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Question 1 of 5
1. Question
2 points
Which of the following statements is incorrectabout the liquidity Trap ?
Correct
Ans: D
Exp:
The term ‘liquidity trap’ was first used by economist John Maynard Keynes. It is an economic situation where consumers hoard cash rather than spend or invest it, even when interest rates are low. The expansionary monetary policy (increase in money supply) does not increase the interest rate, or income, and hence does not stimulate economic growth. The speculative money demand function is infinitely elastic in this period. In this situation, interest rates are so low that most people prefer to keep cash on hand rather than invest in bonds and other debt instruments . A high personal savings level is witnessed (not high level of spending). People hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war.
The term ‘liquidity trap’ was first used by economist John Maynard Keynes. It is an economic situation where consumers hoard cash rather than spend or invest it, even when interest rates are low. The expansionary monetary policy (increase in money supply) does not increase the interest rate, or income, and hence does not stimulate economic growth. The speculative money demand function is infinitely elastic in this period. In this situation, interest rates are so low that most people prefer to keep cash on hand rather than invest in bonds and other debt instruments . A high personal savings level is witnessed (not high level of spending). People hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war.
The Currency Deposit Ratio is the proportion of the total deposits commercial banks keep as reserves.
The Reserve Deposit Ratio is the ratio of money held by the public in currency to that held in bank deposits.
Which of the statements given above is/are incorrect ?
Correct
Ans: C
Exp:
Statement 1 is incorrect: The currency deposit ratio (CDR ) is the ratio of money held by the public in currency to that held in bank deposits. It reflects people’s preference for liquidity. It is a purely behavioural parameter that depends, among other things, on the seasonal pattern of expenditure. For example, CDR increases during the holiday season as people convert deposits to cash balances to meet extra expenditure during such periods.
Statement 2 is incorrect: Reserve deposit ratio (RDR) is the proportion of the total deposits commercial banks keep as reserves. Reserve money consists of two things: vault cash in banks and the deposits of commercial banks with the RBI. Banks use this reserve to meet the demand for cash from account holders.
Statement 1 is incorrect: The currency deposit ratio (CDR ) is the ratio of money held by the public in currency to that held in bank deposits. It reflects people’s preference for liquidity. It is a purely behavioural parameter that depends, among other things, on the seasonal pattern of expenditure. For example, CDR increases during the holiday season as people convert deposits to cash balances to meet extra expenditure during such periods.
Statement 2 is incorrect: Reserve deposit ratio (RDR) is the proportion of the total deposits commercial banks keep as reserves. Reserve money consists of two things: vault cash in banks and the deposits of commercial banks with the RBI. Banks use this reserve to meet the demand for cash from account holders.
In the context of the Cash Reserve Ratio, consider the following statements:
A high Cash Reserve Ratio decreases the value of the money multiplier.
Banks get interest on the money kept with the RBI under the Cash reserve ratio requirements.
The Cash Reserve Ratio can be maintained either in gold or cash.
Which of the above given statements is/are incorrect?
Correct
Ans: C
Exp:
Statement 1 is correct: Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) also work through the reserve deposit route. A high (or low) value of CRR or SLR helps increase (or decrease) the value of the reserve deposit ratio, thus diminishing (or increasing) the value of the money multiplier and money supply in the economy in a similar fashion.
Statement 2 is incorrect: The percentage of cash required to be kept in reserves, vis-à-vis a bank’s total deposits, is called the Cash Reserve Ratio. The cash reserve is either stored in the bank’s vault or sent to the RBI. Banks do not get any interest on the money that is with the RBI under the CRR requirements.
Statement 3 is incorrect: The Reserve Bank of India (RBI) has mandated banks to maintain a specific amount of cash as part of the cash reserve ratio (CRR). Unlike the Statutory Liquidity Ratio, which can be maintained in either gold or cash, the CRR needs to be maintained only in cash.
Statement 1 is correct: Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) also work through the reserve deposit route. A high (or low) value of CRR or SLR helps increase (or decrease) the value of the reserve deposit ratio, thus diminishing (or increasing) the value of the money multiplier and money supply in the economy in a similar fashion.
Statement 2 is incorrect: The percentage of cash required to be kept in reserves, vis-à-vis a bank’s total deposits, is called the Cash Reserve Ratio. The cash reserve is either stored in the bank’s vault or sent to the RBI. Banks do not get any interest on the money that is with the RBI under the CRR requirements.
Statement 3 is incorrect: The Reserve Bank of India (RBI) has mandated banks to maintain a specific amount of cash as part of the cash reserve ratio (CRR). Unlike the Statutory Liquidity Ratio, which can be maintained in either gold or cash, the CRR needs to be maintained only in cash.
With reference to Financial Markets, consider the following statements:
They provide liquidity to financial assets.
They are classified on the basis of the maturity of financial instruments traded in them.
Which of the statements given above is/arecorrect?
Correct
Ans: C
Statement 1 is correct: Financial markets facilitate easy purchase and sale of financial assets such as shares, bonds, etc. In doing so, they provide liquidity to financial assets so that they can be easily converted into cash whenever required. Holders of assets can readily sell their financial assets through the mechanisms of the financial market.
Statement 2 is correct: Financial markets are classified on the basis of the maturity of financial instruments traded in them. Instruments with a maturity of less than one year are traded in the money market. Instruments with a longer maturity are traded in the capital market.
Statement 1 is correct: Financial markets facilitate easy purchase and sale of financial assets such as shares, bonds, etc. In doing so, they provide liquidity to financial assets so that they can be easily converted into cash whenever required. Holders of assets can readily sell their financial assets through the mechanisms of the financial market.
Statement 2 is correct: Financial markets are classified on the basis of the maturity of financial instruments traded in them. Instruments with a maturity of less than one year are traded in the money market. Instruments with a longer maturity are traded in the capital market.
Which one of the following statements is correct regarding Primary Markets?
Correct
Ans: D
Exp:
The primary market deals with new securities being issued for the first time. Itis also known as the new issue market. It facilitates the transfer of investible funds from savers to entrepreneurs seeking to establish new enterprises or to expand existing ones through the issue of securities for the first time. The investors in this market are banks, financial institutions, insurance companies, mutual funds, and individuals. A company can raise capital through the primary market in the form of equity shares, preference shares, debentures, loans, and deposits. In the Primary market, the prices are determined and decided by the management of the company. The secondary market is a market for the purchase and sale of existing securities. It provides liquidity and marketability to existing securities. In the secondary market, prices are determined by demand and supply for the securities. The major intermediaries in the secondary market are brokers, jobbers etc. Both the Primary and Secondary market deals with Debt and Equity instruments.
The primary market deals with new securities being issued for the first time. Itis also known as the new issue market. It facilitates the transfer of investible funds from savers to entrepreneurs seeking to establish new enterprises or to expand existing ones through the issue of securities for the first time. The investors in this market are banks, financial institutions, insurance companies, mutual funds, and individuals. A company can raise capital through the primary market in the form of equity shares, preference shares, debentures, loans, and deposits. In the Primary market, the prices are determined and decided by the management of the company. The secondary market is a market for the purchase and sale of existing securities. It provides liquidity and marketability to existing securities. In the secondary market, prices are determined by demand and supply for the securities. The major intermediaries in the secondary market are brokers, jobbers etc. Both the Primary and Secondary market deals with Debt and Equity instruments.
Comprehensive coverage with a concise format Integration of PYQ within the booklet Designed as per recent trends of Prelims questions हिंदी में भी उपलब्ध
Quick Revise Now ! UDAAN PRELIMS WALLAH
Comprehensive coverage with a concise format Integration of PYQ within the booklet Designed as per recent trends of Prelims questions हिंदी में भी उपलब्ध
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December 29, 2023