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) A currency drain is an export of the domestic currency
(b) A currency drain is the currency holding by a parallel economy
(c) A currency drain is an increase in currency held outside the banks.
(d) None of these
The correct answers to the above question in:
Answer: (c)
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Read more money and supply banking financial institutions Based Indian Economy Questions and Answers
Question : 1
Which among the following is the only correct statement?
a) Money market meets long term financing needs
b) Ways and means advances given by RBI are nowhere related to State’s revenue
c) Recession in industrial sector in India is normally due to fall in exports
d) Exchange rate is fixed by RBI
Answer »Answer: (b)
Question : 2
Number of times a unit of money changes hands in the course of a year is called
a) Purchasing power of money
b) Value of money
c) Velocity of money
d) Supply of money
Answer »Answer: (c)
Question : 3
The rise in prices of goods and services in an economy may be caused due to:
- Increase in money supply
- Increase in government expenditure
- RBI purchasing government securities from the public
- Increase in wages
a) (i), (ii) & (iii) only
b) (i), (ii), & (iv) only
c) (i) & (ii) only
d) All of the above
Answer »Answer: (d)
One of the reasons of rising in the prices of goods and services is due to increase in the money supply. An increase in money supply can be caused to the government increasing the expenditure or the government increasing the salaries. When RBI purchases government security from the public it pays money to the public and ultimately increases the money supply.
So, all the statements are true.
Question : 4
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 : 5
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 : 6
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.
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