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

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: (d)

The monetary policy framework in India, as it is today, has evolved over the years.

A new “Monetary Policy Framework” Agreement was signed between the Government of India and RBI in Feb 2015. As per the new monetary policy framework agreement, the following are the important points:

The objective of the monetary policy is

1. to primarily maintain price stability, while keeping in mind the objective of growth
2. The monetary policy framework is operated by RBI
3. The inflation target is 4% with a band of +/- 2%
4. The inflation target is decided by the Government of India in consultation with RBI
5. The inflation is the “Consumer Price Index (CPI) – Combined” published by the Ministry of Statistics and Programme Implementation (NSO)
6. The RBI shall be seen to have failed to meet the Target if inflation is more than 6% or less than 2% for three consecutive quarters
7. In case RBI fails to meet the target, it will have to give a written report to the Government of India explaining the reasons for failure, remedial actions to be taken and an estimated time period within which the Target would be achieved

Answer: (c)

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