12 NCERT CBSE Macroeconomics Money and Banking
Answer Key / Self-Check Copy · Answer & Feedback per Question · Slideshow · Generated 8/15/2026
You will see the answer right after each question.
Theme Analysis
Main ThemeMoney and Banking in Macroeconomics
Subject CategoryEconomics
Key Concepts
Functions of MoneyBarter SystemDemand for MoneySupply of MoneyCentral Bank (RBI) FunctionsCommercial Banks and Money CreationMoney MultiplierMonetary Policy ToolsFiat Money and Legal TenderMeasures of Money SupplyDemonetisation
Question FocusQuestions focus on core definitions, relationships, processes, and applications within the 'Money and Banking' topic. A mix of difficulty and Bloom's levels ensures comprehensive understanding, with emphasis on the roles of the central bank and commercial banks, money creation, and monetary policy. Scenario-based questions are used to test application and analysis.
Q1
MCQ
Remember
Barter System
What is the primary characteristic of an economy where economic exchanges occur without the mediation of money?
A
It relies on a central monetary authority.
B
It involves barter exchanges.
C
It primarily uses digital transactions.
D
It has no economic agents.
Hint: Think about direct exchange of goods.
Answer
Economic exchanges without the mediation of money are referred to as barter exchanges.
Explanation
The text explicitly states that 'Economic exchanges without the mediation of money are referred to as barter exchanges.' This is the foundational definition of such an economy.
Q2
MCQ
Understand
Barter System Drawbacks
The 'double coincidence of wants' is a significant problem associated with which economic system?
A
A modern cashless economy
B
A monetary economy
C
A barter system
D
An economy with high inflation
Hint: Consider the challenges of direct exchange.
Answer
The double coincidence of wants is a core problem of a barter system, where two individuals must have exactly opposite demands for their surpluses.
Explanation
The text highlights that barter exchanges 'presume the rather improbable double coincidence of wants.' This means for a transaction to occur, both parties must want what the other has in surplus, which is a major drawback of barter.
Q3
MCQ
Remember
Functions of Money
Which of the following is considered the first and foremost role of money in a modern economy?
A
Store of value
B
Unit of account
C
Medium of exchange
D
Source of interest
Hint: How does money simplify transactions?
Answer
The first and foremost role of money is that it acts as a medium of exchange.
Explanation
The document explicitly states, 'As explained above, the first and foremost role of money is that it acts as a medium of exchange.' This function directly addresses the 'double coincidence of wants' problem of barter.
Q4
MCQ
Apply
Functions of Money
If the price of a bicycle is Rs 5000 and the price of a helmet is Rs 500, how does money facilitate the calculation of the relative price of the bicycle with respect to the helmet?
A
By acting as a store of value, allowing future purchases.
B
By serving as a unit of account, expressing values in monetary units.
C
By being a medium of exchange, simplifying the transaction.
D
By creating a cashless society, reducing physical currency.
Hint: Consider how prices are expressed and compared.
Answer
Money acts as a convenient unit of account, allowing the value of all goods and services to be expressed in monetary units, which then enables easy calculation of relative prices.
Explanation
The text explains that money acts as a 'convenient unit of account' allowing the value of all goods and services to be expressed in monetary units. This makes it possible to calculate relative prices, such as a bicycle being worth 10 helmets (5000 ÷ 500).
Q5
MCQ
Understand
Purchasing Power of Money
What happens to the purchasing power of money if the prices of all commodities generally increase in terms of money?
A
It increases, as money can buy more.
B
It remains stable, as the value of money is fixed.
C
It decreases, as a unit of money can purchase less.
D
It becomes irrelevant in a monetary economy.
Hint: Think about what inflation does to your money.
Answer
If prices of all commodities increase, the value of money in terms of any commodity must have decreased, meaning a unit of money can now purchase less.
Explanation
The text states, 'if prices of all commodities increase in terms of money i.e., there is a general increase in the price level, the value of money in terms of any commodity must have decreased – in the sense that a unit of money can now purchase less of any commodity. We call it a deterioration in the purchasing power of money.'
Q6
MCQ
Analyze
Functions of Money
Why is money generally preferred over perishable goods like rice for storing wealth for future use?
A
Rice is universally acceptable as a medium of exchange.
B
Money is not perishable and has considerably lower storage costs.
C
Rice offers a higher rate of interest when stored.
D
Money’s value is guaranteed to rise over time.
Hint: Consider the physical properties and longevity of different assets.
Answer
Money is not perishable and its storage costs are also considerably lower, making it a better store of value than perishable commodities.
Explanation
The document explains, 'But rice is a perishable item and cannot be stored beyond a certain period. Also, holding the stock of rice requires a lot of space... This problem can be solved if you sell your rice for money. Money is not perishable and its storage costs are also considerably lower.' This highlights money's advantage as a store of value.
Q7
MCQ
Understand
Cashless Society
What defines a 'cashless society' as described in the text?
A
An economy where all transactions are free.
B
An economic state where financial transactions occur primarily through digital information transfers.
C
A society where physical gold and silver are the main forms of payment.
D
An economy with zero demand for money.
Hint: Focus on the medium of exchange in such a society.
Answer
A cashless society is an economic state where financial transactions are not connected with physical bank notes or coins but rather through the transfer of digital information.
Explanation
The text defines a 'cashless society' as 'an economic state whereby financial transactions are not connected with money in the form of physical bank notes or coins but rather through the transfer of digital information (usually an electronic representation of money) between the transacting parties.'
Q8
MCQ
Remember
Demand for Money
According to the text, what is the relationship between the quantum of transactions to be made and the quantity of money demanded?
A
They are inversely related.
B
They have no direct relationship.
C
They are directly related.
D
The relationship is determined by the central bank.
Hint: Think about why people need money for everyday activities.
Answer
The larger the quantum of transactions to be made, the larger is the quantity of money demanded.
Explanation
The text states, 'Since money is required to conduct transactions, the value of transactions will determine the money people will want to keep: the larger is the quantum of transactions to be made, the larger is the quantity of money demanded.'
Q9
MCQ
Understand
Demand for Money
How does a rise in interest rates generally affect the demand for money, according to the document?
A
It increases the demand for money as people want to earn more interest.
B
It decreases the demand for money as holding money means foregoing higher interest earnings.
C
It has no impact on the demand for money.
D
It leads to an increase in the velocity of circulation.
Hint: Consider the opportunity cost of holding cash.
Answer
When interest rates go up, people become less interested in holding money since holding money amounts to holding less of interest-earning deposits, and thus less interest received.
Explanation
The document explains, 'when interest rates go up, people become less interested in holding money since holding money amounts to holding less of interest-earning deposits, and thus less interest received. Therefore, at higher interest rates, money demanded comes down.' This highlights the inverse relationship due to opportunity cost.
Q10
MCQ
Remember
Supply of Money
In a modern economy, what are the two main types of institutions responsible for creating money?
A
Government treasuries and private corporations.
B
Central bank and the commercial banking system.
C
Stock exchanges and investment firms.
D
International monetary funds and regional development banks.
Hint: Think about who issues currency and who handles deposits and loans.
Answer
Money is created by a system comprising two types of institutions: central bank of the economy and the commercial banking system.
Explanation
The text explicitly states that money is 'created by a system comprising two types of institutions: central bank of the economy and the commercial banking system.'
Q11
MCQ
Remember
Central Bank Functions
Which institution is solely responsible for issuing currency in India?
A
Commercial banks
B
The Government of India
C
The Reserve Bank of India
D
The Ministry of Finance
Hint: Recall the central monetary authority of India.
Answer
The Reserve Bank of India (RBI) is the monetary authority in India and issues currency notes.
Explanation
The text states, 'The Reserve Bank is the only institution which can issue currency' and later clarifies, 'In India currency notes are issued by the Reserve Bank of India (RBI), which is the monetary authority in India. However, coins are issued by the Government of India.' Since the question asks about 'currency', which typically refers to notes and coins, but specifically mentions 'issuing currency' as a central bank function, RBI is the primary issuer of currency notes.
Q12
MCQ
Understand
Central Bank Functions
The currency issued by the central bank, which can be held by the public or commercial banks, is also known as what?
A
Broad money
B
Time deposits
C
High-powered money
D
Interbank deposits
Hint: Consider its role as a basis for credit creation.
Answer
The currency issued by the central bank can be held by the public or by the commercial banks, and is called the ‘high-powered money’ or ‘reserve money’ or ‘monetary base’.
Explanation
The document defines this as 'high-powered money' or 'reserve money' or 'monetary base' because 'it acts as a basis for credit creation.'
Q13
MCQ
Understand
Commercial Banks
In the 'Lala the goldsmith' story, how did Lala's paper receipts start acting as money?
A
They were backed by government decree.
B
Everyone in the village accepted them as a medium of exchange.
C
They paid high interest to holders.
D
They could only be used for specific goods.
Hint: Think about the primary function of money.
Answer
The paper receipts started acting as money because everyone in the village accepted these as a medium of exchange.
Explanation
The text explains, 'Thus, the paper receipts started acting as money since everyone in the village accepted these as a medium of exchange.' This acceptance is key to money's function.
Q14
MCQ
Analyze
Money Creation
Based on the Lala the goldsmith example, how do commercial banks create money?
A
By printing new currency notes.
B
By accepting deposits and lending out a portion of them, knowing not all depositors will withdraw simultaneously.
C
By directly converting gold into paper money.
D
By charging high interest rates on loans.
Hint: Recall Lala's decision to lend out gold even with existing claimants.
Answer
Banks can lend simply because they do not expect all the depositors to withdraw what they have deposited at the same time. When the banks lend to any person, a new deposit is opened in that person’s name, thus increasing money supply.
Explanation
The text states, 'The modern banking system works precisely the way Lala behaves in this example. Commercial banks mediate between individuals or firms with excess funds and lend to those who need funds.' It further explains, 'Banks can lend simply because they do not expect all the depositors to withdraw what they have deposited at the same time.'
Q15
MCQ
Remember
Balance Sheet
For a bank, what is considered its main liability?
A
Loans given to the public
B
Reserves held with the central bank
C
Deposits which people keep with it
D
Buildings and furniture
Hint: Think about what the bank owes to others.
Answer
For a bank, the main liability is the deposits which people keep with it.
Explanation
The text defines liabilities for a bank as 'its debts or what it owes to others. For a bank, the main liability is the deposits which people keep with it.'
Q16
MCQ
Remember
Balance Sheet
What are 'reserves' in the context of commercial banking?
A
Loans given by commercial banks to the public.
B
Deposits which commercial banks keep with the Central bank (RBI) and their cash holdings.
C
The profit earned by commercial banks.
D
Bonds issued by the government to commercial banks.
Hint: Consider the funds banks set aside or hold with the central bank.
Answer
Reserves are deposits which commercial banks keep with the Central bank, Reserve Bank of India (RBI) and its cash.
Explanation
The text defines reserves as 'deposits which commercial banks keep with the Central bank, Reserve Bank of India (RBI) and its cash.'
Q17
MCQ
Understand
Money Multiplier
What is the 'Required Reserve Ratio' (CRR) primarily designed to ensure in the banking system?
A
That banks maximize their lending activities without limits.
B
That no bank is 'over lending' and has sufficient funds for depositors.
C
That commercial banks earn maximum profit from the spread.
D
That the central bank can issue more currency.
Hint: Consider the central bank's role in regulating bank stability.
Answer
The RBI decides a certain percentage of deposits which every bank must keep as reserves. This is done to ensure that no bank is ‘over lending’.
Explanation
The document states, 'The RBI decides a certain percentage of deposits which every bank must keep as reserves. This is done to ensure that no bank is ‘over lending’.' This highlights CRR's role as a regulatory tool for financial stability.
Q18
MCQ
Apply
Money Multiplier
If the Cash Reserve Ratio (CRR) is 25 per cent, what would be the money multiplier?
A
2
B
4
C
5
D
10
Hint: Remember the formula for the money multiplier based on the reserve ratio.
Answer
The money multiplier is calculated as 1/CRR. If CRR = 25% (or 0.25), then the money multiplier = 1/0.25 = 4.
Explanation
The document implies the money multiplier formula as 1/CRR. In the example, with CRR of 20% (0.20), the multiplier is 5 (1/0.20). Applying the same logic, if CRR is 25% (0.25), the multiplier would be 1/0.25 = 4.
Q19
MCQ
Analyze
Money Multiplier and Policy
If the Reserve Bank of India (RBI) increases the Cash Reserve Ratio (CRR), what is the likely impact on the money supply in the economy?
A
Money supply will increase because banks have more reserves.
B
Money supply will decrease because banks have less to lend.
C
Money supply will remain unchanged as CRR only affects bank profits.
D
Money supply will become more stable, but its size won't change.
Hint: Consider how CRR affects a bank's ability to create credit.
Answer
If the Central bank changes the reserve ratio, this would lead to changes in lending by the banks which, in turn, would impact the deposits and hence, the money supply. An increase in CRR means banks must hold more reserves, reducing funds available for lending, thus decreasing money supply.
Explanation
The text states, 'if the Central bank changes the reserve ratio, this would lead to changes in lending by the banks which, in turn, would impact the deposits and hence, the money supply.' It further illustrates that if CRR increases, banks would 'have to call back some loans to meet the increased reserve requirements. Hence, money supply would fall.'
Q20
MCQ
Remember
Central Bank Functions
The role of the RBI in being ready to lend to banks at all times is known as what?
A
Banker to the government
B
Custodian of foreign exchange reserves
C
Lender of last resort
D
Manager of public debt
Hint: Think about who banks turn to when they need funds urgently.
Answer
This role of RBI, that of being ready to lend to banks at all times is another important function of the central bank, and due to this central bank is said to be the lender of last resort.
Explanation
The document defines this specific function of the central bank as being the 'lender of last resort,' emphasizing its role in providing funds to commercial banks when needed.
Q21
MCQ
Remember
Monetary Policy Tools
What are 'Open Market Operations' (OMOs) as defined in the context of monetary policy?
A
Trading of stocks and shares by commercial banks.
B
Buying and selling of bonds issued by the Government in the open market.
C
Foreign exchange transactions by the central bank.
D
Lending money directly to individuals by the central bank.
Hint: Focus on the type of asset traded and the market.
Answer
Open Market Operations refers to buying and selling of bonds issued by the Government in the open market.
Explanation
The text clearly defines Open Market Operations as 'buying and selling of bonds issued by the Government in the open market.'
Q22
MCQ
Analyze
Monetary Policy Tools
If the RBI sells Government bonds in the open market, what is the immediate effect on the money supply?
A
Money supply increases as banks have more funds.
B
Money supply decreases as reserves in the economy are reduced.
C
Money supply remains unaffected, only bond prices change.
D
Money supply is channeled into the informal sector.
Hint: Consider where the money goes when the RBI sells bonds.
Answer
Selling of a bond by RBI (to private individuals or institutions) leads to reduction in quantity of reserves and hence the money supply.
Explanation
The text explains, 'Selling of a bond by RBI (to private individuals or institutions) leads to reduction in quantity of reserves and hence the money supply.' When the RBI sells bonds, it receives payment, which effectively drains money from the banking system, reducing reserves and thus the money supply.
Q23
MCQ
Understand
Monetary Policy Tools
What is the key difference between an 'outright open market operation' and a 'repurchase agreement' (repo)?
A
Outright operations are temporary, while repo agreements are permanent.
B
Outright operations involve buying/selling without a promise to reverse, while repo agreements include a promise of resale/repurchase.
C
Outright operations are conducted by commercial banks, while repo agreements are by the central bank.
D
Outright operations target bond prices, while repo agreements target interest rates.
Hint: Consider the duration and reversibility of the transaction.
Answer
Outright open market operations are permanent in nature: when the central bank buys these securities (thus injecting money into the system), it is without any promise to sell them later. Similarly, when the central bank sells these securities (thus withdrawing money from the system), it is without any promise to buy them later. However, in a repurchase agreement (repo), the agreement of purchase also has specification about date and price of resale of this security.
Explanation
The text clearly distinguishes: 'Outright open market operations are permanent in nature: when the central bank buys these securities (thus injecting money into the system), it is without any promise to sell them later... However, there is another type of operation in which when the central bank buys the security, this agreement of purchase also has specification about date and price of resale of this security. This type of agreement is called a repurchase agreement or repo.'
Q24
MCQ
Remember
Monetary Policy Tools
The interest rate at which the RBI gives loans to commercial banks is called the:
A
Repo rate
B
Reverse repo rate
C
Bank Rate
D
Cash Reserve Ratio
Hint: This is a direct lending rate from the central bank to commercial banks.
Answer
The RBI can influence money supply by changing the rate at which it gives loans to the commercial banks. This rate is called the Bank Rate in India.
Explanation
The text states, 'The RBI can influence money supply by changing the rate at which it gives loans to the commercial banks. This rate is called the Bank Rate in India.'
Q25
MCQ
Analyze
Monetary Policy Tools
How does an increase in the Bank Rate affect the money supply in the economy?
A
It increases money supply because commercial banks can borrow more cheaply.
B
It decreases money supply because loans taken by commercial banks become more expensive, reducing their reserves.
C
It has no direct impact on money supply, only on inflation.
D
It makes commercial banks more profitable, encouraging more lending.
Hint: Consider the cost of borrowing for commercial banks from the RBI.
Answer
By increasing the bank rate, loans taken by commercial banks become more expensive; this reduces the reserves held by the commercial bank and hence decreases money supply.
Explanation
The text explains, 'By increasing the bank rate, loans taken by commercial banks become more expensive; this reduces the reserves held by the commercial bank and hence decreases money supply.' This is a direct mechanism for controlling credit availability.
Q26
MCQ
Remember
Demand for Money
Holding money balance rather than putting it in an interest-earning deposit means foregoing potential interest. This foregone interest is referred to as the:
A
Transaction cost
B
Liquidity premium
C
Opportunity cost
D
Inflationary gain
Hint: What do you lose by choosing to hold cash?
Answer
If, instead of holding on to a certain cash balance, you put the money in a fixed deposits in some bank you can earn interest on that money. This foregone interest is the opportunity cost.
Explanation
The text states, 'On the other hand, it has an opportunity cost. If, instead of holding on to a certain cash balance, you put the money in a fixed deposits in some bank you can earn interest on that money.' This clearly identifies foregone interest as an opportunity cost.
Q27
MCQ
Understand
Demand for Money Motives
The principal motive for holding money to carry out day-to-day purchases and payments, given that expenditure patterns do not normally match receipts, is known as the:
A
Speculative motive
B
Precautionary motive
C
Transaction motive
D
Investment motive
Hint: Think about why you need cash for regular spending.
Answer
The principal motive for holding money is to carry out transactions. This is known as the transaction motive.
Explanation
The document explicitly identifies 'The Transaction Motive' as 'The principal motive for holding money is to carry out transactions' because 'our expenditure patterns do not normally match our receipts.'
Q28
MCQ
Remember
Velocity of Circulation
What is the 'velocity of circulation of money'?
A
The total value of all transactions in an economy.
B
The speed at which money is printed by the central bank.
C
The number of times a unit of money changes hands during a unit period.
D
The rate at which bond prices change in the market.
Hint: Consider how frequently a single rupee is used in the economy.
Answer
The number of times a unit of money changes hands during the unit period is called the velocity of circulation of money.
Explanation
The text defines 'velocity of circulation of money' as 'The number of times a unit of money changes hands during the unit period.'
Q29
MCQ
Apply
Demand for Money Motives
According to the transaction demand for money equation `MdT = kPY`, what does 'P' represent?
A
The rate of interest
B
Real GDP
C
The general price level or GDP deflator
D
The velocity of money
Hint: Recall the components that determine the nominal value of transactions.
Answer
In the equation `MdT = kPY`, Y is the real GDP and P is the general price level or the GDP deflator.
Explanation
The document states, 'where Y is the real GDP and P is the general price level or the GDP deflator.' This formula shows that transaction demand is positively related to both real income and the price level.
Q30
MCQ
Understand
Speculative Demand for Money
What is the relationship between the price of a bond and the market rate of interest?
A
Directly proportional
B
No relationship
C
Inversely related
D
Exponentially related
Hint: Consider how changes in interest rates affect the present value of future bond payments.
Answer
It follows that the price of a bond is inversely related to the market rate of interest.
Explanation
The text explicitly states, 'It follows that the price of a bond is inversely related to the market rate of interest.' This is a fundamental concept for speculative demand.
Q31
MCQ
Analyze
Speculative Demand for Money
If an individual expects interest rates to rise in the future, what action would they likely take regarding their bonds, and what would be the effect on their speculative demand for money?
A
Buy more bonds; speculative demand for money decreases.
B
Sell existing bonds and hold money; speculative demand for money increases.
C
Hold onto bonds; speculative demand for money remains unchanged.
D
Convert money into other assets; speculative demand for money becomes zero.
Hint: Consider the impact of rising interest rates on bond prices and the desire to avoid capital loss.
Answer
If you expect interest rate to rise and consequently bond prices to fall, you will try to sell your bond and hold money instead. Thus, speculations regarding future movements in interest rate and bond prices give rise to the speculative demand for money, which increases when interest rates are expected to rise.
Explanation
The text explains: 'If you expect interest rate to rise and consequently bond prices to fall... you will try to sell your bond and hold money instead. Thus speculations regarding future movements in interest rate and bond prices give rise to the speculative demand for money.' This means higher expected interest rates lead to a higher speculative demand for money (to avoid capital loss on bonds).
Q32
MCQ
Remember
Liquidity Trap
What is a 'liquidity trap'?
A
A situation where the central bank cannot control the money supply.
B
A situation where people are willing to hold any amount of money at a very low interest rate, expecting it to rise.
C
A situation where there is no demand for money at all.
D
A situation where bond prices are at their highest possible level.
Hint: Consider the extreme case where interest rates are very low and everyone expects them to rise.
Answer
Such a situation is called a liquidity trap, where the market rate of interest is already low enough so that everybody expects it to rise in future, causing capital losses, nobody will wish to hold bonds. Everyone in the economy will hold their wealth in money balance and if additional money is injected within the economy it will be used up to satiate people’s craving for money balances without increasing the demand for bonds and without further lowering the rate of interest below the floor r_min.
Explanation
The document defines a liquidity trap as a situation where 'the market rate of interest is already low enough so that everybody expects it to rise in future, causing capital losses, nobody will wish to hold bonds. Everyone in the economy will hold their wealth in money balance and if additional money is injected within the economy it will be used up to satiate people’s craving for money balances without increasing the demand for bonds and without further lowering the rate of interest below the floor r_min.'
Q33
MCQ
Understand
Total Demand for Money
The total demand for money in an economy is composed of which two main types of demand?
A
Investment demand and consumption demand.
B
Export demand and import demand.
C
Transaction demand and speculative demand.
D
Government demand and private demand.
Hint: Recall the two motives for holding money discussed in detail.
Answer
Total demand for money in an economy is, therefore, composed of transaction demand and speculative demand.
Explanation
The document summarizes, 'Total demand for money in an economy is, therefore, composed of transaction demand and speculative demand.'
Q34
MCQ
Remember
Fiat Money
What is 'fiat money'?
A
Money that has intrinsic value, like gold coins.
B
Money whose value is derived from the guarantee provided by the issuing authority, without intrinsic value.
C
Money that can only be used for international transactions.
D
Money that is convertible into a precious metal on demand.
Hint: Think about the value of paper currency.
Answer
Currency notes and coins are therefore called fiat money. They do not have intrinsic value like a gold or silver coin. The value of the currency notes and coins is derived from the guarantee provided by the issuing authority of these items.
Explanation
The text explains, 'Currency notes and coins are therefore called fiat money. They do not have intrinsic value like a gold or silver coin. They are also called legal tenders as they cannot be refused by any citizen of the country for settlement of any kind of transaction.' The value comes from the issuing authority's guarantee.
Q35
MCQ
Understand
Legal Tender
Why are cheques drawn on savings or current accounts NOT considered legal tender?
A
They have intrinsic value.
B
They are issued by commercial banks, not the central bank.
C
They can be refused by anyone as a mode of payment.
D
They are only used for large transactions.
Hint: Consider if everyone is legally obligated to accept them for payment.
Answer
Cheques drawn on savings or current accounts, however, can be refused by anyone as a mode of payment. Hence, demand deposits are not legal tenders.
Explanation
The document states, 'Cheques drawn on savings or current accounts, however, can be refused by anyone as a mode of payment. Hence, demand deposits are not legal tenders.' Legal tender means it cannot be refused for settlement of transactions.
Q36
MCQ
Remember
Measures of Money Supply
Which measure of money supply is defined as CU + DD (Currency held by public + Net demand deposits of commercial banks)?
A
M1
B
M2
C
M3
D
M4
Hint: Recall the most liquid measure of money supply.
Answer
M1 = CU + DD, where CU is currency (notes plus coins) held by the public and DD is net demand deposits held by commercial banks.
Explanation
The document explicitly defines the measures of money supply: 'M1 = CU + DD'.
Q37
MCQ
Understand
Measures of Money Supply
Which of the following measures of money supply is considered the 'most liquid' and 'easiest for transactions'?
A
M4
B
M3
C
M2
D
M1
Hint: Think about what components are included in each measure.
Answer
These measures (M1, M2, M3, M4) are in decreasing order of liquidity. M1 is most liquid and easiest for transactions whereas M4 is least liquid of all.
Explanation
The text states, 'These measures are in decreasing order of liquidity. M1 is most liquid and easiest for transactions whereas M4 is least liquid of all.'
Q38
MCQ
Remember
Measures of Money Supply
M1 and M2 are collectively known as what type of money?
A
Broad money
B
Narrow money
C
High-powered money
D
Reserve money
Hint: Consider their relative liquidity.
Answer
M1 and M2 are known as narrow money.
Explanation
The document explicitly states, 'M1 and M2 are known as narrow money.'
Q39
MCQ
Remember
Demonetisation
What was one of the stated primary objectives of the demonetisation initiative in India in November 2016?
A
To increase the circulation of physical cash.
B
To tackle problems of corruption, black money, and fake currency.
C
To encourage international trade through cash transactions.
D
To reduce the power of the central bank.
Hint: Recall the issues the government aimed to address.
Answer
Demonetisation was a new initiative taken by the Government of India in November 2016 to tackle the problem of corruption, black money, terrorism and circulation of fake currency in the economy.
Explanation
The text clearly states, 'Demonetisation was a new initiative taken by the Government of India in November 2016 to tackle the problem of corruption, black money, terrorism and circulation of fake currency in the economy.'
Q40
MCQ
Analyze
Demonetisation Impact
How did demonetisation positively impact tax compliance in India, according to the text?
A
It allowed for greater cash transactions, making tax evasion easier.
B
It channelized individual savings into the formal financial system, bringing more people into the tax ambit.
C
It reduced the need for tax payments by simplifying the tax structure.
D
It led to a decrease in government revenue, forcing tax reforms.
Hint: Think about how cash-based transactions differ from formal financial transactions.
Answer
It improved tax compliance as a large number of people were bought in the tax ambit. The savings of an individual were channelised into the formal financial system.
Explanation
The text notes a positive impact: 'It improved tax compliance as a large number of people were bought in the tax ambit. The savings of an individual were channelised into the formal financial system.'
Q41
MCQ
Understand
Monetary Policy Tools
Quantitative tools of monetary policy primarily aim to control what aspect of the economy?
A
The extent of money supply.
B
The moral behavior of commercial banks.
C
Specific sectors of the economy.
D
The level of government expenditure.
Hint: Consider the direct impact of CRR, Bank Rate, and OMOs.
Answer
Quantitative tools, control the extent of money supply by changing the CRR, or bank rate or open market operations.
Explanation
The text states, 'Quantitative tools, control the extent of money supply by changing the CRR, or bank rate or open market operations.' This directly answers the question about their primary objective.
Q42
MCQ
Remember
Monetary Policy Tools
Which of the following is an example of a 'qualitative tool' of monetary policy?
A
Cash Reserve Ratio (CRR)
B
Open Market Operations (OMO)
C
Bank Rate
D
Moral suasion
Hint: Think about tools that influence behavior rather than directly changing quantities.
Answer
Qualitative tools include persuasion by the Central bank in order to make commercial banks discourage or encourage lending which is done through moral suasion, margin requirement, etc.
Explanation
The text lists 'moral suasion, margin requirement, etc.' as qualitative tools, which involve persuasion rather than direct quantitative controls.
Q43
MCQ
Understand
Financial Inclusion
Which of the following initiatives has strengthened the Indian government's resolve to move towards a cashless society and greater financial inclusion?
A
Increased printing of high-denomination currency notes.
B
Promotion of barter exchanges in rural areas.
C
Jan Dhan accounts, Aadhar enabled payment systems, e-Wallets.
D
Reducing the number of commercial banks.
Hint: Recall specific government programs mentioned in the text.
Answer
During the last few years’ initiatives such as Jan Dhan accounts, Aadhar enabled payment systems, e –Wallets, National financial Switch (NFS) and others have strengthened the government resolve to go cashless.
Explanation
The document specifically lists 'Jan Dhan accounts, Aadhar enabled payment systems, e –Wallets, National financial Switch (NFS)' as initiatives that have strengthened the government's resolve towards a cashless society and financial inclusion.
Q44
MCQ
Understand
Money Creation
When commercial banks lend money to a person, how does this action typically affect the overall money supply in the economy?
A
Money supply decreases as funds are transferred out of the bank.
B
Money supply remains unchanged as it's just a transfer of existing funds.
C
Money supply increases as a new deposit is typically opened in the borrower's name.
D
Money supply is only affected if the loan is repaid immediately.
Hint: Think about the 'Lala the goldsmith' example and how deposits expand.
Answer
When the banks lend to any person, a new deposit is opened in that person’s name. Thus money supply increases to old deposits plus new deposit (plus currency).
Explanation
The text explains, 'When the banks lend to any person, a new deposit is opened in that person’s name. Thus money supply increases to old deposits plus new deposit (plus currency.)' This is the essence of credit creation by commercial banks.
Q45
MCQ
Remember
Demand for Money Motives
The demand for money balance is often referred to as what, reflecting the trade-off between liquidity and foregone interest?
A
Investment preference
B
Liquidity preference
C
Savings preference
D
Monetary neutrality
Hint: Consider the advantage of holding money.
Answer
Demand for money balance is thus often referred to as liquidity preference.
Explanation
The text explicitly states, 'Demand for money balance is thus often referred to as liquidity preference,' indicating the choice individuals make regarding holding liquid assets versus interest-earning assets.
Q46
MCQ
Analyze
Money Multiplier
In the money multiplier process illustrated, if a bank starts with an initial deposit of Rs 100 and the reserve ratio is 20%, what is the maximum total deposit that can be supported by these reserves once the process is complete?
A
Rs 100
B
Rs 200
C
Rs 400
D
Rs 500
Hint: Use the money multiplier formula (1/CRR) and the initial reserves.
Answer
The required reserves will be Rs 100 only when the total deposits become Rs 500. This is because for deposits of Rs 500, cash reserves would have to be Rs 100 (20 per cent of 500 = 100).
Explanation
The text explicitly shows in Table 3.2 and the accompanying explanation that with an initial deposit creating Rs 100 in reserves (when no currency is in circulation and the initial deposit itself becomes reserves) and a 20% CRR, the process continues 'till all the required reserves become Rs 100. The required reserves will be Rs 100 only when the total deposits become Rs 500.' This demonstrates the money multiplier (1/0.20 = 5) applied to the reserves (5 * Rs 100 = Rs 500).
Q47
MCQ
Evaluate
Demonetisation Impact
One of the long-term positive impacts of demonetisation, as mentioned, was the shifting of transactions from the cash economy into the formal payment system. What is a likely consequence of this shift for tax administration?
A
It makes tax evasion easier due to more complex digital trails.
B
It simplifies tax administration by creating traceable transactions and improving compliance.
C
It significantly increases the cost of tax collection for the government.
D
It has no impact on tax administration, only on consumer spending habits.
Hint: Consider the transparency of digital transactions compared to cash.
Answer
Demonetisation could also help tax administration in another way, by shifting transactions out of the cash economy into the formal payment system. Households and firms have begun to shift from cash to electronic payment technologies.
Explanation
The text states, 'Demonetisation could also help tax administration in another way, by shifting transactions out of the cash economy into the formal payment system.' Formal payment systems leave digital trails, making transactions more transparent and easier to track for tax purposes, thereby improving compliance and simplifying administration.
Q48
MCQ
Remember
Supply of Money
Apart from currency notes and coins, what other component of the public's holdings is considered money because cheques drawn on these accounts are used to settle transactions?
A
Fixed deposits
B
Time deposits
C
Savings and current account deposits (demand deposits)
D
Government bonds
Hint: Think about bank balances that are readily accessible for payments.
Answer
Apart from currency notes and coins, the balance in savings, or current account deposits, held by the public in commercial banks is also considered money since cheques drawn on these accounts are used to settle transactions. Such deposits are called demand deposits as they are payable by the bank on demand from the account-holder.
Explanation
The text specifies, 'Apart from currency notes and coins, the balance in savings, or current account deposits, held by the public in commercial banks is also considered money since cheques drawn on these accounts are used to settle transactions. Such deposits are called demand deposits.'
Q49
MCQ
Understand
Monetary Policy Tools
If the Reserve Bank of India (RBI) conducts a 'reverse repurchase agreement' (reverse repo), what is the effect on the money supply?
A
It increases money supply by injecting funds into the system.
B
It decreases money supply by withdrawing money from the system.
C
It stabilizes money supply without changing its overall quantity.
D
It only affects long-term interest rates, not money supply.
Hint: Recall what happens when the central bank sells securities with a promise to repurchase.
Answer
The rate at which the money is withdrawn in this manner is called the reverse repo rate, indicating that a reverse repo operation leads to the withdrawal of money from the system, thus decreasing money supply.
Explanation
The text explains that a reverse repo involves the central bank selling securities with a promise to repurchase. This action 'withdraws money' from the system, and 'The rate at which the money is withdrawn in this manner is called the reverse repo rate.' Therefore, a reverse repo decreases the money supply.
Q50
MCQ
Apply
Functions of Money
A farmer sells her surplus wheat for money and then uses that money to buy clothes. Which function of money is most prominently demonstrated in this transaction?
A
Store of value
B
Unit of account
C
Medium of exchange
D
Measure of wealth
Hint: Consider how money simplifies the process of trading goods and services.
Answer
The individuals can then sell their produces for money and use this money to purchase the commodities they need. This demonstrates money acting as a medium of exchange, facilitating transactions.
Explanation
The text describes this exact scenario: 'The individuals can then sell their produces for money and use this money to purchase the commodities they need.' This is the primary role of money as a medium of exchange, overcoming the need for a double coincidence of wants inherent in barter.
Question 1 of 50
No comments:
Post a Comment