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

Answer: (c)

If there is inflation in the economy then it means the rupee is losing value with respect to goods and services.

Now, when the rupee loses value with respect to goods and services in the economy (and the only purpose of the rupee is to purchase goods and services in the economy) then anyone selling dollars and demanding rupees will now demand more rupees per unit of dollar and rupee will depreciate.

But if the rupee is depreciating, then it means the rupee is losing value with respect to a specific item i.e. dollar. That does not mean the rupee will lose value with respect to all the goods and services in the economy.

(Layman’s explanation: If the rupee is losing value with respect to onions means onion becoming costlier. That does not mean the rupee will lose value with respect to all goods and services, and prices of other goods and services will not increase.)

Answer: (a)

Prime rate or prime lending rate is a term applied in many countries to a reference interest rate used by banks. The term originally indicated the rate of interest at which banks lent to favoured customers,

i.e., those with high credibility. When these rates are high, demand decreases and output falls to meet the new lower demand.

Less output requires fewer workers, driving unemployment higher.

Answer: (c)

In all RBI related documents, it is written that RBI acts as a lender of last resort for banks.

But in the case of the IL&FS crisis in 2018, where it defaulted on loan papers, Mr Viraj Acharya, the ex-Deputy Governor of RBI clarified that RBI can act as lender of last resort for NBFCs also.

All NBFCs are not registered or regulated by RBI. Some NBFCs are regulated by SEBI, IRDAI etc. also

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.

Answer: (d)

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.