Macro Economic Environment MBA 2018-20

Stagflation refers to a situation where there is a high level of unemployment and a high level of inflation at the same time. This is a unique and challenging economic condition because typically inflation and unemployment have an inverse relationship. Stagflation can occur when there is a decrease in aggregate supply, leading to higher prices and unemployment. It is characterized by stagnant economic growth, rising prices, and a lack of job opportunities. This can be caused by factors such as supply shocks, government policies, or international events.

The term "special window for banks" refers to a specific facility or arrangement provided by an institution or organization (such as the government or the central bank) to banks. This special window is designed to provide additional support, funding, or assistance to banks during times of financial stress or crisis. It may involve offering loans at preferential rates, providing liquidity support, or implementing specific measures to stabilize the banking sector. This special window aims to ensure the stability and functioning of the banking system and prevent any potential systemic risks.

The correct answer is RBI because the Reserve Bank of India (RBI) is the central bank of the country and has the authority to issue and regulate the supply of high power money. It is responsible for managing the monetary policy, controlling inflation, and maintaining the stability of the financial system. The RBI is the sole authority in India that has the power to create and distribute currency notes and coins, making it the correct answer in this context.

The speculative demand for money is a function of the rate of interest. This means that individuals hold money not only for transactions but also as an investment. When the rate of interest is high, people are more likely to hold money in the form of investments rather than spending it, resulting in a decrease in the speculative demand for money. Conversely, when the rate of interest is low, people are more likely to spend their money rather than investing it, leading to an increase in the speculative demand for money.

The correct answer is demand side. The Reserve Bank of India (RBI) has control over the demand side of the economy. This means that it can influence factors such as interest rates, credit availability, and money supply to regulate the overall demand for goods and services in the economy. By managing the demand side, the RBI aims to achieve price stability and promote economic growth.

The bank rate is not used by the RBI. The bank rate is the rate at which the central bank lends money to commercial banks. However, the RBI does not use the bank rate as a tool for monetary policy anymore. Instead, it uses other instruments such as the repo rate, reverse repo rate, CRR, and SLR to regulate liquidity and interest rates in the economy.

The Phillips curve shows the relationship between the inflation rate and the unemployment rate. It suggests that when the unemployment rate is low, inflation tends to be high, and vice versa. This is because when there is low unemployment, workers have more bargaining power and can demand higher wages, which leads to increased production costs and ultimately higher inflation. On the other hand, when unemployment is high, there is less pressure on wages, leading to lower inflation.

When the rupee depreciates, it means that the value of the rupee decreases in relation to the dollar. In order to stabilize the currency, the Reserve Bank of India (RBI) sells dollars from its reserves. By selling dollars, the RBI increases the supply of dollars in the market, which helps to strengthen the rupee. This action is taken to prevent further depreciation of the rupee and maintain stability in the foreign exchange market.

National income or output is not a determinant of exchange rate. Exchange rate is primarily influenced by factors such as net capital flow, inflation rate, interest rate, and purchasing power parity. National income or output refers to the total value of goods and services produced in a country, and while it may indirectly affect exchange rates through its impact on other determinants, it is not a direct determinant itself.

The correct answer is CPI because the Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. It is used by the Reserve Bank of India (RBI) to anchor the inflation rate, as it reflects the changes in the cost of living for consumers. By monitoring the CPI, the RBI can assess the level of inflation in the economy and take appropriate measures, such as adjusting interest rates, to control inflation and maintain price stability.