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

Answer: (d)

Gresham's law is an economic principle that states:

"When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation."

It is commonly stated as: "Bad money drives out good.”

Answer: (a)

International Development Association (IDA), is a part of the World Bank that helps the world’s poorest countries.

It complements the World Bank’s other lending arm— the International Bank for Reconstruction and Development (IBRD) which serves middle-income countries with capital investment and advisory services. IDA was created in 1960.

Answer: (c)

The objectives of setting up small finance banks are

1. to promote financial inclusion by providing provision of savings vehicles and supply of credit to small business units;
2. small and marginal farmers; micro and small industries; and other unorganized sector entities, through high technology-low cost operations.
3. They are required to extend 75% of their loans to priority sectors and 50% of their loan portfolio shall constitute loans of up to 25 lacs.

The scope of activities for small finance banks will be,

Basic banking activities of acceptance of deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganized sector entities and there will not be any restriction in the area of operations.

They will be required to maintain CRR and SLR. They will be set up as differentiated banks for serving niche interests

Small Finance Banks are not particularly for rural areas.

RBI released guidelines for 'on-tap' licensing of Small Finance Banks. Urban Cooperative Banks and Payment Banks can apply for conversion into SFB.

‘On-tap’ means any time they can apply for conversion into SFB and they don’t need to wait for a time window when RBI will grant licenses.

Answer: (d)

Companies issue debentures instead of shares to extend their business. These debentures are issue to borrow loans from the general public; interest is paid on the borrowed money to the debenture holders.

So a debenture holder is essentially a creditor who simply gives a loan to the company.

Answer: (a)

Generally, economists have defined four types of functions of money which are as follows:

1. Medium of exchange (transfer of value)
2. Measurement of value,
3. Standard of deferred payments, and
4. Store of value. Price stabilization is a function of monetary policy.

Answer: (d)

Devaluation refers to a decline in the value of a currency in relation to another, usually brought about by the actions of a central bank or monetary authority.

Devaluation is sometimes used more generally to describe any significant drop in a currency’s international exchange rate, although usually a decline caused by market forces with no government intervention is termed a depreciation.

Devaluations are most often associated with developing countries that don’t allow their currency prices to float freely on the open market.