Reading Comprehension Quiz for NIACL and SBI PO Mains

Mentor for Bank Exams
Reading Comprehension Quiz for NIACL and SBI PO Mains
Directions (1 – 10): Read the passage given below and then answer the questions given below the passage. Some words may be highlighted for your attention. Pay careful attention.
CENTRAL bankers are under fire. In America, President-elect Donald Trump said that the Federal Reserve chair Janet Yellen should be "ashamed of herself" for keeping rates too low; in Britain, Mark Carney of the Bank of England has been criticised for his views on the economic risks of Brexit; and in Europe, Mario Draghi has faced attacks from critics in Germany (for being too lax) and Greece (for being too tight).In a new paper Ed Balls, who played an influential role in making the Bank of England independent, has teamed up with James Howat and Anna Stansbury to try to think through the role and wider responsibilities of the central bank. Central bank power has increased in the wake of the 2007-08 crisis, extending well beyond the narrow pre-crisis focus on using interest rate policy to meet inflation targets. Absolutist interpretations of complete central bank independence may both undermine the pursuit of new central bank objectives and fray the political support that currently exists for central bank autonomy in their core monetary policy function. ignored the financial risks pre-crisis and that post-crisis, they have failed to meet their inflation targets, while quantitative easing (QE) has had a distorting effect on markets. By passing power to unelected technocrats, politicians may be highlighting their own impotence and adding to voter cynicism. But in defence of central banks, they have used the weapons they had available. The failure has been on the part of elected governments. Some could have used fiscal policy to support expansion (in the US and Germany, in particular) and used tax and benefit policies to offset the redistributive consequences of QE.    
A lot of the current criticism of central banks assumes that they had some hidden political agenda (to support the election of Hillary Clinton or to warn voters off Brexit) behind their policy shifts. That is nonsense, in my view. In a low growth, low inflation world, central banks have had little option but to keep policy loose; many of those that tried to tighten policy have been forced to retreat. And central banks tend to reflect the consensus view of economists which was that Brexit would be bad news (those who think the consensus view has been proved wrong might note that the government has yet even to start the exit process). In short, central banks may have made mistakes but they are honest mistakes. In a sense, central banks are being made scapegoats for others' failures.
As the Balls paper points out, in the run-up to the crisis, most economists thought central bank independence was an unabashedly good thing. That stemmed from the experience of the 1960s and 1970s when inflation got out of hand. When politicians played a role in setting interest rates, they were tempted to use policy to manage the electoral cycle; easing ahead of the polls. Conquering inflation required a change in public expectations. Independent central banks could focus on the narrow issue of inflation, without the need to worry about electoral unpopularity. This made their commitment to control inflation credible. And the early evidence suggested that independence did help bring inflation down.
But the crisis showed there was a problem at the heart of policy; a credit bubble built up but, with inflation quiescent, central banks were passive. The crisis demonstrated that a focus on price stability alone is too narrow: effective macroeconomic policy cannot ignore the financial sector, and requires coordination between monetary and fiscal policy when at the zero lower bound. New trade-offs have been revealed between stable inflation, full employment and financial stability.
What’s more, the crisis demonstrated that the modern complex financial system is vulnerable to systemic risks that may be – and were – missed by micro-prudential regulators focused on specific institutions. Such risks might build up over time: for example herding behaviour can lead to pro-cyclical investment strategies. 
In the course of the crisis, central banks turned on the liquidity taps as the lender of last resort. But in the light of public anger at the banking sector that caused the crisis, this looked like favourable treatment. As the paper says, Contrary to Bagehot, they lent at subsidised rates, on the basis of hard-to-value collateral and to a wide range of counter parties. In fact, some central banks even acted as market-makers-of-last-resort. This raises the tricky issue of whether central banks should be in charge of both monetary policy and of financial supervision. In Britain, the role was split before the crisis but has been (partly) reunited. The paper grapples with this issue. Dividing up responsibility avoids groupthink or regulatory capture (constant dealing with the people they regulate may cause a central bank to become too sympathetic); on the other hand, it can lead to uncoordinated policy.  The systemic risk oversight body should include the central bank, other regulators and the government. This diverse membership will minimise the dangers of group think and help coordinate responses to systemic risks. The government should chair this body, giving it the power to set the agenda and veto recommendations. 
This has the virtue of democratic accountability but at the risk that politicians fail to crack down on financial bubbles for fear of offending, say, homeowners. So there would be a separate macro-prudential policy body that would implement decisions on, say, loan-to-value ratios.
A coordination mechanism should be established that respects the following three principles. It should be triggered by the central bank, it should protect democratic control over fiscal policy and it should be limited to the zero lower bound. An open letter system, in which the central bank outlines its views about the appropriate stance of fiscal policy at times when interest rates are below a pre-defined level close to the zero lower bound, would meet these principles.
1. What is the contradiction regarding the independence of central banks?
A) It is thought that complete independence of central banks would destroy the democracy of a nation resulting in unstable economic policies.
B) Complete independence of central banks would make the government ineffective and loosen its grip on the people.
C) While the independence of central banks would free them from the dirty clutches of politics, their function and role to maintain the economy of the whole nation is doubted.
D) The independence of central banks would lead to a differentiation to judge the monetary and fiscal policies of a nation.
E) Independence of central banks help to reduce inflation and bring a positive impact on the economy of a nation but having a day-to-day administration on these banks would get difficult.
2. Which of the following is the major impact of politics on central banks?
A) Understanding the economic state of a country and implementing them through central banks is better if they are not independent.
B) Central banks are used as a scapegoat by the politicians for election purposes.
C) The major tool of winning during an election is the central banks and the maximum benefits are enjoyed by the banks.
D) Liquidity trap stops to be a major problem in government controlled central banks.
E) Secular stagnation of banks due to absence of politics is a major problem faced often.
3. What is the major problem associated with independent central banks?
A) Administration of these banks gets difficult and policies made by them take time to be implemented.
B) Liquidity trap is a major problem and quantitative easing mainly go to top financial firms and bankers.
C) The fiscal policies made by independent people not appointed by the Government is a threat to the economy of the country.
D) Independent central banks work wonderfully to control inflation but other problems like unemployment etc go unnoticed by them.
E) Independent central banks might be so much influenced by the local people and their problems that they might be a big threat to the economy of the country.
4. What made people think that autonomous central banks are incapable of making fiscal policies?
A) Central banks often get influenced by the problems of people and short term relief measures are taken which make the whole economy unstable.
B) Central banks are not connected to the Government so the lack of collaboration between the two often create confusions.
C) The fiscal policies are made by independent people who are not government officials so the credibility is less.
D) Controlling the government without having any power over the economy is a major problem.
E) The honest problems of these banks are seen as an indirect influence of politics on individuals.
5. What was the factor that influence independent central banks and led to the concept of distribution of responsibilities?
A) Credit bubble built up with inflation quiescent
B) Group think or regulatory capture that makes banks too sympathetic.
C) Lack of coordination between monetary and fiscal policy when at the zero lower bound
D) New trade-offs have been revealed between stable inflation, full employment and financial stability.
E) Politicians fail to crack down on financial bubbles for fear of offending
6. Which of the following has the same meaning as ‘quiescent’?
A) Active
B) Dormant
C) Trending
D) Unpopular
E) Absent
7. Which of the following has the same meaning as ‘redistributive’?
A) Positive
B) Exorbitant
C) Quisling
D) Fair distribution
E) Unbiased decision
8. What is the opinion of the writer on the whole issue?
A) The writer is an ardent supporter of independent central banks
B) The writer has mentioned all the negative aspects of independent central banks thereby supporting these banks controlled by the government
C) The writer mentions the problems of the banks being independent and supports the concept of sharing responsibilities and a mutual co-operation between the two.
D) The writer has focused on the problem of unemployment and the incapacity of these banks to deal with the economy of the nation.
E) The opinion of the writer is not clear and both the pros and cons have been mentioned making the passage quite narrative
9. Which of the following has the opposite meaning of ‘unabashedly’?
A) Clearly
B) Hesitantly
C) Furiously
D) Intended
E) Directly
10. What do you mean by the phrase ‘run-up’?
A) Consequences
B) Dealing with a situation
C) The period before a particular event
D) Problems of a situation
E) Race or competition among several groups
Answers:
1. C)   2. B)   3. D)   4. A)   5. B)   6. B)   7. D)   8. C)   9. B)   10. C)