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

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)

Bank Rate is the interest rate at which a nation's central bank lends money to domestic banks. Managing the bank rate is a preferred method by which central banks can regulate the level of economic activity.

Answer: (d)

Islamic banking is a banking system that is based on the principles of Islamic law, also referred to as Shariah law and guided by Islamic economics. Two basic principles behind Islamic banking are the sharing of profit and loss and the prohibition of the collection and payment of interest by lenders and investors.

In order to earn money without charging interest, Islamic banks use equity-participation systems. This means that if a bank loans money to a business, the business pays back the loan without interest, but it gives the bank a share in its profits. If the business defaults on the loan or does not earn any profits, the bank does not receive any profit either.

The depositors put their savings in an Islamic bank and allow the bank to use this money, with the assurance that they would get the full amount back. The bank is not liable to pay interest to the savers. However, some banks do give a certain sum back to the account holder as profit accrued from their operations.

While an Islamic bank is a bank totally based on and runs with Islamic principles in mind, an "Islamic window" in a bank refers to conventional banks offering Islamic banking services (in addition to conventional banking services) through dedicated windows.

The RBI has proposed the opening of an "Islamic window" in conventional banks for the gradual introduction of Sharia-compliant banking in the country to ensure the financial inclusion of those sections of society that remain excluded due to religious reasons.

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)