money supply, banking & financial institutions section 4 MCQ Questions & Answers Detailed Explanation

Answer: (b)

The reasons for deflation in the economy are:

1. When the Government withdraws money from circulation.
2. When Government imposes heavy direct taxes or takes heavy loans from the public (voluntary or compulsory or both).
3. When the Central Bank sells the securities in the open market (which reduces the quantity of money in circulation).
4. When Central Bank controls the credit money and adopts various measures such as an increase in CRR, credit rationing and direct action.
5. When the Central Bank increases the Bank rate (which curtails the quantity of credit in the economy).
6. When a state of over-production (excess supply over demand) takes place.

Answer: (d)

Capital market deals with long-term finance (more than 365 days) funds. It includes all facilities and institutional arrangements available for borrowing and lending of term funds (including medium-term).

The difference between the money market and capital market is not so much in the institutions involved as in their term of borrowing or lending. Long-term funds are raised either by borrowing from certain institutions or by issuing securities.

Answer: (c)

Answer: (d)

In India, any money you send overseas is subject to controls, as the government is wary of excessive outflows of foreign exchange draining its reserves and destabilising the rupee. But there has been an effort to gradually liberalise these controls.

The window that was opened up in 2004 for individuals to remit/send money across the border, without seeking specific approvals, was called the Liberalised Remittance Scheme (LRS).

Under LRS, all resident individuals (in India) can freely remit/send $250,000 overseas every financial year for a permissible set of current or capital account transactions.

Remittances are permitted for overseas education, travel, medical treatment and purchase of shares and property, apart from maintenance of relatives living abroad, gifting and donations. Individuals can also open, maintain and hold foreign currency accounts with overseas banks for carrying out transactions.

(Now anyone can say that “Rupee is fully convertible at current account” then what is this limit of $2,50,000? See, under this scheme, you can freely send the money abroad without specific government approvals, that is why the name is liberalized. But if you want to send more under current account then it may be possible but you may have to take specific approval of government which is not under this scheme)

However, the rules do not allow trading in “foreign exchange” (for example Dollar and Pound trading). Sending money to certain countries and entities is also barred. Under LRS, people can’t send money to countries identified as 'non-cooperative' by the Financial Action Task Force. Remittances are also prohibited to entities identified as posing terrorist risks.

The LRS represents India’s baby steps towards dismantling controls on foreign exchange movements in and out of the country. It has allowed large numbers of Indians to study abroad and diversify their portfolios from purely desi stocks and property.

Ideally speaking, capital controls in any form have no place in a liberalised economy. But for India, which is heavily dependent on imports of critical goods and perpetually spends more foreign exchange than it earns, it is difficult to free up remittances because of the havoc this can wreak on exchange rates.

The LRS gives you the freedom to put your money to work anywhere in the world. Until India is ready to free all capital controls, the LRS remains the most viable way for individuals to legally remit money overseas.

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.

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.