Economics · Banking Financial Awareness

Macroeconomics and Policy

2,878 Questions

Macroeconomics and policy questions assess the understanding of broad economic indicators, government fiscal strategies, and banking regulations. Topics include inflation causes, currency exchange rates, monetary policy tools, and historical economic systems. These are highly tested in banking and civil services examinations.

Inflation FactorsMonetary PolicyExchange RatesFiscal PolicyEconomic IndicatorsBretton Woods System

Macroeconomics and Policy Questions

Multiple choice

Directions: A brief passage or a statement is given and a question is asked, based on the information provided in the passage/statement. Critically examine the five alternative answer options marked (1) to (5) and choose the best answer. There are fundamentally two possible changes in an economy that will each cause inflation unless other compensating changes also occur. These changes are either reductions in the supply of goods and services or increases in demand. In a pre banking economy the quantity of money available, and hence the level of demand, is equivalent to the quantity of gold available. If the statements above are true, then it is also true that in a pre banking economy

  1. any inflation is the result of reductions in the supply of goods and services

  2. if other factors in the economy are unchanged, increasing the quantity of gold available will lead to inflation

  3. if there is a reduction in the quantity of gold available, then, other things being equal, inflation must result

  4. the quantity of goods and services purchasable by a given amount of gold is constant

  5. Other things remaining the same a reduction in the quantity of gold available, accompanied by a corresponding reduction in the level of demand will have no impact on the economy.
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

(2) Options (1) and (4) can be easily rejected. Option (3) will have the opposite effect. Option (5) is rendered unsuitable because of the use of the word ‘economy’ instead of ‘inflation’.

Multiple choice

Directions: Read the passage/argument and answer the question that follows it.

Although the minutiae vary a lot, banking crisis follows the same story. The precursors to each such story are rising home and equity prices, a rise in capital inflows engineered by foreign investors, a boom in debt and 'just before the doom' an inverted V-shaped path for the economy, with growth first picking up and then faltering. The years just prior to the US sub prime meltdown fit this template remarkably well.

The author is primarily trying to convince us by

  1. presenting examples

  2. explaining the reasons behind the sub prime meltdown in the US

  3. summarizing a number of similar happenings in one general pattern

  4. finding fault with the banking system

  5. discussing the origins of some recent economic phenomena
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

The exemplar has been used to prove a fairly general idea, thus rendering option (2) wrong. Again no examples in particular have been quoted. The discussion is fairly general. Hence option (1) is also wrong. Option (4) is factually incorrect as the author is mainly concerned with reason for banking crises. Only one phenomenon has been discussed i.e. banking crises. Hence, option (5) is not justified. The author is outlining a general paradigm within which all banking crises fit. Hence, option (3) is the best answer.

Multiple choice

Directions: Read the following passage/information and answer the question that follows:

Government borrowing from RBI, viz. printing of notes, has substituted for other ways of increasing reserve money for keeping monetary growth from slowing excessively in the context of slowing growth of net forex assets. This increasing monetisation of government debt can act only as an interim solution.

Which of the following expresses an idea concurrent to the above?

  1. The current government policy would not do as a long term solution.

  2. The main reason why the economy expands is the problem of credit.

  3. More monetisation is necessary to alleviate the liquidity crunch.

  4. RBI is responsible for the government deficit.

  5. Forex assets are an important source of fiscal growth.
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

 The last sentence of the argument leads us to (1) as the answer. It is only an interim solution. Hence, 5 could not be the answer.

Multiple choice

Directions: The following passage is followed by a question with five options. Choose the best option.

The recent decline in the value of rupee was triggered by a prediction of slower economic growth in the coming year. This prediction would not have adversely affected the rupee but for the government's huge budget deficit. Budget deficit should, therefore, be decreased to prevent future currency declines.

Which of the following, if true, would most seriously weaken the conclusion about how to prevent future currency declines?

  1. The government has made little attempt to reduce the budget deficit.

  2. The budget deficit has not caused a slowdown in economic growth.

  3. The value of rupee declined several times in the year prior to the recent prediction of slower economic growth.

  4. Before there was a large budget deficit, predictions of slower economic growth had frequently caused decline in rupee value.

  5. Similar predictions of slower economic growth in a previous year did not result in currency decline.
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

The argument assumes that a particular prediction can cause a currency decline only if accompanied by a large budget deficit. Since (4) states that this prediction can cause a currency decline without a large budget deficit, it is the best answer.

Multiple choice

Which of the following is NOT true about the Economic Survey 2003-04 released recently?

  1. Industrial Growth rate should be 10%

  2. Combined fiscal deficit in 2003-04 at 9.4% of GDP
  3. Foreign Exchange reserve at $119.3 billion as of May 31, 2004

  4. Maintaining inflation at around 3% (5%)
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

The Economic Survey 2003-04 did not set an inflation target of 3-5 percent as a primary 'not true' statement in the context of the provided options; however, the other options were factual data points from that survey, making this the correct choice for the 'NOT true' question.

Multiple choice

The term 'Stagflations' is used to describe�

  1. fixed prices and wages

  2. stagnation in production and inflation

  3. high productivity and price rise

  4. a stagnent economy
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Stagflation is an economic condition characterized by slow economic growth (stagnation) and relatively high unemployment, accompanied by rising prices (inflation).

Multiple choice

Which of the following is not helpful in controlling money supply?

  1. Bank Rate

  2. CRR

  3. Free Market Policy

  4. Change in margin requirement
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Free Market Policy is not helpful in controlling money supply. A free market is an economic system that allows supply and demand to regulate prices, wages, etc, rather than government.[1] Free markets contrast with controlled markets in which prices, supply or demand are directly or indirectly controlled by government. 

Multiple choice

As reported in the major financial newspapers the Federal Reserve has made certain changes/ corrections in its base federal funds rates. This act of the Federal Reserve will bring an effect directly and immediately on the banks located in

  1. Russia

  2. USA

  3. Japan

  4. China
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The Federal Reserve is the central bank of the United States. Changes to the federal funds rate directly impact the banking system within the USA.

Multiple choice

As we read in financial news-papers and economic journals/ magazines in financial sector a time comes when the banks cannot lend more; in fact they start recalling their old loans and also raise the rate of interest. What message does it give to the business community?

  1. This creates an atmosphere where corporates impatiently start reducing their inventory holdings and cancel the unexecuted orders pending with the manufacturers.
  2. Manufacturers start curtailing their scale of operations and start turning workers out of employment.
  3. Workers also start curtailing their spending and the demand of the commodities goods/services get reduced as people buy less.

  1. Only 1

  2. Only 2

  3. Only 3

  4. 1 and 3 only
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

When banks recall loans and raise interest rates, it signals a credit crunch. This forces businesses to reduce inventory and cancel orders (1), and leads to reduced consumer spending due to job losses (3). Statement 2 is a consequence, but the question asks for the message to the business community, which is best captured by the economic cycle described in 1 and 3.

Multiple choice

Every time RBI reviews its monetary and credit policy or make certain corrections/ adjustments in it, banks also normally revise their interest rates either upwardly or downwards. What impact do the interest rates put on overall economy if they are reduced little bit?

  1. It will bring down the interest burden of the corporates.
  2. The cost of the capital is also reduced.
  3. It will stimulate industrial growth and investment.

  1. Only 1

  2. Only 2

  3. Only 3

  4. All 1, 2 and 3
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Reducing interest rates lowers the cost of borrowing for corporations, reduces the cost of capital, and encourages investment, which stimulates industrial growth. All three statements are correct.