money supply, banking & financial institutions section 3 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) Collecting and compilation of statistical information relating to banking and other financial sector
(b) Accepting deposits from the public
(c) Banks underwrite the securities issued by public or private organisations
(d) Bank issues the letter of credit to their customers certifying their creditability
The correct answers to the above question in:
Answer: (a)
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Question : 1
Consider the following statements:
- Currencies and coins are fiat money
- Currencies do not have intrinsic value but coins have
- Currencies and coins are legal tenders
- Cheques are legal tenders
a) (i) & (iii) only
b) (iii) & (iv) only
c) (i) only
d) (ii), (iii) & (iv) only
Answer »Answer: (a)
Currencies and coins are fiat money because they derive their value from government "fiat"/ order. If the coin is melted then it will not fetch the same value in the market and the paper of which the currency note is made does not have any value in the market.
Hence, Currency notes and coins are called fiat money and they do not have intrinsic value.
They are also called legal tenders as they cannot be refused by any citizen of the country for settlement of any kind of transaction. Cheques were drawn on savings or current accounts, however, can be refused by anyone as a mode of payment. Hence cheques are not legal tenders.
So only (i) & (iii) statements are true.
Question : 2
Consider the following statements regarding Cash Reserve Ratio (CRR):
- It helps in securing monetary stability and managing liquidity in the economy
- There is no limit on CRR without any floor or ceiling rate
a) (ii) only
b) Both (i) & (ii)
c) (i) only
d) Neither (i) nor (ii)
Answer »Answer: (b)
“In terms of Section 42(1) of the RBI Act, 1934 the Reserve Bank, having regard to the needs of securing the monetary stability in the country, prescribes the CRR for Scheduled Commercial Banks (SCBs) without any floor or ceiling rate”.
The other purpose of CRR is to manage liquidity (RBI can increase CRR to decrease liquidity in the economy) and it also ensures that a part of the bank’s deposit is with the Central Bank and is hence, safe.
As a depositor, the CRR and SLR requirements together ensure that some portion of the deposits with Indian banks remain secure, even if banks make poor lending decisions.
In absence of the CRR and SLR requirements, to make more profits banks may lend most of the deposits and if there is a sudden rush to withdraw, banks will struggle to meet the repayments to the depositors. The maximum limit for SLR is 40%.
Question : 3
Consider the following statements regarding RBI:
- RBI regulates interest rates on savings & Time deposits in commercial banks
- RBI regulates "Money Market"
a) (ii) only
b) Both (i) & (ii)
c) (i) only
d) Neither (i) nor (ii)
Answer »Answer: (a)
RBI has deregulated interest rates on term/ time deposits since Oct 1997.
RBI had deregulated interest rates on savings deposits since May 2011.
RBI regulates three categories of financial markets; money markets, government securities markets and foreign exchange markets.
Question : 4
The Non-Votable charges or ‘Charged Expenditure’ included in the Union Budget include :
- Salary and Allowances of the Presiding Officers of the houses of Parliament.
- Salary and Allowances of the Judges of the Supreme Court and High Courts.
- Salary and Allowances of the CAG.
- Pension of the retired Judges of the Supreme Court.
- Pension of the retired Judges of High Courts.
a) 1, 2 and 3
b) 1 and 2
c) 1, 2, 3 and 4
d) All of them
Answer »Answer: (d)
Question : 5
Consider the following statements regarding Open Market Operations:
- It is conducted by Commercial Banks
- It is conducted by RBI
- It is about debt securities
- It is about equity securities
a) (ii) & (iii) only
b) (ii), (iii) & (iv) only
c) (i) & (iii) only
d) All of the above
Answer »Answer: (a)
Government issues only debt securities like treasury bills, cash management bills, dated securities and state development loans.
Anybody can give a loan (debt) to the government but they cannot own government i.e. they cannot purchase government shares. The government never issues shares.
‘Government’ is different from ‘government companies’ (PSUs) which can issue shares and bonds.
Open Market Operations is conducted by RBI where it buys or sells govt. bonds. (debt securities) So, (ii) & (iii) statements are true.
Question : 6
To know whether the rich are getting richer and the poor getting poorer, it is necessary to compare
a) the wholesale price index over different periods of time for different regions
b) the distribution of income of different sets of income recipients at a point of time
c) the distribution of income of an idential set of income recipients in different period of time
d) the availability of foodgrains among two sets of people, one rich and the other poor, over different period of time
Answer »Answer: (c)
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