This question tests understanding of the economic effects of inflation on different financial stakeholders, specifically debtors and bond-holders. We need to analyze how the real value of money changes during inflation and its impact on fixed monetary obligations.
A) 1 only — Statement 1 is correct because inflation erodes the real value of debt, making it easier for debtors to repay their loans with money that has less purchasing power. Statement 2 is incorrect because inflation reduces the real value of fixed interest payments and principal repayments, thereby harming bond-holders.
The question asks about the implications of an increase in the Bank Rate. Understanding the definition of the Bank Rate and its role in monetary policy is crucial to answering this question. The Bank Rate is a key policy rate used by the central bank to control liquidity and inflation in the economy.
Therefore, an increase in the Bank Rate indicates that the central bank is pursuing a tight money policy to control inflation or reduce liquidity.
D) Central Bank is following a tight money policy
As explained above, an increase in the Bank Rate makes borrowing more expensive for commercial banks, which then pass on these higher costs to their customers. This reduces the overall money supply and credit availability in the economy, which is the objective of a tight money policy.
To determine which measures increase the money supply, we need to understand how each action affects the amount of currency and bank deposits available in the economy. An increase in money supply typically means more money is available for spending and lending.
Based on this analysis, measures 1 and 3 directly lead to an increase in the money supply.
Correct Option: C) 1 and 3
This question tests understanding of the Statutory Liquidity Ratio (SLR) and its impact on the banking system and the economy. We need to analyze the direct consequences of a reduction in SLR by the Reserve Bank of India (RBI).
Correct Option: C) Scheduled Commercial Banks may cut their lending rates
As explained, a reduction in SLR increases the lendable resources of banks. To deploy these additional funds and attract borrowers, banks are likely to reduce the interest rates they charge on loans.
This question assesses understanding of the relationship between interest rates and economic activities like consumption, investment, and savings. A decrease in interest rates generally makes borrowing cheaper and saving less attractive, influencing economic behavior.
Considering these points, a decrease in interest rates primarily stimulates investment expenditure.
Correct Option: C) increase the investment expenditure in the economy
When interest rates fall, the cost of borrowing for businesses decreases. This makes it cheaper for them to take out loans to finance new projects, expand their operations, or purchase new machinery and equipment. Consequently, the expected return on investment for various projects becomes more attractive, leading to an increase in overall investment expenditure in the economy. This is a fundamental principle of monetary policy aimed at stimulating economic growth.
The question asks about the primary purposes of 'Statutory Reserve Requirements' in the context of the Indian economy. We need to evaluate each given statement to determine its validity as a purpose of these requirements.
Based on this analysis, only statement 1 accurately describes a primary purpose of statutory reserve requirements.
A) 1 only. Statement 1 correctly identifies that statutory reserve requirements are a crucial tool for the Central Bank to control the credit creation capacity of commercial banks, thereby managing money supply and inflation in the economy.