money supply, banking & financial institutions section 7 MCQ Questions & Answers Detailed Explanation
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The following question based on Money Supply, Banking and Financial Institutions topic of indian economy mcq
(a) Purchase and sale of Government securities by RBI
(b) Deposit mobilisation
(c) Borrowings by Scheduled banks from RBI
(d) Lending by Commercial banks to industry
The correct answers to the above question in:
Answer: (a)
Open Market Operation (OMO) refers to the buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. A central bank uses OMO as the primary means of implementing monetary policy.
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Read more money and supply banking financial institutions Based Indian Economy Questions and Answers
Question : 1
Which of the following are the reasons that make a moderate level of inflation good for the economy?
- It increases consumption levels
- It keeps businesses profitable
- It induces people to save more
a) (i) & (ii) only
b) (iii) only
c) (ii) only
d) All of the above
Answer »Answer: (d)
In the case of low and moderate inflation, people are willing to save money and put in bank deposits because banks offer deposit rates higher than inflation rates.
People are willing to sign long term contracts (linked with inflation index) in money terms because they are confident that the relative prices of goods and services they buy and sell will not get too far out of line and it helps in promoting business.
As the prices are increasing, people are also willing to consume because if they postpone their consumption, they will have to spend more on consumption at a future date.
Question : 2
The basic aim of Lead Bank Scheme is that:
a) big banks should try to open offices in each district
b) individual banks should adopt particular districts for intensive development
c) there should be stiff competition among the various nationalized banks
d) all the banks should make intensive efforts to mobilize deposits
Answer »Answer: (b)
The basic aim of Lead Bank scheme is that the bank should adopt particular districts for intensive development by offering loans and banking services.
Question : 3
If the 'Real Effective Exchange Rate' of a country appreciates then which of the following will be true:
a) Export competitiveness will reduce
b) Imports will decrease
c) Exports will become more competitive
d) Will have no impact on trade
Answer »Answer: (a)
Suppose Nominal Exchange Rate is $1 = Rs.60
Burger Price - India : Rs. 30, US : $1 Whether India will export burgers to US or not depends on three parameters/prices
Price of Burger in US (directly proportional, i.e. if it increases, exports to US will increase)
Price of Burger in India (indirectly proportional, i.e. if it increases exports to the US $ will decrease)
Nominal Exchange Rate (directly proportional, i.e. if it increases exports to US $ will increase)
And all the three parameters are captured in Real Exchange Rate
Real Exchange Rate = $\text"Price in US X Nominal Exchange Rate"/\text"Price in India"$
= ${1 X 60}/30$ = 2
Till Real Exchange Rate > 1, India will continue to export its burgers to the US. If Real Exchange Rate becomes equal to 1, then export & import will stop. If Real Exchange Rate is < 1, then the US will start exporting its burgers to India. So Real Exchange Rate determines export competitiveness between two countries.
But if India wants to measure its export competitiveness with all its trading partners then it calculates the Real Effective Exchange Rate which is a weighted average (weights being the shares in foreign trade with respective countries) of the Real Exchange Rates of its different trading partners.
If the real effective exchange rate appreciates that means it moves from 2 to 1 (in the example above) which means the export competitiveness of Indian products will start reducing.
Question : 4
According to the Chakravarthy Committee, one of the principal causes affecting price stability in India is:
a) existence of black money
b) India’s precarious balance of payment position
c) violent fluctuation in agricultural production
d) fiscal deficit
Answer »Answer: (c)
Question : 5
Consider the following statements:
- Debt overhang refers to a debt burden so large that an entity cannot take on additional debt to finance future projects.
- Debt trap is a situation in which it becomes difficult or impossible to repay the debt
a) (ii) only
b) Both (i) & (ii)
c) (i) only
d) Neither (i) nor (ii)
Answer »Answer: (b)
Question : 6
Which of the following statements are true regarding the Monetary Policy Committee (MPC)?
- It has the authority to decide repo rate, CRR, SLR
- Its decision is binding on RBI
a) (ii) only
b) Both (i) & (ii)
c) (i) only
d) Neither (i) nor (ii)
Answer »Answer: (a)
MPC has the authority to decide only the repo rate and not CRR & SLR or other things. Its decision of repo rate is binding on RBI.
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