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

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)

The money supply is defined as the stock of money in circulation among the public. So, money lying with the government, RBI and interbank deposits are not considered as money supply.

Answer: (d)

An angel investor is a person who invests in highly risky companies, typically before those companies have any revenue or profits. Angel investors are often among an entrepreneur's family and friends and invest in small start-ups and entrepreneurs.

Angel investors provide more favourable terms compared to other lenders since they usually invest in the entrepreneur starting the business rather than the viability of the business.

Angel investors are focused on helping start-ups take their first steps, rather than the possible profit they may get from the business. Fund-raising with angel investors is typically done more casually, using networking and crowd funding platforms.

Essentially, angel investors are the opposite of venture capitalists. Angel investors typically use their own money, unlike venture capitalists who take care of pooled money from many other investors and place them in a strategically managed fund.

Angel Investment in India is regulated by the Securities and Exchange Board of India (SEBI) under Category I of Alternative Investment Funds (AIF).

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)

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: (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.