money supply, banking & financial institutions section 1 MCQ Questions & Answers Detailed Explanation

Answer: (b)

Answer: (d)

When foreign investors come to India, they bring dollars and this dollar they sell in forex market and demand rupees which results in increase in demand of rupee and rupee appreciates.

When exports increase, we earn more dollars from the foreign market and this dollar we sell in the forex market to purchase rupees which results in increase in demand of rupees and rupee appreciates.

When the interest rate in India increases, more foreign investors come to India to invest in fixed interest rate instruments, which results in rupee appreciation.

So, none of the statements are true.

Answer: (a)

Answer: (d)

Monetary transmission is the pass-through of RBI’s monetary policy decisions to the economy at large in terms of interest rates, asset prices, or other economic parameters etc. And monetary transmission may result in any direction i.e. interest rates or asset prices moving up or down.

Answer: (d)

When government deviates from the fiscal deficit target and spends more, it results in higher inflation. So even if RBI is trying to bring down the inflation, deviation in the fiscal deficit target will create issues in RBI achieving the inflation target.

To target inflation, RBI changes the repo rate which ultimately increases/decreases the interest rate, resulting in a change in the money supply. Through a change in money supply, RBI tries to achieve its inflation target. So, hindrances in monetary policy transmission may create issues in RBI achieving the inflation target.

In case of supply-side challenges like drought, floods or governance issues, just reducing the money supply may not result in bringing down the prices of commodities.

Answer: (a)

The bank rate also referred to as the discount rate, is the rate of interest that the central bank charges on the loans and advances to a commercial bank. Repo (Repurchase) rate is the rate at which the central bank lends short-term money to the banks against securities.

A reduction in the repo rate will help banks to get money at a cheaper rate. The reverse repo rate is the rate at which the banks park surplus funds with the reserve bank, while the repo rate is the rate at which the banks borrow from the central bank.