money supply, banking & financial institutions section 5 Practice Questions Answers Test with Solutions & More Shortcuts

Answer: (c)

The Central Bank of a country regulates money supply with the help of open market operations, changing the reserve requirements (CRR) and changing discount rate (bank rate).

Besides, banks are required to maintain liquid assets in the form of gold, cash and approved securities (margin requirements); also known as Statutory Liquidity Ratio.

In India, the Reserve Bank of India has recently been resorting more to open market operations.

Answer: (c)

The bank rate also referred to as the discount rate, is the rate of interest that the central bank charges on the loans and advances to a commercial bank. Whenever the banks have any shortage of funds they can borrow them from the central bank. Repo (Repurchase) rate is the rate at which the central bank lends short-term money to the banks against securities.

A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from the central bank becomes more expensive. It is more applicable when there is a liquidity crunch in the market.

Answer: (a)

Answer: (d)

The monetary policy framework in India, as it is today, has evolved over the years.

A new “Monetary Policy Framework” Agreement was signed between the Government of India and RBI in Feb 2015. As per the new monetary policy framework agreement, the following are the important points:

The objective of the monetary policy is

1. to primarily maintain price stability, while keeping in mind the objective of growth
2. The monetary policy framework is operated by RBI
3. The inflation target is 4% with a band of +/- 2%
4. The inflation target is decided by the Government of India in consultation with RBI
5. The inflation is the “Consumer Price Index (CPI) – Combined” published by the Ministry of Statistics and Programme Implementation (NSO)
6. The RBI shall be seen to have failed to meet the Target if inflation is more than 6% or less than 2% for three consecutive quarters
7. In case RBI fails to meet the target, it will have to give a written report to the Government of India explaining the reasons for failure, remedial actions to be taken and an estimated time period within which the Target would be achieved

Answer: (d)

Inflation benefits borrowers, as it leads to a fall in the real cost of capital. But this is only a temporary phase and the interest rate is bound to go up to compensate for the inflation.