Understanding Economic Development

Money Multiplier is the ratio of the stock of money to the stock of high powered money. It is the relationship between the monetary base and money supply of an economy. It explains the increase in the amount of cash in circulation generated by the banks' ability to lend money out of their depositors' funds. Therefore, it refers to how an initial deposit can lead to a bigger final increase in the total money supply.

For example, if the commercial banks gain deposits of Rs1 Lakh and this leads to a final money supply of Rs 10 lakh. The money multiplier is 10.

Therefore, increase in banking habit of the population would lead to more deposits and hence increase in Money Multiplier. Hence (b) is the correct answer.

Source: Introductory Macroeconomics: NCERT Class 12 Economics

Devaluation means the official lowering of the value of a country's currency within a fixed exchange rate system. Devaluation of a currency happens in countries with a fixed exchange rate (or also where it is managed floating rate).

Example: Let us assume that the prevailing exchange rate of $1 is 10 rs. So currently 1 rs is worth $0.1. If devaluation of currency is done and now the exchange rate of $1 is 20 rs, this means 1 rs is worth $0.05. So the value of domestic currency (rs) is decreased in terms of the value of foreign currency ($). Hence, statement 2 is not correct.

Let us take another example to understand statement 1: If a shirt costs $8 in the US and Rs 400 in India, the rupee-dollar exchange rate should be Rs 50. To see why, at any rate higher than Rs 50, say Rs 60, it costs Rs 480 per shirt in the US but only Rs 400 in India. In that case, all foreign customers would buy shirts from India. So devaluation of currency improves the competitiveness of the domestic exports (India) in the foreign markets. Hence, statement 1 is correct.

Balance of Trade (BOT) is the difference between the value of exports and the value of imports of goods of a country in a given period of time. Regarding third statement, with the devaluation of currency competitiveness of the export improves, but trade balance depends upon both export as well as imports and it is not necessarily true that devaluation of currency improves trade balance. (Let us take a possibility in the Indian economy, our economy is heavily dependent upon the import of crude oil, and at the time of devaluation of currency, export increases but for the same period, demand for crude oil also increases due to increased growth in the economy, and the value of this increase in import is more than the value of increase in export. So, in this scenario again we have a deficit trade balance). Hence statement 3 is not correct.

Source Citation:

• Vision Ias Economy Study Material Part-I
• NCERT: Introductory Macroeconomics Chapter 6

Expansionary monetary policy is when the RBI would use its tools to stimulate the economy. That increases the money supply, lowers interest rates, and increases aggregate demand.

Lower interest rates will also tend to reduce the value of the currency. If domestic interest rates fall relative to elsewhere, it becomes less attractive to save money in domestic banks.

Therefore, it will lead to outflow of foreign currency and therefore, slide of Indian Rupee.

Source: Introductory Macroeconomics: NCERT Class 12 Economics

The Government of India subsidizes fertilizers to ensure that fertilizers are easily available to farmers and the country remains self-sufficient in agriculture. The same has been achieved largely by controlling the price of fertilizer and the amount of production. For example, as per the New Urea Policy of 2015, the government fixes the market price of urea. Also, there is a fixed subsidy component as well. Similarly, for Phosphorous and Potassium, as per the Nutrient Based Subsidy Scheme of 2010, subsidy is provided based on nutrient content per kg of fertilizer. Hence, statement 1 is not correct.

Fertilizer production uses 1.2% of the world’s total energy, out of which 90% is used for ammonia production, which is a key ingredient in the production of nitrogen fertilizers. Ammonia can be produced from natural gas. Hence, statement 2 is correct.

Sulfur is a major by-product of oil refining and gas processing. Most crude oil grades contain some sulfur, most of which must be removed during the refining process to meet strict sulfur content limits in refined products. Industries, for instance, the Mathura oil refinery, have been responsible for producing pollutants like sulphur dioxide and nitrogen dioxide. Also, Sulphur is used in phosphoric acid fertilizer (There is a process known as The Wet Process for producing the same). Hence, statement 3 is correct.

Sources:

• NCERT: Class 9 Science

Deficit financing refers to the practice of funding government spending by borrowing rather than from revenue. In India, it is primarily used for:

• Infrastructure Development: Building roads, bridges, and other essential facilities.
• Social Welfare Programs: Funding schemes aimed at improving the quality of life for citizens.
• Economic Stimulus: Injecting money into the economy to boost growth during downturns.

This approach can lead to increased public debt but is often seen as necessary for promoting growth and development.

Source: NCERT: XII Macro Economics, Economic Survey