Money Supply, Banking & Financial Institutions Section 1 Practice Questions Answers Test With Solutions & More Shortcuts

Answer: (d)

Saving is income not spent or deferred consumption.

In economics, it refers to any income not used for immediate consumption– consuming less out of a given amount of resources in the present in order to consume more in the future.

Saving, therefore, is the decision to defer consumption and to store this deferred consumption in some form of asset.

Answer: (d)

Answer: (b)

In terms of Section 20 of the RBI Act 1934, RBI has the obligation to undertake the receipts and payments of the Central Government and to carry out the exchange, remittance and other banking operations, including the management of the public debt of the Central Govt. Further, as per Section 21 of the said Act, RBI has the right to transact Government business of the Union in India.

State Government transactions are carried out by RBI in terms of the agreement entered into with the State Governments in terms of section 21 A of the RBI Act. As of now, such agreements exist between RBI and all the State Governments except the Government of Sikkim.

Thus, the legal provisions vest the Reserve Bank of India with both the right and obligation to function as a banker to the government.

Answer: (c)

Money supply = (Money multiplier) X (Monetary base)

When RBI does open market operations, then monetary base changes (RBI buys/sells govt. securities in lieu of cash), due to which money supply also changes. But it does not change money multiplier, which depends on two things:

People’s tendency of depositing money in banks (currency deposit ratio)

Statutory reserve requirement of the banks, and; (reserve deposit ratio)

Answer: (a)

Inflation will necessarily occur in case there is effective demand in the economy. If there is increase in aggregate demand, there may not be inflation if the supply also increases. If output decreases and demand also decreases then it may not result in inflation.

Govt borrowing and spending increases aggregate demand rather than effective demand.