Why: Let us analyze each statement: 1. If inflation is too high, RBI is likely to BUY government securities - This is INCORRECT. When inflation is high, RBI pursues contractionary monetary policy and SELLS government securities to reduce money supply and control inflation. Buying securities would increase money supply and worsen inflation. 2. If the rupee is rapidly depreciating, RBI is likely to SELL dollars in the market - This is CORRECT. When the rupee depreciates, RBI intervenes by selling dollars (and buying rupees) to increase demand for rupees and strengthen the currency. 3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to BUY dollars - This is CORRECT. When foreign interest rates fall, foreign investors find lower returns abroad and may move capital to India seeking higher returns. This increases demand for rupees and supply of dollars. RBI may buy dollars to prevent excessive rupee appreciation and maintain competitiveness of exports. Therefore, statements 2 and 3 are correct. The answer is B (2 and 3 only).

Why: Expansionist (or expansionary) monetary policy aims to increase money supply in the economy to promote growth and reduce unemployment. Let us examine each option: 1. Cut and optimize the Statutory Reserve Ratio (SRR) - This would be DONE. Reducing SRR allows banks to lend more, increasing money supply. 2. Reduce the Bank Rate - This would be DONE. Lowering the bank rate makes borrowing cheaper, encouraging lending and investment, thus increasing money supply. 3. Purchase government securities from the market - This would be DONE. Open Market Operations (OMO) involving purchase of securities injects money into the economy, increasing money supply. 4. Increase the Cash Reserve Ratio (CRR) - This would NOT be DONE. Increasing CRR forces banks to hold more reserves with RBI, reducing their lending capacity and decreasing money supply. This is a contractionary measure, opposite to expansionist policy. Therefore, the answer is D - Increase the Cash Reserve Ratio is what RBI would NOT do during expansionist monetary policy.

Why: The Bank Rate is the rate at which the Reserve Bank of India lends money to commercial banks. When RBI lowers the Bank Rate, it reduces the cost at which commercial banks can borrow from the central bank. This reduction in borrowing costs for banks typically leads to a decrease in the lending rates offered by commercial banks to their customers. Consequently, the cost of borrowing from commercial banks decreases for individuals and businesses. This is an expansionary monetary policy tool used to stimulate economic activity by making credit cheaper and more accessible. Therefore, lowering the Bank Rate leads to a decrease in the cost of borrowing from commercial banks.

Why: Let us analyze each statement: 1. The RBI Act, 1934 was amended in May 2016 to provide a statutory basis for the implementation of the flexible inflation-targeting framework - This is CORRECT. The amendment provided a legal framework for inflation targeting in India. 2. The inflation target of monetary policy is 4% Consumer Price Index with an upper tolerance limit of 6% and lower tolerance limit of 2% - This is CORRECT. These are the official inflation targets set under India's flexible inflation-targeting framework. 3. The inflation target is set by the RBI independently without consultation with the Government of India - This is INCORRECT. The inflation target is set by the Government of India in consultation with the RBI, not by RBI alone. This ensures coordination between fiscal and monetary authorities. Therefore, statements 1 and 2 are correct. The answer is A.

Why: Let us analyze each statement: 1. Tight monetary policy of US Federal Reserve could lead to capital flight from emerging markets like India - This is CORRECT. When the US Federal Reserve tightens monetary policy (raises interest rates), it makes US investments more attractive with higher returns. This encourages investors to move capital from emerging markets like India to the US, causing capital flight. 2. Capital flight may increase the interest cost of firms with existing External Commercial Borrowings (ECBs) - This is CORRECT. When capital flows out, the rupee depreciates. For firms with ECBs (loans in foreign currency), depreciation of the rupee increases the rupee value of their foreign currency debt, effectively increasing their interest burden and repayment costs. 3. Devaluation of domestic currency decreases the currency risk associated with ECBs - This is INCORRECT. Devaluation of the domestic currency INCREASES currency risk for firms with ECBs. When the rupee devalues, the rupee equivalent of foreign currency debt increases, making repayment more expensive and increasing currency risk, not decreasing it. Therefore, statements 1 and 2 are correct. The answer is A.