money supply, banking & financial institutions section 8 MCQ Questions & Answers Detailed Explanation
MOST IMPORTANT indian economy mcq - 12 EXERCISES
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The following question based on Money Supply, Banking and Financial Institutions topic of indian economy mcq
- Nationalisation of Banks.
- Formation of Regional Rural Banks.
- Adoption of villages by Banks Branches.
(a) 2 and 3
(b) 1, 2 and 3
(c) Only 3
(d) 1 and 2
The correct answers to the above question in:
Answer: (b)
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Read more money and supply banking financial institutions Based Indian Economy Questions and Answers
Question : 1
Which of the following statements are true regarding "Domestic Systemically Important Banks (DSIB)":
- These are also called "too big to fail"
- They need to meet additional capital requirement
- The list of DSIB should be declared annually by RBI
- The list of DSIB is declared by the Ministry of Finance
a) (ii) & (iii) only
b) (ii) & (iv) only
c) (i) & (ii) only
d) (i), (ii) & (iii) only
Answer »Answer: (d)
Some banks, due to their size, cross-jurisdictional activities, complexity, lack of substitutability and interconnectedness, become systemically important. The disorderly failure of these banks has the potential to cause significant disruption to the essential services they provide to the banking system, and in turn, to the overall economic activity.
Therefore, the continued functioning of Systemically Important Banks (SIBs) is critical for the uninterrupted availability of essential banking services to the real economy.
All the banks under D-SIB are subject to additional capital requirements. Banks whose assets exceed 2% of GDP are considered part of this group.
SIBs are perceived as banks that are ‘Too Big To Fail (TBTF)’. This perception of TBTF creates an expectation of government support for these banks at the time of distress. Due to this perception, these banks enjoy certain advantages in the funding markets.
However, the perceived expectation of government support amplifies risk-taking, reduces market discipline, creates competitive distortions, and increases the probability of distress in the future. These considerations require that SIBs should be subjected to additional policy measures to deal with the systemic risks and moral hazard issues posed by them.
The concept of D-SIB emerged after the global financial crisis of 2008. As per the framework, from 2015, every August, RBI has to disclose names of banks designated as D-SIB.
Question : 2
Consider the following statements:
- In Minimum Reserve System, RBI had to keep a minimum reserve of Gold worth ` 115 Crores and rest in Indian Rupees.
- The Minimum Requirement of Foreign Securities was diluted when Minimum Reserve System was launched.
a) Only 2 is correct
b) Only 1 is correct
c) Both of them are correct
d) Both of them are incorrect
Answer »Answer: (c)
Question : 3
In India, the interest rate on savings accounts in all the nationalised commercial banks is fixed by
a) Union Finance Commission
b) Banks itself
c) Indian Bank’s Association
d) Union Ministry of Finance
Answer »Answer: (b)
Question : 4
The amount of Money Supply in the economy affects the following macroeconomic variables:
a) Price level
b) Output
c) Rate of Interest
d) All of the above
Answer »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.
Question : 5
Consider the following statements regarding an economy facing deflation:
- Companies defer their investments
- People defer their expenditures
- Demand decreases
- Unemployment increases
a) (iii) only
b) (iii) & (iv) only
c) (i) & (ii) only
d) All of the above
Answer »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.
Question : 6
Consider the following statements with regard to Statutory Liquidity Ratio (SLR) :
- To meet SLR, Commercial banks can use cash only.
- SLR is maintained by the banks with themselves.
- SLR restricts the banks leverage in pumping more money into the economy.
a) 1 and 3
b) 1, 2 and 3
c) 2 and 3
d) only 2
Answer »Answer: (c)
SLR used by bankers indicates the minimum percentage of deposits that the banks have to maintain in the form of gold, cash or other approved securities.
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