Fiscal-Monetary Relations
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Central Banking (Elective) — CAIIB.
One-liners from this chapter
Free sample — 8 of 66 rapid-fire Q&A cards.
What is 'fiscal dominance' in the context of monetary policy?
Fiscal dominance occurs when large fiscal deficits force the central bank to monetise government debt, undermining its ability to control inflation and impairing its price stability mandate.
What was the primary consequence of automatic monetization on India's money supply?
It continuously expanded money supply without any sterilization mechanism.
How does the central bank monetise government debt?
The central bank monetises government debt by purchasing government securities, thereby injecting money into the economy and financing the fiscal deficit through money creation.
What are Ad hoc Treasury Bills in the context of Indian fiscal-monetary history?
Short-term instruments RBI rolled over indefinitely to finance government deficits.
What is the primary mandate of a central bank in the context of fiscal-monetary relations?
The primary mandate of a central bank is price stability, which can be compromised when it is compelled to finance large government deficits through debt monetisation.
What is the Market Stabilization Scheme (MSS) designed to address?
Excess liquidity from large foreign capital inflows that cannot be productively absorbed.
How does a large fiscal deficit lead to inflationary pressure?
A large fiscal deficit, when monetised by the central bank, increases money supply in the economy, which raises aggregate demand beyond productive capacity and leads to inflation.
What instruments are issued under the Market Stabilization Scheme to absorb excess flows?
Market Stabilization Bonds (MSBs) issued in coordination with the Government of India.
MCQ practice tests
Chapter-wise mock tests with instant scoring.
More chapters in Module A - Rationale and Functions of Central Bank
Master the full CB syllabus
Every chapter of Central Banking (Elective) — videos, tests, notes and one-liner decks in one place.