Worksheet Solutions: Money and Banking- 1

Multiple Choice Questions (MCQs)

Q1: Supply of money is a:
(a) Flow variable
(b) Stock variable
(c) Real flow
(d) None of these
Ans: (b)
Explanation: Supply of money is measured at a particular point of time (the quantity of money existing in the economy at that moment), therefore it is a stock variable rather than a flow variable.
Q2: Supply of money refers to
(a) currency held by the public
(b) currency held by Reserve Bank of India
(c) currency held by the public and demand deposits with the commercial banks
(d) currency held by Reserve Bank of India and demand deposits with commercial bank
Ans: (c)
Explanation: Money supply commonly includes currency with the public plus demand deposits (bank deposits withdrawable on demand), since these together determine the liquidity available for transactions.
Q3: Demand deposit include...
(a) Saving account deposits and fixed deposits
(b) Saving account deposits and current account deposits
(c) Current account deposits and fixed deposits
(d) All types of deposits
Ans: (b)
Explanation: Demand deposits are those withdrawable on demand, which include current account balances and many types of savings accounts; fixed or term deposits are not demand deposits.
Q4: ________ is the main source of money supply in an economy.
(a) Central Bank
(b) Commercial Banks
(c) Government
(d) Both (a) and (b)
Ans: (d)
Explanation: The Central Bank issues currency and controls base money, while commercial banks expand money through deposit creation. Both together determine total money supply.
Q5: Which of the following is not included in money supply?
(a) Currency held by public
(b) Inter-bank-deposits
(c) Demand deposits in Banks
(d) Saving deposits with post office banks.
Ans: (b)
Explanation: Inter-bank deposits (funds placed by banks with other banks) are not part of the money held by the public and therefore are excluded from standard measures of money supply.
Q6: Supply of money refers to the quantity of money
(a) on 31st March
(b) during any specific period of time
(c) on any point of time
(d) during a fiscal year
Ans: (c)
Explanation: Money supply is a stock measured at a point of time (for example, the amount outstanding on a given date), not over a period.
Q7: Which one is included in the primary function of money?
(a) Medium of Exchange
(b) Measure of Value
(c) Both (a) and (b)
(d) None of these
Ans: (c)
Explanation: The primary functions of money include being a medium of exchange and a measure (or unit) of value, so both are correct.
Q8: Which of the following statements is correct?
(a) Supply of money refers to stock of money held by public at a point of time
(b) Supply of money is a flow variable
(c) Supply of money includes cash reserve of banks
(d) Supply of money refers to bank money
Ans: (a)
Explanation: The supply of money is a stock and usually refers to the money held by the public at a given point. Options (b), (c) and (d) are incomplete or misleading descriptions.
Q9: Which of the following is the supplier of money?
(a) Government and banking system
(b) Cooperative societies
(c) General public
(d) Life insurance corporation
Ans: (a)
Explanation: Money is supplied by the government (through currency issued by the central bank) and the banking system (through deposit creation by commercial banks).
Q10: Deposits which can be withdraw on demand by the depositors are called__________
(a) Time deposits
(b) Savings deposits
(c) Term deposits
(d) Demand deposits
Ans: (d)
Explanation: Deposits withdrawable immediately are called demand deposits; time or term deposits have fixed maturities.
Q11: The central bank can increase availability of credit by:-
(a) Raising repo rate
(b) Raising reverse repo rate
(c) Buying government securities
(d) Selling government securities
Ans: (c)
Explanation: When the central bank buys government securities from the market, it injects liquidity into the banking system, increasing bank deposits and the capacity to lend (expansion of credit).
Q12: _____________ is the main function of central Bank.
(a) Notes issue
(b) Credit creation
(c) Accepting deposits front e public
(d) None of these
Ans: (a)
Explanation: One of the central bank's primary functions is the issue of currency notes (note issue). Credit creation is mainly a function of commercial banks; central bank influences it.
Q13: Which is the most liquid measure of the money supply?
(a) M4
(b) M3
(c) M2
(d) M1
Ans: (d)
Explanation: M1 (currency with public + demand deposits + other liquid items) is the narrowest and most liquid measure of money supply.
Q14: Which of the following is not the function of the Central Bank?
(a) Banking facilities to government
(b) Lending to commercial banks
(c) Banking facilities to public
(d) Lending to government
Ans: (c)
Explanation: The central bank does not provide ordinary banking services to the general public; it serves the government and the banking system and acts as a lender to banks and sometimes to government.
Q15: When the central act as a banker to the government, what does it do?
(a) It carries out government transactions
(b) It advises on monetary and financial matters
(c) It keeps accounts of the government
(d) It carries out government transactions, advises on monetary and financial matters and keeps accounts of the government
Ans: (d)
Explanation: As banker to the government, the central bank carries out transactions, keeps government accounts and advises on monetary and financial matters - so all listed services apply.
Q16: Central Bank is an apex bank of the country that:
(a) Controls the entire banking system of the country
(b) accepts and lending of deposits to public
(c) store of value
(d) creates credit
Ans: (a)
Explanation: The central bank is the apex regulator that supervises and controls the banking system; it does not directly accept public deposits or typically act as a commercial bank.
Q17: The lender of the last resort is the function of:
(a) Rural Bank
(b) Central Bank
(c) Post office
(d) Commercial bank
Ans: (b)
Explanation: The central bank acts as the lender of last resort, providing emergency liquidity to solvent banks that face temporary shortages.
Q18: Credit Control means
(a) Contraction of credit only
(b) Extension and contraction of money supply
(c) extension of credit only
(d) supply of money remains the same
Ans: (b)
Explanation: Credit control by the central bank involves both expanding and contracting the supply of money and credit to achieve macroeconomic objectives.
Q19: Quantitative instrument of monetary policy includes:
(a) Margin Requirement
(b) Direct Action
(c) Statutory Liquidity Ratio
(d) Rationing of Credit
Ans: (c)
Explanation: Statutory Liquidity Ratio (SLR) is a quantitative tool that sets a numerical requirement for banks' liquid assets and thus affects total credit.
Q20: Identify qualitative measure of central bank:
(a) Bank rate
(b) Open market operation
(c) Margin Requirement
(d) Cash reserve ratio
Ans: (c)
Explanation: Margin requirements are qualitative (selective) measures that influence the direction and terms of credit rather than the overall volume.
Q21: What will be the effect of an increase in the 'Repo Rate on the Money Supply?
(a) Money supply will increase
(b) Money supply will decrease
(c) Money supply will remain the same
(d) Money supply will initially increase and then it will decrease
Ans: (b)
Explanation: An increase in repo rate raises banks' borrowing costs from the central bank and typically leads to higher lending rates, reducing borrowing and therefore contracting money supply.
Q22: ____________ is the rate of interest charger by the Central Bank on loans given to commercial banks.
(a) Bank rate
(b) CRR
(c) Statutory liquidity Ratio
(d) Reserve Repo Rate
Ans: (a)
Explanation: The bank rate is the rate at which the central bank lends to commercial banks for long-term needs; CRR and SLR are reserve ratios, not interest rates.
Q23: Ms. Sakshi, an economics teacher, was explaining the concept of 'minimum percentage of the total deposits to be kept by any commercial bank with the Central Bank of the country, as per norms and statute prevailing in the country'.
From the following, choose the correct alternative which specifies towards the concept explained by her?
(a) Cash Reserve Ratio
(b) Repo Rate
(c) Bank Rate
(d) Statutory Liquidity Ratio
Ans: (a)
Explanation: The description matches the Cash Reserve Ratio (CRR), which is the minimum fraction of deposits that banks must keep with the central bank.
Q24: Which of the following is not a quantitative Method of Credit Control?
(a) Open Market Operation
(b) Margin Requirements
(c) Variable Reserve Ratio
(d) Bank Rate Policy
Ans: (b)
Explanation: Margin requirements are a qualitative (selective) instrument; the others are quantitative tools affecting overall liquidity.
Q25: ____________ refers to that portion of total deposits of a commercial bank which it has to keep with itself in the form of liquid assets
(a) Statutory Liquidity Ratio(SLR)
(b) Cash Reserve Ratio(CRR)
(c) Bank Rate
(d) Reserve Repo Rate
Ans: (a)
Explanation: SLR is the minimum percentage of deposits banks must maintain with themselves in approved liquid assets (cash, gold, government securities).
Q26: Which agency is responsible for issuing Rs.1 currency notes in India?
(a) Ministry of Finance
(b) Ministry of Home Affairs
(c) Reserve Bank of India
(d) All of the above
Ans: (a)
Explanation: In India, the Ministry of Finance (Government of India) issues one-rupee notes; the RBI issues most other denominations.
Q27: Who regulates money supply?
(a) Government of India
(b) Reserve Bank of India
(c) NITI Aayog
(d) Commercial Banks
Ans: (b)
Explanation: The Reserve Bank of India (RBI), as the central bank, is primarily responsible for regulating money supply through monetary policy instruments.
Q28: Who creates credit in the economy?
(a) Government of India
(b) Reserve Bank of India
(c) NITI Aayog
(d) Commercial Banks
Ans: (d)
Explanation: Commercial banks create credit by accepting deposits and advancing loans, thereby expanding deposit liabilities beyond the initial deposits.
Q29: If the total deposits created by commercial banks is ₹. 10,000 crores and legal reserve requirements is 40% then amount of initial deposits will be
(a) ₹ 2000
(b) ₹ 2500
(c) ₹ 4000
(d) ₹ 10,000
Ans: (c)
Explanation: If total deposits = ₹10,000 and LRR = 40% then money multiplier K = 1/LRR = 1/0.4 = 2.5, initial deposit = total deposits / K = 10,000 / 2.5 = ₹4,000 crore.
Q30:. What will be the value of money multiplier when initial deposits are ₹ 500 crores and LRR is 10%?
(a) 0.1
(b) 0.2
(c) 10
(d) 20
Ans: (c)
Explanation: Money multiplier K = 1 / LRR = 1 / 0.10 = 10. (Initial deposit amount is not required to compute the multiplier.)
Q30: The amount of initial deposits is 3000cr and LRR is 25%. Calculate the amount of total deposits created by commercial banks
(a) 10000 crore
(b) 11000 crore
(c) 12000 crore
(d) 13000 crore
Ans: (c)
Explanation: Money multiplier K = 1 / 0.25 = 4. Total deposits = initial deposits × K = 3,000 × 4 = ₹12,000 crore.
Q31: Deposit creation by bank comes to an end when
(a) Fresh deposit with banks become zero
(b) LRR become zero
(c) Money multiplier become zero
(d) Total reserve equal to initial deposit
Ans: (d)
Explanation: Deposit creation ends when the total reserves held by banks equal the initial deposit available to be re-lent; at that point no further rounds of lending can occur.
Q32: What would be the total money creation in the economy, If initial fresh deposits with banks = ₹50,000 and LRR = 20%.
(a) ₹2,50,000
(b) ₹5,00,000
(c)₹10,00,000
(d) ₹12,00,000
Ans: (a)
Explanation: Multiplier K = 1 / 0.20 = 5. Total money creation = initial deposit × K = 50,000 × 5 = ₹2,50,000.
Q33: Which one of the following is used for credit creation?
(a) K = 1/LRR
(b) K = 1/SLR
(c) K = 1/Bank Rate
(d) K = 1/ Repo Rate
Ans: (a)
Explanation: Credit (deposit) multiplier is given by K = 1 / LRR (legal reserve ratio), which determines how many times initial deposits can be multiplied.
Q34: The value of credit multiplier will be high when
(a) Cash reserve ratio is high
(b) Cash reserve ratio is low
(c) Cash reserve ratio is zero
(d) Cash reserve ratio is infinity
Ans: (b)
Explanation: A lower cash reserve ratio means banks retain less as reserves and can lend more, producing a higher multiplier.
Q35: In a hypothetical economy, Mr. Neeraj has deposited ₹100 in the bank. If it is assumed that there is no other currency circulation in the economy, then the total money supply in the economy will be ______
a) zero
b) ₹ 100
c) not defined
d) ₹ 120
Ans: (b)
Explanation: If there is no other currency circulation and the only deposit is ₹100, total money supply equals that deposit, i.e. ₹100.
Q36: Two friends Akash and Amit were discussing about the features of central bank
."This features saves the commercial banks from possible breakdown"
The above mentioned statement was given by Akash, identify the feature was he taking about...
(a) Banker's bank
(b) Lender of the last resort
(c) Controller of credit
(d) Financial advisor
Ans: (b)
Explanation: The feature that protects commercial banks from collapse by providing emergency funds is the lender of the last resort function of the central bank.
Q37: Read the following statements carefully and choose the correct alternatives given below:
Statement 1 - Central bank lends money to borrowers at a very low interest.
Statement 2 - Ministry of finance circulates all mint and one rupee note in India.
Alternatives:
(a) Both the statements are true.
(b) Both the statements are false.
(c) Statement 1 is true and Statement 2 is false
(d) Statement 2 is true and Statement 1 is false
Ans: (d)
Explanation: Statement 1 is false because central bank does not generally lend to borrowers at very low interest (it lends to banks and sets policy rates). Statement 2 is true: the Government (Ministry of Finance) issues the one-rupee note and mints coins.
Q38: Read the following statements carefully and choose the correct alternatives given below:
Statement 1 - The value of money multiplier is determined by the reserve ratio prevailing in the monetary system.
Statement 2 - The process of credit creation directly relates to the value of reserve ratio.
Alternatives:
(a) Both the statements are true.
(b) Both the statements are false.
(c) Statement 1 is true and Statement 2 is false
(d) Statement 2 is true and Statement 1 is false
Ans: (c)
Explanation: Statement 1 is true: the multiplier depends on reserve ratio. Statement 2 as worded is false because credit creation is inversely related to the reserve ratio (higher reserve ratio → less credit creation), not a direct positive relation.
Q38: Choose the correct statement from given below
(a) Commercial banks create credit out of primary deposits.
(b) The money multiplier is directly related to the legal reserve ratio.
(c) The central bank of the country is not authorized to maintain foreign exchange reserves.
(d) All of the above
Ans: (a)
Explanation: Commercial banks create credit from initial (primary) deposits. Option (b) is incorrect (multiplier is inversely related to LRR) and (c) is false because central banks do maintain foreign exchange reserves.
Q39: Assertion(A): Currency Held by Public is a monetary liabilities of central bank
Reason(R): Central bank control credit, whereas commercial bank create credit with currency held by Public.
(a) Both Assertion(A) and Reason(R) are true and Reason(R) is the correct explanation of the Assertion(A)
(b) Both Assertion(A) and Reason(R) are true and Reason(R) is not the correct explanation of the Assertion(A)
(c) Assertion(A) is true but Reason(R) is false
(d) Assertion(A) is false but Reason(R) is true
Ans:
Explanation:
(i) Assertion:
Currency held by the public is a monetary liability of the central bank - true. The central bank issues notes which appear as its liabilities.
(ii) Reason:
Central bank controls credit while commercial banks create credit using deposits - true, but this does not explain why currency held by public is the central bank's liability.
(iii) Justification:
Therefore both statements are true but Reason is not the correct explanation of the Assertion. (Option b.)
Q40: Assertion (A): Central Bank as a banker to the government, works as a custodian of cash reserves.
Reason(R): The Central Bank acts as a clearinghouse for the transfer and settlement of mutual claims of commercial banks.
(a) Both Assertion(A) and Reason(R) are true and Reason(R) is the correct explanation of the Assertion(A)
(b) Both Assertion(A) and Reason(R) are true and Reason(R) is not the correct explanation of the Assertion(A)
(c) Assertion(A) is true but Reason(R) is false
(d) Assertion(A) is false but Reason(R) is true
Ans:
Explanation:
(i) Assertion:
Central bank acts as a custodian of government cash reserves - true.
(ii) Reason:
Central bank also functions as a clearinghouse for inter-bank settlements - true.
(iii) Justification:
Although both are true, the clearinghouse role is not the direct explanation for being custodian of government cash reserves; they are distinct functions. (Option b.)
Q41: Assertion(A): Central bank as a banker to government, work as a financial advisor
Reason(R): Government borrow internally from banks and general public.
(a) Both Assertion(A) and Reason(R) are true and Reason(R) is the correct explanation of the Assertion(A)
(b) Both Assertion(A) and Reason(R) are true and Reason(R) is not the correct explanation of the Assertion(A)
(c) Assertion(A) is true but Reason(R) is false
(d) Assertion(A) is false but Reason(R) is true
Ans:
Explanation:
(i) Assertion:
The central bank acts as a financial adviser to the government - true.
(ii) Reason:
Government borrows internally from banks and the public - true.
(iii) Justification:
However, the fact that the government borrows internally does not by itself explain why the central bank advises the government; the advisory role arises from the central bank's expertise and role in managing public debt. Thus the Reason is true but not the correct explanation of the Assertion. (Option b is not listed for this Q; the correct choice is (c) as per the original answer which indicates the Assertion is true and Reason is false; but given both statements here are true, the proper evaluation is that Reason is not the correct explanation. To align with the original answer provided, we record: Assertion true, Reason true but Reason is not the correct explanation.)
Q42: Assertion(A): Demand deposits are also called bank money.
Reason(R): Demand deposits are created by commercial banks.
(a) Both Assertion(A) and Reason(R) are true and Reason(R) is the correct explanation of the Assertion(A)
(b) Both Assertion(A) and Reason(R) are true and Reason(R) is not the correct explanation of the Assertion(A)
(c) Assertion(A) is true but Reason(R) is false
(d) Assertion(A) is false but Reason(R) is true
Ans:
Explanation:
(i) Assertion:
Demand deposits are called bank money - true because they represent money created by banks.
(ii) Reason:
Demand deposits are indeed created by commercial banks - true.
(iii) Justification:
Reason correctly explains the Assertion: since commercial banks create demand deposits, these deposits are termed bank money. (Option a.)
Q43: Assertion(A): LRR represents the minimum reserve ratio essential to be maintained by banks.
Reason(R): Banks create deposits in the process of making loansto their customers.
(a) Both Assertion(A) and Reason(R) are true and Reason(R) is the correct explanation of the Assertion(A)
(b) Both Assertion(A) and Reason(R) are true and Reason(R) is not the correct explanation of the Assertion(A)
(c) Assertion(A) is true but Reason(R) is false
(d) Assertion(A) is false but Reason(R) is true
Ans:
Explanation:
(i) Assertion:
LRR (legal reserve ratio) is the minimum reserve ratio banks must maintain - true.
(ii) Reason:
Banks create deposits when they make loans - true.
(iii) Justification:
The Reason explains why LRR matters for controlling deposit creation; both statements are true but Reason is not a direct explanation of the definition of LRR. (According to the original answer, select option b.)
Q44: Assertion(A): The Central Bank is also known as the bank of issue.
Reason(R): The Central Bank enjoys the sole monopoly of issuing currency to ensure control over volume of currency and money supply.
(a) Both Assertion(A) and Reason(R) are true and Reason(R) is the correct explanation of the Assertion(A)
(b) Both Assertion(A) and Reason(R) are true and Reason(R) is not the correct explanation of the Assertion(A)
(c) Assertion(A) is true but Reason(R) is false
(d) Assertion(A) is false but Reason(R) is true
Ans:
Explanation:
(i) Assertion:
Central Bank is called the bank of issue - true.
(ii) Reason:
Central Bank has monopoly right to issue currency to control money supply - true.
(iii) Justification:
The Reason correctly explains the Assertion because monopoly of issue is why it is called the bank of issue. (Option a.)
Q45: Assertion(A): Demand deposits are created by commercial banks.
Reason(R): Demand deposits form a significant part of the total money supply in the economy.
(a) Both Assertion(A) and Reason(R) are true and Reason(R) is the correct explanation of the Assertion(A)
(b) Both Assertion(A) and Reason(R) are true and Reason(R) is not the correct explanation of the Assertion(A)
(c) Assertion(A) is true but Reason(R) is false
(d) Assertion(A) is false but Reason(R) is true
Ans:
Explanation:
(i) Assertion:
Demand deposits are created by commercial banks - true.
(ii) Reason:
Demand deposits are a significant component of money supply - true.
(iii) Justification:
Reason does not directly explain why demand deposits are created by banks, though both statements are true. (Option b.)
Q46: Assertion(A): Only net demand deposits held by commercial banks are taken as part of money supply.
Reason(R): Only deposits of the public held by the banks are included in money supply
(a) Both Assertion(A) and Reason(R) are true and Reason(R) is the correct explanation of the Assertion(A)
(b) Both Assertion(A) and Reason(R) are true and Reason(R) is not the correct explanation of the Assertion(A)
(c) Assertion(A) is true but Reason(R) is false
(d) Assertion(A) is false but Reason(R) is true
Ans:
Explanation:
(i) Assertion:
Only net demand deposits (public deposits) are included in money supply - true.
(ii) Reason:
Only deposits of the public are included - true.
(iii) Justification:
Reason correctly explains the Assertion because money supply excludes inter-bank and intra-bank deposits and counts deposits held by the public. (Option a.)
Q47: Assertion(A): Credit creation is inversely related to the Legal Reserve Ratio.
Reason(R): LRR is fixed by the market forces of demand and supply.
(a) Both Assertion(A) and Reason(R) are true and Reason(R) is the correct explanation of the Assertion(A)
(b) Both Assertion(A) and Reason(R) are true and Reason(R) is not the correct explanation of the Assertion(A)
(c) Assertion(A) is true but Reason(R) is false
(d) Assertion(A) is false but Reason(R) is true
Ans:
Explanation:
(i) Assertion:
Credit creation is inversely related to LRR - true (higher reserves → less lending).
(ii) Reason:
LRR is not fixed by market forces; it is set by the central bank or statutory authority - false.
(iii) Justification:
Therefore Assertion is true while Reason is false. (Option c.)
Q48: Assertion(A): The monetary policy is the policy formulated by central bank of a country
Reason(R) : The policy measures involves measures taken by the central bank to regulate the supply of money, availability and cost of credit in the economy.
(a) Both Assertion(A) and Reason(R) are true and Reason(R) is the correct explanation of the Assertion(A)
(b) Both Assertion(A) and Reason(R) are true and Reason(R) is not the correct explanation of the Assertion(A)
(c) Assertion(A) is true but Reason(R) is false
(d) Assertion(A) is false but Reason(R) is true
Ans:
Explanation:
(i) Assertion:
Monetary policy is formulated by the central bank - true.
(ii) Reason:
Monetary policy regulates money supply, availability and cost of credit - true.
(iii) Justification:
Reason correctly explains the Assertion as it describes the content of monetary policy. (Option a.)
Q49: Assertion(A): Banks issues currencies.
Reason(R): Commercial Bank is an institution that accepts deposits and provides loans to the public.
(a) Both Assertion(A) and Reason(R) are true and Reason(R) is the correct explanation of the Assertion(A)
(b) Both Assertion(A) and Reason(R) are true and Reason(R) is not the correct explanation of the Assertion(A)
(c) Assertion(A) is true but Reason(R) is false
(d) Assertion(A) is false but Reason(R) is true
Ans: (d)
Explanation:
(i) Assertion:
Banks issue currencies - false. In most countries only the central bank or government issues currency.
(ii) Reason:
Commercial banks accept deposits and give loans - true.
(iii) Justification:
Therefore Assertion is false while Reason is true. (Option d.)
Q50: Assertion(A): An increase in CRR results in decrease in the value of multiplier
Reason(R): Banks lend money many times more than their cash reserves.
(a) Both Assertion(A) and Reason(R) are true and Reason(R) is the correct explanation of the Assertion(A)
(b) Both Assertion(A) and Reason(R) are true and Reason(R) is not the correct explanation of the Assertion(A)
(c) Assertion(A) is true but Reason(R) is false
(d) Assertion(A) is false but Reason(R) is true
Ans:
Explanation:
(i) Assertion:
Increase in CRR reduces the multiplier - true because higher CRR reduces funds available for lending.
(ii) Reason:
Banks lend many times more than cash reserves - true; this refers to the deposit multiplier process.
(iii) Justification:
Reason correctly explains why higher CRR reduces the multiplier; both are true and Reason is the correct explanation. (Option a.)
Q51: Assertion (A)- Credit creation process increases the money supply in economy.
Reason (R)- through the credit creation process commercial banks can distribute loans many times as compare to their primary deposits
(a) Both Assertion(A) and Reason(R) are true and Reason(R) is the correct explanation of the Assertion(A)
(b) Both Assertion(A) and Reason(R) are true and Reason(R) is not the correct explanation of the Assertion(A)
(c) Assertion(A) is true but Reason(R) is false
(d) Assertion(A) is false but Reason(R) is true
Ans: (b)
Explanation:
(i) Assertion:
Credit creation increases money supply - true.
(ii) Reason:
Banks can lend many times over primary deposits - true.
(iii) Justification:
While both are true, the Reason describes the mechanism but is not set out as the precise explanatory link given in the Assertion in the original key; therefore classification as option (b) follows the provided answer key.
Q52:Assertion (A)-settlement of liabilities of commercial banks is done by RBI. Reason (R)- RBI holds the accounts of all commercial banks and commercial banks keep funds in it essentially.
(a) Both Assertion(A) and Reason(R) are true and Reason(R) is the correct explanation of the Assertion(A)
(b) Both Assertion(A) and Reason(R) are true and Reason(R) is not the correct explanation of the Assertion(A)
(c) Assertion(A) is true but Reason(R) is false
(d) Assertion(A) is false but Reason(R) is true
Ans: (b)
Explanation:
(i) Assertion:
RBI settles liabilities among commercial banks - true, it facilitates inter-bank settlement.
(ii) Reason:
RBI holds accounts of banks and banks keep balances with it - true.
(iii) Justification:
Both are true but Reason is not the sole explanation of settlement function; settlement also relies on clearing mechanisms and inter-bank arrangements. Hence option (b).
Q53: Assertion (A): Statutory liquidity ratio is the ratio of demand deposits of a commercial bank which, it has to keep with itself in the form of specified liquid assets.
Reason (R): Statutory liquidity ratio is a component of legal reserve ratio, which affects the credit creation in the economy.
(a) Both Assertion(A) and Reason(R) are true and Reason(R) is the correct explanation of the Assertion(A)
(b) Both Assertion(A) and Reason(R) are true and Reason(R) is not the correct explanation of the Assertion(A)
(c) Assertion(A) is true but Reason(R) is false
(d) Assertion(A) is false but Reason(R) is true
Ans: (b)
Explanation:
(i) Assertion:
SLR is the portion of deposits banks must keep as liquid assets - true.
(ii) Reason:
SLR is part of legal reserve requirements and affects credit creation - true.
(iii) Justification:
Both statements are true but Reason is not the direct definition of SLR; hence option (b).

Case Study - 2

Q1: Read the following case study paragraph carefully and answer the questions on the basis of the same.
Ans: The Reserve Bank of India raised its inflation forecast because of higher oil and raw material prices, while keeping the growth forecast unchanged at 9.5% for FY22 despite weak investment demand. Governor Shaktikanta Das noted that consumer price index (CPI) inflation may remain close to the upper tolerance band of 6% until September, with easing expected thereafter as kharif harvest supplies arrive. The RBI emphasised that supply-side factors (like volatile crude prices and higher industrial input costs) are raising cost pressures, while weak demand is tempering pass-through to output prices. The RBI also warned that a premature tight monetary response could harm a fragile recovery.
Q2: How does RBI promote growth process of country:-
(a) By controlling price level in country
(b) By changing various interest rates and money supply
(c) By increasing supply of products
(d) All of above
Ans: (b)
Explanation: RBI promotes growth mainly through monetary policy - by adjusting interest rates and the money supply to influence investment and consumption; controlling prices is an indirect effect, and increasing product supply is not a direct RBI function.
Q3: Why does RBI fix the inflation target?
(a) To make growth process fast
(b) To make coordination with government
(c) To manage exchange rate
(d) To stabilize economy
Ans: (d)
Explanation: An inflation target helps to stabilise the economy by anchoring inflation expectations and guiding monetary policy actions to maintain price stability.\u00a0
Q4: Why increasing crude oil prices are matter of concern :-
(a) Increasing crude oil prices are increasing transportation cost
(b) Increasing crude oil prices are making economy potentially unstable
(c) Increasing crude oil prices are volatising growth process
(d) Increasing crude oil prices are adversely affecting demand
Ans: (b)
Explanation: Rising crude oil prices raise production and transport costs, feed into inflation and can make the overall economy potentially unstable by worsening external balances and reducing real incomes.\u00a0
Q5: What is money multiplier?
Ans: It is the ratio that measures the total money created in the banking system for each unit of initial deposit. It is given by Money Multiplier = 1 / LRR where LRR is the legal reserve ratio.
Q6: What is central bank?
Ans: A central bank is the apex monetary institution that controls, regulates and develops a nation's monetary and banking system. In India the central bank is the Reserve Bank of India, established on 1 April 1935.
Q7: Explain various functions of central bank.
Ans: Functions of central bank:

• Bank of Issue: The central bank has the sole authority to issue currency (except some small denominations in some countries). Currency issued by the central bank is legal tender and the bank must maintain adequate reserves of gold and foreign exchange against notes issued.
• Banker to the Government: The central bank carries out government banking business, keeps government accounts, accepts receipts and makes payments on its behalf, and manages public debt. It may also provide short-term advances to the government when required.
• Banker's Bank: The central bank supervises and supports the banking system. This role includes:
  • Custodian of Cash Reserves: Keeping minimum reserves that commercial banks must maintain with the central bank.
  • Lender of Last Resort: Providing emergency funds to solvent banks facing temporary liquidity shortages.
  • Clearing House Function: Facilitating settlement of mutual claims among banks by adjusting their accounts maintained with the central bank.
• Controller of Money Supply and Credit: The central bank issues currency and regulates money supply and credit to maintain price stability. It uses:
  • Quantitative Instruments: Bank rate, open market operations, cash reserve ratio (CRR), statutory liquidity ratio (SLR), repo and reverse repo rates to control the overall volume of credit.
  • Qualitative Instruments: Moral suasion, margin requirements and selective credit controls to influence the direction and terms of credit.
• Custodian of Foreign Exchange Reserves: The central bank holds and manages the nation's foreign exchange and gold reserves to stabilise the external value of the domestic currency and to meet international payment obligations. All foreign exchange transactions are routed through the central bank.

Q8: Explain various tools of monetary policy to control credit in the economy.
Ans: Monetary policy tools used by the central bank are divided into quantitative and qualitative instruments.
Quantitative Tools
(a) Bank Rate: The rate at which the central bank lends to commercial banks for long-term needs. An increase raises borrowing costs for banks and tends to contract credit; a decrease has the opposite effect.
(b) Open Market Operations (OMO): Buying and selling government securities in the market. Purchasing securities injects liquidity and expands credit; selling securities withdraws liquidity and contracts credit.
(c) Cash Reserve Ratio (CRR): The minimum percentage of deposits banks must hold with the central bank. A higher CRR reduces funds available for lending; a lower CRR increases lending capacity.
(d) Statutory Liquidity Ratio (SLR): The minimum percentage of deposits banks must maintain in liquid assets with themselves. Raising SLR reduces bank credit; lowering SLR expands it.
(e) Repo Rate: The rate at which the central bank lends short-term funds to banks against approved securities. Higher repo rate increases banks' borrowing costs and can contract credit; a lower repo rate tends to expand credit.
(f) Reverse Repo Rate: The rate at which the central bank borrows from banks. Raising the reverse repo rate encourages banks to park funds with the central bank, reducing credit; lowering it encourages banks to lend more to the public.
Qualitative Tools
(a) Marginal Requirements: The difference between market value of collateral and loan amount. Higher margin requirements reduce credit against securities; lower margins increase it.
(b) Moral Suasion: Persuading banks to follow the central bank's policy directions (for expansion or contraction of credit) without statutory compulsion.