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

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: (d)

The four concepts of money used in calculating money supply are known as the money stock measures or measures of monetary aggregates.

These are M₁, M₂, M₃, M₄.

M₃ = M₁ + Term deposits with the bank.

Answer: (a)

Banks are mandated to keep only a fraction of the deposits as reserves, the rest they can lend and this lending creates money in the system.

For example, If I had Rs. 100 cash with me which I deposited in a bank, and say the bank kept Rs. 20 in reserves and rest i.e. Rs. 80 it lent to someone else.

Now, the money with me is Rs. 100 (in deposit form) and money with the other person is Rs. 80. So, now total money in the system is Rs. 180, while earlier it was only Rs. 100. And this became possible just because the person depositing the money in the bank and the bank kept only a fraction in the reserve and the rest is lent to someone else. This is called fractional reserve banking.

In the above case monetary base is Rs. 100 and money supply is Rs. 180

Money multiplier = Money Supply/Monetary Base =180/100 = 1.8

In another case, if I would have only Rs. 50, which I deposited in the bank and the bank kept 20% reserves i.e. Rs. 10 and the rest Rs. 40 it lent then, Money multiplier = 90/50 = 1.8

If banks are mandated to keep all the deposited money i.e. Rs. 100 as reserves then banks would not have lent and no new money would have been created in the system. And then; the Money multiplier would have been = 100/100 = 1

For a detailed understanding, you can refer to the book on Indian Economy by Vivek Singh.

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: (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)

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.