Tag: instruments of monetary policy and the reserve bank of india

Questions Related to instruments of monetary policy and the reserve bank of india

Investment made on shares and debentures is called ________ investment.

instruments of monetary policy and the reserve bank of india money and banking economics

  1. real

  2. financial

  3. inventary

  4. foreign

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Correct Option: B
Explanation:

Financial investments are the investments which are made of financial assets like shares and debentures where the ownership of these assets are easily transferable in the market with high mobility and such type of investments carry high risk.

If a country's lending is more than its borrowing from the rest of the world,it is a _________.

instruments of monetary policy and the reserve bank of india money and banking economics

  1. net borrower

  2. net lender

  3. surplus state

  4. deficit state

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Correct Option: B
Explanation:

If a country's lending is more than its borrowing from the rest of the world, it is known as a net lender. In such a case, the country is regarded as a creditor nation. It is very easy for such nations to raise credit from other nations in monetary terms. 

A country is treated a debtor nation if ______.

instruments of monetary policy and the reserve bank of india money and banking economics

  1. it has a history of more lending than borrowing

  2. it has a history of more borrowing than lending

  3. it has positive surplus

  4. it has negative surplus

Show answer
Correct Option: B
Explanation:

If a country's borrowing is more than its lending to the rest of the world, it is known as a net borrower. In such a case, the country is treated as a debtor nation because it has a history of more  borrowings(taking credits) than 

lending(giving credits). 

If a country's borrowing is more than its lending from the rest of the world,it is a _______.

instruments of monetary policy and the reserve bank of india money and banking economics

  1. net borrower

  2. net lender

  3. surplus state

  4. deficit state

Show answer
Correct Option: A
Explanation:

If a country's borrowing is more than its lending to the rest of the world, it is known as a net borrower. In such a case, the country is treated as a debtor nation. . It is very difficult for such nations to raise credit from other nations in monetary terms. 

A country is treated a creditor nation if ________.

instruments of monetary policy and the reserve bank of india money and banking economics

  1. it has a history of more lending than borrowing

  2. it has a history of more borrowing than lending

  3. it has positive trade surplus

  4. it has negative trade surplus

Show answer
Correct Option: A
Explanation:

If a country's lending is more than its borrowing from the rest of the world, it is known as a net lender. In such a case, the country is treated as a creditor nation because it has a history of more lending(giving credits) than borrowings(taking credits). 

If RBI infuses fresh money into circulation this will effect _______.

instruments of monetary policy and the reserve bank of india money and banking economics

  1. M1

  2. M2

  3. Both

  4. None

Show answer
Correct Option: C
Explanation:

Money supply refers to the total stock of money of all types ( currency as well as demand deposits) held by the people of a country at a given point of time. 

Money supply is measured in several ways which includes M1, M2, M3 and M4  measurement of money supply. Every measurement has it own definition with different components varying from most liquid to most rigid form. 

If Reserve Bank of India(RBI) infuses fresh money into circulation, this will effect M1 and M2 measurement of money supply as they are considered the liquid money supply in the economy and includes currency held by public in terms of coins and paper notes and the demand deposits of the people with the commercial banks. 

If the county is passing through recession, the RBI would _______.

instruments of monetary policy and the reserve bank of india money and banking economics

  1. buy bonds

  2. reduce CRR

  3. ease out bank rate

  4. all or any of the above three

Show answer
Correct Option: D
Explanation:

If the country would be passing through recession then the Reserve Bank of India(RBI) will use the quantitative measures of their monetary policy in order to control it, which includes: 

(i) Buying bonds in open market: Open market operation (OMO) is a monetary policy by the central bank in which the bank deals in the sale and purchase of securities and bonds in the open market to control the supply of money in the economy. By buying the securities and bonds, the central bank releases liquidity in the economy that increases the purchasing power in the economy which controls the situation of recession.  
(ii) Reducing CCR: Cash Reserves Ratio (CRR) refers to the proportion of total deposits of the commercial banks which they must keep as reserves with the central bank in the form of cash. By decreasing the cash reserve ratio, the commercial banks has to maintain less cash with the central bank which  increases their credit creation capacity and therefore money supply in the economy also increases which corrects the situation of recession.
(iii) Easing out of bank rate: Bank rate is the rate charged on the loans offered by the Central bank to the commercial banks without any collateral. Bank rate is a quantitative credit control measure under the monetary policy of the government as it controls the overall supply of the money in the economy. During recession, bank rate is decreased to increase the total money supply in the economy by increasing the amount of credit creation by the commercial banks. 

If RBI wants to decrease the money supply in order to check inflation it will __________.

instruments of monetary policy and the reserve bank of india money and banking economics

  1. sell bonds

  2. increase CRR

  3. hike bank rate

  4. all or any of the above three

Show answer
Correct Option: D
Explanation:

If Reserve Bank of India wants to decrease the money supply in order to check inflation then they will use the quantitative measures of their monetary policy which includes: 

(i) Selling bonds in open market: Open market operation (OMO) is a monetary policy by the central bank in which the bank deals in the sale and purchase of securities and bonds in the open market to control the supply of money in the economy. By selling the securities and bonds, the central bank soaks liquidity from the economy that reduces the purchasing power in the economy which controls the situation of inflation.  
(ii) Increase in CCR: Cash Reserves Ratio (CRR) refers to the proportion of total deposits of the commercial banks which they must keep as reserves with the central bank in the form of cash. By increasing the cash reserve ratio, the commercial banks has to maintain more cash with the central bank which  reduces their credit creation capacity and therefore money supply in the economy also reduces which corrects the situation of inflation.
(iii) Hiking bank rate: Bank rate is the rate charged on the loans offered by the Central bank to the commercial banks without any collateral. Bank rate is a quantitative credit control measure under the monetary policy of the government as it controls the overall supply of the money in the economy. During inflation, bank rate is increased to reduce the total money supply in the economy by reducing the amount of credit creation by the commercial banks. 

If RBI sucks excess money into circulation this will effect ________.

instruments of monetary policy and the reserve bank of india money and banking economics

  1. M1

  2. M2

  3. Both

  4. None

Show answer
Correct Option: C
Explanation:

Money supply refers to the total stock of money of all types ( currency as well as demand deposits) held by the people of a country at a given point of time. 

Money supply is measured in several ways which includes M1, M2, M3 and M4  measurement of money supply. Every measurement has it own definition with different components varying from most liquid to most rigid form. 

If Reserve Bank of India(RBI) sucks excess money into circulation, this will effect M1 and M2 measurement of money supply as they are considered the liquid money supply in the economy and includes currency held by public in terms of coins and paper notes and the demand deposits of the people with the commercial banks. 

Cheap money policy is followed __________.

instruments of monetary policy and the reserve bank of india money and banking economics

  1. to counter inflation

  2. to reverse depression

  3. to appease the public

  4. to increase disposal income of the households

Show answer
Correct Option: B
Explanation:

Cheap money policy refers to a monetary policy by the central bank where the central bank sets low interest rates so that credit is easily available to the general public in order to bring efficiency in trade and commerce in an economy. Such a policy is used by the government at the time of depression in the economy as it increases the money supply in the economy which reverses depression.