Q1. What is the primary objective of the Monetary Policy of India?
(a) Price stability
(b) Economic growth
(c) Ensuring exchange rate stability
(d) All of the above
Q2. Which institution is responsible for framing the Monetary Policy in India?
(a) Finance Ministry
(b) Reserve Bank of India (RBI)
(c) Securities and Exchange Board of India (SEBI)
(d) Planning Commission
Q3. What does the term 'Repo Rate' refer to?
(a) Rate at which RBI borrows money from commercial banks
(b) Rate at which RBI lends money to commercial banks
(c) Rate at which commercial banks lend money to their customers
(d) Rate at which the Government of India lends money to the RBI
Q4. What is the primary focus of the Monetary Policy Committee (MPC) of India?
(a) To regulate the stock market
(b) To focus on foreign exchange reserves
(c) To maintain price stability and accelerate economic growth
(d) To oversee the performance of commercial banks
Q5. Which of the following is a tool of Monetary Policy used by the RBI to manage liquidity?
(a) Direct taxes
(b) Public expenditure
(c) Open Market Operations (OMO)
(d) Fiscal deficit targeting
Q6. What is the target inflation rate set by the Monetary Policy Committee (MPC) in India?
(a) 2%
(b) 4% with a margin of +/- 2%
(c) 6%
(d) 8%
Q7. What is 'Marginal Standing Facility' (MSF)?
(a) A facility that allows the government to borrow from the RBI.
(b) A facility for banks to borrow from the RBI without providing collateral.
(c) A facility that allows banks to borrow funds overnight from the RBI against government
securities.
(d) A facility to provide loans to small and marginal farmers.
Q8. What is the role of 'Inflation Targeting' in monetary policy?
(a) To ensure that inflation does not exceed a certain level.
(b) To reduce inflation to zero.
(c) To increase inflation for stimulating economic growth.
(d) To adjust inflation based on government spending.
Q9. What effect does a decrease in the Statutory Liquidity Ratio (SLR) have on the economy?
(a) It decreases the money supply.
(b) It increases the money supply by allowing banks to lend more.
(c) It has no impact on the money supply.
(d) It reduces the liquidity in the banking system.
Q10. Which of the following statements is true regarding the impact of a decrease in the Repo
Rate?
(a) It makes borrowing more expensive for banks.
(b) It encourages banks to lend more due to lower borrowing costs.
(c) It decreases the money supply in the economy.
(d) It increases the savings rate in the economy.
Solutions
S1.Ans (d)
Sol. The Correct answer is (d)
The primary objective of the Monetary Policy of India is multi-faceted, including price
stability, economic growth, and ensuring exchange rate stability. The Reserve Bank of India
(RBI) aims to maintain a balance between these objectives to ensure overall economic stability.
S2.Ans (b)
Sol. The Reserve Bank of India (RBI) is responsible for framing the Monetary Policy in India.
It is the central bank of the country and manages the nation's currency, money supply, and
interest rates to achieve financial stability and growth. The RBI's Monetary Policy aims to
control inflation, regulate the banking system, and support economic development through
various tools, including the repo rate.
S3.Ans(b)
Sol. The term "Repo Rate" refers to the rate at which RBI lends money to commercial banks.
So the answer is (b).

Repo Rate (Repurchase Rate):This is the interest rate set by the central bank (RBI in
India) at which it lends short-term money to commercial banks by buying government
securities from them with an agreement to repurchase them later on a predetermined
date. This helps banks manage their liquidity requirements.

Reverse Repo Rate: This is the opposite of the Repo Rate.It is the rate at which
RBI borrows short-term money from commercial banks by selling government
securities to them with an agreement to repurchase them later.
S4.Ans(c)
Sol. The primary focus of the Monetary Policy Committee (MPC) of India is (c) To maintain
price stability and accelerate economic growth
The MPC is tasked with fixing the benchmark interest rate (repo rate) in India to control
inflation within a specified target level, thereby contributing to the overall stability and growth
of the economy. It does not directly regulate the stock market, focus primarily on foreign
exchange reserves, or oversee the performance of commercial banks, although its decisions can
indirectly impact these areas.
S5.Ans(c)
Sol. The correct option is (c) Open Market Operations (OMO)
Open Market Operations (OMO) are a tool of monetary policy used by central banks, such as
the Reserve Bank of India (RBI), to manage liquidity and influence the economy. This involves
the buying and selling of government securities in the open market to control the money supply.
When the RBI buys securities, it injects liquidity into the banking system, making more funds
available for banks to lend, which can help in reducing interest rates and stimulating economic
growth. Conversely, selling securities withdraws liquidity, potentially increasing interest rates
and slowing down inflationary pressures.
S6.Ans(b)
Sol. The target inflation rate set by the Monetary Policy Committee (MPC) in India is 4% with
a margin of +/- 2%, allowing the inflation rate to be in the range of 2% to 6%.
S7.Ans(c)
Sol. The 'Marginal Standing Facility' (MSF) is (c) A facility that allows banks to borrow funds
overnight from the RBI against government securities.
MSF is a scheme launched by the Reserve Bank of India (RBI) that allows banks to borrow
money overnight at a rate higher than the repo rate. Under this facility, banks can borrow funds
by pledging government securities as collateral. The objective of MSF is to regulate short-term
liquidity fluctuations and provide a safety valve against unanticipated liquidity shocks to the
banking system.
S8. Ans(a)
Sol. The correct answer is (a) To ensure that inflation does not exceed a certain level.
Inflation targeting is a monetary policy strategy used by central banks to keep inflation within
a predefined target range or at a specific target rate over a certain period. This strategy involves
the central bank making policy decisions—such as adjusting interest rates, conducting open
market operations, and utilizing other monetary tools—to steer the rate of inflation towards the
target. The target is usually set in collaboration with the government and is intended to provide
a balance between avoiding excessively high inflation, which can erode purchasing power and
destabilize the economy, and avoiding deflation, which can lead to decreased consumer
spending and economic slowdown. Inflation targeting aims to provide a clear and transparent
framework for monetary policy, helping to stabilize the economy by managing expectations
regarding future inflation, thereby fostering an environment conducive to economic growth
and stability.
S9. Ans(b)
Sol. The correct answer is (b) It increases the money supply by allowing banks to lend more.
The Statutory Liquidity Ratio (SLR) is the percentage of deposits that banks are required to
maintain in the form of gold, government bonds, or other approved securities before lending to
the customers. When the SLR is decreased, banks are required to hold a lower proportion of
their deposits in these liquid assets. This means they have more funds available for lending to
the public. As banks increase lending, the money supply in the economy expands because new
money is created whenever banks extend credit. This process leads to an increase in the amount
of money that consumers and businesses can spend, potentially stimulating economic activity.
Therefore, a decrease in the SLR can lead to an increase in the money supply, promoting higher
spending and investment in the economy.
S10. Ans(b)
Sol. The statement that is true regarding the impact of a decrease in the Repo Rate is (b) It
encourages banks to lend more due to lower borrowing costs.
When the Repo Rate is decreased, it reduces the cost at which banks can borrow money from
the central bank. This lower borrowing cost can encourage banks to lend more to businesses
and consumers because they can now do so at lower interest rates. This can stimulate
investment and spending in the economy. A decrease in the Repo Rate does not make
borrowing more expensive for banks, decrease the money supply in the economy, nor directly
increase the savings rate in the economy.
Q1. Fiscal Policy is concerned with
(a) the volume of currency that banks should put in the economy
(b) the policy regarding taxation and expenditure
(c) policy for regulating stock
(d) the policy for dealing with IMF
Q2. Which one of the following is part of fiscal policy?
(a) Production policy
(b) Tax policy
(c) Foreign policy
(d) Interest rate policy
Q3. Fiscal policy means
(a) policy relating to money and banking in a country
(b) policy relating to non-banking financial institutions
(c) policy relating to government spending, taxation and borrowing
(d) policy relating to financial matters of international trade
Q4. Which one of the following is NOT the objective of fiscal policy of government of
India?
(a) Full employment
(b) Price stability
(c) Regulation of inter-state trade
(d) Economic growth
Q5. In India, which one among the following formulates the fiscal policy?
(a) Planning Commission
(b) Finance Commission
(c) Finance Ministry
(d) Reserve Bank of India
Q6. Which of the following economists, introduced fiscal policy as a tool to rectify the
Great Depression of 1929-30?
(a) Prof. Keynes
(b) Prof. Pigou
(c) Prof. Marshall
(d) Prof. Crowther
Q7. A change in fiscal policy affects the balance of payments through
(a) Only the current account
(b) Only the capital account
(c) Both the current account and capital account
(d) Neither current account nor capital account
Q8. Which one of the following was not stipulated in the Fiscal Responsibility and Budget
Management Act 2003?
(a) Elimination of revenue deficit by the end of the fiscal year 2007-08
(b) Non-borrowing by the Central Government from Reserve Bank of India except – under
certain circumstances
(c) Elimination of primary deficit by the end of the fiscal year 2008-09
(d) Fixing government guarantees in any financial year as a percentage of GDP
Q9. Fiscal responsibility and Budget Management Act was enacted in India in the year
(a) 2007
(b) 2005
(c) 2002
(d) 2003
Q10. Which one of the following statements appropriately describes the ‘fiscal stimulus’?
(a) It is a massive investment by the government in manufacturing sector to ensure the
supply of goods to meet the demand surge caused by rapid economic growth
(b) It is an intense affirmative action of the government to boost economic activity in the
country
(c) It is government’s intensive action of financial institutions to ensure disbursement of
loans to agriculture and allied sectors to promote greater food production and contain
food inflation
(d) It is an extreme affirmative action by the government to pursue its policy of financial
inclusion
Solutions
S1. Ans. (b)
Sol. The Correct option is (b) the policy regarding taxation and expenditure
Fiscal policy is the branch of economics that deals with the government's use of taxation
and spending to influence the economy. By adjusting tax rates and government spending
levels, policymakers aim to achieve various economic goals, such as:
 Economic growth: During economic downturns, governments may use
expansionary fiscal policy, which involves increasing spending or reducing taxes,
to stimulate aggregate demand and promote growth.
 Controlling inflation: During periods of high inflation, governments may
implement contractionary fiscal policy, which involves decreasing spending or
raising taxes, to cool down the economy and curb inflation.
 Income redistribution: Fiscal policy can also be used to address income inequality.
Progressive taxes like income taxes or inheritance taxes raise more revenue from
higher earners, which can be used to fund social programs that benefit lowerincome individuals.
S2. Ans. (b)
Sol. The Correct option is (b) Tax policy
Fiscal policy involves government spending and taxation decisions, which are used to
influence the economy. Tax policy, as part of fiscal policy, includes decisions on tax rates
and tax credits that can affect overall economic demand, investment, and consumption
patterns. The other options, such as production policy, foreign policy, and interest rate
policy, do not fall under the direct purview of fiscal policy. Interest rate policy, for
instance, is typically part of monetary policy, which is managed by a country's central
bank rather than its government.
S3. Ans. (c)
Sol. The Correct option is (c) policy relating to government spending, taxation, and
borrowing
Fiscal policy involves the use of government spending and taxation policies to influence
economic conditions, including aggregate demand, employment, and inflation. It is a key
tool used by governments to manage the economy, support economic growth, and
stabilize the business cycle.
S4. Ans. (c)
Sol. The Correct option is (c)
The objective of the fiscal policy of the Government of India includes various economic
goals such as promoting economic growth, achieving full employment, and maintaining
price stability. Among the options provided Full employment Price stability, and
Economic growth are indeed objectives of fiscal policy, as these policies are designed to
influence the overall economic activity in the country, manage inflation, and support
sustainable growth through government spending and taxation.
Regulation of inter-state trade, however, is not typically an objective of fiscal policy. Fiscal
policy is primarily concerned with taxation and government spending decisions. The
regulation of inter-state trade is more directly related to commerce policies and legal
frameworks set by the government to facilitate or manage the movement of goods and
services across state borders. Therefore, (c) Regulation of inter-state trade is NOT an
objective of the fiscal policy of the Government of India.
S5. Ans. (c)
Sol. The Correct option is (c) Finance Ministry
Fiscal policy in India, as in most countries, involves the government's plan for taxation,
spending, and borrowing to influence the economy. The Finance Ministry of India is the
main agency that formulates and oversees the implementation of the fiscal policy. This
includes deciding on tax policies, government budgets, and public expenditures. The
Finance Ministry works under the guidance of the Union Finance Minister and plays a
crucial role in determining how resources are allocated across various sectors of the
economy to achieve the government's macroeconomic objectives.
S6. Ans. (a)
Sol. The answer is (a) Prof. Keynes.
The economist who introduced fiscal policy as a tool to rectify the Great Depression of
1929-30 was (a) Prof. Keynes, specifically John Maynard Keynes. Keynes advocated for
the use of government spending and taxation policies to influence economic activity, a
core principle of what would later be known as Keynesian economics. His ideas were a
departure from the classical economics that preceded him, emphasizing that during
periods of economic downturn, government intervention could help stabilize economies
by mitigating the effects of decreased private spending.
S7. Ans. (c)
Sol. The correct answer is (c) Both the current account and capital account.
Fiscal policy, which involves government spending and tax policies, can affect a country's
balance of payments in various ways, influencing both the current account and the capital
account.
1. Current Account: Fiscal policy can directly impact the current account, which
includes trade in goods and services, income from abroad, and current transfers.
For instance, an expansionary fiscal policy, characterized by increased
government spending or decreased taxes, can lead to higher domestic income and
consumption. This could increase imports, affecting the trade balance, a major
component of the current account. Conversely, a contractionary fiscal policy might
reduce domestic demand and imports, potentially improving the current account
balance.
2. Capital Account: Fiscal policy can also influence the capital account, which
records transactions in financial instruments and changes in foreign ownership of
assets. For example, expansionary fiscal policy may lead to higher interest rates if
it increases demand for money. Higher interest rates can attract foreign
investment, impacting the capital account. Similarly, fiscal policies that affect the
economic outlook of a country can influence foreign investors' confidence, thereby
affecting capital flows.
Therefore, changes in fiscal policy have the potential to affect both the current and capital
accounts of the balance of payments, making option (c) the correct answer.
S8. Ans. (c)
Sol. The correct answer is (c) Elimination of primary deficit by the end of the fiscal year
2008-09
The Fiscal Responsibility and Budget Management (FRBM) Act, 2003, was enacted by the
Government of India to introduce more fiscal discipline and to aim for a balanced budget.
The main provisions of the FRBM Act include targets for reducing fiscal deficits,
eliminating revenue deficits, and other related objectives.
Based on the key stipulations of the FRBM Act, 2003:
 Elimination of revenue deficit by the end of the fiscal year 2007-08: The
FRBM Act did set targets for reducing and eventually eliminating the revenue
deficit. This aligns with the act's objectives to ensure fiscal discipline by managing
the government's revenue and expenditure more effectively.
 Non-borrowing by the Central Government from Reserve Bank of India
except – under certain circumstances: The act aimed to limit the government's
borrowing from the Reserve Bank of India, except under certain conditions, to
reduce the fiscal deficit and avoid monetization of government debt.
 Fixing government guarantees in any financial year as a percentage of GDP:
The act included provisions related to the management of government guarantees,
aiming to limit them as a measure to contain the fiscal deficit and manage
government liabilities more effectively.
Given these points, the option that was not directly stipulated in the FRBM Act, 2003, as
written, would be (c) Elimination of primary deficit by the end of the fiscal year 2008-09.
While the act focused on fiscal and revenue deficit reduction targets, the specific
elimination of the primary deficit by the fiscal year 2008-09 is not a stipulated target in
the act. The primary focus was on the fiscal and revenue deficits, not specifically on the
primary deficit by a certain timeline.
S9. Ans. (d)
Sol. The correct answer is (d)
The Fiscal Responsibility and Budget Management (FRBM) Act was enacted in India in
the year 2003.
Details of the FRBM Act, 2003
The FRBM Act was introduced by the Indian government to introduce more transparency
in fiscal operations of the government and to introduce fiscal discipline to avoid a fiscal
deficit. The main objectives of the act were:
1. Reduce Fiscal Deficit: The Act aimed to reduce the fiscal deficit to a manageable
level by setting targets for the government to achieve. It initially aimed to reduce
the fiscal deficit to 3% of the GDP by the financial year 2008-09.
2. Eliminate Revenue Deficit: One of the key aims was also to eliminate revenue
deficit, ensuring that revenue expenditure is financed entirely by revenue
receipts, thus, in the long run, making the government borrow only to finance its
capital expenditure.
3. Transparency in Fiscal Operations: The Act mandated the government to lay
before the Parliament a medium-term fiscal policy statement, a fiscal policy
strategy statement, and a macroeconomic framework statement every year along
with the budget, to bring greater transparency.
4. Prudential Borrowing: The Act discourages borrowing from the Reserve Bank of
India, thereby making the borrowing process more transparent and ensuring that
the government does not directly print money to finance the deficit.
5. Fiscal Rules and Targets: The Act set specific targets for the government to
achieve in terms of fiscal deficit and revenue deficit as percentages of the GDP.
S10. Ans. (b)
Sol. The correct answer is (b)
The term "fiscal stimulus" refers to a set of policies by the government aimed at boosting
economic activity, particularly during periods of low growth or recession. This can
involve various forms of government spending (such as infrastructure projects, public
services, and direct aid to citizens) or tax cuts. The primary goal of fiscal stimulus is to
increase consumer spending and investment by businesses, thereby stimulating
economic growth.
Option (b) is the most accurate description of fiscal stimulus. It highlights the general
intention behind fiscal stimulus measures, which is to boost economic activity in the
country. It correctly captures the essence of fiscal stimulus without limiting its
application to specific sectors or purposes.