CSS Economics Economics Paper I: Money, Banking, Public Finance and Trade Flashcards

24 sample cards from the Economics Paper I: Money, Banking, Public Finance and Trade deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. Distinguish between a primary deposit and a derivative deposit.

   A primary (passive) deposit arises when a customer deposits cash into a bank. A derivative (active) deposit is created when the bank grants a loan and credits the borrower's account, thereby creating new deposit money without an inflow of cash.

2. Define a central bank.

   A central bank is the apex monetary institution of a country that issues currency, acts as banker to the government and to commercial banks, controls credit and money supply, manages foreign exchange reserves, and serves as the lender of last resort.

3. List the principal functions of a central bank.

   (1) Monopoly of note issue, (2) banker, agent and adviser to the government, (3) bankers' bank and lender of last resort, (4) custodian of foreign exchange reserves, (5) clearing house function, (6) controller of credit/money supply, and (7) maintainer of monetary and financial stability.

4. Why is the central bank called the 'lender of last resort'?

   Because it provides emergency funds/credit to commercial banks facing liquidity shortages or financial distress when no other source is available, by rediscounting bills or granting loans against securities, thereby preventing bank failures and maintaining confidence in the system.

5. What is meant by the central bank acting as 'bankers' bank'?

   Commercial banks keep their cash reserves (statutory reserves) with the central bank, the central bank clears and settles interbank transactions (clearing-house function), and it advances loans/rediscounts bills for them, thus supervising and supporting the banking system.

6. When was the State Bank of Pakistan established, and under what law?

   The State Bank of Pakistan was established on 1st July 1948 under the State Bank of Pakistan Order, 1948. It was inaugurated by Quaid-e-Azam Muhammad Ali Jinnah.

7. List the main functions of the State Bank of Pakistan.

   (1) Sole right of note issue, (2) banker to the government, (3) bankers' bank and lender of last resort, (4) regulation and supervision of the banking/financial system, (5) custodian of foreign exchange reserves and management of the exchange rate, (6) formulation and conduct of monetary and credit policy, and (7) promotion of growth (developmental role).

8. What is the lowest denomination note issued by the State Bank of Pakistan, and which note is issued by the Government of Pakistan?

   The State Bank of Pakistan issues all notes of Rs. 5 and above (one-rupee and subsidiary coins/notes were historically issued by the Government of Pakistan). Coins are minted by the Government; SBP handles the principal currency note issue.

9. Distinguish between quantitative and qualitative instruments of credit control.

   Quantitative (general) instruments affect the total volume of credit — bank rate, open market operations, and cash reserve ratio. Qualitative (selective) instruments regulate the direction/use of credit — margin requirements, credit rationing, moral suasion, and consumer-credit regulation.

10. Explain the 'bank rate' (discount rate) as an instrument of credit control.

    The bank rate is the rate at which the central bank rediscounts first-class bills or lends to commercial banks. Raising it makes borrowing costlier, contracting credit; lowering it makes borrowing cheaper, expanding credit. It influences the whole interest-rate structure.

11. How do Open Market Operations (OMO) control credit?

    The central bank buys or sells government securities in the open market. Selling securities absorbs cash from banks, reducing their reserves and contracting credit; buying securities injects cash, increasing reserves and expanding credit.

12. How does the Cash Reserve Ratio (CRR) work as a credit-control tool?

    The CRR is the minimum fraction of deposits commercial banks must hold as reserves with the central bank. Raising the CRR reduces banks' lendable funds and contracts credit; lowering it increases lendable funds and expands credit. Since credit $=\frac{D}{r}$, a higher $r$ lowers the multiplier.

13. Define 'margin requirement' as a selective credit control.

    The margin is the difference between the market value of the security/collateral offered and the loan amount granted against it. Raising the margin requirement reduces the loan obtainable per unit of collateral (contracting credit in that sector); lowering it expands such credit.

14. What is meant by 'moral suasion' in monetary policy?

    Moral suasion is the central bank's use of persuasion, advice, requests, and informal pressure (without legal compulsion) to convince commercial banks to follow its desired credit policy, e.g., restraining lending during inflation.

15. Define monetary policy and state its main objectives.

    Monetary policy is the central bank's regulation of the money supply, credit availability, and interest rates to achieve macroeconomic goals. Main objectives: price stability, full employment, economic growth, exchange-rate stability, and balance-of-payments equilibrium.

16. Distinguish between expansionary (easy/dear-money's opposite) and contractionary monetary policy.

    Expansionary (cheap-money) policy increases money supply and lowers interest rates to fight recession/unemployment (lower bank rate, buy securities, lower CRR). Contractionary (dear-money) policy reduces money supply and raises interest rates to curb inflation (raise bank rate, sell securities, raise CRR).

17. Outline the channels of the monetary policy transmission mechanism.

    (1) Interest-rate channel (policy rate → market rates → investment/consumption), (2) credit/bank-lending channel (reserves → loan supply), (3) asset-price channel (wealth and equity prices), (4) exchange-rate channel (rates → currency → net exports), and (5) expectations channel.

18. Define public finance and state its scope.

    Public finance is the branch of economics that studies the income (revenue) and expenditure of the government and the management of public debt and financial administration. Its scope covers: (1) public revenue, (2) public expenditure, (3) public debt, (4) financial administration/budgeting, and (5) economic/fiscal policy.

19. What is the 'principle of maximum social advantage' in public finance?

    Formulated by Dalton/Pigou, it states that public finance operations should be conducted so that social benefit from public expenditure equals social sacrifice from taxation at the margin, maximizing net social welfare: i.e., where marginal social benefit (MSB) = marginal social sacrifice (MSS).

20. State Wagner's Law of increasing state activity.

    Adolph Wagner's law holds that as an economy/per-capita income grows and industrializes, the share of public (government) expenditure in national income tends to rise secularly, because the state expands its administrative, protective, welfare, and developmental functions.

21. Give a common classification of public (government) expenditure.

    (1) Revenue vs. Capital expenditure; (2) Developmental vs. Non-developmental; (3) Productive vs. Unproductive; (4) Transfer vs. Non-transfer (real) expenditure; and (5) Plan vs. Non-plan expenditure.

22. What are the main sources of government revenue?

    Broadly, tax revenue (direct and indirect taxes) and non-tax revenue. Tax revenue includes income/corporate taxes, customs, excise, and sales tax/GST; non-tax revenue includes fees, fines/penalties, profits of public enterprises, interest receipts, grants, and administrative revenues.

23. Define a tax and distinguish a direct tax from an indirect tax.

    A tax is a compulsory contribution to the state imposed without a direct quid pro quo. A direct tax is levied on income/wealth and its burden cannot be shifted (e.g., income tax, wealth tax). An indirect tax is levied on goods/services and its burden can be shifted to others (e.g., sales tax, customs, excise).

24. Differentiate between tax revenue and non-tax revenue, giving examples of non-tax revenue.

    Tax revenue is compulsory payment with no direct return (income tax, GST, customs). Non-tax revenue arises from sources other than taxes and often involves a service/return: fees, licenses, fines and penalties, profits of public enterprises, interest, rent/royalties, and gifts/grants.

What this deck covers

Economics Paper I: Money, Banking, Public Finance and Trade flashcards FAQ