrect:
M1 is the most liquid form of the money supply.

Measure of Money Supply in India

1.M1
It is also known as Narrow Money.
M1= C+DD+OD
C= Currency with Public.
DD= Demand Deposit with the public in the Banks.
OD= Other Deposits held by the public with RBI.
It is the most liquid form of the money supply.

2.M2
It is a broader concept of the money supply.
M2= M1 + Saving deposits with the post office saving banks.
M1 is distinguished from M2 because the post office saving deposits are not as liquid as Bank deposits.

3.M3
It is also known as Broad Money.
M3 = M1+ Time Deposits with the Bank.
Time deposits serve as a store of wealth and represent a saving of the people and are not as liquid as they cannot be withdrawn through cheques or ATMs as compared to money deposited in Demand deposits.
M3 is the most popular and essential measure of the money supply. The monetary committee headed by late Prof Sukhamoy Chakravarty recommended its use for monetary planning in the economy. M3 is also called Aggregate Monetary Resource

4.M4
M4 includes all items of M3 along with total deposits of post office saving accounts.
M4= M3+Total Deposits with Post Office Saving Organisations.
M4 however, excludes National Saving Certificates of Post Offices.

All Options are Correct:
The Foreign exchange reserves of India are India’s holdings of cash, bank deposits, bonds, and other financial assets denominated in currencies other than India’s national currency, the Indian rupee. The reserves are managed by the Reserve Bank of India for the Indian government and the main component is foreign currency assets.

Foreign exchange reserves act as the first line of defense for India in case of economic slowdown, but acquisition of reserves has its own costs. Foreign exchange reserves facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

Composition:
Reserve Bank of India Act and the Foreign Exchange Management Act, 1999 set the legal provisions for governing the foreign exchange reserves. Reserve Bank of India accumulates foreign currency reserves by purchasing from authorized dealers in open market operations. Foreign exchange reserves of India act as a cushion against rupee volatility once global interest rates start rising.
The Foreign exchange reserves of India consists of below four categories:
1.Foreign Currency Assets
2.Gold
3.Special Drawing Rights (SDRs)
4.Reserve Tranche Position

Option B is Correct:
Disinflation is a decrease in the rate of inflation – a slowdown in the rate of increase of the general price level of goods and services in a nation’s gross domestic product over time. It is the opposite of reflation. Disinflation occurs when the increase in the “consumer price level” slows down from the previous period when the prices were rising.

Deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the value of currency over time, but deflation increases it. This allows one to buy more goods and services than before with the same amount of currency.

Stagflation : In economics, stagflation, a portmanteau of stagnation and inflation, is a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high. It raises a dilemma for economic policy, since actions designed to lower inflation may exacerbate unemployment, and vice versa.
Reflation is the act of stimulating the economy by increasing the money supply or by reducing taxes, seeking to bring the economy (specifically price level) back up to the long-term trend, following a dip in the business cycle. It is the opposite of disinflation, which seeks to return the economy back down to the long-term trend.

Reflation, which can be considered a form of inflation (increase in the price level), is contrasted with inflation (narrowly speaking) in that “bad” inflation is inflation above the long-term trend line, while reflation is a recovery of the price level when it has fallen below the trend line.