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Generate QuizEconomics – True/False – GK Questions
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Full Capital Account Convertibility allows residents to freely convert local financial assets into foreign financial assets without any regulatory restrictions.
- True
- False
Answer: True
Capital account convertibility pertains to the freedom to move capital across borders for investments (like buying foreign stocks or real estate). While India has full Current Account convertibility (for trade in goods/services), it maintains partial restrictions on the Capital Account to prevent volatile hot money flows from destabilizing the economy.
Special Drawing Rights (SDRs) can be used directly by private corporations to settle international trade invoices.
- True
- False
Answer: False
SDRs are strictly an international reserve asset used by the IMF and member countries' central banks to settle balance of payments deficits or supplement official reserves. Private entities and individuals cannot hold or transact in SDRs; they must be exchanged for hard currencies first.
The Office of the Economic Adviser (OEA), Ministry of Commerce and Industry, is responsible for compiling the Consumer Price Index (CPI).
- True
- False
Answer: False
The OEA compiles and publishes the Wholesale Price Index (WPI). The Consumer Price Index (CPI) is compiled by the National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI), while the Labour Bureau compiles CPI for specific industrial and agricultural workers.
The Narasimham Committee (1998) is primarily associated with the comprehensive reform of the Indian banking sector, including prudential norms and asset classification.
- True
- False
Answer: True
The second Narasimham Committee laid the blueprint for strengthening the Indian banking system. It recommended tighter income recognition and provisioning norms, the reduction of the SLR and CRR, and the deregulation of interest rates to make Indian banks globally competitive.
Operation Twist is a monetary policy tool where the RBI simultaneously sells short-term securities and buys long-term securities to flatten the yield curve.
- True
- False
Answer: True
By buying long-term bonds, the RBI increases their price and lowers their yield (interest rate), making long-term borrowing cheaper for infrastructure and housing. Simultaneously selling short-term paper prevents excess overall liquidity from building up in the system.
The RBI acts as the 'Banker to the Government' by maintaining the current accounts of the Central and State Governments and managing their public debt.
- True
- False
Answer: True
As the government's banker, the RBI receives and makes payments on behalf of the government, facilitates the transfer of funds, and crucially, manages the issuance of new government bonds and treasury bills to finance the fiscal deficit.
The money multiplier in an economy is directly proportional to the Cash Reserve Ratio (CRR) maintained by commercial banks.
- True
- False
Answer: False
The money multiplier is inversely related to the reserve ratio (including CRR). When banks are required to hold a higher percentage of deposits as reserves, they have less money available to lend out. This reduces the credit creation capacity of the banking system, thereby shrinking the overall money multiplier.
Fiat money possesses high intrinsic value because it is fully backed by gold reserves held by the central bank.
- True
- False
Answer: False
Fiat money, such as modern paper currency, has zero intrinsic value and is not backed by any physical commodity like gold or silver. Its value derives entirely from government decree (fiat) and the public's trust that it will be accepted as a medium of exchange for goods and taxes.
The Harrod-Domar growth model emphasizes technological progress as the primary driver of long-term economic growth, whereas the Solow model focuses solely on savings rates.
- True
- False
Answer: False
The reverse is true. The Harrod-Domar model posits that economic growth depends heavily on the national savings rate and the capital-output ratio, assuming fixed technology. The Solow-Swan model introduced exogenous technological progress as the critical factor for sustaining long-term per capita growth beyond mere capital accumulation.
The Production Linked Incentive (PLI) scheme provides financial incentives to companies based on their total historical investments rather than their incremental sales from products manufactured in India.
- True
- False
Answer: False
The PLI scheme is specifically designed to reward incremental sales from goods manufactured within domestic borders over a defined base year. It aims to boost domestic manufacturing, attract foreign direct investment, and integrate Indian firms into global supply chains by making them globally competitive.
Moral hazard occurs before a transaction takes place, whereas adverse selection occurs after the transaction is completed.
- True
- False
Answer: False
The reverse is true. Adverse selection happens before the transaction (e.g., high-risk individuals are more likely to buy insurance). Moral hazard occurs after the transaction, when one party changes their behavior and takes more risks because they are protected from the consequences (e.g., driving recklessly after buying full-coverage insurance).
The 'Free Rider Problem' is most commonly associated with private goods sold in competitive markets.
- True
- False
Answer: False
The free-rider problem occurs with public goods, where individuals have no incentive to pay for the good because they can consume it without paying, relying on others to foot the bill. This leads to the under-provision of the good by the free market, necessitating government intervention and taxation.
The 'Most Favoured Nation' (MFN) principle under the WTO mandates that a country must give preferential trade treatment to its closest political allies over other WTO members.
- True
- False
Answer: False
The MFN principle actually requires non-discrimination; if a WTO member grants a special trade favor (like a lower tariff) to one country, it must immediately extend the exact same favor to all other WTO members. Exceptions exist only for Free Trade Agreements or special concessions for developing nations.
The Real Effective Exchange Rate (REER) adjusts the Nominal Effective Exchange Rate (NEER) for inflation differentials between the home country and its trading partners.
- True
- False
Answer: True
While NEER measures the weighted average of a currency relative to a basket of others, REER adjusts this for relative inflation rates. REER is a superior indicator of a country's actual trade competitiveness, as high domestic inflation can erode the benefits of a nominally depreciated currency.
The Phillips Curve illustrates an inverse relationship between the rate of inflation and the rate of unemployment in the short run.
- True
- False
Answer: True
A.W. Phillips observed that when unemployment is low, wages tend to rise faster, leading to higher inflation. Conversely, high unemployment suppresses wage growth and inflation. However, Milton Friedman later argued this trade-off only exists in the short run, becoming vertical in the long run.
Headline inflation includes the prices of highly volatile items like food and fuel, whereas core inflation excludes them to show the underlying trend.
- True
- False
Answer: True
Headline inflation represents the raw, overall inflation rate in the economy, which can be skewed by temporary supply shocks in food or energy. Central banks often focus on core inflation (CPI excluding food and fuel) to make long-term monetary policy decisions, as it reflects sustained demand pressures.
The recommendations of the Finance Commission regarding the distribution of tax proceeds between the Centre and States are binding on the Government of India.
- True
- False
Answer: False
The Finance Commission is an advisory constitutional body under Article 280. While its recommendations carry immense weight and are generally accepted by the government, they are technically advisory in nature and not legally binding on the Parliament or the Executive.
Non-Banking Financial Companies (NBFCs) are allowed to accept demand deposits (savings/current accounts) from the public just like commercial banks.
- True
- False
Answer: False
NBFCs primarily engage in lending and investment activities but cannot accept demand deposits from the public. Furthermore, they are not part of the payment and settlement system and cannot issue cheques drawn on themselves, distinguishing them fundamentally from commercial banks.
Commercial Papers (CPs) are unsecured, short-term debt instruments issued primarily by the Government of India.
- True
- False
Answer: False
Commercial Papers are issued by large, highly-rated corporate entities, primary dealers, and financial institutions to meet their short-term working capital needs. The government issues Treasury Bills (T-bills), not CPs, for its short-term borrowing requirements.
The SARFAESI Act, 2002 allows banks to auction secured assets without the intervention of a court to recover non-performing assets (NPAs).
- True
- False
Answer: True
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act empowers banks and financial institutions to enforce their security interest directly. This bypasses the lengthy judicial process, enabling faster recovery of bad loans from defaulting borrowers.