Tag: economics

Questions Related to economics

Consider the following statements and select the correct ones using the code given below:
1. RBI takes recourse to open market operations (OMOs) to manage liquidity in the system.
2. In OMOs, RBI generally sells the G-Sec in open market, however, in rare cases it also buys back the same from the market.
3. A 'debt switch' is a method in which RBI buys back G-Secs of short-term maturity and replaces it with G-Secs with longer maturity periods.

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

  1. 1 nad 2

  2. 2 and 3

  3. 1 and 3

  4. 1,2 and 3

Show answer
Correct Option: C
Explanation:

OMOs are an effective quantitative policy tool in the armoury of the RBI by which it modulates the liquidity in the system in the short-term. This is a two-way operation-through sell or buy of the G-Secs. The OMOs is constrained by the stock of the G-Secs available with the RBIonce it needs to siphon out money from the market. 

An increase in the Bank rate generally indicates that the ________________.

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

  1. market rate of interest is likely to fall

  2. Central Bank is no longer making loans to commercial banks

  3. Central Bank is following an easy money policy

  4. Central Bank is following a tight money policy

Show answer
Correct Option: D
Explanation:

Bank rate is the interest rate of the RBI for long-term lending to its clients. Higher 'bank rate' indicates the RBI signalling for a tighter money policy.

Select the correct tools used by the RBI in announcing the monetary policy-use the code given below to select your answer:
1. Term repo rates for 7,14 and 28 days.
2. Bank rate & Marginal standing facility rate.
3. Marginal cost of fund based lending rate.
4. Reverse repo rate for 7,14 and 28 days.

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

  1. 1 and 2

  2. 2 and 4

  3. 1 and 3

  4. 2 and 3

Show answer
Correct Option: A
Explanation:

Repo rates for more than 1 day are known as the 'term repos' which was launched by the RBI in October 2013 for the first time besidef the one day repo rate (also known as overnight epo rate). 'Marginal cost of fund based lending rate' (MCLR) are announced by the bank. Reverse repo is only for 1 day.

Select the incorrect statements related to the functions of RBI, using the code given below :
1. The final decision regarding Credit & Monetary Policy is taken by the Union Ministry of Finance.
2. Open Market Operations by the RBI comes under its autonomous powers.
3. Ultimate power of issuing fresh currency notes in India remains with the RBI.
4. RBI has been given full autonomy in the area of regulating the All India Financial Institutions.

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

  1. 1, 2 and 3

  2. 2, 3 and 4

  3. 1, 3 and 4

  4. 1, 2, 3 and 4

Show answer
Correct Option: B
Explanation:

RBI avails no autonomy in its functioning-though the Narasimhan Committee-I, in 1991, has suggested to allow it autonomy in the areas of critical importance, similar to many Western economies. It is believed that it has been given a kind of working autonomy in the area of making and announcing the Credit & Monetary Policy (though there is no change in the official stand hitherto).

Select the functions of the RBI, which are correct using the code given below:
1. as 'banker to the Government' it performs merchant banking function for the central and the state governments and also acts are their 'banker'.
2. As 'banker to banks', it maintains banking accounts of all scheduled banks.

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

  1. Only 1

  2. Only 2

  3. 1 and 2

  4. Neither 1 nor 2

Show answer
Correct Option: C
Explanation:

It means the RBI functions as the body, which manage the borrowing programmes of the government in India. Statement-2 talks about the 'banker of the last resort' function of the RBI under which it lends money to all operating banks and the financial institutions in the country.

One of the most important quantitative tools of credit control is _______.

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

  1. deficit financing

  2. moral suasion

  3. market borrowings

  4. statutory liquidity ratio

Show answer
Correct Option: D
Explanation:

 SLR (Statutory Liquidity Ratio) is the reserve requirement given by the Reserve Bank of India that the commercial banks in India are required to maintain in the form of cash, gold reserves, government approved securities before providing credit to the customers.

If the SLR is increased by the RBI, it will reduce the money supply in the economy and vice versa.

'Deficit Financing' means _________.

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

  1. relying on foreign aid

  2. spending by borrowing from abroad

  3. not spending enough to ensure development

  4. spending in excess of revenues

Show answer
Correct Option: D
Explanation:

Deficit financing, practice in which a government spends more money than it receives as revenue, the difference is filled up by borrowing or printing new currency.

Which of the following is not a cure for inflation?

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

  1. Better capacity utilization

  2. Lowering of bank rate

  3. Public distribution system

  4. Reducing bedget deficit

Show answer
Correct Option: B
Explanation:

When banks want to borrow long term funds from RBI, bank rate is the interest rate which RBI charges to them. Increase in the bank rate will be useful to control inflation.

It is currently set to 6.75 % (Second Bi-monthly Monetary Policy Statement, 2018–19). The bank rate is not used to control money supply these days.

Interest Rate Policy is a part of ________.

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

  1. fiscal policy

  2. industrial policy

  3. monetary policy

  4. none of the above

Show answer
Correct Option: C
Explanation:

Interest rate policy relates to the tools used by the central bank (RBI) to change the money supply in the economy.

Thus, it is essentially a part of monetary policy.

Open Market Operation (OMO) refers to the purchase and sale of __________.

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

  1. gold

  2. foreign exchange

  3. iron and steel

  4. government securities

Show answer
Correct Option: D
Explanation:

Open market operations (OMO) refer to the buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system.

This is one of the tools used bu the Reserve Bank of India to increase or decrease the money supply in the economy.