money supply, banking & financial institutions section 6 MCQ Questions & Answers Detailed Explanation

Answer: (b)

Answer: (d)

When the output in the economy is high, that means factories are working at full potential and employing more labour.

So, (i) the statement is not true.

When the unemployment in the economy is high, people have less money to purchase goods and services i.e. the demand in the economy decreases which leads to a decrease in prices.

So, (ii) statement is also not true.

Answer: (d)

Base Rate was introduced in July 2010 replacing the Benchmark Prime Lending Rate (BPLR) system. Base Rate is the minimum rate below which Scheduled Commercial Banks cannot lend. RBI publishes guidelines for the calculation of Base Rate and every bank calculates its own base rate.

Base rate calculation methodology was based on various factors like:

1. (Average) Cost of deposits/funds (the interest rate that the bank offers to its depositors)
2. Cost of maintaining CRR and SLR (if the banks are required to keep higher reserves like CRR and SLR, then they will be able to lend less money & will have to charge higher interest rates)
3. Operational Costs of Banks
4. Return on Net worth (investment)

From 1st April 2016, RBI has introduced a new methodology for calculation of the Base Rates based on marginal cost of funds rather than the average cost of funds. This new methodology is called Marginal Cost of Funds based Lending Rate (MCLR)

MCLR calculation methodology will be based on the following factors: -

1. The marginal cost of deposits/funds
2. Cost of maintaining CRR and SLR
3. Operational Costs of Banks
4. Tenor Premium (based on the time period for which the loan is given)

The basic difference between the previous Base Rate and the new MCLR based rate is the change from average to marginal.

(When RBI reduces the repo rate, generally banks reduce their deposit rate. Earlier the calculation of lending rate was based on the average cost of deposits to the banks.

So, due to reduction in repo rate and further reduction of deposit rates by banks, the average cost of deposits of the banks did not reduce immediately (it may reduce in future when new depositors will deposit money at lower deposit rate) because still, banks need to pay the higher deposit rate to all its previous depositors.

In the new method, banks will calculate the lending rate based on the marginal cost of deposits i.e. the new deposit rate. So, when RBI will reduce the repo rate and banks reduce the deposit rate, the marginal cost of deposits will get reduced and the banks will have to generally reduce the lending rates). This will help in better monetary policy transmission.

The banks shall review and publish their MCLR every month.

Answer: (b)

The term “Strategic Disinvestment” means the sale of a substantial portion of the Government share-holding of a central public sector enterprise (CPSE) of up to 50%, or such higher percentage (to the strategic partner) along with transfer of management control.

(It has to be kept in mind that even by selling less than 50% stake to the strategic partner, the government can transfer the management control to the strategic partner, it is legally possible.)

In Strategic Disinvestment, management control must be transferred to the private strategic partner. Strategic disinvestment is a way of privatisation

Answer: (b)

Answer: (d)

Gresham’s law is an economic principle that states:

“When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation.”

It is commonly stated as: “Bad money drives out good.”

More exactly, if coins containing metal of different value have the same value as legal tender, the coins composed of the cheaper metal will be used for payment, while those made of more expensive metal will be hoarded or exported and thus tend to disappear from circulation.