All questions of Macroeconomics for UPSC CSE Exam

Credit creation is the most significant function of the commercial banks. Commercial banks accept deposits and lend loans and advances. In this process they create two types of deposits, namely primary deposits and derivative or active deposits. The former refers to the cash deposited by a customer in a bank or deposit a cheque with the bank for collection. The banker merely accepts cash am converts it into a deposit. Hence, this is merely a passive role performed by the banks. These primary deposits do not add to the money stock in the economy. From their experience and observation the banks know that not all the customers will withdraw their deposits on any single day. Hence, after providing for some reserve to meet the cash requirement of the depositors, the banks lend the balance to the borrow. The amount of reserve to be maintained by the banks is Cash Reserve Ratio which is determined by the central bank.

Fiat money refers to any currency lacking intrinsic value that is declared legal tender by a government .so currency notes and coins are called as both legal tender and fiat money

A barter system is an old method of exchange. Th is system has been used for centuries and long before money was invented. People exchanged services and goods for other services and goods in return.

Because it is used for immediate consumption .
it does not required any further processing

The double coincidence of wants mean that both the parties have to agree to sell and buy each other's commodity i.e. what a person desires to sell is exactly what the other person wishes to buy. In a barter system commodities bare exchanged with commodities of other person without the use of money.

True, because it is measured over a period of time.

Definition of CRR
The Cash Reserve Ratio (CRR) is the fraction of deposits that commercial banks keep as reserves with themselves, either in cash or as deposits with the RBI. It is a monetary policy tool used by the central bank to regulate the money supply in the economy.

Importance of CRR
The CRR is an important tool for the RBI to regulate liquidity in the economy. By increasing the CRR, the RBI reduces the amount of money that commercial banks can lend, thereby reducing the money supply in the economy. Similarly, by decreasing the CRR, the RBI increases the amount of money that commercial banks can lend, thereby increasing the money supply in the economy.

Impact of CRR
The impact of CRR on the economy is significant. If the CRR is high, banks will have less money to lend, which can lead to a decrease in economic growth. On the other hand, if the CRR is low, banks will have more money to lend, which can lead to inflation.

Conclusion
In conclusion, the CRR is an important tool for the RBI to regulate the money supply in the economy. It is the fraction of deposits that commercial banks keep as reserves with themselves, either in cash or as deposits with the RBI. The impact of CRR on the economy is significant, and it is important for the RBI to use this tool wisely to achieve its monetary policy objectives.

The important quantitative methods of credit control is (a) bank rate.The methods used by the central bank to regulate the flows of credit into particular directions of the economy are called qualitative or selective methods of credit control. Unlike the quantitative methods, which affect the total volume of credit, the qualitative methods affect the types of credit, extended by the commercial banks; they affect the composition rather than the size of credit in the economy.

Money is any item or verifiable record that is generally accepted as  payment for  goods and services and repayment of  debts  in a particular country or socio-economic context.  The main functions of money are distinguished as: a  medium of exchange, a unit of account, a store of value and sometimes, a  standard of deferred payment. Any item or verifiable record that fulfills these functions can be considered as money.

Functions of Money

Money plays several roles in an economy. These roles are known as functions of money. The four key functions of money are:

1. Medium of Exchange: Money is used as a medium of exchange to buy goods and services. It makes transactions more convenient and efficient as it eliminates the need for barter system.

2. Measure of Value: Money serves as a measure of value as it provides a standard unit for measuring the worth of goods and services. This makes it easier for people to compare the values of different goods and services.

3. Standard of Deferred Payment: Money is used as a standard of deferred payment, which means that it allows people to buy goods and services on credit and pay for them later.

4. Store of Value: Money serves as a store of value as it can be saved and used at a later date. This function of money is important as it enables people to save for future needs and invest in assets.

The Correct Answer

The correct answer to the given question is option 'C', which states that money is a store of value. This is because money can be saved and used at a later date, which makes it a store of value. Money serves as a means of storing wealth, which can be used to meet future needs or make investments. The other options mentioned in the question, such as store of stocks and store of currency, are not functions of money.

True: It can happen when NFIA is negative i.e., factor income paid to abroad is more than factor income received from abroad. 

Because the power is in hands of government

Credit control is most important function of Reserve Bank of India. Credit control in the economy is required for the smooth functioning of the economy. By using credit control methods RBI tries to maintain monetary stability. There are two types of methods: Quantitative control to regulates the volume of total credit.

Most Liquid Asset: Money

Liquid assets are those assets that can be easily converted into cash without losing its value. The most liquid asset is considered to be money. Money is the most liquid of all assets because it is widely accepted in transactions for goods and services. It can be easily exchanged for goods and services, and it is universally recognized as a store of value.

Other assets such as gold, land, and treasury bonds may have value, but they are not as easily converted into cash as money. Gold, for instance, needs to be sold in the market, which may take time, and the value of land may vary depending on the location, demand, and other factors. Treasury bonds have a fixed maturity period and may not be easily sold in the market if the demand is low.

Money, on the other hand, can be readily used to settle debts, pay bills or purchase goods and services. It is widely accepted and can be used in any currency. Money can also be stored in different forms like cash, bank deposits, or other financial instruments. With the rise of digital payment systems, money can now be easily transferred electronically, making it even more liquid.

Conclusion

In conclusion, money is the most liquid asset because it can be easily converted into cash and is widely accepted in transactions. While other assets may have value, they are not as easily convertible into cash as money.

C

Understanding CRR (Cash Reserve Ratio)
The Cash Reserve Ratio (CRR) is a crucial aspect of the banking system that regulates the amount of funds that commercial banks must hold in reserve with the Central Bank. Here’s a detailed look at the concept:
Definition of CRR
- CRR is the percentage of a bank's total deposits that must be maintained as reserves with the Central Bank in the form of cash.
- It is a regulatory requirement aimed at ensuring liquidity and stability within the banking system.
Purpose of CRR
- Liquidity Management: It ensures that banks have enough liquid cash to meet customer withdrawals and other obligations.
- Control Inflation: By adjusting the CRR, the Central Bank can influence the amount of money that banks can lend, thereby controlling inflation.
- Encourage Stability: A higher CRR can help prevent banks from overextending their loans, promoting financial stability.
Impact on Banking Operations
- Lending Capacity: A higher CRR means less money available for banks to lend, which may lead to higher interest rates for borrowers.
- Interest Rates: Changes in CRR directly affect the interest rates set by banks for loans and deposits.
Comparison with Other Terms
- SLR (Statutory Liquidity Ratio): Different from CRR, SLR is the ratio of liquid assets that banks must maintain. It includes cash, gold, and government securities.
- Bank Rate: This is the rate at which the Central Bank lends money to commercial banks. It impacts overall lending rates in the economy but is not a reserve requirement.
In summary, CRR is essential for maintaining the financial health of banks and the overall economy, ensuring that banks can meet their obligations while helping to regulate credit in the market.

Question hi answer hai iska.....'Final goods' -Means No Further production is required....it is ready for Consumption like-,Milk is a final good if it is purchased to drink,Bicycle that is sold to consumer is a final good or consumer goods.

Answer should be c

The RBI acts as the custodian of the country's foreign exchange reserves, manages exchange control and acts as the agent of the government in respect of India's membership of the IMF

Managed Floating Exchange Rate System

The managed floating exchange rate system is a monetary system in which the central bank or government allows the exchange rate to be determined by market forces but intervenes in the foreign exchange market to influence the exchange rate when necessary. It is a hybrid of fixed and floating exchange rate systems.

Features of Managed Floating Exchange Rate System

- Central bank or government intervention: In a managed floating exchange rate system, the central bank or government intervenes in the foreign exchange market to influence the exchange rate when necessary. This intervention can be in the form of buying or selling foreign currency to increase or decrease the value of the domestic currency.

- Market forces determine the exchange rate: In a managed floating exchange rate system, the exchange rate is primarily determined by market forces such as supply and demand for foreign currency.

- Flexibility: The managed floating exchange rate system allows for greater flexibility than a fixed exchange rate system. The exchange rate can adjust to changes in market conditions, which can help to maintain stability in the economy.

- Stability: The managed floating exchange rate system can provide greater stability than a pure floating exchange rate system as the central bank or government can intervene to prevent sharp fluctuations in the exchange rate.

Advantages of Managed Floating Exchange Rate System

- Greater flexibility: The managed floating exchange rate system allows for greater flexibility than a fixed exchange rate system as the exchange rate can adjust to changes in market conditions.

- Stability: The managed floating exchange rate system can provide greater stability than a pure floating exchange rate system as the central bank or government can intervene to prevent sharp fluctuations in the exchange rate.

- Market-oriented: The managed floating exchange rate system is more market-oriented than a fixed exchange rate system as it allows market forces to determine the exchange rate.

Disadvantages of Managed Floating Exchange Rate System

- Uncertainty: The managed floating exchange rate system can create uncertainty for businesses and investors as the exchange rate can be subject to intervention by the central bank or government.

- Political interference: The managed floating exchange rate system can be subject to political interference as the central bank or government may intervene in the foreign exchange market for political reasons.

Conclusion

In conclusion, the managed floating exchange rate system is a monetary system in which the central bank or government allows the exchange rate to be determined by market forces but intervenes in the foreign exchange market to influence the exchange rate when necessary. It provides greater flexibility and stability than a fixed exchange rate system and is more market-oriented. However, it can create uncertainty for businesses and investors and be subject to political interference.

Yes it is M1

MPS is measured as ratio of change in savings to change in income, its value lies between 0 and 1. Also, marginal propensity to save is opposite of marginal propensity to consume. Mathematically, in a closed economy, MPS + MPC = 1, since an increase in one unit of income will be either consumed or saved.

Microeconomics is mainly the individual choices and it's main tool is demand and supply
In contrast Macroeconomics it is the aggregate choice and it's main tool is aggregate demand and aggregate supply.
Both Macroeconomics and microeconomics are interrelated with each in various segments and dependent on each other . As we have seen in microeconomics it is the individual choice and whole sum is the Macroeconomics.