Q13 of 34 Page 1

Discuss any one of the following functions of a central bank:

a)As government’s bank b) Open market operations.


Governments bank: RBI or central bank acts as a banker, agent, and a financial advisor or the government. As a banker to the government it maintains the accounts of the government.

As an agent it buys and sells securities on behalf of the government.


As an advisor to the government, it frames policies to regulate money market.


Open market operations


Open market operations refer to the buying and selling of securities in the open market by the central bank.


• Sale of securities: Central bank soaks the liquidity in the market by selling the securities. It reduces the reserves of the commercial banks and it reduces the credit creation capacity of a bank.


• Purchase of securities: Central bank releases liquidity in the market by buying the securities. It increases the reserves and raises the bank’s ability to give credit.


Thus, inflation is corrected by selling of securities and soaking liquidity, while deflation is corrected by buying the securities and releasing liquidity.


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11

India's GDP is expected to expand 7.5% in 2019-20: World Bank”- The Economic Times. Does the given statement mean that welfare of people of India increase at the same rate? Comment with reason. 3

 12

Calculate the value of Marginal Propensity to Consume (MPC), if in an economy, autonomous consumption is ₹ 500 crores, ex-ante investments are ₹ 4000crores and equilibrium level of Income of the economy is ₹ 18,000 crores?

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 14

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State and discuss the likely effects of the given statement on foreign exchange rate with reference to the Indian Economy. 4


Or


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 15

Elaborate the objective of ‘reallocation of resources’ in the government budget.