money supply, banking & financial institutions section 1 MCQ Questions & Answers Detailed Explanation
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The following question based on Money Supply, Banking and Financial Institutions topic of indian economy mcq
(a) SLR, CRR and Priority Sector Financing
(b) CRR, Priority Sector Financing and Financing to capital goods sector
(c) SLR and Financing to Capital goods sector
(d) SLR and CRR
The correct answers to the above question in:
Answer: (a)
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Question : 1
_______ are conducted by the RBI by selling and buying government securities from banks.
- Bank rate
- Cash reserve ratio
- Open market operations
- Statutory Liquidity Ratio
a) 2 only
b) 1 only
c) 3 only
d) 4 only
Answer »Answer: (c)
Open Market Operations: These are conducted by the RBI by selling and buying government securities from banks.
Question : 2
Which of the following are part of “Seigniorage”?
- Interest income on reserves kept with RBI for money creation
- Interest accruing from bank balances kept the central bank as interest-free balances in order to meet the reserve requirements
- Inflation tax
a) (ii) only
b) (i) & (ii) only
c) (i) only
d) All of the above
Answer »Answer: (d)
Seigniorage refers to the income from money creation. It is a way for governments to generate revenue without levying conventional taxes. Seigniorage is the profit that accrues to the central banks (which then may be transferred to the central government) in the following ways:
While issuing currency, the reserves/backup that the RBI keeps with itself, these reserves give RBI interest Income on the total amount of currency in circulation (minus cost of printing currency)
Interest accruing from bank balances with central banks arises from funds banks have to hold with the central banks to meet their reserve requirements, either as interest-free balances (CRR) or at below-market interest rates. the inflation tax concept which is measured as the product of the inflation rate and
the monetary base. (Because of inflation, the currency note that the public is holding losses value which reduces the liability of RBI in real terms)
Question : 3
Which of the following statements is correct?
a) An undervalued currency will boost exports from the country
b) Overvaluation/ undervaluation of currency does not impact exports
c) An overvalued currency will boost exports from the country
d) None of the above
Answer »Answer: (a)
Suppose (Nominal) exchange rate is $1 = Rs. 60
Now if an Indian exporter exported a particular commodity (1 unit) in the international market whose price is $8,
then he will get $8 and after conversion in India, he will get ultimately Rs. 480.
But if the rupee is undervalued (means less valued) i.e. USD 1 = Rs. 64 then he can sell his product in the international market at a lesser price of $7.5 and can earn the same Rs. 480 after conversion.
(When a country devalues its currency, then exporters are able to sell their product in the international market at a lesser price without compromising their earnings.)
So, we also say that exporters become more competitive.
Question : 4
Consider the following statement:
- As per recommendations of the Narasimham Committee, it has been decided that credit facilities granted by banks will be classified into performing and non-performing assets (NPA)
- NPA is a loan which is in default for more than nine months.
a) 2 only
b) 1 only
c) 1 and 2
d) None of the Above
Answer »Answer: (a)
NPA is a loan (whether term loan, cash credit, overdraft, or bills discounted), which is in default for more than six months.
Question : 5
Consider the following statements:
- Banks require prior approval of RBI for appointment of directors
- Management of Public Sector banks is under dual regulation of Central Govt. & RBI
a) (ii) only
b) Both (i) & (ii)
c) (i) only
d) Neither (i) nor (ii)
Answer »Answer: (b)
RBI issues various guidelines for directors of banks and also has powers to appoint additional directors on the board of a banking company. Banks need prior approval of RBI for appointment/termination of Chairman, Directors and CEO.
RBI in consultation with Central Govt. can supersede the Board of Directors of Banks. Public Sector Banks (PSBs) are under dual regulation of Central Govt. and RBI. RBI’s powers are curtailed regarding PSBs, where RBI cannot remove directors and management, cannot supersede banks board and does not have the power to force a merger or trigger liquidation.
A license is required from RBI to commence banking operations, opening of new bank branches and closing of branches or change in the location of existing branches. RBI regulates mergers, amalgamation and winding up of banks. (For shifting, merger and closure of urban branches, now no approval is required).
Question : 6
Which among the following is not Tier I Capital?
a) Paid up Capital
b) Revaluation Reserves
c) Statutory Reserves
d) Investment Fluctuation Reserves
Answer »Answer: (b)
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