This question relates to the basic principles of monetary economics, specifically the relationship between money demand, money supply, and the rate of interest. When the supply of money is fixed and the demand for it increases, it creates a disequilibrium in the money market. Understanding how this disequilibrium is resolved is key to identifying the correct answer.
B) an increase in the rate of interest — As explained above, with a fixed money supply, an increase in money demand leads to a shortage of money. This drives down the price of financial assets, which in turn increases the rate of interest until the quantity of money demanded equals the fixed supply.
The question asks to identify the components of Monetary Policy from the given options. Monetary policy refers to the actions undertaken by a central bank to influence the availability and cost of money and credit to achieve national economic goals. These policies primarily involve controlling the money supply and interest rates.
Correct Option: C) 1 and 2
The question asks about the correct statement regarding inflation control in India. We need to evaluate each option based on economic principles and the roles of various institutions in India.
C) Decreased money circulation helps in controlling the inflation. When the money supply in the economy is reduced, there is less purchasing power available, which curbs aggregate demand. This reduction in demand can lead to a stabilization or decrease in prices, thus helping to control inflationary pressures. The RBI often uses tools like increasing interest rates to reduce money circulation.
The question asks to identify the correct statement(s) regarding the Monetary Policy Committee (MPC). We need to evaluate each statement based on the established facts about the MPC in India.
A) 1 only. Statement 1 accurately describes a core function of the MPC, which is to decide the benchmark interest rates (like the repo rate) to achieve inflation targets.
The question asks for the correct definition of "legal tender money." To answer this, we need to understand the legal characteristics of money that make it acceptable for settling debts.
Correct Option: B) The money which a creditor is under compulsion to accept in settlement of his claims.
The question asks what the RBI would NOT do if it adopts an expansionist monetary policy. An expansionist monetary policy aims to increase the money supply in the economy to stimulate growth. This is typically achieved by making credit cheaper and more accessible. We need to evaluate each statement based on whether it aligns with an expansionist policy.
Correct Option: B) 2 only. The RBI would not increase the Marginal Standing Facility Rate as part of an expansionist monetary policy because this would make borrowing more expensive for banks, thus reducing liquidity and contracting the money supply.