QUIZ – 2020: INSIGHTS STATIC , 15 July 2021 – Economy – INSIGHTSIAS

Solution: a)

The Fifth Five-Year Plan laid stress on employment, poverty alleviation (Garibi Hatao), and justice. The plan also focused on self-reliance in agricultural production and defence.

Solution: d)

Convertibility is the ease with which a country’s currency can be converted into gold or another currency through global exchanges. It indicates the extent to which the regulations allow inflow and outflow of capital to and from the country. Currencies that aren’t fully convertible, on the other hand, are generally difficult to convert into other currencies.

Full convertibility would mean the rupee exchange rate would be left to market factors without any regulatory intervention. There may be no limit on inflow or outflow of capital for various purposes including investments, remittances, or asset purchases/sales.

Solution: b)

What are open market operations?

• They are conducted by the RBI by way of sale or purchase of government securities (g-secs)to adjust money supply conditions.
• The central bank sells g-secs to suck out liquidity from the system and buys back g-secs to infuse liquidity into the system.
• These operations are often conducted on a day-to-day basis in a manner that balances inflation while helping banks continue to lend.
• The RBI uses OMO along with other monetary policy tools such as repo rate, cash reserve ratio and statutory liquidity ratio to adjust the quantum and price of money in the system.
• When the RBI wants to increase the money supply in the economy, it purchases the government securities from the market and it sells government securities to suck out liquidity from the system.
• RBI carries out the OMO through commercial banks and does not directly deal with the public. 

Solution: c)

What is the fiscal deficit?

It is the difference between the Revenue Receipts plus Non-debt Capital Receipts (NDCR) and the total expenditure.

• In other words, fiscal deficit is “reflective of the total borrowing requirements of Government”.

The significance of fiscal deficit is that if this ratio is too high, it implies that there is a lesser amount of money left in the market for private entrepreneurs and businesses to borrow. Lesser amount of this money, in turn, leads to higher rates of interest charged on such lending.

So, simply put, a higher fiscal deficit means higher borrowing by the government, which, in turn, mean higher interest rates in the economy.

A high fiscal deficit can also be good for the economy if the money spent goes into the creation of productive assets like highways, roads, ports and airports that boost economic growth and result in job creation.

Solution: c)

Stagflation is characterized by slow economic growth and relatively high unemployment—or economic stagnation—which is at the same time accompanied by rising prices (i.e. inflation). Stagflation can also be alternatively defined as a period of inflation combined with a decline in gross domestic product (GDP).