UPSC Prelims Practice Questions — U.S. Federal Reserve holds rates despite sticky inflation

Q1. With reference to the composition of the Federal Open Market Committee (FOMC) of the United States, consider the following statements: Which of the statements given above is/are correct?

  1. All Reserve Bank presidents, including the president of the Federal Reserve Bank of New York, hold FOMC voting seats only by annual rotation.
  2. Members of the Board of Governors together form a majority of the FOMC's voting members.
  3. Every voting member of the FOMC holds that seat by virtue of appointment by the President of the United States.
  • A. 1 and 2 only
  • B. 2 only
  • C. 2 and 3 only
  • D. 1, 2 and 3

Q2. Consider the following statements comparing India's Monetary Policy Committee (MPC) with the U.S. Federal Open Market Committee (FOMC): Which of the statements given above is/are correct?

  1. India's MPC, like the FOMC, decides by recorded vote, and how each member voted is made public.
  2. India's MPC, unlike the FOMC, has half of its members appointed by the government as external members rather than drawn from the central bank.
  3. India's MPC, like the FOMC, announces its policy rate as a target range rather than as a single rate.
  • A. 1 only
  • B. 2 and 3 only
  • C. 1 and 2 only
  • D. 1, 2 and 3

Q3. Consider the following statements: Which of the following is correct in respect of the above statements?

  1. A prolonged 'higher for longer' stance by the U.S. Federal Reserve tends to limit how far the RBI can cut its policy rate without putting pressure on the rupee.
  2. Higher U.S. interest rates reduce the relative attractiveness of emerging-market assets, so non-resident capital inflows into such economies tend to decline.
  • A. Both Statement-I and Statement-II are correct and Statement-II explains Statement-I
  • B. Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
  • C. Statement-I is correct, but Statement-II is incorrect
  • D. Statement-I is incorrect, but Statement-II is correct

Q4. Consider the following statements: Which of the following is correct in respect of the above statements?

  1. In the initial phase of the 2013 'taper tantrum', emerging-market currencies and asset prices came under pressure with little differentiation among countries.
  2. The 2013 'taper tantrum' was triggered by the U.S. Federal Reserve sharply raising its policy interest rate.
  • A. Both Statement-I and Statement-II are correct and Statement-II explains Statement-I
  • B. Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
  • C. Statement-I is correct, but Statement-II is incorrect
  • D. Statement-I is incorrect, but Statement-II is correct

Q5. Suppose a hawkish surprise from the U.S. Federal Reserve raises the term premium that global investors demand on emerging-market local-currency bonds, while the RBI keeps its policy repo rate unchanged. Consider the following possible outcomes for India: Which of the above is/are likely?

  1. Yields on long-dated Government of India securities may rise.
  2. The overnight money market rate would necessarily rise by the same margin as long-term yields.
  3. The cost of fresh market borrowing by the Union Government would tend to increase.
  4. The gap between long-term and short-term interest rates would tend to widen.
  • A. 1, 3 and 4 only
  • B. 1, 2, 3 and 4
  • C. 2, 3 and 4 only
  • D. 1 and 3 only

Q6. With reference to the IMF's 'Institutional View' on the liberalisation and management of capital flows, consider the following statements: Which of the statements given above are correct?

  1. It holds that full capital-account liberalisation is not an appropriate goal for all countries at all times.
  2. It accepts capital flow management measures in a limited manner, mainly during inflow surges and disruptive outflows.
  3. It suggests that countries with long-standing capital restrictions would probably benefit from some liberalisation.
  4. It treats capital flow management measures as an acceptable substitute for necessary macroeconomic adjustment.
  • A. 2, 3 and 4 only
  • B. 1, 2, 3 and 4
  • C. 1 and 2 only
  • D. 1, 2 and 3 only

Q7. After an unexpectedly hawkish signal from the U.S. Federal Reserve, an emerging economy faces sudden portfolio outflows and its currency is depreciating in a disorderly way. Which of the following actions by its central bank would most directly ease this pressure on the currency?

  • A. Selling U.S. dollars from its foreign exchange reserves in the spot market
  • B. Relaxing the limits on remittances that residents may send abroad
  • C. Buying U.S. dollars in the spot market to add to its foreign exchange reserves
  • D. Cutting its policy interest rate to lower domestic borrowing costs

Q8. Consider the following findings from IMF research on emerging markets: I. A 100-basis-point rise in the real U.S. 10-year Treasury rate lowered non-resident capital inflows by almost 2% of GDP over six quarters, but net inflows fell by less because residents repatriated their foreign assets. II. A positive U.S. output shock increased net capital flows to emerging markets despite the rise in U.S. interest rates that came with it. Which of the following inferences can be drawn from the above?

  1. The economic driver behind a rise in U.S. yields matters for how emerging markets are affected.
  2. Any increase in U.S. interest rates necessarily leads to net capital outflows from emerging markets.
  3. Domestic residents' behaviour can partly cushion the effect of foreign investors pulling money out.
  4. U.S. tightening that mainly reflects stronger U.S. growth is likely to be less disruptive for emerging markets than a monetary tightening unrelated to growth.
  • A. 1, 2, 3 and 4
  • B. 1, 3 and 4 only
  • C. 2, 3 and 4 only
  • D. 1 and 3 only