money supply, banking & financial institutions section 2 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) Scarce currency
(b) Surplus currency
(c) Soft currency
(d) Hard currency
The correct answers to the above question in:
Answer: (c)
Soft currency is a currency with a value that fluctuates as a result of the country's political or economic uncertainty which may be due to the balance of payments problem.
Currencies from most developing countries are considered to be soft currencies.
Often, governments from these developing countries will set unrealistically high exchange rates, pegging their currencies to a currency such as the U.S. dollar
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Read more money and supply banking financial institutions Based Indian Economy Questions and Answers
Question : 1
Which of the following were the reasons for the recent NBFC crisis in the economy?
- Relying on short term financing to fund long-term investments
- Asset liability mismatch (ALM)
- Rollover risk of commercial papers
a) (i), (ii) only
b) (ii), (iii) only
c) (i) only
d) All of the above
Answer »Answer: (d)
NBFCs rely on short-term financing like commercial papers to fund long-term investments (long term loans to businesses). So, the tenure of liability (the commercial papers issued by NBFCs) is short and the tenure of assets (loans given by NBFCs) is long. This is called Asset Liability Mismatch (ALM).
So, NBFCs are required to refinance these commercial papers at short frequencies of a few months. The frequent repricing of loans/advances (as they need to be raised again and again and interest rate keeps on changing in the market) exposes NBFCs to the risk of facing higher financing costs, and in the worst case, credit rationing. Such refinancing risks are referred to as rollover risks.
Credit rationing is the limiting by lenders of the supply of additional credit to borrowers who demand funds, even if the latter are willing to pay higher interest rates.
Question : 2
Which of the following are supply-side factor/s responsible for inflation?
- Increase in exports
- Increase in government expenditure
- Increase in credit creation
a) (ii) & (iii) only
b) (i) & (iii) only
c) (i) only
d) (iii) only
Answer »Answer: (c)
A supply shock is an unexpected event that suddenly changes the supply of a product or commodity, resulting in an unforeseen change in price. Supply shocks can be negative, resulting in a decreased supply, or positive, yielding an increased supply; however, they're often negative.
A supply shock inflation is caused because of the problem (negative supply shock) in the supply of goods and services rather than a change in demand.
If the exports from India increase because foreigners purchased more Indian products then it may result in a shortage in supply of that product in the domestic economy resulting in supply shock inflation.
Because of increased government expenditure, more money reaches the public resulting in increased demand and hence demand-pull inflation.
If there is more money/credit creation in the economy then it results in higher demand in the economy resulting in demand-pull inflation.
Question : 3
Consider the following statements regarding “State Development Loans”
- It is a Government security
- RBI manages the public debt of states
- It can be used under SLR by banks
a) (i) & (ii) only
b) (i) & (iii) only
c) (ii) only
d) All of the above
Answer »Answer: (d)
A Government Security (G-Sec) is a tradeable instrument issued by the Central Government or the State Governments. (G-Secs are issued through auctions conducted by RBI.
Auctions are conducted on the electronic platform called the E-Kuber, the Core Banking Solution (CBS) platform of RBI). G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments. (Govt. issues only debt securities). There are four kinds of government securities.
Government Securities (G-Sec)
- Treasury Bills
- Cash Management Bills
- Dated Securities
- State Dev. Loans
SDLs are allowed to be kept under SLR by banks. SDLs have a maturity of more than one year. In terms of Sec. 21A (1) (b) of the Reserve Bank of India Act, 1934, the RBI may, by agreement with any State Government undertake the management of the public debt of that State.
Accordingly, the RBI has entered into agreements with 29 State Governments and one Union Territory (UT of Puducherry) for management of their public debt.
Question : 4
Monetary policy is implemented by ..... in India.
a) The Parliament
b) Reserve Bank of India
c) Planning Commission
d) The Ministry of Finance
Answer »Answer: (b)
Question : 5
It is said that, in order to control inflation, foreign inflow needs to be sterlised. Sterlisation here refers to:
a) ensuring that black money is accounted.
b) ensuring that counterfeit currency does not enter circulation
c) compliance with import-export regulations
d) withdrawing equivalent local currency to maintain a desirable rate of exchange
Answer »Answer: (d)
Question : 6
Consider the following statement:
- Bombay Stock Exchange (BSE) is India’s oldest stock exchange
- It formally came into being in 1888
- It was a regional exchange till 2002 when it became a national exchange
a) 2 only
b) 1 only
c) 3 only
d) None of the Above
Answer »Answer: (c)
Bombay Stock Exchange (BSE) India’s oldest stock exchange formally came into being in 1887 and was a regional exchange till 2002 when it became a national exchange.
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