money supply, banking & financial institutions section 5 MCQ Questions & Answers Detailed Explanation

Answer: (c)

The Central Bank of a country regulates money supply with the help of open market operations, changing the reserve requirements (CRR) and changing discount rate (bank rate).

Besides, banks are required to maintain liquid assets in the form of gold, cash and approved securities (margin requirements); also known as Statutory Liquidity Ratio.

In India, the Reserve Bank of India has recently been resorting more to open market operations.

Answer: (c)

The bank rate also referred to as the discount rate, is the rate of interest that the central bank charges on the loans and advances to a commercial bank. Whenever the banks have any shortage of funds they can borrow them from the central bank. Repo (Repurchase) rate is the rate at which the central bank lends short-term money to the banks against securities.

A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from the central bank becomes more expensive. It is more applicable when there is a liquidity crunch in the market.

Answer: (a)

Answer: (b)

Through ECB and Masala Bonds, the money is raised in foreign currency which is then sold in the forex market to purchase rupees which leads to rupee appreciation. Restricting FPI investments will reduce the supply of dollar and will have an opposite impact.

When we reduce imports by restricting non-essential items, it leads to reduction in demand of dollars and appreciation of rupee.

Answer: (b)

A country or its citizens may use many modes of exchange in their daily lives. History tells us that ancient humans used salt and spices as currency. But ‘Legal tender’ is the money that is recognized by the law of the land, as valid for payment of debt.

It must be accepted for discharge of debt. RBI Act 1934, Section 26 states that “Every central bank note shall be legal tender at any place in India in payment or on account for the amount expressed therein”.

Legal tender can be limited or unlimited in character. In India, coins function as limited legal tender. Therefore, 50 paise coins can be offered as legal tender for dues up to Rs. 10 and smaller coins for dues up to Rs. 1. Currency notes are unlimited legal tender and can be offered as payment for dues of any size.

As per the RBI Act 1934, all currency notes are guaranteed by the Central Government

Answer: (d)

Electoral bonds can be purchased for any value in multiples of Rs. 1,000, Rs. 10,000, Rs. 10 lakh, and Rs. 1 crore from any of the specified branches of the State Bank of India.

The purchaser will be allowed to buy electoral bonds only on due fulfilment of all the extant KYC norms and by making payment from a bank account. A citizen of India or a body incorporated in India will be eligible to purchase the electoral bond which will be an interest free instrument.

The bonds will have a life of 15 days during which they can be used to make donations to registered political parties (which they can encash through a designated bank account) that have secured not less than 1% of the votes polled in the last election to the Lok Sabha or Assembly.

At present, the donor, the quantum and the source of funds is not known. Now, with electoral bonds, the balance sheet of the donor will reflect the purchase of these bonds. The donor will know, which party he is depositing money to.

The political party will file return with the election commission as to how much money has come through electoral bonds. Now, which donor gave to which political party, that is the only thing which will not be known.

It will ensure cleaner money coming from donors, cleaner money coming to political party and ensure significant transparency against the current system of unclean money.