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Test: Monetary Policy - UPSC MCQ


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

Test: Monetary Policy for UPSC 2024 is part of Indian Economy for UPSC CSE preparation. The Test: Monetary Policy questions and answers have been prepared according to the UPSC exam syllabus.The Test: Monetary Policy MCQs are made for UPSC 2024 Exam. Find important definitions, questions, notes, meanings, examples, exercises, MCQs and online tests for Test: Monetary Policy below.
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Test: Monetary Policy - Question 1

Consider the following statements regarding the Marginal Standing Facility (MSF) of RBI: 
1. It is similar to the repo rate for the financial institutions.
2. It is on the lines of the liquidity adjustment facility and part of it.  
3. Though it is a costlier route to fulfill overnight requirement of funds, it is not a penal rate. 
4. Banks use this route once they exhaust all channels to raise short-term funds.
Which of the statements given above is/are not correct?

Detailed Solution for Test: Monetary Policy - Question 1

This route is only for banks, on the lines of the LAF but it is not its part. It is a penal rate that is why remains always higher than the repo rate. While putting this route in place the RBI has permitted banks to borrow maximum 1 per cent of their Net Demand and Time Liabilities, in coming times it was cut down, too. Similarly, it commenced with a rate 1 per cent higher than the current repo rate but over the time it went upto 3 per cent higher than the current repo (in the process of checking inflation, by end 2013).

Test: Monetary Policy - 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?

Detailed Solution for Test: Monetary Policy - Question 2

Option 4, Neither 1 nor 2, is correct.

Cash Reserve Ratio (CRR) is a percentage of the total deposits of a bank that it is required to maintain with the central bank (in this case, the Reserve Bank of India or RBI). The main purpose of CRR is to ensure that banks have sufficient liquidity to meet the cash withdrawal and payment needs of their customers.

Statement 1 is incorrect because increasing the CRR tends to have the opposite effect of curbing deflation or low inflation. When the CRR is increased, banks are required to hold a larger proportion of their deposits with the RBI, which reduces the amount of money they have available for lending. This can lead to a contraction in the money supply and potentially contribute to deflation or low inflation.

Statement 2 is also incorrect because the RBI does not pay interest on the CRR that banks are required to maintain. The CRR is a percentage of the total deposits of a bank and is not a separate deposit or investment.

Test: Monetary Policy - 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?

Detailed Solution for Test: Monetary Policy - Question 3

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

Test: Monetary Policy - 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?

Detailed Solution for Test: Monetary Policy - Question 4

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

Test: Monetary Policy - 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?

Detailed Solution for Test: Monetary Policy - Question 5

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.

Test: Monetary Policy - Question 6

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

Detailed Solution for Test: Monetary Policy - Question 6

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

Test: Monetary Policy - 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:

Detailed Solution for Test: Monetary Policy - Question 7

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

Test: Monetary Policy - 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?

Detailed Solution for Test: Monetary Policy - Question 8

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

Test: Monetary Policy - 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?

Detailed Solution for Test: Monetary Policy - Question 9

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

Test: Monetary Policy - 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?

Detailed Solution for Test: Monetary Policy - Question 10

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

Test: Monetary Policy - 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

Detailed Solution for Test: Monetary Policy - Question 11

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

Test: Monetary Policy - Question 12

Which of the following is not a function of RBI?

Detailed Solution for Test: Monetary Policy - Question 12

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

Test: Monetary Policy - 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

Detailed Solution for Test: Monetary Policy - Question 13

Both, is correct.

Statement 1 is correct because the Reserve Bank of India (RBI) is the central bank of India and is responsible for implementing monetary policy and regulating the country's financial system. As part of its mandate, the RBI provides advice on monetary matters to the government and other stakeholders, but it does not typically involve itself in matters related to agriculture and industrial finance.

Statement 2 is also correct because the RBI is required to transact the business of the central government and state governments, including the state of Jammu and Kashmir. This includes managing the government's accounts, receiving and making payments on behalf of the government, and issuing and managing government securities.

Test: Monetary Policy - 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

Detailed Solution for Test: Monetary Policy - Question 14

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

Test: Monetary Policy - Question 15

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

Detailed Solution for Test: Monetary Policy - Question 15

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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