Test: Money And Banking - 2


20 Questions MCQ Test Economy and Indian Economy (Prelims) by Shahid Ali | Test: Money And Banking - 2


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QUESTION: 1

Bank rate is for

Solution:

The Reserve Bank of India (RBI) today gave freedom to banks in deciding their base rate. “Banks may choose any benchmark to arrive at the base rate for a specific tenor that may be disclosed transparently,” RBI said, as it released the final guidelines this evening.

QUESTION: 2

Lending rate is for

Solution:
QUESTION: 3

Open market operations is

Solution:

Open market operations (OMO) refer to the buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. Securities' purchases inject money into the banking system and stimulate growth, while sales of securities do the opposite and contract the economy. The Federal Reserve (Fed) facilitates this process and uses this technique to adjust and manipulate the federal funds rate, which is the rate at which banks borrow reserves from one another.

QUESTION: 4

Open market operations is done by

Solution:
QUESTION: 5

Currency notes and coins are called as:

Solution:
QUESTION: 6

The lender of last resort is a function of

Solution:
QUESTION: 7

What is the currency deposit ratio (cdr)?

Solution:
QUESTION: 8

Cash reserve ratio is a percentage of total deposits which the central bank keeps with the commercial banks by law.

Solution:
QUESTION: 9

Which among the following is considered to be the most liquid asset?

Solution:
QUESTION: 10

The RBI can decrease the money supply in the market by:

Solution:

The correct option is Option B. 

If Reserve Bank of India wants to decrease the money supply in order to check inflation then they will use the quantitative measures of their monetary policy which includes: 

(i) Selling bonds in open market: Open market operation (OMO) is a monetary policy by the central bank in which the bank deals in the sale and purchase of securities and bonds in the open market to control the supply of money in the economy. By selling the securities and bonds, the central bank soaks liquidity from the economy that reduces the purchasing power in the economy which controls the situation of inflation.  

(ii) Increase in CCR: Cash Reserves Ratio (CRR) refers to the proportion of total deposits of the commercial banks which they must keep as reserves with the central bank in the form of cash. By increasing the cash reserve ratio, the commercial banks has to maintain more cash with the central bank which  reduces their credit creation capacity and therefore money supply in the economy also reduces which corrects the situation of inflation.

(iii) Hiking bank rate: Bank rate is the rate charged on the loans offered by the Central bank to the commercial banks without any collateral. Bank rate is a quantitative credit control measure under the monetary policy of the government as it controls the overall supply of the money in the economy. During inflation, bank rate is increased to reduce the total money supply in the economy by reducing the amount of credit creation by the commercial banks.

QUESTION: 11

What among the following is NOT an example of 'public goods'?

Solution:

The services administered by 
government and paid for collectively through taxation are known as public goods. 

Examples of public goods are National defense, Roads, National forests. 

But, if we talk about cars, they are the mixed public goods.

QUESTION: 12

M1 includes

Solution:
QUESTION: 13

M2 includes M1 and

Solution:

M2 is a calculation of the money supply that includes all elements of M1 as well as "near money." M1 includes cash and checking deposits, while near money refers to savings deposits, money market securities, mutual funds and other time deposits.

QUESTION: 14

One of the type of deposit accounts with the commercial banks is

Solution:
QUESTION: 15

Barter system is now replaced by

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QUESTION: 16

The fraction of deposits is kept as Cash Reserves by the commercial banks with the

Solution:
QUESTION: 17

The fraction of deposits kept as Cash Reserves by the commercial banks is called

Solution:

Cash Reserve Ratio is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves with the central bank.

QUESTION: 18

The fraction of deposits kept as Cash Reserves by the commercial banks with themselves is called

Solution:

Cash Reserves Ratio (CRR) refers to the proportion of total deposit of the commercial banks which they must keep as reserves with the central bank in the form of cash deposits. In other words, these are the cash deposits of commercial banks with the central bank which they have to deposit as a legal requirement with central bank. The ratio is fixed by the central bank and is varied from time to time to control the supply of money in the economy depending upon the prevailing situation of inflation or deflation.

QUESTION: 19

The fraction of deposits kept as Cash Reserves by the commercial banks is a

Solution:
QUESTION: 20

The fraction of deposits kept as Cash Reserves by the commercial banks are also called as

Solution:

Fractional-reserve banking is the common practice by commercial banks of accepting deposits, and making loans or investments, while holding reserves at least equal to a fraction of the bank's deposit liabilities. Reserves are held as currency in the bank, or as balances in the bank's accounts at the central bank.

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