This question assesses understanding of monetary policy tools, specifically the Bank Rate, and its impact on market liquidity. The Bank Rate is a key policy rate used by the Reserve Bank of India (RBI) to control the money supply in the economy.
Correct Option: A) More liquidity in the market.
When the Reserve Bank of India lowers the Bank Rate, commercial banks can borrow funds from the RBI at a lower cost. This reduces their cost of funds, allowing them to lower their own lending rates to customers. Lower interest rates encourage individuals and businesses to borrow more, leading to increased investment and consumption. This influx of money into the economy increases the overall money supply and, consequently, the liquidity in the market.
The question asks for the appropriate description of "fiscal stimulus." Fiscal stimulus refers to government actions aimed at boosting economic activity, typically during a recession or slowdown. This involves increasing government spending or reducing taxes to inject money into the economy.
Correct Option: B) It is an intense affirmative action of the government to boost economic activity in the country.
The question asks for the definition of the "base effect" in the context of inflation. The base effect refers to the impact of the previous year's price levels on the current year's inflation rate calculation. Understanding how inflation is calculated is key to identifying the correct option.
Correct Option: C) It is the impact of the price levels of previous year on the calculation of inflation rate.
This option accurately describes the base effect. The base effect highlights how the reference point (previous year's price level) significantly influences the perceived rate of inflation in the current period.
The question asks to identify the most inflationary action among the given options. Inflation is generally caused by an increase in the money supply relative to the goods and services available in an economy. We need to analyze each option to see how it affects the money supply and aggregate demand.
Correct Option: D) Creating new money to finance a budget deficit
This method directly increases the money supply in the economy without any corresponding increase in goods and services. When the government creates new money to finance its spending, it injects additional purchasing power into the economy. If the supply of goods and services remains constant or does not increase proportionally, this increased money supply will lead to higher prices, i.e., inflation. This is the most direct and potent way to cause inflation among the given options.
This question asks about the causes of a general rise in the level of prices, also known as inflation. We need to evaluate each given statement to determine if it contributes to inflation.
All three statements describe conditions that can lead to a general rise in the level of prices.
D) 1, 2 and 3
All three factors—an increase in the money supply, a decrease in the aggregate level of output, and an increase in effective demand—are well-established causes of inflation. An increase in money supply leads to more money chasing fewer goods (if output is constant). A decrease in aggregate output means fewer goods are available for the same or increasing demand. An increase in effective demand means more people are willing and able to buy, pushing prices up if supply is inelastic or limited.
The question asks about 'Open Market Operations' (OMO) in the context of the Indian economy. OMOs are a key monetary policy tool used by the central bank (RBI in India) to manage liquidity in the financial system.
Correct Option: C) purchase and sale of government securities by the RBI
This option accurately describes Open Market Operations. The RBI uses the buying and selling of government securities (like Treasury Bills, Government Bonds) in the open market to control the money supply and influence interest rates. This is a crucial quantitative tool of monetary policy.