Reading Comprehension Flashcards

Passage: 'Priority sector lending mandates require commercial banks to allocate a specified portion of their advances to agriculture, micro enterprises, and weaker sections. Failure to meet these targets results in mandatory contributions to government funds.' What is the consequence of not meeting PSL targets?

Answer: Banks must contribute to government funds

The passage states that failure to meet PSL targets results in mandatory contributions to government funds.

Read: 'The term 'moral hazard' in banking refers to the risk that institutions, knowing they will be bailed out, take on excessive risks. This behavior can destabilize the financial system, making effective regulation essential.' Which of the following best defines 'moral hazard' as used in the passage?

Answer: Excessive risk-taking due to expectation of bailout

The passage defines moral hazard as institutions taking excessive risks because they expect to be bailed out.

Passage: 'Inflation targeting, adopted by the RBI in 2016, commits the central bank to maintaining CPI inflation within a specified band. This framework enhances monetary policy credibility and anchors inflation expectations.' The word 'anchors' in this context most likely means:

Answer: Stabilizes or keeps steady

In monetary policy context, 'anchors' means stabilizes or keeps inflation expectations steady around the target.

A passage reads: 'Financial contagion occurs when economic distress in one institution or country spreads rapidly to others through interconnected financial networks. The 2008 global financial crisis exemplified how localized mortgage defaults cascaded into a worldwide recession.' What does the passage identify as the mechanism of financial contagion?

Answer: Interconnected financial networks

The passage explicitly states that contagion spreads through interconnected financial networks.

Read: 'Corporate bonds offer higher yields than government securities to compensate investors for greater credit risk. Investors seeking safety prefer government bonds, while those chasing returns often gravitate toward corporate debt.' Which group would most likely prefer corporate bonds?

Answer: Investors chasing higher returns

The passage states that investors chasing returns gravitate toward corporate debt due to higher yields.

Passage: 'The cash reserve ratio is the fraction of a bank's total deposits that must be held as reserves with the central bank. A higher CRR reduces the funds available for lending, effectively tightening credit in the economy.' Based on the passage, what is the effect of raising the CRR?

Answer: Banks have fewer funds to lend, tightening credit

The passage directly states that a higher CRR reduces funds available for lending and tightens credit.

Passage excerpt: 'Behavioural economics challenges the classical assumption of rational decision-making, demonstrating that individuals often make financial choices based on cognitive biases and emotional responses rather than pure logic.' The passage suggests that classical economics assumed people make decisions based on:

Answer: Pure logic and rationality

The passage contrasts behavioural economics with 'classical assumption of rational decision-making,' implying classical economics assumed pure rationality.