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
- The rupee-dollar rate depends on market forces of demand & supply
- RBI regulates the Rupee dollar rate
- RBI intervenes in the forex market
- RBI regulates the forex market
(a) (i) & (iii) only
(b) (i), (iii) & (iv) only
(c) (i) only
(d) (ii) & (iii)
The correct answers to the above question in:
Answer: (b)
The rate of rupee-dollar is determined in the forex market based on market forces of demand and supply. When the rupee becomes highly volatile, then RBI intervenes in the forex market, to contain the volatility.
But RBI does not regulate or fix the rupee-dollar rate. This is called ‘Managed Float’ or ‘Dirt Float’.
RBI regulates the Forex Market, Money Market and Govt. securities Market.
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Question : 1
Consider the following actions which the government can take
- Devaluing the domestic currency.
- Reduction in the export subsidy.
- Adopting suitable policies which attract greater FDI and more funds from FIIS.
a) 2 and 3
b) 1 and 3
c) Only 3
d) 1 and 2
Answer »Answer: (b)
Question : 2
Which of the following investors/ agencies can purchase government of India securities/bonds?
- Reserve Bank of India
- Portfolio Investors
- Financial Institution
- Individuals
a) (i) & (iii) only
b) (iii) only
c) (i) only
d) All of the above
Answer »Answer: (d)
Question : 3
Debentures and Equity differ in?
a) Debentures are bonds confirming that money has been borrowed; equity is a shareholder’s voting rights in proportion to his shareholding
b) Equity shares have greater risk compared to debentures which have fixed interest on the amount paid.
c) An equity shareholder cannot withdraw his investment but debenture holder can withdraw his money.
d) Both have the right to vote irrespective of the size of their holdings. Debentures are of lower value than equity
Answer »Answer: (a)
Question : 4
Which one of the following statements is not correct?
a) RBI is the banker of the Central and State Government
b) RBI was established in 1949
c) RBI is the custodian of the country’s Foreign Exchange Reserve
d) RBI is the Central Bank of the country
Answer »Answer: (b)
Question : 5
Which of the following will be the impact of rupee depreciation?
- Exports will become more competitive
- Exporters will fetch more dollars for the same amount of goods exported
- Demand for domestic goods and services will increase
a) (ii) only
b) (i) & (iii) only
c) (i) only
d) All of the above
Answer »Answer: (b)
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 depreciated i.e. $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 and demand for domestic goods and services increases as the price gets reduced.
So, exporters will not earn more dollars when the rupee depreciates. He will still get the same dollars or if he reduces the price, then he will get fewer dollars per unit of goods sold.
So, (ii) the statement is false.
Question : 6
In a period of inflation and price rise the supply of money remains
a) decreases
b) increases or decreases proportionately.
c) the same
d) increases
Answer »Answer: (d)
The money supply is the total amount of monetary assets available in an economy at a specific time. The relation between money and prices is historically associated with the quantity theory of money.
There is strong empirical evidence of a direct relation between long-term price inflation and money-supply growth, at least for rapid increases in the amount of money in the economy.
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