UPSC Prelims 2015 · Question 86 of 98
UPSC Prelims 2015 question on Monetary Policy Instruments
- ExamUPSC CSE
- Year2015
- PaperGeneral Studies Paper I
- SubjectIndian Economy
- TopicMoney Market
- DifficultyMedium
- TypeStatement
With reference to Indian economy, consider the following:
1. Bank rate
2. Open market operations
3. Public debt
4. Public Revenue
Which of the above is/are components/component of Monetary Policy?
Show answer
Answer: C. 1 and 2
Verdict
The answer is 1 and 2, the bank rate and open market operations. Public debt and public revenue belong to fiscal policy.
Analysis
Statement 1 is CORRECT. The bank rate is a policy rate at which the central bank lends and is a classic instrument of monetary policy. Statement 2 is CORRECT. Open market operations, the purchase and sale of government securities by the central bank, are the principal means by which liquidity is infused or absorbed under the modern operating framework. Statements 3 and 4 are INCORRECT. Public debt and public revenue are instruments of fiscal policy, operated by the government through borrowing and taxation, not by the central bank.
Source
Reserve Bank of India Annual Report material.
How to crack it
Ask who operates the instrument, because that single question sorts monetary from fiscal cleanly. Anything the central bank controls, rates, reserve ratios and open market operations, is monetary; anything the government controls through the budget, taxation, spending and borrowing, is fiscal. Then note the shared vocabulary trap: government securities appear in both, since the government issues them and the central bank trades them, so identify the actor rather than the instrument.