money supply, banking & financial institutions section 7 MCQ Questions & Answers Detailed Explanation

Answer: (b)

Accommodative Monetary Policy:

When a central bank attempts to expand the overall money supply to boost the economy when growth is slowing. This is done to encourage more spending from consumers and businesses by making money less expensive to borrow by lowering the interest rate.

A neutral monetary policy is also called the "natural" or "equilibrium" rate where the policy (repo) rate is such that neither it stimulates nor restrains economic growth.

Whenever RBI conducts its monetary policy review, it also tells the general public what will be its future stand (this is also called ‘Forward Guidance’) i.e. going forward, in which direction the policy rate may move. If it wants to move the repo rate down in future then it will keep an ‘accommodative stance’. If it expects to move the repo rate up in future then it will keep a ‘hawkish stance’. And if it wants that it should be able to move the repo rate in any direction then it keeps a ‘neutral stance’.

When RBI is changing its stance from "accommodative" to "neutral", in any monetary policy review, that means RBI is expecting that in future it may be required to change the repo (policy) rate in any direction.

When RBI is having an accommodative monetary policy stance that means in future it expects to lower the policy rate. But if it thinks that the inflation or demand in the economy is edging up then it may change its stance from accommodative to neutral so that it has the leeway to change the policy rate even in the upward direction (or maybe downward direction).

When consumer confidence in the economy is up it shows that in future the consumers will be willing to purchase more goods and services which may lead to an increase in inflation. But if consumer confidence is down then it implies that consumers will be spending less in future.

Answer: (b)

The Wholesale Price Index (WPI) is a weighted average of indices covering 676 commodities, which are traded in primary, manufacturing and fuel and power-sectors.

Answer: (d)

The GIC was formed in November 1972 consequent upon the nationalisation of the general insurance business.

The 107 private companies operating in the field were grouped together into four - National Insurance Company, United India Insurance Company, Oriental Insurance Company and New India Assurance Company, with GIC as the holding company.

Answer: (d)

Answer: (a)

Disinflation is a decrease in the rate of inflation – a slowdown in the rate of increase of the general price level of goods and services in a nation’s gross domestic product over time.

It is the opposite of reflation. Disinflation occurs when the increase in the “consumer price level” slows down from the previous period when the prices were rising. Disinflation is the reduction in the general price level in the economy but for a very short period of time.

Disinflation takes place only when an economy is suffering from a recession.

Answer: (d)

NBFCs borrow from banks and then lend. They also issue bonds in financial markets to raise money and then this money they lend at a higher interest rate. NBFCs also borrow from abroad through debt financing (called ECB).

Mutual funds also invest in NBFCs which means, NBFCs issue debt papers to mutual funds and then this money they lend.

But, the main wholesale funding sources of the NBFCs comprise mainly of:

Banks (primarily via term loans and rest through non-convertible debentures and commercial paper); and

debt mutual funds (via non-convertible debentures and commercial paper).

Debentures are long-term unsecured debt financial instruments (they are similar to bonds in functioning). Some debentures have a feature of convertibility into shares after a certain point of time. The debentures which can't be converted into shares or equities are called non-convertible debentures (or NCDs) and earn a higher interest rate.

Commercial Paper (CP) is an unsecured money market debt instrument issued in the form of a promissory note for less than one year.