Test: Monetary Policy


15 Questions MCQ Test Indian Economy for UPSC CSE | Test: Monetary Policy


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QUESTION: 1

Consider the following statements regarding the Marginal Standing Facility (MSF) of RBI: 
1. It is used by all financial institutions. 
2. It is a part of the liquidity adjustment facility. 
3. It is a cheaper route to fulfil the overnight requirement of funds. 
4. Banks use this route only if they exhaust all other channels to raise short-term funds. 
Which of the statements given above is/are not correct?

Solution:

It is the penal rate and is used when SLR limit is breached.It is always more than the repo rate. It acts as a sort of punishment to the bank when they breach their SLR limit

QUESTION: 2

Consider the following statements about Cash Reserve Ratio (CRR): 
1. It can be increased to curb deflation or low inflation. 
2. RBI pays interest on CRR to the scheduled banks. 
Which of the statements given above is/are correct?

Solution:

CRR is decreased to curb deflation. Decreasing CRR will increase money supply and push the economy towards inflationary tendency.No interest is paid on CRR

QUESTION: 3

Consider the following statements about Monetary Policy Committee (MPC): 
1. Its members are appointed by the President on the recommendations of the Central Government. 
2. Its core mandate is to fix the benchmark policy interest rate to contain inflation within the target level. 
3. It is headed by the Governor of RBI. 
Which of the statements given above is/are correct?

Solution:

It is a 6 member body.3 members are nominated by the central government and 3 are from the RBI. It sets the policy rate to keep inflation within the band decided by the central government

QUESTION: 4

Consider the following statements about Statutory Liquidity Ratio (SLR): 
1. It includes cash and gold. 
2. Banks may earn returns on money parked as SLR 
Which of the statements given above is/are correct?

Solution:

Both statements are correct. SLR includes cash, gold and other government securities. Banks are eligible to earn interest on SLR .

QUESTION: 5

Consider the following statements: 
1. Repo rate and Reverse repo rate as an instrument of money market were introduced post economic reforms of 1991.
2. In reverse repo, RBI is the lender whereas Banks and Financial Institutions are borrowers. 
Which of the statements given above is/are correct?

Solution:

In reverse repo RBI absorbs excess liquidity and acts a borrower. IN Repo rate transaction the RBI acts as a lender as it infuses more money in the system.

QUESTION: 6

Sale/purchase of government bonds, as a means to control the money supply in the market, is termed as:

Solution:

Open market operations are defined as the sale and purchase of government securities to control the money supply. They are usually done on an overnight basis

QUESTION: 7

Which of the following tools are used by RBI to maintain money supply in the economy?
1. Statutory liquidity ratio
2. Repo Rate
3. Bank Rate
Select the correct answer using the code given below:

Solution:

All of the above are used to maintain money supply in the economy. They are quantitative  measures for the same.

QUESTION: 8

With reference to Open Market Operations (OMO), consider the following statements:
1. It refers to the sale and purchase of government securities and treasury bills by RBI.
2. Its objective is to regulate the money supply in the economy.
3. RBI deals with the public directly to carry out Open Market Operations.
Which of the statements given above is/are correct?

Solution:

RBI deals with banks and other financial institutions for open market operations. RBI does not deal with the public directly.

QUESTION: 9

With reference to Cash Reserve Ratio (CRR) in India, consider the following statements:
1. It is a monetary policy tool used by RBI to control the liquidity in the banking sector.
2. Banks earn a certain amount of return on money reserved as CRR.
3. The CRR requires every commercial bank to have reserves in terms of cash and gold.
Which of the statements given above is/are correct?

Solution:

CRR is the Cash reserve ratio. As the name suggests, it only deals with cash and no other form of monetary tool. It earns no interest

QUESTION: 10

Consider the following statements on Marginal Standing Facility (MSF):
1. It is always fixed above Repo rate.
2. It is overnight scheme of lending funds to banks by the central bank.
Which of the above statement(s) is/are correct?

Solution:

MSF is always above the repo rate as it is a penal rate. It is used for overnight lending by the RBI

QUESTION: 11

Consider the following statements and identify the right ones
1. RBI has the sole right to issue currency notes
2. Minimum reserve system has been replaced by proportional reserve system

Solution:

Proportional reserve system has been replaced by a minimum reserve system.

QUESTION: 12

Which of the following is not a function of RBI?

Solution:

RBI performs central banking functions as well as development and promotional functions.

QUESTION: 13

Consider the following statements and identify the right ones.
1. RBI provides advice in all monetary matters except agriculture and industrial finance.
2. RBI is obliged to transact business of central government and state governments including J&K

Solution:

RBI provides advice in all monetary matters including agriculture and industrial finance. RBI is obliged to transact business of central government and state governments excluding J&K.

QUESTION: 14

Consider the following statements and identify the right ones.
1. RBI acts as clearing house for commercial banks.
2. It also grants license for setting up banking operations

Solution:

RBI is also responsible for regulating banks, directs their credit policies and provides advice to them.

QUESTION: 15

The amount a bank needs to maintain in form of cash, gold and other securities before giving credit is

Solution:

The amount a bank needs to maintain in the form of cash, gold and other securities before giving credit is called SLR.

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