money supply, banking & financial institutions section 8 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) The relationship between tax rates and absolute revenue these rates generate for the government.
(b) The inequality in income distribution.
(c) The inverse relationship between the rate of unemployment and the rate of inflation in an economy.
(d) The relationship between environmental quality and economic development.
The correct answers to the above question in:
Answer: (a)
In economics, the Laffer curve is a hypothetical representation of the relationship between government revenue raised by taxation and all possible rates of taxation.
It is used to illustrate the concept of taxable income elasticity – which taxable income will change in response to changes in the rate of taxation.
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Question : 1
The term “provisioning” in the banking sector is related to which of the following:
a) It is the amount of fund that the bank needs to set aside when the loan turns NPA
b) It is the minimum amount of funds that the depositors will receive when the bank goes bankrupt
c) It is the loss that the bank incurs on sale of bad assets
d) It is the minimum amount which the borrower will have to pay even if the loan turns NPA
Answer »Answer: (a)
Higher NPAs worsens the financial health of a bank. To tackle the NPA or bad assets problem, RBI has designed several mechanisms. An important among them is the Provisioning norms.
In banking lexicon, provisioning means to set aside or provide some funds to cover up losses if things go wrong and some of their loans turn into bad assets.
The banks need to provision some funds as a percentage of their loans/advances. For standard asset (which have not turned NPAs), the requirement of provisioning is very less (0.4%) but for NPAs, it may be quite high.
The provisioning coverage ratio is the prescribed percentage of funds to be set aside by the banks for covering the prospective losses due to bad loans –most probably from their profit. For example, if the provisioning coverage ratio is 70% for a particular category of loan, then banks have to set aside funds equivalent to 70% of those loans out of their profits.
Question : 2
The lowering of Bank Rate by the Reserve Bank of India leads to
a) less liquidity in the market
b) mobilisation of more deposits by commercial banks
c) no change in the liquidity in the market
d) more liquidity in the market
Answer »Answer: (d)
Question : 3
Gresham’s law is related to
a) Circulation of money
b) Deficit financing
c) Consumption and demand
d) Supply and demand
Answer »Answer: (a)
Gresham’s law is an observation in economics that “bad money drives out good.”
More exactly, if coins containing metal of different value have the same value as legal tender, the coins composed of the cheaper metal will be used for payment, while those made of more expensive metal will be hoarded or exported and thus tend to disappear from circulation.
Sir Thomas Gresham, financial agent of Queen Elizabeth I, was not the first to recognize this monetary principle, but his elucidation of it in 1558 prompted the economist H.D. Macleod to suggest the term Gresham’s law in the 19th century.
Question : 4
‘Money is a matter of functions four, a medium, a measure a standard and .....’. What is the fourth function of money indicated in this popular phrase?
a) A flow
b) A payment
c) A store
d) A stock
Answer »Answer: (c)
Question : 5
The smaller the Cash Reserve Ratio, the scope for lending by banks is :
a) weaker
b) lesser
c) greater
d) smaller
Answer »Answer: (c)
Cash Reserve Ratio is a regulation set by the Central bank (RBI in India) which dictates the minimum amount (reserves) that a commercial bank must be held to customer notes and deposits.
A decrease in CRR will make it mandatory for the banks to hold a lesser proportion of their deposits in the form of deposits with the RBI. This will increase the number of Bank deposits and they will lend more as they have more amount as their reserve.
Question : 6
Which of the following measure of the high power money Supply (H) has been used by RBI in India?
a) Cash reserve of the commercial banks + other deposits with the RBI
b) Currency held by the public + Cash reserves of the commercial banks + Time deposits of commercial banks + Other deposits with the RBI
c) Currency held by the public + Cash reserves of the commercial banks + Other deposit with the RBI
d) Currency held by public + other deposits with the RBI
Answer »Answer: (c)
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