money supply, banking & financial institutions section 7 Practice Questions Answers Test with Solutions & More Shortcuts

Question : 1 [SSC CGL 2014]

Pegging up of a currency means, fixing the value of a currency

a) at a higher level

b) leaving it to market forces

c) at a constant level

d) at a lower level

Answer: (c)

Currency pegging is the idea of fixing the exchange rate of a currency by matching its value to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold or silver.

A fixed exchange rate is usually used to stabilize the value of a currency, with respect to the currency or the other valuable it is pegged to.

Question : 2

What are the causes of inflation?

  1. Increase in demand for goods & services
  2. Decrease in the supply of goods & services
  3. Decrease in demand for goods & services
  4. Increase in the supply of goods & services
Choose the correct code.

a) 3 and 4

b) 1 and 2

c) 1 and 4

d) 2 and 3

Answer: (b)

Inflation occurs due to two main factors:

  1. Increase in demand for goods & services,
  2. Decrease in the supply of goods & services

Question : 3 [SSC CML 2002]

For channelising the unaccounted money for productive purposes the Government Introduced the scheme of :

a) Provident Funds

b) Market Loans

c) Special Bearer Bonds

d) Resurgent India Bonds

Answer: (c)

The Special Bearer Bonds (Immunities And Exemptions) Act, 1981 laid down the purpose of such bonds as necessary to canalize for productive purposes black money which has become a serious threat to the national economy.

With a view to such canalization, the Central Government decided to issue at par certain bearer bonds to be known as the Special Bearer Bonds, 1991.

Question : 4

Which of the following measures would result in an increase in the money supply in the economy?

  1. Purchase of government securities from the public by the Central Bank
  2. Deposit of currency in commercial banks by the public
  3. Borrowing by the government from the Central Bank
  4. Sale of government securities to the public by the Central Bank
Select the correct answer using the codes given below :

a) 2 and 4

b) 1 only

c) 1 and 3

d) 2, 3 and 4

Answer: (c)

Question : 5

Consider the following statements:

  1. Open Market Operation is a monetary policy tool
  2. Open Market Operations take place in the secondary market
  3. Sterilization is a monetary policy tool
Select the correct answer using the code given below:

a) (i) & (iii) only

b) (iii) only

c) (i) only

d) All of the above

Answer: (d)

Open Market Operations (OMO) is a monetary policy tool where RBI buys/sells government securities in the secondary (open) market to increase or decrease the money supply.

Due to foreign investments inflow or outflow, the money supply in the Indian economy increases/ decreases. To prevent or sterilize the economy from such external shocks, RBI buys or sells government securities to keep the money supply unchanged.

This is called sterilization or Market Stabilization Scheme (MSS) and it is not a day to day phenomenon, rather less frequently used.

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