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

Answer: (b)

Certificate of Deposit (CD) and Commercial Paper (CP) markets were introduced by Reserve Bank of India in March 1989 in order to widen the range of money market instruments and give investors greater flexibility in the deployment of their shortterm surplus funds.

Answer: (c)

GDP (Output) is the final value of goods and services produced in the economy. But there are a lot of transactions that happen in the economy for intermediate goods, so the value of transactions is higher than the value of final output in the economy.

For example, suppose, I purchased Rs. 30 of input to produce Rs. 100 of the final output, which I sold in the market. GDP will be Rs. 100, while the value of transactions in the economy will be Rs. 130.

Since money keeps on moving between different hands, the same money is used for transacting again and again (also referred to as the velocity of circulation), so the money required for doing transactions will be less than the total value of transactions in the economy.

As of 13th March 2020, Money Supply in the economy was Rs. 165 lakh crores. While GDP of 2019-20 is expected to be Rs. 204.4 lakh crore. And the value of transactions is much more than the GDP.

Answer: (c)

Devaluation means the official lowering of the value of a country’s currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency.

Devaluation causes a country’s exports to become less expensive, making them more competitive in the global market. This, in turn, means that imports are more expensive, making domestic consumers less likely to purchase them.

Answer: (b)

In international transactions, generally dollars and some other stable/hard currencies like Euro, Pound, Yen etc. are used/accepted. So, if there is a problem of international liquidity then it means non-availability of these hard currencies.

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.

Answer: (c)