money supply, banking & financial institutions section 4 MCQ Questions & Answers Detailed Explanation
MOST IMPORTANT indian economy mcq - 12 EXERCISES
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The following question based on Money Supply, Banking and Financial Institutions topic of indian economy mcq
(a) A short-term capital provided to industries
(b) Funds provided to industries at times of incurring losses
(c) A long-term start-up capital provided to new entrepreneurs
(d) Funds provided for replacement and renovation of industries
The correct answers to the above question in:
Answer: (c)
Venture capital (VC) is a long term financial capital provided to early-stage, high-potential, start up companies or new companies.
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Read more money and supply banking financial institutions Based Indian Economy Questions and Answers
Question : 1
An outward shift in the demand for money, other things being equal should lead to:
a) A lower interest rate but the same quantity of money
b) A higher quantity of money but lower interest rates
c) A higher interest rate but the same quantity of money
d) A higher quantity of money but the same interest rate
Answer »Answer: (c)
An outward shift in the demand for money, other things being equal should lead to a higher interest rate but the same quantity of money. The supply will not increase but with more demand the price (the interest rate) should increase.
Question : 2
Which one of the following is not a function of the central bank in an economy ?
a) Controlling government spending
b) Acting as a banker’s bank
c) Dealing with foreign exchange
d) Controlling monetary policy
Answer »Answer: (a)
A central bank, reserve bank, or monetary authority is a public institution that manages a state’s currency, money supply, and interest rates. Central banks also usually oversee the commercial banking system of their respective countries.
In contrast to a commercial bank, a central bank possesses a monopoly on increasing the nation’s monetary base, and usually also prints the national currency, which usually serves as the nation’s legal tender.
The primary function of a central bank is to manage the nation’s money supply (monetary policy), through active duties such as managing interest rates, setting the reserve requirement, and acting as a lender of last resort to the banking sector during times of bank insolvency or financial crisis.
Central banks usually also have supervisory powers, intended to prevent bank runs and to reduce the risk that commercial banks and other financial institutions engage in reckless or fraudulent behaviour.
Question : 3
Consider the following statements:
- The repo rate is the rate at which other banks borrow from the Reserve Bank of India.
- A value of 1 for Gini Coefficient in a country implies that there is perfectly equal income for everyone in its population.
a) 2 only
b) 1 only
c) Both 1 and 2
d) Neither 1 nor 2
Answer »Answer: (b)
Repo Rate is the rate at which commercial banks borrow funds from RBI. A reduction in the repo rate will help banks to get money from the central bank at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive.
A value of (0) for the Gini Coefficient in a country implies that there is perfect equality in the system. If the value is 1 then there is complete inequality in the country.
Question : 4
If an economy is in “Liquidity Trap”, then which of the following statements shall be true:
- The interest rate in the market will be very low/zero
- People and businesses both will hold on to their cash and don’t spend
- People will be willing to spend
- Demand Deposits of banks increases
a) (ii) & (iv) only
b) (i), (ii) & (iv) only
c) (i) only
d) (i) & (iv) only
Answer »Answer: (b)
A liquidity trap is a situation where the Central Bank wants to increase the money supply in the economy in case of recession but fails to lower the interest rate as the interest rates (repo rate and bank deposit rates) almost reaches zero. This makes the monetary policy ineffective.
In such a situation people would like to hold on to their cash (maybe in savings deposits in banks that is also called cash and not the fixed deposit) and may not spend money as there is almost zero or negative inflation.
(Actually, people are not willing to spend and demand in the economy declines, that is why the economy enters into a liquidity trap).
So, (i), (ii) & (iv) statements are true.
Question : 5
When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50 basis points, which of the following is likely to happen?
a) Foreign Institutional Investors may bring more capital into our country
b) India’s GDP growth rate increases drastically
c) Scheduled Commercial Banks may cut their lending rates
d) It may drastically reduce the liquidity to the banking system
Answer »Answer: (c)
When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50 basis points; the Scheduled Commercial Banks may cut their lending rates.
Question : 6
When the exchange rate changes from 1 $ = 60 to 1 $ = 58, it means
- Rupee value has appreciated
- Dollar value has depreciated
- Rupee value has depreciated
- Dollar value has appreciated
a) 2 and 3 are correct
b) 2 and 4 are correct
c) 1 and 4 are correct
d) 1 and 2 are correct
Answer »Answer: (d)
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