Daily Static Quiz – 21st January, 2023

Correct Answer : C
Answer Justification :
All the above statements are correct.
What is Money Market?
30.1 While the G-Secs market generally caters to the investors with a long-term investment
horizon, the money market provides investment avenues of short term tenor. Money market
transactions are generally used for funding the transactions in other markets including G-Secs
market and meeting short term liquidity mismatches. By definition, money market is for a
maximum tenor of one year.

Within the one year, depending upon the tenors, money market is classified into:
i. Overnight market – The tenor of transactions is one working day.
ii. Notice money market – The tenor of the transactions is from 2 days to 14 days.
iii. Term money market – The tenor of the transactions is from 15 days to one year.
What are the different money market instruments?
30.2 Money market instruments include call money, repos, T- Bills (for details refer para 1.3),
Cash Management Bills (for details refer para 1.4), Commercial Paper, Certificate of Deposit
and Collateralized Borrowing and Lending Obligations (CBLO).
Call money market
30.3 Call money market is a market for uncollateralized lending and borrowing of
funds. This market is predominantly overnight and is open for participation only to scheduled
commercial banks and the primary dealers.

Correct Answer : B
Answer Justification :
Commercial Paper (CP)
30.13 Commercial Paper (CP) is an unsecured money market instrument issued in the
form of a promissory note and held in a dematerialized form through any of the
depositories approved by and registered with SEBI. A CP is issued in minimum
denomination of ₹5 lakh and multiples thereof and shall be issued at a discount to
face value. Hence, statement 1 is incorrect.
No issuer shall have the issue of CP underwritten or co-accepted and options (call/put) are not
permitted on a CP. Companies, including NBFCs and AIFIs, other entities like co-operative
societies, government entities, trusts, limited liability partnerships and any other body
corporate having presence in India with net worth of ₹100 cr or higher and any other entities
specifically permitted by RBI are eligible to issue Commercial papers subject to conditions
specified by RBI. All residents, and non-residents permitted to invest in CPs under Foreign
Exchange Management Act (FEMA), 1999 are eligible to invest in CPs; however, no person can
invest in CPs issued by related parties either in the primary or secondary market. Investment
by regulated financial sector entities will be subject to such conditions as the concerned
regulator may impose.
Certificate of Deposit (CD)
30.14 Certificate of Deposit (CD) is a negotiable money market instrument and issued
in dematerialised form or as a Usance Promissory Note, for funds deposited at a bank
or other eligible financial institution for a specified time period. Hence, statement 1
is incorrect.
Banks can issue CDs for maturities from 7 days to one year whereas eligible FIs can issue for
maturities from 1 year to 3 years.

Correct Answer : C
Answer Justification :
All the above statements are correct.
Repo market
30.4 Repo or ready forward contract is an instrument for borrowing funds by selling
securities with an agreement to repurchase the said securities on a mutually agreed
future date at an agreed price which includes interest for the funds borrowed.
30.5 The reverse of the repo transaction is called ‘reverse repo’ which is lending of funds
against buying of securities with an agreement to resell the said securities on a mutually
agreed future date at an agreed price which includes interest for the funds lent.
30.6 It can be seen from the definition above that there are two legs to the same transaction in
a repo/ reverse repo. The duration between the two legs is called the ‘repo period’.
Predominantly, repos are undertaken on overnight basis, i.e., for one day period. Settlement of
repo transactions happens along with the outright trades in G-Secs.
30.7 The consideration amount in the first leg of the repo transactions is the amount borrowed
by the seller of the security. On this, interest at the agreed ‘repo rate’ is calculated and paid
along with the consideration amount of the second leg of the transaction when the borrower
buys back the security. The overall effect of the repo transaction would be borrowing of funds
backed by the collateral of G-Secs.
30.8 The repo market is regulated by the Reserve Bank of India. All the above-mentioned repo
market transactions should be traded/reported on the electronic platform called the Clearcorp
Repo Order Matching System (CROMS).
Repo Rate
Repo rate is the return earned on a repo transaction expressed as an annual interest rate.

Repo/Reverse Repo
Repo means an instrument for borrowing funds by selling securities of the Central Government
or a State Government or of such securities of a local authority as may be specified in this
behalf by the Central Government or foreign securities, with an agreement to repurchase the
said securities on a mutually agreed future date at an agreed price which includes interest for
the fund borrowed.
Reverse Repo means an instrument for lending funds by purchasing securities of the Central
Government or a State Government or of such securities of a local authority as may be
specified in this behalf by the Central Government or foreign securities, with an agreement to
resell the said securities on a mutually agreed future date at an agreed price which includes
interest for the fund lent.

Correct Answer : D
Answer Justification :
All the above statements are correct.
The different measures used for controlling inflation are explained below.
1. Monetary Measures:
The government of a country takes several measures and formulates policies to control
economic activities. Monetary policy is one of the most commonly used measures taken by the
government to control inflation.
In monetary policy, the central bank increases rate of interest on borrowings for commercial
banks. As a result, commercial banks increase their rate of interests on credit for the public. In
such a situation, individuals prefer to save money instead of investing in new ventures.
This would reduce money supply in the market, which, in turn, controls inflation. Apart from
this, the central bank reduces the credit creation capacity of commercial banks to control
inflation.
The monetary policy of a country involves the following:
(a) Rise in Bank Rate:
Refers to one of the most widely used measure taken by the central bank to control inflation.
The bank rate is the rate at which the commercial bank gets a rediscount on loans and
advances by the central bank. The increase in the bank rate results in the rise of rate of
interest on loans for the public. This leads to the reduction in total spending of individuals.
The main reasons for reduction in total expenditure of individuals are as follows;
(i) Making the borrowing of money costlier:
Refers to the fact that with the rise in the bank rate by the central bank increases the interest
rate on loans and advances by commercial banks. This makes the borrowing of money
expensive for general public.
Consequently, individuals postpone their investment plans and wait for fall in interest rates in
future. The reduction in investments results in the decreases in the total spending and helps in
controlling inflation.
(ii) Creating adverse situations for businesses:
Implies that increase in bank rate has a psychological impact on some of the businesspersons.
They consider this situation adverse for carrying out their business activities. Therefore, they
reduce their spending and investment.
(iii) Increasing the propensity to save:
Refers to one of the most important reason for reduction in total expenditure of individuals. It
is a well-known fact that individuals generally prefer to save money in inflationary conditions.
As a result, the total expenditure of individuals on consumption and investment decreases.
(b) Direct Control on Credit Creation:
Constitutes the major part of monetary policy.
The central bank directly reduces the credit control capacity of commercial banks by
using the following methods:
(i) Performing Open Market Operations (OMO):
Refers to one of the important method used by the central bank to reduce the credit creation
capacity of commercial banks. The central bank issues government securities to commercial
banks and certain private businesses.
In this way, the cash with commercial banks would be spent on purchasing government
securities. As a result, commercial bank would reduce credit supply for the general public.
(ii) Changing Reserve Ratios:
Involves increase or decrease in reserve ratios by the central bank to reduce the credit
creation capacity of commercial banks. For example, when the central bank needs to reduce
the credit creation capacity of commercial banks, it increases Cash Reserve Ratio (CRR). As a
result, commercial banks need to keep a large amount of cash as reserve from their total
deposits with the central bank. This would further reduce the lending capacity of commercial
banks. Consequently, the investment by individuals in an economy would also reduce.
2. Fiscal Measures:
Apart from monetary policy, the government also uses fiscal measures to control inflation. The
two main components of fiscal policy are government revenue and government expenditure. In
fiscal policy, the government controls inflation either by reducing private spending or by
decreasing government expenditure, or by using both.
It reduces private spending by increasing taxes on private businesses. When private
spending is more, the government reduces its expenditure to control inflation. However, in
present scenario, reducing government expenditure is not possible because there may be
certain on-going projects for social welfare that cannot be postponed.
Besides this, the government expenditures are essential for other areas, such as defense,
health, education, and law and order. In such a case, reducing private spending is more
preferable rather than decreasing government expenditure. When the government reduces
private spending by increasing taxes, individuals decrease their total expenditure.
For example, if direct taxes on profits increase, the total disposable income would reduce. As a
result, the total spending of individuals decreases, which, in turn, reduces money supply in the
market. Therefore, at the time of inflation, the government reduces its expenditure and
increases taxes for dropping private spending.
3. Price Control:
Another method for ceasing inflation is preventing any further rise in the prices of goods and
services. In this method, inflation is suppressed by price control, but cannot be controlled for the long term. In such a case, the basic inflationary pressure in the economy is not exhibited in
the form of rise in prices for a short time. Such inflation is termed as suppressed inflation.
The historical evidences have shown that price control alone cannot control inflation, but only
reduces the extent of inflation. For example, at the time of wars, the government of different
countries-imposed price controls to prevent any further rise in the prices. However, prices
remain at peak in different economies. This was because of the reason that inflation was
persistent in different economies, which caused sharp rise in prices. Therefore, it can be said
inflation cannot be ceased unless its cause is determined.

Correct Answer : C
All the above statements are correct. Core inflation
This nomenclature is based on the inclusion or exclusion of the goods and services while
calculating inflation. Popular in western economies, core inflation shows price rise in all goods
and services excluding energy and food articles. In India, it was first time used in the
financial year 2000–01 when the government expressed that it was under control—it means
the prices of manufactured goods were under control.22 This was criticized by experts on
account of excluding food articles and energy out of the inflation and feeling satisfied on the
inflation front. Basically, in the western economies, food and energy are not the problems for
the masses, while in India these two segments are of most vital importance for the common
people.
Definition: An inflation measure which excludes transitory or temporary price
volatility as in the case of some commodities such as food items, energy products etc.
It reflects the inflation trend in an economy.

A dynamic consumption basket is considered the basis to obtain core inflation.
Some goods and commodities have extremely volatile price movements. Core inflation is
calculated using the Consumer Price Index (CPI) by excluding such commodities.

The term core inflation was coined by Eckstein (1981) who defined it as ‘the trend
increase of the cost of factors of production’ that ‘originates in the long-term
expectations of inflation in the minds of households and businesses, in the
contractual arrangements which sustain the wage-price momentum, and in the tax
system’. The concept of core inflation became popular in the 1970s during periods of high
inflation and now normally refers to that component of inflation that is likely to persist for a
long period, say, for several years and, therefore, useful for near-term and medium-term
inflation forecasting [Blender (1997); and Byran and Ceechetti (1994)]. most core measures
are based on the concept that total inflation can be separated into two components: the core
part, representing the underlying trend of inflation as shaped by the pressure of aggregate
demand against capacity, and the non-core part, which reflects price movements caused by
temporary shocks or relative price changes[(Lafleche (2006)].
A good measure of core inflation should have three properties. first, core measure of inflation
should be more stable or less volatile than headline inflation. Second, over a long period of
time, average rate of core inflation should match the average rate of headline inflation and
there should be no systematic divergence between the two. Also, core inflation should be able
to track the trend rate of inflation. Third, if core inflation represents the underlying trend of
inflation, it should then be better able to predict total or headline inflation. It is expected that
core measures contain more information about the future trend of inflation than the headline
inflation.

Correct Answer : B
Answer Justification :
What Is a Lorenz Curve?
A Lorenz curve is a graphical representation of income inequality or wealth inequality
developed by American economist Max Lorenz in 1905. Hence, option (b) is correct.
The graph plots percentiles of the population on the horizontal axis according to income or wealth. It plots cumulative income or wealth on the vertical axis, so that an x-value of 45 and a
y-value of 14.2 would mean that the bottom 45% of the population controls 14.2% of the total
income or wealth. In practice, a Lorenz curve is usually a mathematical function estimated
from an incomplete set of observations of income or wealth.
A Lorenz curve is a graphical representation of the distribution of income or wealth
within a population.
Lorenz curves graph percentiles of the population against cumulative income or wealth
of people at or below that percentile.
Lorenz curves, along with their derivative statistics, are widely used to measure
inequality across a population.
Because Lorenz curves are mathematical estimates based on fitting a continuous curve
to incomplete and discontinuous data, they may be imperfect measures of true
inequality.
What Is Engel’s Law
Engel’s Law is an economic theory introduced in 1857 by Ernst Engel, a German statistician,
stating that the percentage of income allocated for food purchases decreases as income rises.
As a household’s income increases, the percentage of income spent on food decreases while
the proportion spent on other goods (such as luxury goods) increases.
Key Takeaways
Engel’s Law is a 19th century observation that as household income increases, the
percentage of that income spent on food declines on a relative basis.
This is because the amount and quality of food a family can consume in a week or month
is fairly limited in price and quantity.
As food consumption declines, luxury consumption and savings increase in turn.
The Rahn curve is a graph used to illustrate an economic theory, proposed in 1996 by
American economist Richard W. Rahn, which suggests that there is a level of government
spending that maximizes economic growth. The theory is used by classical liberals to argue for
a decrease in overall government spending and taxation. The inverted-U-shaped curve
suggests that the optimal level of government spending is 15–25% of GDP.

Correct Answer : D
Answer Justification :
What is the Phillips Curve?
The Phillips curve is an economic concept developed by A. W. Phillips stating that
inflation and unemployment have a stable and inverse relationship. Hence, statement is incorrect.
The theory claims that with economic growth comes inflation, which in turn should lead to
more jobs and less unemployment. However, the original concept has been somewhat
disproven empirically due to the occurrence of stagflation in the 1970s, when there were high
levels of both inflation and unemployment.
Key Takeaways
The Phillips curve states that inflation and unemployment have an inverse relationship.
Higher inflation is associated with lower unemployment and vice versa.
The Phillips curve was a concept used to guide macroeconomic policy in the 20th
century, but was called into question by the stagflation of the 1970’s.
Understanding the Phillips curve in light of consumer and worker expectations, shows
that the relationship between inflation and unemployment may not hold in the long run,
or even potentially in the short run.
What is the Laffer Curve?
The Laffer Curve is a theory developed by supply-side economist Arthur Laffer to
show the relationship between tax rates and the amount of tax revenue collected by
governments. The curve is used to illustrate Laffer’s argument that sometimes-
cutting tax rates can increase total tax revenue. Hence, statement 2 is incorrect.
Key Takeaways
The Laffer Curve describes the relationship between tax rates and total tax revenue,
with an optimal tax rate that maximizes total government tax revenue.
If taxes are too high along the Laffer Curve, then they will discourage the taxed
activities, such as work and investment, enough to actually reduce total tax revenue. In
this case, cutting tax rates will both stimulate economic incentives and increase tax
revenue.
The Laffer Curve was used as a basis for tax cuts in the 1980’s with apparent
success, but criticized on practical grounds on the basis of its simplistic
assumptions, and on economic grounds that increasing government revenue might
not always be optimal.

Correct Answer : B
Financial Stability and Development Council (FSDC)
About FSDC:
The Financial Stability and Development Council (FSDC) was constituted in December,
2010. The FSDC was set up to strengthen and institutionalise the mechanism for
maintaining financial stability, enhancing inter-regulatory coordination and
promoting financial sector development.
An apex-level FSDC is not a statutory body. Hence, statement 1 is incorrect.

Composition:
The Council is chaired by the Union Finance Minister and its members are Governor,
Reserve Bank of India; Finance Secretary and/or Secretary, Department of Economic Affairs;
Secretary, Department of Financial Services; Chief Economic Adviser, Ministry of Finance;
Chairman, Securities and Exchange Board of India; Chairman, Insurance Regulatory and
Development Authority and Chairman, Pension Fund Regulatory and Development Authority. It
also includes the chairman of the Insolvency and Bankruptcy Board (IBBI).
Recently, the government through a gazette notification, had included ministry of electronics
and information technology (MeitY) secretary in the FSDC in view of the increased focus of the
government on digital economy.
What it does?
The Council deals, inter-alia, with issues relating to financial stability, financial sector
development, inter–regulatory coordination, financial literacy, financial inclusion and macro
prudential supervision of the economy including the functioning of large financial
conglomerates. No funds are separately allocated to the Council for undertaking its activities.

Correct Answer : A
Answer Justification :
Definition of ‘Infrastructure Investment Trusts’
Definition: An Infrastructure Investment Trust (InvITs) is like a mutual fund, which
enables direct investment of small amounts of money from possible
individual/institutional investors in infrastructure to earn a small portion of the
income as return. InvITs work like mutual funds or real estate investment trusts (REITs) in
features. InvITs can be treated as the modified version of REITs designed to suit the specific
circumstances of the infrastructure sector.
Description: Sebi notified the Sebi (Infrastructure Investment Trusts) Regulations, 2014 on
September 26, 2014, providing for registration and regulation of InvITs in India. The objective
of InvITs is to facilitate investment in the infrastructure sector.
InvITS are like mutual funds in structure. InvITs can be established as a trust and
registered with Sebi. Hence, statement 2 is incorrect.
An InvIT consists of four elements:
1) Trustee,
2) Sponsor(s),
3) Investment Manager and
4) Project Manager.
The trustee, who inspects the performance of an InvIT is certified by Sebi and he cannot be an
associate of the sponsor or manager.
‘Sponsors’ are people who promote and refer to any organisation or a corporate entity with a
capital of Rs 100 crore, which establishes the InvIT and is designated as such at the time of
the application made to Sebi, and in case of PPP projects, base developer.
Promoters/sponsor(s), jointly, have to hold a minimum of 25 per cent for three years (at least)
in the InvIT, excluding the situations where an administrative requirement or concession
agreement needs the sponsor to hold some minimum percent in the special purpose vehicle. In
these cases, the total value of the sponsor holding in the primary special purpose vehicle and
in the InvIT should not be less than 25 per cent of the value of units of InvIT on post-issue
basis.
Investment manager is an entity or limited liability partnership (LLP) or organisation that
supervises assets and investments of the InvIT and guarantees activities of the InvIT. Project
manager refers to the person who acts as the project manager and whose duty is to attain the
execution of the project and in case of PPP projects. It indicates that the entity is responsible
for such execution and accomplishment of project landmark with respect to the agreement or
other relevant project document.

Correct Answer : A
Answer Justification :
Methods of Taxation
There are three methods of taxation prevalent in economies.
Progressive taxation
This method has increasing rates of tax for increasing value or volume on which the
tax is being imposed. Hence, statement 3 is incorrect.
Indian income tax is a typical example of it. The idea here is less tax on the people who earn
less and higher tax on the people who earn more—classifying income earners into different
slabs.
regressive taxation
This is just opposite to the progressive method having decreasing rates of tax for
increasing value or volume on which the tax is being imposed. Hence, statement 2 is
incorrect.
There are not any permanent or specific sectors for such taxes. As a provision of promotion,
some sectors might be imposed with regressive taxes. As for example, to promote the growth
and development of small-scale industries, India at one time had regressive excise duty on
their productions—with increasing slabs of volume they produced, the burden of tax used to go
on decreasing.
Proportional taxation
In such a taxation method, there is neither progression nor regression from the point of view
rate of taxes point of view. Such taxes have fixed rates for every level of income or
production, they are neutral from the poor or rich point view or from the point of view of the levels of production. Usually, this is not used by the economies as an independent
method of taxation.