Chapter 34: Interconnection of various markets/Market Dynamics (JAIIB - MODULE D)
1. What does “interconnectedness of financial markets” primarily refer to?
A. Existence of multiple markets in one country
B. Only foreign exchange market affecting stock market
C. Linkages between money, capital, forex, and commodity markets
D. Role of technology in market expansion
Interconnectedness means movements in one financial market affect others, e.g., changes in money market influencing forex and capital markets.
2. Which of the following is the BEST example of financial market interconnectedness?
A. Increase in food grain production raising rural income
B. Rise in US interest rates causing capital outflow from Indian stock market
C. Government introducing new tax slabs
D. Launch of a new mobile banking app
Global interconnectedness is visible when US interest rates rise, making investors withdraw from Indian markets, linking forex, capital, and money markets.
3. One major reason for increased interconnectedness of financial markets is:
A. Reduction in household savings
B. Decline of government borrowing
C. Ban on speculative trading
D. Liberalisation, globalisation, and technological integration
Economic liberalisation, cross-border capital flows, and technology have made global markets highly interconnected.
4. A sudden fall in stock market prices leads to redemption pressure in mutual funds, which in turn affects the money market. This illustrates:
A. Contagion effect due to interconnectedness
B. Fiscal dominance of markets
C. Arbitrage opportunities
D. Independent functioning of markets
The contagion effect shows how stress in one market spreads to others due to deep linkages between financial systems.
5. Which of the following is NOT a reason for market interconnectedness?
A. Cross-border capital flows
B. Growth of financial conglomerates
C. Strict isolation policies of markets
D. Technological advancement in trading platforms
Strict isolation policies prevent integration, while other factors like globalization, technology, and cross-border flows increase interconnectedness.
6. Why is interconnectedness of financial markets considered important for an economy?
A. It increases isolation of markets
B. It reduces efficiency of fund allocation
C. It ensures government control in all markets
D. It enables efficient transmission of funds, risks, and policies across markets
Interconnectedness improves capital flow, spreads risk, and helps in smooth transmission of monetary and fiscal policies.
7. Which of the following is a positive outcome of financial market interconnectedness?
A. Broader investment opportunities and risk diversification
B. Elimination of technology in trading
C. Restricting global capital flows
D. Complete independence of each market
Interconnected markets allow investors to diversify, access more opportunities, and spread risks across instruments and geographies.
8. A challenge of financial market interconnectedness is:
A. Better efficiency in pricing assets
B. Risk contagion from one market spreading to another
C. Improved flow of funds between savers and borrowers
D. Better policy transmission
While interconnectedness improves efficiency, it also increases vulnerability as crises can spread quickly across markets.
9. The term “heterogeneity of financial markets” refers to:
A. All markets functioning in an identical way
B. Complete independence of money and capital markets
C. Existence of diverse participants, instruments, and objectives across markets
D. Elimination of differences between domestic and global markets
Heterogeneity means financial markets differ in their participants (banks, investors, corporates), instruments (equities, bonds, derivatives), and objectives (liquidity, long-term capital).
10. Which of the following is the BEST example of heterogeneity in financial markets?
A. Money market providing short-term liquidity while capital market provides long-term funds
B. All investors using only one type of financial product
C. RBI controlling both monetary and fiscal policy
D. Only one regulator for all financial institutions globally
The money market deals in short-term instruments (like Treasury Bills), while the capital market deals in long-term instruments (like bonds, equity). This diversity reflects heterogeneity.
11. Which reform is considered a key milestone in achieving financial market integration in India?
A. Nationalisation of banks (1969)
B. Introduction of the Liberalisation, Privatisation and Globalisation (LPG) reforms in 1991
C. Establishment of NABARD in 1982
D. Setting up of regional rural banks (1975)
The 1991 LPG reforms liberalised the economy, encouraged capital flows, and integrated Indian markets with global financial markets.
12. Achievement of market integration in India has been accelerated by:
A. Keeping stock markets independent of global trends
B. Restricting entry of foreign banks
C. Eliminating electronic trading platforms
D. Adoption of technology, financial sector reforms, and policy liberalisation
Technology-driven platforms (like NEFT, RTGS, online stock exchanges), reforms, and policy liberalisation have enhanced Indian market integration.
13. Which of the following is an example of domestic level financial market integration?
A. Indian rupee linked with US dollar
B. Indian banks settling trade via SWIFT
C. Integration of Indian money market with Indian capital market
D. Bilateral trade agreements between India and Japan
Domestic level integration means interlinkages between markets within the same country, such as money, forex, and capital markets in India.
14. Different levels of market integration include:
A. Domestic, Regional, and Global
B. Local, Sectoral, and Political
C. Fiscal, Monetary, and Regulatory
D. Government, Private, and Public
Market integration is observed at three levels: domestic (within a country), regional (between nearby economies), and global (worldwide linkages).
15. The Asian Clearing Union (ACU) was established with the objective of:
A. Promoting retail banking in Asia
B. Facilitating multilateral settlement of payments among member countries
C. Creating a common Asian currency
D. Financing Asian infrastructure projects
ACU, set up in 1974, promotes multilateral settlement of intra-regional payments to economise on the use of foreign exchange reserves and promote trade.
16. Which of the following countries is a member of the Asian Clearing Union (ACU)?
A. USA
B. France
C. Brazil
D. India
India is a founding member of the ACU along with other Asian countries such as Bangladesh, Iran, Nepal, Pakistan, and Sri Lanka.
17. Which of the following is a major benefit of interconnectedness of financial markets?
A. Efficient allocation of resources and better price discovery
B. Isolation of markets from each other
C. Elimination of competition in markets
D. Prevention of global capital flows
Interconnected markets improve efficiency in allocation of funds, aid in better price discovery, and promote liquidity.
18. A key cost of interconnectedness of markets is:
A. Reduced flow of foreign capital
B. Decrease in investor opportunities
C. Rapid contagion effect during financial crises
D. Stronger monetary policy transmission
While integration offers benefits, it also means that financial shocks in one market spread quickly to others, as seen in the 2008 global crisis.
19. Interconnectedness of the money market with other financial markets is mainly due to:
A. Long-term borrowing instruments
B. Role of short-term interest rates affecting capital and forex markets
C. Agricultural policies and subsidies
D. Industrial production only
Money market rates influence cost of funds, impacting capital markets (bond yields, equity valuations) and forex markets (capital inflows/outflows).
20. A sudden rise in call money rates in India is most likely to affect:
A. Food grain production
B. Government taxation policy
C. Agricultural subsidies
D. Liquidity in the capital and credit markets
Higher call money rates reduce liquidity, increasing borrowing costs for banks and corporates, which impacts both capital and credit markets.
21. The interconnectedness of the credit market with other markets is best reflected when:
A. Banks stop lending to corporates
B. Stock exchanges introduce new indices
C. A slowdown in credit growth affects investment and hence stock market performance
22. Which of the following is NOT an indicator of the interconnectedness of the credit market?
A. Seasonal agricultural output variations
B. Growth of non-performing assets (NPAs)
C. Banks’ lending rates linked to repo rate
D. Credit flow influencing demand in equity and bond markets
Agricultural output variations are not directly related to credit market interconnectedness, whereas NPAs, lending rates, and credit flows are.
23. Which of the following best explains the interconnectedness of the Capital Market with other markets?
A. Only equity prices determine interest rates
B. Capital markets work completely independent of other financial markets
C. Capital markets are influenced only by domestic investors
D. Movements in bond and equity markets affect and are affected by money, credit, and forex markets
The capital market is highly interconnected with other markets, as bond yields, equity performance, and forex flows influence and are influenced by interest rates, credit supply, and cross-border capital movements.
24. How does the Forex Market influence the Capital Market?
A. Currency fluctuations impact FII/FDI inflows, affecting stock and bond markets
B. Forex market only impacts exports, not capital markets
C. Forex market is regulated separately, so no impact
D. Forex affects only importers and exporters, not investors
Exchange rate volatility directly impacts foreign investments. A stronger rupee may attract capital inflows, while a weaker rupee may trigger outflows, thereby influencing stock and bond markets.
25. Which of the following is a key channel of interconnectedness between Forex and Capital Markets?
A. CRR and SLR regulations
B. Domestic agricultural output
C. Foreign Institutional Investments (FIIs) and External Commercial Borrowings (ECBs)
D. Priority sector lending norms
FIIs and ECBs link forex and capital markets. Inflows and outflows of foreign funds due to exchange rate movements directly impact liquidity and valuations in equity and debt markets.
26. Why is the Forex Market considered crucial for the stability of other financial markets?
A. Because forex markets work in isolation from money and capital markets
B. Because exchange rate fluctuations influence trade balance, inflation, and foreign investments
C. Because forex markets only affect import prices
D. Because RBI directly controls forex without spillover to other markets
Forex markets affect inflation, interest rates, capital inflows, and overall financial stability. Hence, volatility in forex markets has a direct spillover effect on money, credit, and capital markets.
27. Which of the following events shows strong interconnectedness of Forex and Capital Markets in India?
A. RBI's CRR announcement
B. Introduction of Jan Dhan Yojana
C. Priority Sector Lending guidelines
D. Rupee depreciation leading to FII outflows and fall in Sensex
When the rupee weakens, foreign investors often withdraw funds, leading to a fall in stock indices and pressure on bond yields, proving the interconnectedness of forex and capital markets.
28. What is the main objective of Integrated Treasury Operations in banks?
A. To reduce staff costs
B. To focus only on forex trading
C. To manage liquidity, interest rate, forex, and credit risks in a coordinated way
D. To invest only in government securities
Integrated Treasury Operations aim to bring money market, forex market, and securities market activities under one roof for better liquidity, risk, and return management.
29. Which of the following is NOT a function of an Integrated Treasury?
A. Liquidity management
B. Agricultural credit disbursement
C. Risk management
D. Proprietary trading
Integrated Treasury Operations handle liquidity, forex, investments, and risk management, but agricultural credit disbursement is not its role.
30. The Contagion Effect in financial markets refers to:
A. The spread of financial instability or crisis from one market/country to another
B. The process of treasury integration
C. Increase in cross-border investments
D. Government’s fiscal policy measures
Contagion Effect means that a financial crisis or shock in one market or country spreads rapidly to other markets due to interconnectedness.
31. Which global financial crisis is most often cited as an example of the Contagion Effect?
A. Asian Financial Crisis of 1997
B. Indian Balance of Payments Crisis of 1991
C. Dot-com Bubble of 2000
D. Global Financial Crisis of 2008
The 2008 Global Financial Crisis started in the U.S. housing market and spread worldwide, becoming the most prominent example of the Contagion Effect.
32. Which of the following BEST explains why Contagion Effect occurs?
A. Increase in domestic consumption
B. Changes in government policy
C. High interconnectedness of global financial markets
D. Seasonal fluctuations in agriculture
The Contagion Effect mainly happens because of the strong interlinkages among global capital, money, and forex markets that transmit shocks quickly.
