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Economic Development and Government Financing
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Economic Development and Government Financing

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Questions and Answers

What is one of the primary uses of finances needed by the government?

  • Development of defence infrastructure (correct)
  • Research and development in private companies
  • Importing luxury goods
  • Expansion of the tourism sector

    • How does government intervention in India's financial system influence economic development?

  • By limiting access to financial markets
  • By making credits available at cheaper rates (correct)
  • By increasing inflation rates
  • By providing higher interest rates to corporations

    • What does financial deepening refer to in the context of a financial system?

  • Reduction of investment opportunities in the market
  • The decrease in the variety of financial instruments
  • Increasing financial assets as a percentage of GDP (correct)
  • The increase in the number of financial institutions

    • What was one significant change in India's financial system after Independence in 1947?

    <p>Availability of liquidity primarily through the unorganised sector</p> Signup and view all the answers

    Which of the following is NOT mentioned as a role of the financial system?

    <p>Facilitating international trade</p> Signup and view all the answers

    What does financial broadening mean in the context of a financial system?

    <p>An increase in the variety of financial participants and instruments</p> Signup and view all the answers

    What influence does the capital market have on the economy as mentioned in the context?

    <p>It contributes to liquidity in the industrial sector</p> Signup and view all the answers

    What is a key characteristic of the financial system in a mixed economy like India?

    <p>Balanced involvement of both private and public sectors</p> Signup and view all the answers

    Which type of financial instrument has a maturity period of more than 1 year?

    <p>Mutual Funds</p> Signup and view all the answers

    What is an example of a short term financial instrument?

    <p>Bills of Exchange</p> Signup and view all the answers

    Which of the following is NOT a feature of hybrid instruments?

    <p>They are solely equity-based.</p> Signup and view all the answers

    What service is primarily offered by commercial banks?

    <p>Accepting Deposits</p> Signup and view all the answers

    Which organization is an example of a non-banking financial service provider?

    <p>Life Insurance Corporation</p> Signup and view all the answers

    How do financial intermediaries generally enhance economic growth?

    <p>By mobilizing public savings for productive utilization.</p> Signup and view all the answers

    What percentage of the total financial sector assets do commercial banks account for?

    <p>64%</p> Signup and view all the answers

    Which of the following services is an emerging trend in modern banking?

    <p>E-Banking</p> Signup and view all the answers

    What is the primary function of the financial market?

    <p>To transfer funds from the surplus sector to the deficit sector</p> Signup and view all the answers

    Which market primarily deals with short-term borrowing and lending?

    <p>Money Market</p> Signup and view all the answers

    How is the Capital Market categorized?

    <p>By the duration of securities</p> Signup and view all the answers

    Which of the following is NOT a sector of the Money Market?

    <p>Credit sector</p> Signup and view all the answers

    What type of market facilitates the issuance of new securities?

    <p>Primary or New Issue Market</p> Signup and view all the answers

    Which market is primarily involved in the trading of existing securities?

    <p>Secondary Market</p> Signup and view all the answers

    Which of the following best defines the Foreign Exchange Market?

    <p>A platform for exchanging currencies of different countries</p> Signup and view all the answers

    Which type of instrument is NOT typically associated with Capital Markets?

    <p>Time deposits</p> Signup and view all the answers

    What is a primary function of Commercial Banks?

    <p>Simplify the lending and borrowing process</p> Signup and view all the answers

    Which of the following is true about Credit Unions?

    <p>They provide financial assistance to their members</p> Signup and view all the answers

    What differentiates Non-Banking Finance Companies (NBFCs) from Commercial Banks?

    <p>NBFCs do not accept deposits but may advance loans</p> Signup and view all the answers

    What is one of the main roles of Stock Exchanges?

    <p>To facilitate trading of securities and stocks</p> Signup and view all the answers

    What do Mutual Fund Companies do with the pooled funds from investors?

    <p>Invest in securities and bonds for collective growth</p> Signup and view all the answers

    What is the purpose of Insurance Companies collecting premiums?

    <p>To invest in profitable schemes for returns</p> Signup and view all the answers

    Investment Bankers specialize in which of the following services?

    <p>Underwriting and facilitating IPOs</p> Signup and view all the answers

    What role do Escrow Companies play in financial transactions?

    <p>They act as an intermediary for fulfilling loan conditions</p> Signup and view all the answers

    What is one of the primary functions of the RBI in the banking sector?

    <p>Printing and circulating currency</p> Signup and view all the answers

    Which aspect does SEBI primarily focus on to protect investors?

    <p>Preventing insider trading</p> Signup and view all the answers

    What power does SEBI have over stock exchanges?

    <p>Supervising their functioning</p> Signup and view all the answers

    What does the IRDA regulate in the insurance industry?

    <p>Premium rates and terms of insurance</p> Signup and view all the answers

    Why was SEBI established in 1992?

    <p>To respond to malpractices in capital markets</p> Signup and view all the answers

    What role does the RBI play in controlling inflation?

    <p>Regulating interest rates</p> Signup and view all the answers

    What is one of the regulatory powers of the IRDA?

    <p>Modifying fees for insurance plans</p> Signup and view all the answers

    Which function does the RBI perform related to foreign exchange?

    <p>Managing the country's foreign exchange reserves</p> Signup and view all the answers

    Study Notes

    Government Financial Needs

    • Significant funds required for defense infrastructure, social welfare, public health, and education.
    • Financial markets supply necessary finance to the government.

    Economic Development

    • India functions as a mixed economy with government intervention in financial systems.
    • Macroeconomic variables, like interest rates and inflation, can be influenced by government actions.
    • Availability of credit at lower rates supports corporate growth, contributing to national economic development.

    Functions of Financial Systems

    • Monitors corporate performance and offers resource transfer mechanisms across regions.
    • Provides portfolio adjustment facilities through financial markets and intermediaries.
    • Lowers transaction costs, encouraging higher savings among individuals.
    • Supports financial deepening (increasing financial assets as GDP percentage) and broadening (diversifying participants and instruments).

    Evolution of Financial System in India

    • Financial system development gained attention post-Independence in 1947.
    • Initial lack of financial institutions and an underdeveloped capital market.
    • Shift towards a mixed economy prompted financial system evolution to meet socioeconomic objectives.

    Financial Markets Overview

    • Financial markets facilitate fund transfers from surplus to deficit sectors.
    • Classifications based on asset duration and product nature:
      • Money Market: Short-term borrowing/lending (up to 1 year).
      • Capital Market: Long-term borrowing/lending (over 1 year).
      • Foreign Exchange Market: Currency exchange transactions.

    Types of Financial Instruments

    • Long-term instruments (mature > 1 year): Share, Debentures, Mutual Funds.
    • Short-term instruments (mature ≤ 1 year): Call money, Promissory Notes.
    • Hybrid instruments: Features of both equity and debt, e.g., convertible debentures.

    Financial Services

    • Banking Services: Provided by commercial and development banks, including deposit acceptance and loan offerings.
    • Non-Banking Services: Offered by companies like LIC and GIC; do not accept deposits.
    • Other Services: Enhanced offerings like ATM, credit/debit cards, electronic fund transfers, and internet banking.

    Role of Financial Intermediaries

    • Mobilize public savings for productive use by pooling deposits and providing loans.
    • Types of financial intermediaries:
      • Commercial Banks: Major players in lending and borrowing.
      • Credit Unions: Co-operative societies aiding member finances.
      • Non-Banking Finance Companies (NBFCs): Provide loans at higher interest rates without accepting deposits.
      • Stock Exchanges: Facilitate securities trading, earning through brokerage.
      • Mutual Fund Companies: Pool investments to achieve capital gains for similar risk appetites.
      • Insurance Companies: Offer policies for risk protection, pooling premiums for investment.
      • Financial Advisors/Brokers: Guide client investments in securities.
      • Investment Bankers: Specialize in IPOs, mergers, and debt issuances.
      • Escrow Companies: Act as intermediaries in mortgage agreements.
      • Pension Funds: Collect funds from employees for investment and retirement benefits.

    Regulatory Bodies and Their Functions

    • Reserve Bank of India (RBI):

      • Regulates money market and banking sector reserves.
      • Manages currency, interest rates, and inflation control.
      • Inspects financial statements of banks and regulates payments.

    • Securities and Exchange Board of India (SEBI):

      • Established in 1992 to enhance investor confidence.
      • Protects investors by preventing malpractices like insider trading.
      • Regulates market participants, audits exchanges, and promotes investor education.

    • Insurance Regulatory and Development Authority (IRDA):

      • Established in 1999 to oversee the insurance industry.
      • Regulates insurance rates, agent qualifications, and terms for insurance policies.

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    Related Documents

    IFS Unit 1.pdf

    Description

    This quiz explores the financial needs of governments for defense infrastructure, social welfare, public health, and education. It also examines the role of economic development in a mixed economy like India, including government interventions in the financial system.

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