Question 1

If the interest rate is decreased in an economy, it will

Accepted Answer

When the interest rate in an economy decreases, businesses are more likely to increase their spending on capital goods such as factories and equipment.

Question 2

Consider the following statements: 1. Tight monetary policy of US Federal Reserve could lead to capital flight. 2. Capital flight may increase the interest cost of firms with existing External Commercial Borrowings (ECBs). 3. Devaluation of domestic currency decreases the currency risk associated with ECBs. Which of the statements given above are correct?

Accepted Answer

Tight monetary policy by the US Federal Reserve can lead to capital flight, where investors move their assets to other countries with higher returns. Capital flight can increase the interest cost for firms with existing External Commercial Borrowings (ECBs) due to higher risk perception by lenders. This explains why statements 1 and 2 are correct.

Question 3

In India, which one of the following is responsible for maintaining price stability by controlling inflation?

Accepted Answer

The Reserve Bank of India (RBI) is responsible for maintaining price stability in India by controlling inflation. It achieves this through various monetary policy tools such as repo rate, reverse repo rate, and open market operations. By regulating the supply of money and credit in the economy, the RBI aims to keep inflation in check and promote economic stability.

Question 4

Consider the following statements: Statement-I: In the post-pandemic recent past, many Central Banks worldwide had carried out interest rate hikes. Statement-II: Central Banks generally assume that they have the ability to counteract the rising consumer prices via monetary policy means. Which one of the following is correct in respect of the above statements?

Accepted Answer

Central Banks worldwide did not carry out interest rate hikes in the post-pandemic recent past; in fact, they mostly maintained low-interest rates to support economic recovery. Central Banks use monetary policy tools to influence inflation, but they do not always assume they can fully counteract rising consumer prices.

Monetary Policy — UPSC Previous Year Questions

If the interest rate is decreased in an economy, it will

Year-wise Distribution

Sample Questions

Monetary Policy — UPSC Previous Year Questions

If the interest rate is decreased in an economy, it will

Year-wise Distribution

Sample Questions