Economics Mock Test - 6

The correct answer is option 2.

Key Points

• As per the RBI, the total micro-finance loans stand at Rs. 2.7 lakh crores.
• The highest share is accounted for by the Scheduled Commercial Banks (40%). The NBFC-MFIs account for 30% of the loans.
• Micro Credit has been defined as the provision of thrift, credit and other financial services and products of a very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve their living standards.
• Micro Credit Institutions are those, which provide these facilities.
• The new definition of Microfinance as per RBI circular (March 2022): A microfinance loan is defined as a collateral-free loan given to a household having an annual household income of up to ₹3,00,000.
• All collateral-free loans, irrespective of end-use and mode of application/ processing/ disbursal (either through physical or digital channels), provided to low-income households, i.e., households having annual income up to ₹3,00,000, shall be considered as microfinance loans.

The correct answer is Reducing fiscal deficit

Key Points

• Monetary policy is the procedure by which the monetary authority of a nation, normally the central bank or currency board, controls either the expense of short-term borrowing or the cash supply, focusing on inflation or the loan fee to guarantee value strength and general trust in the currency.
• Developing the Monetary Policy in India is a prerogative of the Reserve Bank of India. Hence, it is also called the Monetary Policy of RBI. The RBI is vested with this responsibility under the RBI Act, 1934. The Monetary policy of RBI regulates the money supply, availability of credit and interest rates.
• The main objectives of the RBI's Monetary Policy in India are:
  1. To regulate money supply in the economy
  2. To attain price stability
  3. To promote economic growth
  4. To promote saving and investment
  5. To control business cycles
  6. To promote exports and substitute imports
  7. To develop infrastructure
  8. To regulate and expand banking
  9. To ensure more credit for priority sector
  10. To promote employment
  11. To manage aggregate demand

•  In India, the government manages its fiscal deficit by borrowing from various sources like the Reserve Bank of India, public sector banks, large public institutions, overseas markets, capital markets, and it can raise funds from the public as well.

Based on the above discussion we can conclude that, reducing fiscal deficit is not an objective of the Monetary Policy of Reserve Bank of India.

The correct answer is Mo.

• Money Supply can be defined as the money circulating in an economy.
• As money supply is connected with ‘circulating money’, only the highly-liquid forms of money like currency and bank deposits are usually considered.

Important Points

1. The monetary base (or M0) is the total amount of a currency that is either in general circulation in the hands of the public or the form of commercial bank deposits held in the central bank's reserves.
2. This measure of the money supply is not often cited since it excludes other forms of non-currency money that are prevalent in a modern economy.
3. Also known as M0, the monetary base of an economy includes all of the physical paper and coin currency in circulation, plus bank reserves held by the central bank.
4. The monetary base is sometimes referred to as "high-powered money" as it can be expanded through the money multiplier effect of the fractional reserve banking system.

Hence, M0 is generally called High powered money Reserve money or Base Money.

The correct answer is None of these.

Key Points

• A direct tax is one that is paid directly to the institution that imposed it.
• A direct tax cannot be transferred to another person or business.
• The person or entity who is subjected to the tax is responsible for making sure the tax is paid.
• Income tax, real property tax, personal property tax, and asset taxes are all examples of taxes that are paid directly to the government by an individual taxpayer.
• The Central Board of Direct Taxes is responsible for levying and collecting direct taxes as well as formulating other direct tax policies.

Additional Information

• A wealth tax is a tax levied on the market value of a taxpayer's assets.
• Corporation tax, often known as company tax, is a direct tax placed on a corporation's net revenue or profit from its business, whether it is foreign or domestic.
• An income tax is a tax levied on individuals or businesses based on their earnings or profits.

The correct answer is Value.

Key Points

• Value is the monetary, material, or assessed worth of an asset, good, or service. 
  • The process of calculating and assigning a value to a company or an asset is called valuation.

Additional Information 

• Price is the amount of money that has to be paid to acquire a given product.
  • Insofar as the amount people are prepared to pay for a product represents its value, price is also a measure of value.
  • So long as they are not artificially controlled, prices provide an economic mechanism by which goods and services are distributed among the large number of people desiring them.
• The income amount is the amount of monetary or other returns, either earned or unearned, accruing over a period of time.
  • Income is money that a person or a business receives in return for working, providing a product or service, or investing capital.
  • A person's income may also derive from a pension, a government benefit, or a gift.
• Services are the non-physical, intangible parts of our economy, as opposed to goods, which we can touch or handle.
  • Services, such as banking, education, medical treatment, and transportation make up the majority of the economies of rich nations. 

The correct answer is 1955.

Key Points

• The creation of the State Bank of India in July 1955 followed the passage of the Imperial Bank of India into state ownership.  
• In January 1921, the Imperial Bank was established as a joint-stock bank by merging the Presidency Banks of Bombay, Calcutta, and Madras. The Imperial Bank had the status of a quasi-central bank, undertaking until the formation of the Reserve Bank of India in 1935, banking functions for the Government of India and other banking institutions and managing the rupee debt of the government. 
• The State Bank of India (SBI) is an Indian multinational public sector bank and the statutory entity that provides financial services.
• Its headquarters are in Mumbai, Maharashtra.
• SBI is the world's 43rd largest bank and the only Indian bank in the Fortune Global 500 list of the world's largest firms for 2020, ranking 221st. 
• It is India's largest public sector bank, with a 23% asset market share and a 25% share of the total loan and deposit market.
• The bank is descended from the Bank of Calcutta, which was created in 1806 via the Imperial Bank of India, making it the Indian Subcontinent's oldest commercial bank.
• Various services offered by the State Bank of India include Personal Banking, Rural/ Agriculture, Small and Medium Enterprise (SME), Domestic Treasury, NRI Services, International Banking, Corporate Banking, Government Business, and KYC (Know Your Customer).
• The Chairman of SBI is Mr. Dinesh Kumar Khara and the 4 Managing Directors are Ashwani Bhatia, Swaminathan J., C.S. Setty, and Ashwini Kumar Tewari.​

The correct answer is Repo rate.

Key Points

• Repo stands for Repurchase Rate.
• Repo rate is the rate at which the central bank of a country lends money to commercial banks in the event of any shortfall of funds.
• In the event of inflation, central banks increase the repo rate as this acts as a disincentive for banks to borrow from it. This ultimately reduces the money supply within the economy and thus helps in arresting inflation.
• Repo Rate is the most vital rate for the common man.
• Everything from interest rates on loans to returns on deposits is influenced by this important rate set by the RBI, which is why interest rates on home loans, car loans and other forms of borrowings go up and down supporting the direction of Repo Rate change.
• Similarly, banks adjust bank accounts, fixed deposit returns supported this benchmark.
• Hence Repo rate is used as a primary means of implementing the monetary policy of the Reserve Bank of India.

Additional Information

• Monetary policy refers to the policy of the central bank with regard to the use of monetary instruments under its control to achieve the goals specified in the Act.
• The Reserve Bank of India (RBI) is vested with the responsibility of conducting monetary policy. This responsibility is explicitly mandated under the Reserve Bank of India Act, 1934.
• The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth.
• Price stability is a necessary precondition to sustainable growth.

The correct answer is option 1.

Key Points

• Purchase of Government Securities by the RBI from the banks will involve payment made by the RBI to the banks, thereby increasing liquidity with the banks, hence expansionary liquidity.
• An increase in the Government Securities (Higher SLR) minimum requirement will leave fewer funds with banks for giving loans.
• Repurchase of the government securities sold to the RBI the banks last month at a higher repurchase price than earlier means higher Repo Rate.
• It will encourage banks to keep more reserves with them and hence less lending to the public. Hence option 1 is correct.
• Open Market Operations is the simultaneous sale and purchase of government securities and treasury bills by RBI.
• The objective of OMO is to regulate the money supply in the economy.
• RBI carries out the OMO through commercial banks and does not directly deal with the public.
• The sale of Government Securities by the RBI to the banks extract money from the market. Hence option 2 is incorrect.
• An increase in the minimum requirement of the Government Securities to be held by the banks will also suck money out of the market. Hence it's not an expansionary policy. Hence, statement 3 is incorrect.
• Repurchase of the government securities by the banks at a higher repurchase price than earlier will also swipe out money from the market, making it difficult for loans for capital formation, crowding out effect will also entail. Hence statement 4 is incorrect.

​So, option 1 is correct.

An increase in the interest rate would make the borrowing cost for the banks substantially higher, this would result them in raising their lending rates. Inflation, stock market and deposit rates may or may not be directly affected by an increase in the interest rate.

The answer is Much higher in urban areas.

Key Points

• Tendulkar Expert Group (2009):
  • The national poverty line for 2011-12 was estimated at Rs. 816 per capita per month for rural areas and Rs. 1,000 per capita per month for urban areas.
  • Per person per day consumption, resulting in the figure of Rs 32 and Rs 26 a day for urban and rural areas.
• Rangrajan Committee (2014):
  • Monthly per capita consumption expenditure of Rs. 972 in rural areas and Rs. 1407 in urban areas is recommended as the poverty line at the all India level.
  • The government did not take a call on the report of the Rangarajan Committee.

Important Points

• Poverty:
  • A state in which an individual is unable to fulfil even the basic necessities of life. The minimum requirement includes food, clothing, shelter & health facilities.
• Poverty line:
  • The poverty line is a cutoff point on the line of distribution, which usually divides the population of the country as poor & non-poor.
  • People having income below the poverty line are called poor & people with income above the poverty line are called non-poor.
  • The planning commission has defined the poverty line on the basis of recommended nutritional requirement of 2400 calories per person in rural areas and 2100 for a person in urban areas.
  • While fixing the poverty line, consumption of food is considered the most important criteria.
    • The consumption worth of Rs. 328 per person a month in the rural area and for the urban area it was Rs. 454 also considered for the poverty line.
• Causes and remedy of poverty:

 

Causes	Population explosion High level of unemployment Inequalities of income High illiteracy rate The poor state of agriculture Underutilization of resource
Remedy	Acceleration of economic growth Reducing inequalities of income Population control Agricultural development More employment opportunities Land reforms

Key Points

Antyodaya Anna Yojana

• Adopted in Union Budget 2017-18, Mission Antyodaya is a convergence and accountability framework aiming to bring optimum use and management of resources allocated by 27 Ministries/ Department of the Government of India under various programs for the development of rural areas.
• Antyodaya Anna Yojana is the sponsored scheme of the Government of India to provide highly subsidized food to millions of the poorest families. This scheme was developed by the then Union Food and Civil Supplies Minister, Shanta Kumar.
• Antyodaya cards are the ration cards for the people below the poverty line. People who have no stable income, old men and women, laborers, etc., are provided these cards under the Public Distribution System.
• Unemployed people, women and old aged people fall under this category. These cardholders are eligible to receive 35kg of food grains per month per family.

​Therefore Antyodaya cards are given to those below the poverty line.

Additional Information

1. Priority household (PHH) ration card – This card is issued to those households which meet the eligibility criteria set by the state governments. Every household which has a priority ration card is entitled to 5 kilograms of food grains per member every month.
2. Antyodaya (AAY) ration card – The Antyodaya ration card is issued to those households which fall under the ‘poorest of poor’ category. Those who have this card, are entitled to 35 kilograms of food grain every month.
3. APL (Above Poverty line) ration card – The APL ration card was issued to households living above the poverty line.
4. BPL (Below Poverty line) ration card – The BPL ration was for those households living before the poverty line.
5. AAY (Antyodaya) ration card – The AAY which is still in place was issued to the poorest of poor households.

​The correct answer is Lakdawala Committee.

• The first estimation of poverty in India was made by Lakdawala Committee.

Key Points

Lakdawala Committee

• The committee was constituted in the year 1993 and chaired by  Professor  D T Lakdawala.
• Till as recently as 2011, the official poverty lines were based entirely on the recommendations of the Lakdawala Committee of 1993.
• According to the Lakdawala Committee, a poor is one who cannot meet these average energy requirements. 
• This committee defined the poverty line on the basis of household per capita consumption expenditure.
• The committee used CPI-IL (Consumer Price Index for Industrial Laborers) and CPI- AL (Consumer Price Index for Agricultural Laborers) for estimation of the poverty line.
• In the earlier estimates, both health and education were excluded because they were expected to be provided by the states.
• The method of calculating poverty included first estimating the per capita household expenditure at which the average energy norm is met, and then, with that expenditure as the poverty line, defining as poor as all persons who live in households with per capita expenditures below the estimated value.
• The fallout of the Lakdawala formula was that the number of people below the poverty line got almost double.
• The number of people below the poverty line was 16 percent of the population in 1993-94. Under the Lakdawala calculation, it became 36.3 percent.
• This poverty line was set such that anyone above them would be able to afford 2400 and 2100 calories worth of consumption in rural and urban areas respectively in addition to clothing and shelter.
• These calorie consumptions were derived from the YK Alagh committee only.

 

Additional Information

National Income Committee

• National Income Committee defines national income as "the value of commodities and services produced in an economy during a given period, counted without duplication."
• The Government of India appointed National Income Committee in 1949.
• The committee was chaired by Prof. P.C. Mahalanobis and had Prof D.R. Gadgil and Dr. V.K.R.V. Rao as members.
• The first report of the committee was presented in 1951.
• The First Report of the National Income Committee was signed on 15 April 1951.
• According to the first report, the National Income of India for 1948-49 was Rs. 8,710 crores and the per capita income was Rs. 225.
• The Final Report of the National Income Committee was signed on 14 February 1954.

​The correct answer is unemployment during the recessionary phase of the trade cycle.

Key Points

• Unemployment occurs when a person who is capable of working is actively looking for a job and is not able to find a job.
• Cyclical unemployment takes place when in an economy the demand for goods and services decreases. Companies generate their revenue from the sale of services and goods and when the revenue decreases there is a decrease in the profits.
• In order to keep the business running, the companies cut down their cost by laying off the employees and reducing labour costs.
• This type of unemployment is a temporary condition but can also last for years when the recession is severe.
• Cyclical unemployment is a type of unemployment that contributes to total unemployment. Total unemployment also includes structural, seasonal, frictional, and institutional unemployment.
• Cyclical unemployment simply means unemployment during the recessionary phase of a trade cycle.

Hence, option 1 is correct.

Important Points 

1. Structural unemployment is caused when there is a fundamental shift in the economy. In this type of unemployment, jobs are available but there occurs a mismatch between what workers are able to offer and what the companies require.

2. Frictional unemployment is “short-term” joblessness which is caused when a person leaves a job to start another one. This includes the time required by a person to start a new job. It can take place in a stable, and growing economy.

3. Seasonal unemployment takes place when the demand shifts from a season to another. This category includes a labor force whose jobs are dependent on a particular season.

4. Institutional unemployment is a type of unemployment caused due to the inferences with free-market conditions instead of voluntary decisions of those who are unemployed. They are a result of long-term institutional factors and incentives in an economy.

The correct answer is P.V. Narsimha Rao.

Important Points

• The first phase of liberalization in India began in 1991 under the regime of Prime Minister P.V Narasimha Rao.
• He introduced it with the goal of making the economy more market and service-oriented and expanding the role of private and foreign investment.
• It led to changes such as increased foreign investment, lower import tariffs, deregulation of markets, and lower taxes.
• The supporters of liberalisation credited it for the high economic growth recorded by the country in the 1990s and 2000s.
  • While its opponents have blamed it for increased poverty, inequality, and economic degradation.
• It paved the way for ending the licence-permit raj by decreasing the government intervention in the business.
• The policy opened up the country to a global economy.
• It discouraged public sector monopoly and paved the way for competition in the market.

The correct answer is 1991-2000.

• It was in the year 2000-01, that the government announced the reforms of the second generation, the ones which had been initiated by the then in 1991-2000 were called as 1st generation reforms. Important steps taken during these reforms were-
  • Promotions to the private sector
  • To make the Public sector undertaking more profitable and efficient.
  • Reforms for the banking sector, Insurance, etc.
  • Tax reforms

• The second generation of reforms was launched in the year 2000-01 when the reforms launched in the 1990s were not taking place as per the desired level of improvement. The major components covered in these reforms are-

  • Factor Market reforms related to petroleum, sugar, fertilizers, drugs, etc. in which dismantling of Administered Price Mechanism(APM) took place which means the regulation of the price of various products by the government.
    • Petroleum, Sugar, Fertilizers, Drugs, etc. were totally under the APM before the second generation reforms, now in petroleum only kerosene, LPG was under the APM, while petrol, diesel, and lubricants phased out from the APM
  • Public sector reforms related to the leverage to the capital market, international tie-ups, and green filed ventures. 
  • Legal sector reforms - These reforms were started in the first generation itself, but it was implemented and newer things were added in these like reforms in the Indian Penal code, Labour laws, company laws and enable suitably legal provisions like cyber laws, etc.
  • Reforms in Critical areas like in the infrastructure sector, education, healthcare sector, agricultural sector, etc.
  • State's role in the reforms - For the very first time state's role was defined in the process of economic reforms, all new steps of the reforms were started by the state with the centre playing a supportive role in it.
  • Social sector - The social sector especially in healthcare and the education sector gets special attention in the second generation of reforms with the increase in the allocations as well as centre showing greater performance to the development programmes in the health and education sector.
• The third generation of reforms was made on the launching of the tenth plan(2002-07). This generation of reforms was introduced to the cause of the fully functional Panchayati Raj Institutions (PRIs) so that the economic reforms can reach the grass-root level.
  • This generation of reforms was fully focussed on the world-class infrastructure and nurturing the spirit of entrepreneurship in India.

The book "Planned Economy for India" written by M Visvesvaraya. 

1. The attempt to start economic planning in India was made by M. Visvesvaraya, a noted engineer and politician, in 1934 through his book, 'Planned Economy for India'.
2. The book has a brief of the Indian situation in its economic aspects and to urge, in respect of the problems before the country, the adoption of certain courageous solutions based on recent world experience. 

The correct answer is 'option 3'

Key Points

• The balance of payments (BOP) is the record of all international financial transactions made by the residents of a country.
• There are three main categories of the BOP: the current account, the capital account, and the financial account.
• The current account is used to mark the inflow and outflow of goods and services into a country.
• The capital account is where all international capital transfers are recorded.
• In the financial account, international monetary flows related to investment in the business, real estate, bonds, and stocks are documented.
• A transfer payment is a payment of money for which there are no goods or services exchanged. 
• Unilateral transfers are one-way transfers of assets, such as worker remittances from abroad and direct foreign aid. Aid and gifts count as a debit to the capital account of the donor nation.

Therefore, as is clear from the understanding of the Account types, the correct answer is 'Current Account'

Additional Information

1. Examples- Current Account: Within the current account are credits and debits on the trade of merchandise, which includes goods such as raw materials and manufactured goods that are bought, sold, or given away. Services refer to receipts from tourism, transportation, engineering, business service fees and royalties from patents and copyrights. Unilateral Transfers and Income Receipts are also included here.
2. Examples- Capital Account: The capital account is broken down into the monetary flows branching from debt forgiveness, the transfer of goods, and financial assets by migrants leaving or entering a country, the transfer of ownership on fixed assets, the transfer of funds received to the sale or acquisition of fixed assets, gift and inheritance taxes, death levies and, finally, uninsured damage to fixed assets.
3. Examples- Financial Account: In the financial account, international monetary flows related to investment in the business, real estate, bonds, and stocks are documented. Also included are government-owned assets, such as foreign reserves, gold, SDRs held with IMF, private assets held abroad, and FDI.  Assets owned by foreigners, private and official, are also recorded in the financial account.
4. The official reserve account, a subdivision of the capital account, is the foreign currency and securities held by the government, usually by its central bank, and is used to balance the payments from year to year.

The correct answer is 'option 2'.

The balance of payments (BOP) is the record of all international financial transactions made by the residents of a country. There are three main categories of the BOP: the current account, the capital account, and the financial account.

Current Account	Capital Account	Financial Account
1. Merchandise trade, which consists of all raw materials and manufactured goods bought, sold, or given away. 2. Services: travel and tourism, labour, transportation, engineering, business services, such as law, management consulting, accounting, and fees from patents and copyrights on software, books, and movies. 3. Income receipts include income derived from ownership of assets, such as stock dividends and bond interest. 4. Unilateral transfers are one-way transfers of assets, such as worker remittances from abroad and direct foreign aid. Aid and gifts count as a debit to the capital account of the donor nation.	1. Capital transfers: debt forgiveness, migrants' transfers title transfer of fixed assets, transfer of funds linked to the sale or purchase of fixed assets, gift and inheritance taxes, death duties, uninsured damage to fixed assets, legacies. 2. Acquisition and disposal of real or intangible assets: transactions of real assets, such as the rights to natural resources, 3. Intangible assets, such as patents, copyrights, trademarks, franchises, and leases.	1. International monetary flows related to investment in the business, real estate, bonds, and stocks are documented. 2. Government-owned assets, such as foreign reserves, gold, SDRs held with the IMF, private assets held abroad, and FDI. 3. Assets owned by foreigners, private and official, are also recorded in the financial account.

• The capital account records all international transactions that involve a resident of the country concerned changing either his assets with or his liabilities to a resident of another country. Transactions in the capital account reflect a change in stock – either assets or liabilities. 
• It is the difference between the receipts and payments on account of the capital account. It refers to all financial transactions.  
• The capital account involves inflows and outflows relating to investments, short-term borrowings/lending, and medium-term to long-term borrowing/lending.

The correct answer is 2015; 2030.

Key Points

• The UN came up with 17 sustainable Development Goals in 2015 which were aimed to be achieved by 2030.
• The 2030 Agenda for Sustainable Development provides a shared blueprint for peace and prosperity for people of the world and the planet.
• There are 17 Sustainable Development Goals (SDGs) which are an urgent call for action by all countries- developed and developing- in a global partnership.
• The annual SDG reports provide a overview of the world's implementation efforts to date, highlighting areas of progress and where more actions need to be taken.

 Thus, we can say that in 2015, United Nations came up with 17 Sustainable Development Goals which were aimed to be achieved by 2030.

The World Committee on Environment and Development (WCED), often known as the Brundtland Commission after its chairman, Norwegian physician Gro Harlem Brundtland, was an international commission that debated and proposed solutions for environmental protection and sustainable development.

 Important Points

• The Brundtland Report, also known as Our Common Future, was a 1987 publication by the World Commission on Environment and Development (WCED) that presented the idea of sustainable development and detailed how it could be accomplished.
• The Brundtland Commission’s characterization of ‘sustainable development’ is the development that meets the needs of the present without compromising the ability of future generations to meet their own needs.
  The prominence given to ‘needs’ reflects a concern to eradicate poverty and meet basic human needs, broadly understood.
  The concept of sustainable development-focused attention on finding strategies to promote economic and social development in ways that avoided environmental degradation, over-exploitation, or pollution, and sidelined less productive debates about whether to prioritize development or the environment.

Additional Information

• The Brundtland Report of 1987 strictly focuses on the question of sustainable development and does not aim at studying unemployment, social justice, and free trade.

Hence, the Brundtland Report of 1987 spoke about sustainable development.

The correct answer is All of the above.

• Rural social development is helpful in employment generation, agriculture growth and development of communication facilities.
• Rural development mainly means the economic development of the people.
• Developmental and remedial work was carried out, so that Improvements in their living, eating habits, education, health etc.
• Despite this, 85% of rural households in the country use traditional wood, cow dung is used for cooking.
• Kerosene oil is used for cooking by 1% of rural households in the country.
• By May 2020, 90% of rural households in the country have electricity.
• The availability of electricity in urban areas is 93%.

The correct answer is Accredited Social Health Activist.

Important Points

• Accredited Social Health Activist.(ASHA)
  • ASHA is one of the key components of the National Rural Health Mission is to provide every village in the country with a trained female community health activist ASHA or Accredited Social Health Activist.
  • ASHA must primarily be a woman resident of the village married/ widowed/ divorced.
  • preferably in the age group of 25 to 45 years.
  • ASHA is Selected from the village itself and accountable to it, 
  • ASHA is a trained female community health activist who works as an interface between the public health system and the community.

Additional Information

• Responsibilities of ASHA workers
  • Identifying and registering new pregnancies, births, and deaths.
  • Mobilizing, counselling and supporting the community to demand and seek health services.
  • Identifying, managing, or referring to cases of illness.​
  • Supporting health service delivery through home visits, first-aid and immunizations sessions.
  • Maintaining data and participating in community-level health planning.
  • Arrange escort/accompany pregnant women & children requiring treatment/ admission to the nearest pre-identified health facility i.e. Primary Health Centre/ Community Health Centre/ First Referral Unit (PHC/CHC /FRU). 

The correct answer is Option 1.

Key Points

Inflation:

• Inflation is a persistent rise in the price levels of goods and services leading to a fall in the currency’s purchasing power. Therefore, The value of money during inflation decreases. Hence, Statement 2 is not correct and Statement 1 is correct.
• Inflation measures the change in prices of a basket of goods and services over a year.
• It occurs as a result of a mismatch between the supply and demand for money, changes in production and distribution costs, or an increase in product taxes.
• Inflation is measured by the Consumer Price Index (CPI) in India.
• The Impact of Inflation is that it reduces households' purchasing power due to an increase in prices. Hence, Statement 3 is not correct.
• The impact of inflation is felt across different sectors of the economy which are favourable to some and unfavourable to others. This price uncertainty may discourage investment and savings for the future.

Additional Information

Positive Impacts

• Increased Profits for Producers: Hence, Statement 4 is not correct.
  • In most cases, inflation benefits the producers of goods. They make more money because they can sell their products at higher prices.
• Increased Investment Returns
  • During periods of inflation, investors and entrepreneurs are given additional incentives to invest in productive activities. As a result, they benefit from higher returns.
• Increase in production output
  • When producers receive the appropriate investment, they produce more goods and services. As a result, inflation causes an increase in product/service production.
• Increased Employment and Earnings
  • As output rises, so does the demand for various production factors, including labour. As a result, employment and income rise in response to inflation.
• Shareholders income increases
  • If a company's profits increase as a result of inflation, it can pay dividends to its shareholders. As a result, during inflationary periods, shareholders' dividend income may increase.
• Borrowers' Advantages
  • Inflation reduces the purchasing power of money. As a result, if the borrower pays an interest rate lower than the inflation rate, he benefits from the process. This is because the real value of the money returned by the borrower is less than the value of the money borrowed.
• Governments' tax revenue improves

The correct answer is Increase in Life Expectancy.

Key Points

• An increase in Life Expectancy indicates an increase in economic devlopment.
• Life Expectancy means the number of years a person can expect to live.
• Life expectancy in India is almost 70 years (as of 2014-18 data).

Additional Information

• Differences between Economic Growth and Economic Development:

Economic Growth

Economic Development

It refers to an increase in the real output of goods and services in the country. It relates to a gradual increase in one of the components of GDP, consumption, government spending, investment, and net exports. It is measured by quantitative factors such as an increase in real GDP or per capita income. It brings quantitative changes in the economy.

It implies progressive changes (institutional and technological changes) in the socio-economic structure of the country along with income, savings, and investment. It deals with the growth of human capital, reduction of inequality figures and structural changes that improve the quality of life of the population, which increases in life expectancy. Qualitative measures like HDI (Human Development Index), gender-inqeuality index, human poverty index, infant mortality rate, literacy rate, etc. are used to measure economic development. It shows the qualitative and quantitative changes in the economy.

The correct answer is Private good.

Key Points

• A good that is consumed by a single person or household is known as Private good.
• Private goods refer to groups or individuals whose ownership is limited to buying goods for their own consumption.
• Private items are not shared with anyone else but can be sold along with the right to use or consume.
• Private goods are different from public goods, which everyone can use regardless of their income level.

Additional Information 

• Merits Goods:
  • ​Merit goods are those goods and services that the government believes that people will not consume enough. They should be subsidized or provided free of charge when used so that consumption does not depend primarily on the ability to pay for goods or services.
• ​Demerit Goods:
  • Demerit goods ​is a product that may have a negative impact on consumers, but these harmful effects may be unknown or ignored by consumers.
  • Demerit goods usually also have negative externalities, in which consumption has an adverse effect on third parties.
• Public Goods:
  • Public goods are goods or services that benefit all members of society and are generally provided free of charge through public taxes.
  • Public goods are the opposite of private goods, private goods are rare by nature and are paid for only by individuals.
  • Society will have different opinions about what goods should be considered as public goods.

The correct answer is Privatization.

Key Points

• Disinvestment in India is a policy of the Government of India, wherein the Government liquidates its assets in the Public sector Enterprises partially or fully.
• The decision to disinvest is mainly to reduce the fiscal burden and bridge the government's revenue shortfall. 

Important Points

1. Privatization is considered to bring more efficiency and objectivity to the company, something that a government company is not concerned about.
2. India went for privatization in the historic reforms budget of 1991, also known as the 'New Economic Policy or LPG policy'.
3. The transfer of ownership, property, or business from the government to the private sector is termed privatization. The government ceases to be the owner of the entity or business.
4. The process in which a few people take over a publicly-traded company is also called privatization. The company's stock is no longer traded in the stock market and the general public is barred from holding a stake in such a company. 

Additional Information

1. Globalization, or globalization, is the process of interaction and integration among people, companies, and governments worldwide. 
2. liberalization, the loosening of government controls. Although sometimes associated with the relaxation of laws relating to social matters such as abortion and divorce, liberalization is most often used as an economic term.
3. Industrialization is the transformation of a society from agrarian to a manufacturing or industrial economy. 

Hence, In India disinvestment in the public sector units is called Privatization.

The correct answer is John Maynard Keynes.

Key Points

• John Maynard Keynes
  • He organized the idea of deficit financing as compensatory spending meant to solve the problem of unemployment and depression. Hence, Option 3 is correct.
  • Modern economists prescribe deficit financing for developmental purposes.

Important Points

• Deficit Financing 
  • It can be defined as the practice where the government spends more money than it receives as revenue, the difference being made up by borrowing or minting new funds.
  • It can happen when the total income of the government (revenue account + capital account) falls below its total expenditure.
  • The government resorts to withdrawing money from its cash deposited in the RBI or orders the RBI to print new currency notes or borrows money from the public in the form of bonds and other securities.
  • The deficit is financed by borrowing loans from the central bank, commercial banks, and even state governments through Ad-hoc Treasury Bills.

Additional Information

• Adam Smith 
  • He was a Scottish economist and also known as the Father of economics or the Father of Capitalism.
  • Adam Smith's work includes 
  • The Theory of Moral Sentiments(1759)
  • An Inquiry into Nature and Causes of the Wealth of Nations. (1776)
  • Economics is a social science concerned with the production, distribution, and consumption of goods and services. It studies how individuals, businesses, governments, and nations make choices about how to allocate resources.  
• Alfred Marshall.
  • The general principles of pricing were given by Alfred Marshall.
  • Principles of Economics is an economics textbook by Alfred Marshall, first published in 1890. 
  • The Theory of Supply and Demand was given by Alfred Marshall in 1890.
  • The Theory of Demand and Supply is a central concept in the understanding of the Economic system and its function.
  • The quantity demanded of a good or service is the amount that consumers plan to buy during a particular time period, and at a particular price.
• Milton Friedman.
  • ​The 'natural rate of unemployment hypothesis' was advocated by Milton Friedman.
  • According to this hypothesis, a minimum level of unemployment was important to prevent a continuous rise in inflation levels.
  • This would ensure lesser demand in the market because of the decreasing purchasing power capacity of the potential workforce, which is still unemployed.

The correct answer is Petrol.

Key Points

• Goods and Service Tax (GST)
  • It is an indirect tax used in India on the supply of goods and services.
  • It is a value-added tax levied on most goods and services sold for domestic consumption.
  • It was launched in India on 1 July 2017 as a comprehensive indirect tax for the entire country.
  • It is a comprehensive, multistage, destination-based tax comprehensive because it has subsumed almost all the indirect taxes except a few state taxes. 
  • It is paid by the consumers and is remitted to the government by the businesses selling the goods and services.
  • It is of three types i.e. 
    • CGST to be levied by the Centre, 
    • SGST to be levied by the States and 
    • IGST is a tax levied on all Inter-State supplies of goods and/or services.  
  • All these taxes are levied at rates mutually agreed upon by the Centre and the States. 
  • The GST Council headed by the Union Finance Minister is the governing and key decision-making body for GST. 
  • The following goods are not covered under GST:
    • Petrol, high-speed diesel, aviation turbine fuel, crude oil. Hence, Option 4 is correct.
    • Electricity
    • Alcohol used for human consumption
    • Natural Gas

The correct answer is Option 3.

Key Points

• Stagflation
  • It is characterized by slow economic growth and relatively high unemployment or economic stagnation which is at the same time accompanied by rising prices (i.e. inflation).
  • In simple words, it refers to an economy that is experiencing a simultaneous increase in inflation and stagnation of economic output. Hence, Option 3 is correct.
  • The term "stagflation" was first used during a time of economic stress in the United Kingdom by politician Lain Macleod in the 1960s while he was speaking in the House of Commons. 

Additional Information

• Inflation
  • It is the rate at which the price of goods and services in an economy increases.
• Deflation
  • It is a decrease in the general price levels of goods and services.
  • It is the opposite of Inflation.
  • During deflation prices of goods and services tend to fall.
  • Deflation occurs when the inflation rate falls below 0%. Thus inflation is negative during Deflation.
• Dis-Inflation
  • It is a slower rate of inflation.
  • It means that there is still a rise in prices but the overall rate is slow.
  • It is simply a slowing of Inflation.

The correct answer is 1980.

Key Points

• All the countries began their development strategies in a very similar fashion.
• India made an announcement of its first 5-year plan in the year 1951.
• However, Pakistan made its 5-year plan announcement in the year 1956.
• China, on the other hand, made this announcement in the year 1953.
• Up until the 1980s, all 3 countries had very similar growth rates and per capita incomes.​

Additional Information

• The GDP growth rate improved (from an average of 2.9% in1970s to 5.6% in the 1980s) during the 1980s.
• July 1991, India has taken a series of measures to structure the economy and improve the BOP position.
• The new economic policy introduced changes in several areas.
  • ​Liberalisation.
  • Extending Privatisation.
  • Globalization of the economy.
• Which are known as 'LPG' (Liberalisation, Privatisation, and Globalization).

The correct answer is National Statistical Office.

Key Points

• National Income Statistics
  • National Income measures the total value of goods and services produced within the economy over a period of time.
  • There are three methods for measurement of National Income:
  1. Product Method
  2. Income Method
  3. Expenditure method 
  • The national income in India is calculated by the National Statistical Office.
• Significance of National Income Statistics
  • National Income Statistics are very helpful to the finance minister to formulate policies.
  • It guides him to make the proper and right decisions in regard to taxation and budgets.
  • It provides an instrument for economic planning.
  • It indicates trends of inflation and deflation.
  • It is useful to compare the prosperity of a country at different times.  

Additional Information

• National Statistical Office (NSO)
  • In 2019 government merge the National Sample Survey Office (NSSO) with Central Statistics Office (CSO) to form National Statistical Office (NSO).
  • It works under the ministry Ministry of Statistics and Program Implementation.
  • Headquarters: New Delhi
  • Chairman: G P Samanta

The correct answer is Working population of the country with the existing produce skills.

Key Points

• Human Capital of a country is the working population of the country with the existing productive skills.
• Human capital recognizes the intangible assets and qualities that improve worker performance and benefit the economy.
• It includes assets like education, training, intelligence, skills, health etc.
• Investing in people through nutrition, health care, quality education, jobs and skills help develop human capital.

 Thus, we can say that human capital of a country is the working population of the country with existing productive skills.

Based on employment conditions the economy can be divided into two sectors - the organized and unorganized sectors.                        Important Points

Unorganized Sector.

• The unorganized sector is defined as a sector that is not incorporated with the government and hence is not subject to any government restrictions.
• As the unorganized sector is not registered the employees in the sector are not on government records as employees and hence they are not covered by any sort of social security.
• In the unorganized sector, employees do not have such social security.
• In the unorganized sector, there is no existence of additional advantages.

Additional Information

Organised Sector

• ​The organized sector is one that is registered with the relevant authority or government and adheres to its rules and regulations.
• In the organized sector the employees have some protection against being arbitrarily fired, have fixed working hours, provisions for overtime work as well as sanitary work conditions.
• In the organized sector employees receive additional advantages such as medical care, a pension, leave travel compensation.

Confusion Points

• High productivity syndrome, total government control, and high pay are not characteristics of the unorganized sector where firms are not registered with the government and it consists mainly of low-paying jobs with low job security.

Hence lack of social security is the characteristic of the unorganized sector in an economy.

The correct answer is Quinary activities.

Key Points

• Quinary activities are services that focus on the creation, re-arrangement and interpretation of new and existing ideas; data interpretation and the use and evaluation of new technologies.
• Their importance in the structure of advanced economies far outweighs their numbers.
• The highest level of decision-makers or policymakers performs quinary activities.
• The quinary sector is the branch of a country's economy where top-level executives make high-level decisions in the government, industry, business, education, media, and nonprofit organizations.
• The quinary sector is the top economic sector.
• The quinary sector grows out of the leadership of the quaternary sector.
• The professions of the people working in this industry are generally referred to as "gold collar" professions since the services included in the sector focus on interpreting existing or new ideas, evaluating new technologies, and creating services.
• It is also one of the parts of the tertiary sector, but it involves highly paid professionals, research scientists, and government officials.
• The people are designated with high positions and powers, and those who make important decisions that are especially far-reaching in the world around them often belong to this category.

Additional Information

• ​This sector includes senior executives or officials in different fields, such as government, science, universities, non-profit organizations, health care, culture, and the media.
• The quinary sector is born from the leadership of the quaternary sector.
• Their importance in the structure of advanced economies far exceeds their number.
• The highest level of executives who make decisions or are responsible for policies is those who carry out quinary activities.
• The term quinary is used to classify industries according to the use of knowledge, thus measuring innovation policies and systems.
• Advantages -
  • This sector does not generate wealth. However, if your job is done right, the system should work smoothly for people who create wealth.
  • The quinary sector establishes a kind of cultural economy of knowledge, intangible and emotional.
• Disadvantage - 
  • ​ One downside to this industry is the potential poor decisions that can be made by so few people or organizations. This could lead the world down a wrong and dangerous path, due to its great influence.

Unemployment is studied under Macroeconomics. Hence Option 4 is Correct.

• Microeconomics is the study of individuals and business decisions, while macroeconomics looks at the decisions of countries and governments.
• Microeconomics focuses on supply and demand, and other forces that determine price levels, making it a bottom-up approach.
• Macroeconomics takes a top-down approach and looks at the economy as a whole, trying to determine its course and nature.
• Microeconomics involves several key principles including (but not limited to)
  • Demand, Supply, and Equilibrium: Prices are determined by the theory of supply and demand.
  • Production Theory: This principle is the study of how goods and services are created or manufactured.
  • Costs of Production: According to this theory, the price of goods or services is determined by the cost of the resources used during production.
  • Labor Economics: This principle looks at workers and employers, and tries to understand the pattern of wages, employment, and income.

The correct answer is the price of a commodity falls.

Key Points

• The demand curve is a curve that is used in microeconomics to determine the quantity of any particular commodity that people are willing to purchase with corresponding changes in its price.
• A demand curve graph depicts the relationship between the price of a commodity (the y-axis) and the quantity of that commodity that is demanded at that price (the x-axis).
• The demand curve will shift to left or right as a result of the change in any nonprice determinant of demand. Thus, normally there is no shift in the demand curve when the price of a commodity falls.
• Several factors like rising income, change in population, changes in expectations and changes in tastes and preferences affect individual and market demand.

Important Points

• Determinants of Demand:
  • There are five determinants of demands:
  • Price of the good
  • Taste or level of desire for the product by the buyer
  • The income of the buyer
  • Prices of related products:
  • Substitute products (directly competes with the good in the opinion of the buyer; e.g. tea & coffee)
  • Complementary products (used with the good in the opinion of the buyer; e.g. car & petrol)
  • Future expectations:
  • The expected income of the buyer
  • The expected price of the good.
• Changes That Decrease Demand:
  • The following changes decrease demands:
  • The decrease in the price of a substitute
  • Increase in the price of a complement
  • The decrease in income if good is normal good
  • Increase in income if good is inferior good

The correct answer is Option 1 i.e. Macroeconomics

• Macroeconomics is defined as the economic behavior of the whole system of the country. 
• This is also known as aggregative economics. 
• On the other hand, microeconomics is defined as the study of the individual sectors such as industry, firms, households, etc. 
• Welfare economics is the branch that studies the effect of the microeconomic activities to evaluate the welfare at the macro level. 

The Kinked - Demand curve theory is an economic theory regarding oligopoly and monopolistic competition. Kinked demand was an initial attempt to explain sticky prices.

The equilibrium price is the price at which the quantity demanded equals the quantity supplied. On plugging the values of D and S given, in the equation D = S and solving for P, answer comes out to be 2000.

• The equilibrium price is where the supply of goods matches demand.
• Now we substitute P=1000 we get
• D = 25000 - 7 x 1000 = 18,000.
• S =  10000 + 8 x 1000 = 18,000
• We know that for the equilibrium price demand must be equal to the supply.
• Hence at the price of 1000, both demand and supply are equal at 18000.

The market demand curve is the summation of all the individual demand curves in a given market. It shows the quantity demanded of the good by all individuals at varying price points.

The correct answer is Option 1, i.e Utility Function.

• The relation between the amount of good consumed and a consumer’s utility is shown by utility function.
• The utility function measures welfare or satisfaction of a consumer as a function of consumption of real goods.
• Indifference curve is a locus of points that show such combinations of two commodities which give the consumer same satisfaction.
• A budget line shows the combinations of two products that a consumer can afford to buy with a given income.
• The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity demanded for a given period of time. 

Demand curves have a negative slope, as the price declines, the quantity demanded will increase.

Explanation:

Kerala’s SilverLine project:

• It is Kerala's flagship semi high-speed railway project
• Aim: To reduce travel time between the state’s northern and southern ends.
• It links Kerala's southern end and state capital Thiruvananthapuram with its northern end of Kasaragod.
• The project is being executed by the Kerala Rail Development Corporation Limited (KRDCL). KRDCL, or K-Rail, is a joint venture between the Kerala government and the Union Ministry of Railway

The correct answer is Highways.

Key Points

• Bharatmala Pariyojana:
  • It is an umbrella program for the highways sector envisaged by the Ministry of Road Transport and Highways. Hence, Option 1 is correct.
  • Under Phase-I of Bharatmala Pariyojana, implementation of 34,800 km of national highways in 5 years (from 2017 to 2022) has been approved at an estimated outlay of Rs. 5,35,000 crore.
  • National Highways Authority of India (NHAI) has mandated the development of about 27,500 km of national highways under Phase-I.
  • However, as per ICRA Limited, Phase-I is likely to be delayed by four years due to the prevailing uncertainty due to Covid-19 and the consequent impact on valuations.
  • ICRA Limited is an Indian independent and professional investment information and credit rating agency.
  • Phase-II envisages around 48,000 km of road network across India by 2024.

Additional Information

• Objectives of Bharatmala Pariyojana:
  • To optimize the efficiency of freight and passenger movement across the country by bridging critical infrastructure gaps through effective interventions.
  • The effective interventions include the development of economic corridors, inter corridors and feeder routes, national corridor efficiency improvement, border, and international connectivity roads, coastal and port connectivity roads, and greenfield expressways.
  • Economic Corridors: These are integrated networks of infrastructure within a geographical area designed to stimulate economic development.
  • Greenfield Projects: They lack constraints imposed by prior work on the site. Typically, it entails development on a completely vacant site and architects start completely from scratch.
  • Brownfield Projects: They carry constraints related to the current state of the site and might be contaminated or have existing structures that architects have to tear down or modify in some way before the project can move forward.
  • To generate a large number of direct and indirect employment opportunities in the construction and infrastructure sector and also as part of the enhanced economic activity resulting from better road connectivity across the country.
  • To connect 550 districts in the country through national highway linkages.

The Correct answer is A, C and D.

Important Points

• The Diamond Quadrilateral of Indian railways aims to connect four metropolitan cities (Delhi, Mumbai, Chennai & Kolkata) through high-speed rail connectivity.
• Diamond Quadrilateral project of Indian railways is similar to the Golden Quadrilateral project for the development of highways.
• Six corridors have been identified under the Diamond Quadrilateral project. These are

1. Delhi-Mumbai,
2. Mumbai-Chennai,
3. Chennai-Kolkata,
4. Kolkata-Delhi
5. Delhi-Chennai
6. Mumbai-Kolkata routes.

• The Golden Quadrilateral (GQ) or Super Expressway project is underway to connect the four metropolitan cities - New Delhi, Mumbai, Chennai, and Kolkata through highways.

The Correct Answer is Jharia, Jharkhand.

Key Points

• Jharia, Jharkhand is not related to the production of steel.
• In 2019, India was the world's second-largest steel producer, with 111.2 million tonnes (MT) produced.
• Domestic availability of raw materials such as iron ore and low-cost labour have fueled India's steel industry's rise.
• As a result, India's steel industry has been a significant contributor to the country's manufacturing production.
• The Indian steel industry is cutting-edge, with cutting-edge steel mills.
• It has always aimed to keep older plants up to date and upgrade them to higher energy efficiency standards. Significant producers, primary producers, and secondary producers are the three types of steel producers in India.

Additional Information

• Here is the list where the production of steel in India:

States	Districts
West Bengal	Durgapur, Asansol
Chhattisgarh	Bhilai, Raigarh
Jharkhand	Bokaro, Jamshedpur
Maharashtra	Chandrapur, Tarapur, Dharamtar,
Odisha	Angul, Rourkela, Kalinganagar
Karnataka	Hospet, Bhadravati
Gujarat	Hazira
Andhra Pradesh	Visakhapatnam
Tamil Nadu	Salem

The correct answer is all of the above.

• Special Economic Zones (SEZs):
  • An SEZ is an enclave within a country that is typically duty-free and has different business and commercial laws chiefly to encourage investment and create employment.
  • In this zone, industries get some tax advantages.
  • The Parliament passed the Special Economic Zones Act in 2005 after many consultations and deliberations and it came into force in 2006.
  • SEZs were operational in India from 2000 to 2006 (under the EXIM policy/Foreign Trade Policy).
• Special Economic Zones Act, 2005
  • "It is defined as an Act to provide for the establishment, development, and management of the Special Economic Zones for the promotion of exports and for matters connected therewith or incidental thereto".
• Objectives of the SEZs Act are:
  • To create further economic activity.
  • To encourage the export of goods and services.
  • To provide employment.
  • To boost domestic and foreign investments.
  • To develop infrastructure facilities.
• SEZs can be set up by:
  • Any private/public/joint sector
  • State Government or its agencies
  • Foreign Company

 

The correct answer is 1, 3, and 4 only.

Key Points

• Current Account
  • The current account measures the flow of goods, services, and investments into and out of the country.
  • It represents a country’s foreign transactions and, like the capital account, is a component of a country’s Balance of Payments (BOP).
  • There is a deficit in the Current Account if the value of the goods and services imported exceeds the value of those exported.
  • A nation’s current account maintains a record of the country’s transactions with other nations, that includes net income, including interest and dividends, and transfers, like foreign aid.
  • It comprises of following components:
    • Trade of goods,
    • Services, and
    • Net earnings on overseas investments and net transfer of payments over a period of time, such as remittances. Hence, 1 is correct.
    • Net income from the compensation of employees. Hence option 3 is correct.

    • Gifts remittance grant. Hence option 4 is correct.

  • It is measured as a percentage of GDP.
  • The formulae for calculating CAD is:
    • Current Account = Trade gap + Net current transfers + Net income abroad
  • Trade gap = Exports – Imports
  • Capital account: It includes the financial transactions dealing with assets such as foreign direct investment, foreign portfolio investment, foreign loans, etc. Hence, 2 is incorrect.

So, the correct answer is option 1.

Additional Information

• Balance of payment
  • Balance of Payment (BoP) of a country can be defined as a systematic statement of all economic transactions of a country with the rest of the world during a specific period usually one year.
  • It indicates whether the country has a surplus or a deficit in trade.
  • When exports exceed imports, there is a trade surplus and when imports exceed exports there is a trade deficit.
  • Purposes of calculation of BoP:
    • Reveals the financial and economic status of a country.
    • Can be used as an indicator to determine whether the country’s currency value is appreciating or depreciating.
    • Helps the Government to decide on fiscal and trade policies.
    • Provides important information to analyze and understand the economic dealings of a country with other countries.
• Components of BoP:
  • For preparing BoP accounts, economic transactions between a country and the rest of the world are grouped under - Current account, Capital account, and Errors and Omissions. 
  • It also shows changes in Foreign Exchange Reserves.
  • Current Account:
    • ​It shows the export and import of visible (also called merchandise or goods - represent trade balance) and Invisibles (also called non-merchandise).
    • Invisibles include services, transfers, and income.
  • Capital Account:
    • It shows a capital expenditure and income for a country.
    • It gives a summary of the net flow of both private and public investment into an economy.
    • External Commercial Borrowing (ECB), Foreign Direct Investment, Foreign Portfolio Investment, etc form a part of the capital account.

The correct answer is 1 and 3 only.

Key Points

• The nominal effective exchange rate (NEER)
  • It is an unadjusted weighted average rate at which one country's currency exchanges for a basket of multiple foreign currencies.
  • The nominal exchange rate is the amount of domestic currency needed to purchase foreign currency.
  • It is a measure of the value of a currency against a weighted average of several foreign currencies. An increase in NEER indicates an appreciation of the rupee. Hence, Statement 1 is correct.
• The real effective exchange rate (REER)
  • It is the weighted average of a country's currency in relation to an index or basket of other major currencies.
  • The weights are determined by comparing the relative trade balance of a country's currency against that of each country in the index.
  • An increase in REER implies that exports become more expensive and imports become cheaper; therefore, an increase indicates a loss in trade competitiveness. Hence, Statement 2 is not correct.
  • The NEER is the weighted geometric average of the bilateral nominal exchange rates of the home currency in terms of foreign currencies.
  • The REER is the weighted average of NEER adjusted by the ratio of domestic prices to foreign prices.
• An increasing trend in domestic inflation relative to inflation in other countries creates a divergence in NEER and REER. Hence, Statement 3 is correct.