money supply, banking & financial institutions section 8 MCQ Questions & Answers Detailed Explanation

Answer: (d)

When the economy is facing deflation, that means prices are decreasing. In such a situation, whatever I can buy today in Rs. 100, the same Rs. 100 is able to purchase more in the next year.

This leads to postponement of purchase decisions by the people and the demand in the economy decreases. When the demand decreases, companies defer their production and investment decisions which lead to an increase in unemployment.

So, all the statements are correct.

Answer: (d)

The amount of money supply in the economy impacts prices i.e. when money supply increases inflation increases and when money supply decreases inflation decreases.

Money supply impacts GDP also, as more money is required to increase the output.

When the demand for money increases, rate of interest goes up in the economy. So, when money supply increases then rate of interest may cool/decrease in the economy and vice versa.

So, all statements are correct.

Answer: (b)

Answer: (d)

Additional Tier 1 Bonds (AT-1) bonds have several unusual features lurking in their fine print, which make them very different from normal bonds.

One, these bonds are perpetual and carry no maturity date. Instead, they carry call options that allow banks to redeem them after five or 10 years. But banks are not obliged to use this call (redeem) option and can opt to pay only interest on these bonds for eternity.

Two, banks issuing AT-1 bonds can skip interest payments for a particular year or even reduce the bonds’ face value without getting into hot water with their investors, provided their capital ratios fall below certain threshold levels. These thresholds are specified in their offer terms.

Three, if the RBI feels that a bank is tottering on the brink (called point of non-viability) and needs a rescue, it can simply ask the bank to cancel its outstanding

AT-1 bonds without consulting its investors. AT-1 bonds are risky but people invest as it offers a higher interest rate. In case of a Yes Bank crisis, AT-1 bonds worth Rs. 8415 were written down in March 2020. (This means now investors will not get any interest or principal in future).

Under Basel III norms, banks need to have an 11.5% capital requirement in which 9.5% in Tier 1 capital and 2% is Tier 2 capital. Out of 9.5% Tier 1 capital, Additional Tier 1 capital (AT-1 bonds) can be 1.5%.

Answer: (d)

Crowd funding or marketplace financing refers to a method of funding a project or new venture through small amounts of money raised from a large number of people, typically through a portal (internet/social media) acting as an intermediary.

Crowd funding makes use of the easy accessibility of vast networks of people through social media and crowdfunding websites to bring investors and entrepreneurs together.

Crowd funding has the potential to increase entrepreneurship by expanding the pool of investors from whom funds can be raised beyond the traditional circle of owners.

Answer: (b)