MCQ Money and Banking

 

1. Read the following statements carefully: 

Statement 1: Primary deposits are the cash deposits by general public with commercial banks. 

Statement 2: Secondary deposits are those deposits which arise on account of credit provided by the commercial banks to the people. 

In light of the given statements, choose the correct alternative from the following: 

(a) Statement 1 is true and Statement 2 is false. 

(b) Statement 1 is false and Statement 2 is true. 

(c) Both Statements 1 and 2 are true. 

(d) Both Statements 1 and 2 are false. 

2. The rate at which commercial banks borrow from the Reserve Bank of India to meet their long-term requirements is known as ______ (Choose the correct alternative to fill up the blank) 

(a) Margin requirement 

(b) Bank rate 

(c) Repo rate 

(d) Reverse repo rate 

3. Read the following news report carefully: 

“The central bank has imposed fine on Hisar Urban Cooperative Bank Ltd. and Andaman and Nicobar State Cooperative Bank Ltd. for violation of banking norms” According to the given report, identify the function of the central bank. 

(a) Issue of currency 

(b) Banker to the public 

(c) Banker to the Government 

(d) Banker’s Bank 

4. Identify the incorrect feature(s) of money supply (M1) from the following: 

(i) It is measured at a point of time. 

(ii) It does not include stock of money held by the government. 

(iii) It is always the currency in the hands of the Central Bank of a nation. 

Alternatives:

(A) (i) and (ii) 

(B) (ii) and (iii) 

(C) (ii) only 

(D) (iii) only 

5. Find the missing figures and choose the correct alternative:

Alternatives: 

(A) 1000, 800, 20000, 25000 

(B) 5000, 3200, 25000, 20000 

(C) 1000, 3200, 25000, 20000

(D) 1000, 800, 20000, 25000 

6. Ms. Iqra Ansari, a teacher, was explaining in her class about various types of deposits with the commercial banks. She quoted that- "These deposits form a part of M1 measure of money supply and are payable on demand by the commercial banks." Identify the type of deposits she was explaining about and choose the correct alternative: 

(a) Only (i) (c) (i) and (ii) 

(b) Only (ii) (d) (i), (ii) and (iii)

7. In the Indian economy, _________are issued by the Reserve Bank of India and acts as legal tender money. 

(i) Coins of all denomination 

(ii) Currency notes of various denominations, except one rupee note 

(iii) Demand deposits 

Alternatives: 

(a) Only (i) 

(b) Only (ii) 

(c) Only (iii) 

(d) (i) and (ii) 

8. ………………………. formulates the Monetary Policy in the economy.

 (Fill up the blank with correct alternative) 

(a) Commercial Banks 

(b) International Monetary Fund 

(c) Central Bank 

(d) Central Government 

9. Read the following statements carefully: 

Statement 1: Money is a commodity which is generally accepted as a medium of exchange. 

Statement 2: Money solved the problem of double coincidence of wants. 

 In the light of the given statements, choose the correct alternative from the following: 

(A) Statement 1 is true and statement 2 is false. 

(B) Statement 1 is false and statement 2 is true. 

(C) Both statements 1 and 2 are true. 

(D) Both statements 1 and 2 are false. 

10. Identify the incorrect statement with reference to Cash Reserve Ratio (CRR): 

(A) It is a certain percentage of demand and time deposit liabilities that every bank must keep as cash reserves with the Central Bank. 

(B) It is fixed by the Central Bank. 

(C) It is not binding on the commercial banks. 

(D) It is a tool used by the Central Bank to control the credit creation in the economy. 

11. Identify, which of the following is not a function of the Reserve Bank of India. 

 (Choose the correct alternative) 

(a) Controller of money supply 

(b) Credit provider to commercial banks 

(c) Central agency preparing the annual budget of the Government 

(d) Issuer of currency 

12. If the central bank wants to reduce money supply in the economy, it may ____. 

 (Choose the correct alternative to fill up the blank) 

(a) increase Bank Rate 

(b) reduce Cash Reserve Ratio 

(c) sell securities in the open market 

(d) buy securities in the open

13. Read the following statements carefully: 

Statement 1: Reserve ratio and Credit creation process are inversely related.

Statement 2: Central Bank of an economy performs the vital function of controlling the credit creation process. 

 In light of the given statements, choose the correct alternative from the following: 

(A) Statement 1 is true and Statement 2 is false. 

(B) Statement 1 is false and Statement 2 is true. 

(C) Both Statements 1 and 2 are true. 

(D) Both Statements 1 and 2 are false. 

14. Choose the correct alternative to complete the given schedule:

 

Alternatives: 

(A) 2000, 1620, 20000, 18000 

(B) 1800, 180, 2000, 18000 

(C) 1620, 180, 2000, 18000 

(D) 1800, 1620, 20000, 18000 

15. The Reserve Bank of India (RBI) __________ government securities in a bid to _______the stock of money in the 

economy. (Choose the correct alternative to fill up the blanks) 

(a) sells, decrease 

(b) purchases, decrease 

(c) sells, increase 

(d) purchases, not change 

16. Demand Deposits include ____________. (Choose the correct alternative to fill up the blank)

(a) Currency and coins held with the public. 

(b) Other deposits with the Government 

(c) Savings Account Deposits and Fixed Deposits 

(d) Current Account Deposits and Fixed Deposits 

17. The Central Bank can reduce the Money Supply in the economy by ___________ the ______________. 

 (Fill up the blanks with correct alternative.) 

(A) increasing, bank rate 

(B) decreasing, cash reserve ratio 

(C) decreasing, bank rate 

(D) buying, government securities 

18. Identify the incorrect feature(s) of the Money Supply in an economy, from the following: 

(i) It is measured during a period of time. 

(ii) It includes stock of money held by the government of a nation. 

(iii) It always represents the currency held with Central Bank of the Nation. 

Alternatives: 

(A) (i) only 

(B) (ii) and (iii) 

(C) (i) and (ii) 

(D) (i), (ii) and (iii) 

19. ‘Money is an asset which can be stored for use in future.’ 

 In the light of given statement, identify the function of money. (Choose the correct alternative) 

(a) A measure of value 

(b) A standard of deferred payment 

(c) A store of value 

(d) A medium of exchange 

20. Read the following statements carefully: 

Statement 1: Money supply (M1) in India does not include 'demand deposits' with commercial banks. 

Statement 2: Money supply (M1) refers to, assets available with the Commercial Banks during a particular period of time. 

In the light of the given statements, choose the correct alternative. 

(a) Statement 1 is true and Statement 2 is false. 

(b) Statement 1 is false and Statement 2 is true. 

(c) Both statements 1 and 2 are true. 

(d) Both statements 1 and 2 are false. 

21. “Mr. Sahotra borrowed funds from bank for purchasing a new house”. 

From the above statement, identify the indicated function of money: 

(A) Medium of exchange 

(B) Store of value 

(C) Unit of account 

(D) Standard of deferred payments 

22. If in an economy the initial deposits are ₹ 4,000 crore and Reserve Ratio (RR) is 10%. If total deposit created would be ₹ ______ crore. (Fill up the blank with the correct alternative) 

(A) 4,000 

(B) 40,000 

(C) 2,000 

(D) 20,000 

23. Suppose in a hypothetical economy, the Central Bank increases the reserve ratio from 10% to 25%. Keeping the amount of initial deposits constant at ₹ 1,000 crore, the amount of total money creation would be ₹_______ crore. (Choose the correct 

alternative to fill in the blank) 

(A) 10,000 

(B) 4,000

(C) 6,000 

(D) 5,000 

24……………. is the total volume of money held by the public, for the purpose of disposing off, at a particular point of time. 

(Choose the correct alternative to fill in the blank) 

(A) Term deposits 

(B) Demand for money 

(C) Money supply 

(D) Credit creation 

 25. Read the following information carefully: "The Monetary Policy Committee (MPC) of the Reserve Bank of India 

(RBI), recently increased the Repo Rate by 50 basis points. The Rate stands today at 5.40%, whereas Reverse 

Repo Rate was left unchanged at 3.35%." 

Answer the following questions: 

(i) Identify the nature of the two monetary policy measures mentioned in the above text. 

Ans. The two monetary policy measures mentioned in the above text are of quantitative nature. 

(ii) Elaborate the likely economic rationale behind the increase in Repo Rate by the Monetary Policy Committee. 

Ans. An increase in the repo rate will force the commercial banks to increase the lending rates, which may 

make borrowing costlier to the general public. It may discourage general public from borrowing funds. As a result, Aggregate Demand in the economy may decrease, thereby controlling the inflationary pressures in the economy.

26. Using a suitable numerical example, explain the credit creation process of the banking system, in a hypothetical economy. 

Ans. The process of money creation is based on the assumptions that: 

• entire banking system is a single unit. 

• all transactions are routed through the bank only. 

When a commercial bank receives initial/primary deposits (say ₹ 1,000), as per the requirement of the Central Bank, it has to maintain some reserves. The remaining amount is made available for loans. The lent sum of money is received back in the next round of deposits as secondary deposits. This process of deposit, reserve and lending continues till initial deposits become equal to the sum total of reserves.

27. “Open Market Operations by Reserve Bank of India (RBI) help in regulating money supply in the economy.” Justify the given statement with valid arguments. 

Ans. The Reserve Bank of India (RBI) can regulate the money supply in the economy by the sale/ purchase of government securities in the open market. When RBI sells government securities, the availability of funds with commercial banks reduces, which in turn curtails their lending capacity. Consequently, the money supply in the economy falls. On the contrary, when RBI buys government securities, the availability of funds with commercial banks rises, which in turn increases their lending capacity. Consequently, the money supply in the economy rises. (To be marked as a whole)

28. Elaborate the ‘Government’s Bank and Advisor’ function of the Central Bank of a nation.

Ans. The Central Bank acts as a banker to both central as well as state governments. The Central Bank maintains account, accepts receipts and makes payments for the government and carries out exchange, remittance and other banking operations. It advances credit/loan to the government to meet its requirements in case of crisis. As a financial advisor, the Central Bank advises the government on various financial and economic matters. (To be marked as a whole)

29. Elaborate the ‘Banker's Bank and Supervisor’ function of the Reserve Bank of India. 

Ans. Reserve Bank of India (RBI) accepts the deposits from commercial banks and also advances loans to them as and when required. It maintains reserves of all commercial banks and utilizes it to settle inter-bank claims. 

Being the supreme authority of the banking system, it acts as the financier of last recourse to the commercial banks. It forwards short-term credit to the commercial banks against approved securities. The RBI supervises, regulates and controls the commercial banks. The regulation of banks may be related to their licensing, branch expansion, liquidity of assets, management, amalgamation and liquidation. (To be marked as a whole)

30. Read the following text carefully: "After setting up a working group to study the possibility of a Central Bank Digital Currency (CBDC) in India in 2020, the RBI revealed a concept note on digital rupee (e-Rupee) on 7th October, 2022." "The e-Rupee will provide an additional option to the currency available forms of money. It is substantially not different from bank notes, but being digital it is likely to be easier, faster and cheaper." RBI said that it broadly defines CBDC as the legal tender issued by a central bank in a digital form. It is akin to paper currency in a different form. 

(A) On the basis of the above text and common understanding, answer the following questions: Identify and discuss the function of central bank indicated above text. 

Ans. The function being discussed here is the Bank Of issue or Currency Authority. In India, the Central bank has the sole authority for issuing currency in the economy. This ensures uniformity in the issue of currency and it gives the central bank, control over the money supply. 

(B) State any two advantages of digital rupee. 

Ans. Two advantages of Digital Rupee: • Easier • Cheaper • Faster (Any two) 

(Any other valid explanation to be allotted marks)

31. Explain the role of Central Bank as Governments' agent and advisor. 

Ans. As Government’s agent, the Central Bank accepts receipts and makes payment on behalf of the government. 

For instance, Central Bank issues government securities such as bonds, treasury bills, etc. It makes all arrangements 

in connection with the floatation, conversion or redemption of these securities. It manages the national debt on behalf of the government.

As the Government’s financial advisor, the Central Bank advises the government on all economic, financial and monetary matters.

32. Define Reverse Repo Rate. Discuss briefly, how this instrument helps in controlling credit creation by commercial banks. 

Ans. Reverse Repo Rate is the rate of interest at which commercial banks can park their surplus funds with the Central Bank. In order to control the credit creation capacity of the commercial banks, the Central Bank may increase/decrease Reverse Repo Rate. This induces commercial banks to transfer more/less funds to the Central Bank which in turn reduces/ increases the lending capacity of the commercial banks. As a result, credit creation by commercial banks may be reduced/ increased.

33. “The Reserve Bank of India (RBI) performs the same function for the government as the commercial 

banks perform for the general public.” Discuss briefly any two such functions performed by the Central Bank for the Government of India.

Ans. The Reserve Bank of India (RBI) as the banker to the government maintains account, accepts receipts and makes payments, carries out exchange, remittance, and other banking operations. The Reserve Bank of India advances loans to the government to meet its requirements, in case of financial crisis. Thus, the Reserve Bank of India facilitates the same banking functions for the government just as the commercial banks do for the general public. (To be marked as a whole)

34. Read the following text carefully. Answer the given questions on the basis of the same and common understanding:

On 30th September 2022, the Reserve Bank of India (RBI) raised Repo Rate for the fourth time in a row. The Monetary Policy Committee (MPC) decided to raise the policy rate by 50 basis points. (1 basis point = 1 100 th of a percent). After this announcement, the new repo rate stands at 5.9%, while the reverse repo rate continues to stand at 

3.35%. Commercial banks borrow money from the Central Bank, when there is a shortage of funds. With the surge in the repo rate, borrowings by general public will become costlier. This is because, as RBI hikes its repo rate, it becomes costly for the banks to borrow short term funds from the Central Bank. As a result, the banks hike the rates at which customers borrow money from them to compensate for the hike in the repo rate. This happens because banks offer loans to retail consumers at an interest rate which is generally, directly proportional to the repo rate. The increase of 0.50 percent in repo rate will lead to a higher interest rate on loans for borrowers, implying that the Equated Monthly Instalments (EMIs) for repaying the existing loans will also increase. Source: 

https://www.businessstandard.com/article/economicpolicy/rbi-monetary policy-repo-rate-up-by 50bps

1. Define ‘Repo Rate’.

Ans. Repo rate refers to the rate at which the Central Bank lends to the commercial banks for their short-term requirements. 

2. Outline the recent change made by the Monetary Policy Committee of Reserve Bank of India in the repo rate.

Ans. The Monetary Policy Committee of Reserve Bank of India raised the repo rate by 50 basis points. 

3. "Increase in repo rate is an important tool used by Monetary Policy Committee to combat the situation of inflation in the Economy." Justify the given statement.

Ans. To deal with the situation of inflation, the Monetary Policy Committee (MPC) of Reserve Bank of India has increased the repo rate. An increase in repo rate will force the commercial banks to increase their lending rates making the credit costlier for the general public. Thereby, discouraging the borrowings. 

Consequently, Aggregate Demand will fall and thereby correcting the problem of inflation in the economy.

35. Study the following image:

(i) Identify the indicated situation. 

(ii) Explain any two steps which may be taken by RBI to correct the situation. 

Ans. (I) The above image indicates the situation of inflation. 

(iii) To combat the situation of inflation, the two steps taken by the Reserve Bank of India (RBI) may be: 

• The Government Securities are sold by the RBI in the open market. It will reduce the availability of funds with commercial banks, which in turn curtails their lending capacity. Consequently, the money supply in the economy falls. Thereby, decreasing Aggregate Demand and thus reducing inflation in the economy. 

• The increase in the Bank Rate by the RBI, leads to an increase in the lending rates by the commercial banks. This makes borrowing costlier for the general public. Thereby, discouraging them from borrowing more. As a result, Aggregate Demand in the economy falls, consequently reducing inflation.

Answer Keys

1. Ans.(c) Both Statements 1 and 2 are true

2. Ans. (b) Bank rate

3. Ans. (d) Banker’s Bank

4. Ans. (D) (iii) onlylep

5. Ans. (C) 1000, 3200, 25000, 20000

6. Ans. (a) Only (i)

7. Ans. (b) Only (ii)

8. Ans. (c) Central Bank

9. Ans. (C) Both statements 1 and 2 are true.

10. Ans. (C) It is not binding on the commercial banks.

11. Ans. (c) Central agency preparing the annual budget of the Government

12. Ans. (a) (i) and (iii)

13. Ans. (C) Both Statements 1 and 2 are true.

14. Ans. (D) 1800, 1620, 20000, 18000

15. Ans. (a) sells, decrease

16. Ans. (c) or (d)

17. Ans. (A) increasing, bank rate

18. Ans. (D) (i), (ii) and (iii)

19. Ans. (c) A store of value

20. Ans. (d) Both statements 1 and 2 are false

21. Ans. (D) Standard of deferred payments

22. Ans. (B) 40,000

23. Ans. (B) 4,000

24. Ans. (C) Money supply