Unit-2 Money and Banking

1. Value of Money Multiplier with an increase in Cash Reserve Ratio.

(a) increases (b) decreases

(c) remains unchanged (d) None of these

2. Supply of money refers to

(a) currency held by the public (b) currency held by Reserve Bank of India (RBI)

(c) currency held by the public and demand deposits of the public with commercial banks

(d) currency held in the government account

3. The value of money multiplier is equal to

(a) 1/Cash Reserve Ratio (b) 1/Legal Reserve Ratio

(c) 1/Statutory Liquidity Ratio (d) All of these

4. Loans offered by commercial banks the money supply in the economy.

(a) increase (b) decrease

(c) does not change (d) All of these

5. The interest rate paid by the banks to depositors is lower than the rate charged from the be between
these two types of interest rates is called

(a) Bank Rate (b) Lending Rate

(c) Repo Rate (d) Spread

6. When the banks lend to any person, a new deposit is opened in that person's name. The economy
increases to old deposits plus new deposits plus

(a) Currency held by the public (b) Bank Money

(c) High Powered Money (d) Legal Reserves

7. There is a limit to money or credit creation by banks, and this is determined by The RBI decides a
certain percentage ________ which every bank must keep as reserves, called Legal Reserve Ratio
(LRR).

(a) Demand deposits (b) Time deposits

(c) Net total demand and time deposits (d) Current account deposits
8. If the Reserve Ratio is 20% and the primary deposits are 100, the total lending by the

(a) ₹500 (b) ₹400

(c) ₹100 (d) ₹20

9. M1 measure of money supply is defined as follows:

M1 = CU + DD where, CU is Currency (notes plus coins) held by the public and DD is ‘net’ demand
deposits held by commercial banks. What does the word ‘net’ imply here?

(a) Only hold deposits of the public held by the banks are to be included in money supply.
(b) The interbank deposits, which a commercial bank holds in other commercial banks, are not to be
regarded as part of money supply
(c) Both (a) and (b)
(d) It implies aggregate monetary resources

10. The currency issued by the central bank can be held by the public or by commercial banks, and is
called the __________.
(a) Credit Money (b) Bank Money
(c) High powered money (d) Fiat money

11. Total deposits created by commercial banks is ₹20,000 and LRR is 20%. Calculate the amount of
initial deposits
(a) ₹6000 crore (b) ₹4000 crore
(c) ₹5000 crore (d) ₹3000 crore
12. ______________ measures the amount of money that the banks are able to create in the form of
deposits with every initial deposit.
(a) Money supply (b) Demand deposits
(c) Deposit multiplier (d) High powered money
13. If Reserve Deposit Ratio 12.5%, the value of money multiplier will be:
(a) 2 (b) 5
(c) 8 (d) 10
14. _____________are called legal tenders
(a) Demand Deposits (b) Time Deposits
(c) Inter-bank deposits (d) Currency notes and coins
15. Bank deposits which have fixed period to maturity, e.g fixed deposits are referred to as _________.
(a) Saving account deposits (b) Current account deposits
(c) Time deposits (d) Recurring deposits
16. Central Bank is a very important institution in a modern economy. Almost every country ha one
central bank India got its cntral bank in 1935. Its name is ________________.
(a) State bank of India (SBI) (b) Reserve bank of India (RBI)
(c) Central Bank of India (CBI) (d) Punjab National bank (PNB)
17. Apart from the CRR, banks are also required to keep some reserves in liquid form in the short term.
This ratio is called ___________.
(a) Reserve Ratio (b) Legal Reserve Ratio
(c) Statutory Liquidity Ratio (d) Reserve Deposit Ratio
18. The central bank controls money supply of the country through various methods, like bank rate,
open market operations and variations in ____________.
(a) Cash reserve ratio (b) Statutory Liquidity Ratio
(c) Legal Reserve Deposit Ratio (d) All of these
19. Currency issued by the central bank is called:
(a) Fiat money (b) Legal tenders
(c) High powered money (d) All of the above
20. Apart from currency notes and coins, the balance in _________, held by the public in commercial
bank is also considered money since the amount in these accounts can be used to settle transactions.
Such deposits are called demand deposits because they are payable by the bank on demand from the
account holder.
(a) Saving account deposits (b) Current account deposits

(c) savings and current account deposits (d) None of these

21. High Powered Money is also called:

(a) Reserve Money (b) Monetary Base

(c) Bank Money (d) Credit Money

22. Since banks earn interest from loans they make, any bank would like to land the maximum
possible. But there is a limit to money or credit creation by banks and this is determined by

(a) Commercial bank (b) the central bank (RBI)

(c) Both (a) and (b) (d) None of these

23. When commercial banks need more funds in order to be able to create more credit, they may go to
market for such funds or go to the Central Bank. Central Bank provides them funds through various
instruments. This role of RBI, that of being ready to lend to banks at all times is a important function of
the central bank, and due to this central bank is said to be the

(a) Bankers Bank (b) The Supreme Power

(c) Lender of last resort (d) None of these

24. When the central bank buys the government security through an agreement which has a
specification about date and price of resale of this security. This type of agreement is called a
Repurchase agreement. The interest rate at which the money is lent in this way is called the

(a) Bank Rate (b) Repo Rate

(c) High powered money (d) Lending Rate

25. When the Central bank sells the government security through an agreement which has a
specification about the date and price at which it will be repurchased. This type of agreement is called a
Reverse Repurchase Agreement. The rate at which the money is withdrawn in this manner is called the
(ii),

(a) Bank Rate (b) Repo Rate

(c) Reverse Repo Rate (d) Lending Rate

26. If the Reserve Deposit Ratio is 25% and the initial deposits of the public are 2,000, what is the
value of deposit multiplier, total deposit creation and total lending by the banking system? ₹8,000 and
total lending by the banking system ₹6,000

(a) Deposit multiplier = 4: Total deposit creation = ₹8,000 and total lending by the banking system
₹6,000

(b) Deposit multiplier = 5: Total deposit creation = ₹10,000 and total lending by the banking system
₹10,000
(c) Deposit multiplier = 4: Total deposit creation ₹10,000 and total lending by the banking system
₹10,000

(d) Deposit multiplier = 5; Total deposit creation = ₹8,000 and total lending by the banking system
₹6,000

27. Total deposits created by commercial banks ₹12,000 crore and LRR is 25%. The amount of initial
deposits was:
(a) ₹15,000 crore (b) 12,000 crore
(c) ₹3,000 crore (d) ₹25,000 crore
28. What will be the legal reserve ratio if the initial deposit of 25,000 crore lead to a creation of total
deposits of 1,25,000 crore?

(a) 25% (b) 20%

(c) 125% (d) 12.5%

29. The Reserve Bank of India (RBI), cut Repo Rate to 4.4%, the lowest in at least 15 years. Also, it
reduced the Cash Reserve Ratio (CRR) maintained by the banks for the first time in over seven years.
CRR for all banks wa cut by 100 basis points to release 1.37 lakh crores across the banking system.
RBI governor Dr. Shaktikan Das predicted a big global recession and said India will not be immune. It
all depends how India responds to t situation. Aggregate demand may weaken and ease core inflation.
Cut in Repo rate by RBI is likely to the demand for goods and services in the economy.

(a) Increase (b) Decrease

(c) Double
30. Which of the following is not a function of the Reserve Bank of India

(a) Issue of currency (b) Banker to the public

(c) Banker to government (d) Controller of money supply

31. Identify which of the following statement is true:

(a) Statutory Liquidity Ratio is fixed by the government.

(b) Government of India issues all the coins and 1 currency note.

(c) Supply of currency notes are determined under fiscal policy.

(d) Demand deposits are not payable through cheques.

32. is not related with banking system.

(a) Bank rate (b) Fiscal deficit

(c) Credit creation (d) Cash reserve ratio

33. Central Bank as manages public debt of the government.

(a) Custodian of Foreign Exchange (b) Agent
(c) Financial Advisor (d) Supervisor
34. Process of credit creation by commercial banks comes to an end when

(a) Fresh deposits with Banks become zero.

(b) Reserve Ratio become zero.

(c) Money multiplier becomes zero.

(d) Total money reserves become equals to initial deposit.

35. Statutory liquidity ratio implies to that percentage of

(a) total deposits of the commercial banks which must be kept in the current account, with the Reserve
Bank of India.
(b) total deposits of the commercial banks which must be kept in the form of liquid assets, with the
Reserve Bank of India.

(c) net time and demand deposit liabilities of the commercial banks which must be kept in the form of
cash, with the Reserve Bank of India.

(d) net time and demand deposit liabilities of the commercial bank which must be kept with themselves
in the form of liquid assets.

36. If the Legal Reserve Ratio is 20% and Initial deposit is 2,000. then value of money multipier and
total mone creation will be and

(a) 5:10,000 (b) 4:8,000

(c) 6; 2,000 (d) 4:₹10,000

37. In the context of commercial bank, which of the following alternatives is correct?

(i) Deposits are liabilities of banks.

(ii) Commercial banks are creator of money.

(iii) Commercial banks accept deposits of the general public.

(iv) Accept deposits of World Bank for Agriculture and Rural developments.

Identify the correct alternative from the following:

Alternatives:

(a) (i) and (ii) (b) (ii) and (iii)

(c) (i), (ii) and (iii) (d) (i) and (iv)

38. The total stock of money in circulation among the public is called as 'money supply'.

(a) during a period of time (b) during a calendar year

(c) during a fiscal year (d) at a particular point of time

39. From the following functions of the Central Bank, identify the odd one out:

(a) Currency Authority (b) Banker to the Public

(c) Banker's Bank (d) Controller of Money supply(d) None of these

40. Which of the following is correct with reference to Ministry of Finance?

(a) It issues coins only (b) It issues all type of currency notes

(c) It issues one rupee note and coins (d) It issues only one rupee note

41. Suppose money created by the banking system is 1,000 and the primary deposits is 250. The
respective values of deposit multiplier and reserve ratio would be and

(a) 4.25% (b) 8.12.5%

(c) 4.12.5% (d) 5,20%

42. Number of times the commercial banks are able to create total deposits with the help of reserves
ratio and initial deposits is known as
(a) Investment multiplier (b) Money multiplier

(c) Demonetisation (d) Remonetisation

43. Money can be used to transfer purchasing power from the present to the future. Which specific
function of money is this called?

(a) store of value (b) unit of account

(c) medium of exchange (d) double coincidence of wants

44. There are two statements given below, about the effect of a rise in the general price level of an
economy.
P: It will lead to a rise in the value of money.

Q: It will lead to a rise in the demand for money.

Which of these is/are true?

(a) only P (b) only Q

(c) both P and Q (d) neither P nor Q

45. Which of the following actions by the Central Bank will INCREASE the money supply in the
country?

(a) decreasing the repo rate (b) decreasing the bank rate

(c) increasing the reverse repo rate (d) selling bonds issues by the government in the open market

46. If the reserve ratio is 20%, what will be the amount of total reserves after an initial deposit of 200?

(a) ₹1000 (b) ₹2000

(c) ₹200 (d) ₹400

47. Credit cards are excluded from all measures of the quantity of money, because they are not really a
method of payment, but a method of deferring payment. When you buy a meal with a credit card, the
bank that issued the card pays the restaurant the amount that is due. At a later date, you will have to
repay the bank, perhaps with interest. For this, you might use the money in your demand deposits, and
that money is included in the economy’s stock of money.
Which of the following can happen with an increased use of credit cards in an economy?
(a) increase in money supply (b) decrease in money supply
(c) increase in money demand (d) decrease in money demand

48. A bank 'run' occurs when a large number of customers of a bank withdraw their deposits
simultaneously. This can cause a bank to become insolvent if they cannot pay back all the depositors.

Which of the following facts about a bank make a bank run possible?
(a) Banks hold only about 15 per cent of their deposits as cash. The rest of the deposits are given out as
loans

(b) Banks have to pay a specific amount to the person in whose name a cheque has been issued.
(c) Banks charge a higher interest rate on loans than what they offer on deposits.

(d) Banks pay an amount to account holders as interest on deposits.

49. Identify which of the following bank does not interact directly with the general public? (

(a) Bank of India (b) State Bank of India

(c) Central Bank of India (d) Reserve Bank of India

50. Ms. Sakshi, an economics teacher, was explaining the concept of 'minimum percentage of the total
deposits by any commercial bank with the Central Bank of the country, as per norms and statute
prevailing in the c From the following, choose the correct alternative which specifies towards the
concept explained by her

(a) Cash Reserve Ratio (b) Repo Rate

(c) Bank Rate (d) Statutory Liquidity Ratio

51. Identify which of the following is not a function of the Reserve Bank of India!

(a) To act as the banker to the Government of India.

(b) To act as the custodian of the gold reserve of India

(c) To act as the financial advisor to the Government of India

(d) To issue coins and ont rupee note

52 . In a hypothetical economy, Mr. Neeraj has deposited 100 in the bank. If it is assumed that there is
no other currency circulation in the economy, then the total money supply in the economy will be

(a) zero (b) ₹100

(c) not defined (d) 120

53. Suppose in an economy, the initial deposits of 400 crores lead to the creation of total deposits worth
400 crones

Under the given situation the value of reserve requirements would be

(a) 0.01 (b) 1

(c) 0.1 (d) 0.4

54. Demand Deposits include___________ and _________________.

i. Saving account deposits ii. Fixed deposits

iii. Current Account Deposits iv. Post Office Savings

Alternatives:

(a) i and ii (b) ii and iii

(c) i and iii (d) i and iv

 Assertion & Reasoning Questions
1. Assertion (A): Central bank provides loans to the commercial banks in the situation of financial
distress.
Reason (R): Central bank can order the government to help the bank facing the financial crisis.

(a) Both Asertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Asertion
(A).

(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of
Assertion (A).
(c) Assertion (A) is true, but Reason (R) is false.

(d) Assertion (A) is false, but Reason (R) is true.

2.Assertion (A): Reserve Ratio and credit creation power of commercial bank are directly related.

Reason (R): Credit Creation is the product of the reciprocal of Reserve Ratio (RR) and Primary deposit.
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation for Assertion
(A).

(b) Both Assertion (A) and Reason (R) are true but Reason (R) is not the correct explanation for
Assertion (A).

(c) Assertion (A) is true but Reason (R) is false.

(d) Assertion (A) is false but Reason (R) is true.

3.Statement-I: All the coins are issued by Finance Ministry in India.

Statement-II: All the currency notes are issued by Reserve Bank of India.

(a) Both the statements are true.

(b) Both the statements are false.

(c) Statement-I is true, Statement-II is false.

(d) Statement-II is true, Statement-1 is false.

4. Read the following statements carefully and choose the correct alternative:
Statement 1: Reserve Bank of India keeps a certain percentage of deposits as reserve to avoid 'too much
lending to public'.
Statement 2: The reserve deposit ratio acts as a deterrence to the amount of credit created by the
commercial banks.

(a) Statement 1 is true and statement 2 is false.

(b) Statement 2 is true and statement 1 is false.

(c) Both the statements are true.

(d) Both the statements are false.

5. Assertion (A): Notes and Coins are the only source of money supply in the economy.

Reason (R): Demand deposits with commercial bank is also a component of money supply. the correct
explanation of Assertion (A).

(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion
(A)
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of
Assertion (A)

(c) Assertion (A) is true and Reason (R) is false.

(d) Assertion (A) is false and Reason (R) is true.

6. Statement 1-The value of money multiplier is determined by the reserve ratio prevailing in the
monetary

Statement 2-The process of credit creation directly relates to the value of reserve ratio.

(a) Both the statements are true.

(b) Both the statements are false.
(c) Statement 1 is true and Statement 2 is false

(d) Statement 2 is true and Statement 1 is false

7.Assertion (A): Demand Deposits are considered as a convienent mode of payment for execution of
even the high value transactions
Reason (R): Demand Deposits are non-withdrawable in nature and cannot be withdrawn against issue
of cheques and other similar instruments of payment.
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion
(A),

(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of
Assertion (A),

(c) Assertion (A) is true but Reason (R) is false.

(d) Assertion (A) is false but Reason (R) is true.

8.Statement 1: Currency created by the Central Bank is called bank Money.

Statement 2: Central Bank of a country has monopoly over the currency issue. It has the sole
responsibility printing and putting in circulation all types of currency notes (with a few exceptions).

(a) Statement 1 is true and statement 2 is false.

(b) Statement 2 is true and statement I is false.

(c) Both the statements are true.

(d) Both the statements are false.

9. Assertion (A): An increase in Legal Reserve Deposit Ratio increases the credit creation power of the
commercial banks (banking system).

Reason(R): Credit creation Primary deposits x 1/ Legal Reserve Ratio

(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion
(A).

(b) Both Assertion (A) and Reason (R ) are true and Reason (R) is not the correct explanation of
Assertion (A).

(c) Assertion (A) is true but Reason (R) is false.

(d) Assertion (A) is false but Reason (R) is true.

10. Assertion (A): Currency notes and coins are called fiat money.
Reason(R): RBI is responsible for giving the bearer of the currency equal purchasing power.

(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion
(A).

(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of
Assertion (A).
(c) Assertion (A) is true but Reason (R) is false.
(d) Assertion (A) is false but Reason (R) is true.
11. Assertion (A): Currency notes and coins are called legal tenders. Reason(R): They cannot be
refused by any citizen of the country for settlement of any kind of transaction.

(a) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of
Assertion (A).
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion
(A).

(c) Assertion (A) is true but Reason (R) is false.

(d) Assertion (A) is false but Reason (R) is true.

12.Assertion (A): Money supply is a stock variable.

Reason(R): Money supply is the total stock of money in circulation among the public at a given point
of time
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion
(A).

(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of
Assertion (A)

(c) Assertion (A) is true but Reason (R) is false.

(d) Assertion (A) is false but Reason (R) is true.

13. Assertion (A): Statutory quality ratio is the of demand deposits of a commercial bank which it has
to keep in the form of specified liquidos

Reason®: Statutory liquidity rass is a component of legal merve ratio, which affects the onder creation
in the
(a) Both Assertion (A) and Resson (R) set true and Reason (R) is the correct explanation of Assertion
(A)
(b) Bosh Assertion (A) and Reason (R) see true and Reason (R) is not the cornet explanation of
Assertion (A)

(c) Assertion (A) is true bus Reason (R) is false

(d) Assertion (A) i fabe but Reason (R) is true.

14. Statement 1 Reverse repe rate is the rate at which the Central Bank lends funds to hanks.

Statement 2: When Reverse Repo Rate is raised, it encourages the commercial banks to park their funds
with the central bank.

(a) Statement 1 is true and statement 2 is fabe.

(b) Statement 2 is true and statement 1 is fabe.

(c) Both the statements are true.

(d) Both the starements are false.

15. Assertion (A): To increase the money supply in the economy, Central Bank reduces the margin
requirement
Reason(R): Decrease in margin requirements enhances the borrowing capacity of public, which raises
the money supply in the economy

(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Asertion
(A)
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of
Assertion (A)

(c) Assertion (A) is true but Reason (R) is false.

(d) Assertion (A) is false but Reason (R) is true.

16. Assertion (A): Demand deposits are not legal tenders.

Reason(R): Demand deposits are the deposits which can be easily withdrawable on demand, by cheque
or otherwise, by the depositor from his/her bank account.

Alternatives:
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion
(A).
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of
Assertion (A).

(c) Assertion (A) is true but Reason (R) is false.

(d) Assertion (A) is false but Reason (R) is true.

17. Assertion (A): In a modern economy, money comprises cash and bank deposits. held by the public
and net demand deposits held by commercial

Reason(R): Money supply includes currency banks.

(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion
(A).

(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of
Assertion (A).

(c) Assertion (A) is true but Reason (R) is false,

(d) Assertion (A) is false but Reason (R) is true.

18. Assertion (A): Besides central bank, commercial banks are the other type of institutions which are a
part of the money-creating system of the economy.
Reason(R): Commercial banks accept deposits from the public and lend out part of these funds to those
who want to borrow
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of
Assertion (A)
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion
(A)

(c) Assertion (A) is true but Reason (R) is false.

(d) Assertion (A) is false but Reason (R) is true.

19. Statement I: Quantitative tools control the extent of money supply by changing the Cash Reserve
Ratio or Statutory Liquidity Ratio (SLR) or Bank Rate of Repo Rate or Reverse Repo Rate, or through
Open market operations (OMO).
Statement 2: Quantitative tools include persuasion by the central bank in order to make commercial
banks discourage or encourage lending.
(a) Statement 1 is true and statement 2 is false.

(b) Statement 2 is true and statement 1 is false.

(c) Both the statements are true.

(d) Both the statements are false.

20. Statement 1: Qualitative credit control tools control the extent of money supply.

Statement 2: Qualitative tools discourage or encourage lending which is done through margin
requirement, moral suasion, etc.

(a) Both the statements are true.

(b) Both the statements are false.

(c) Statement 1 is true and statement 2 is false.

(d) Statement 2 is true and statement 1 is false.

21. Assertion (A): MI measure of money supply is defined as follows: M1 CU+DD, where CU is
Currency (nos plus coins) held by the public and DD is 'net' demand deposits held by commercial
banks. The word 'net' he implies that only deposits of the public held by the banks are to be included in
money supply.

Reason(R): The interbank deposits, which a commercial bank holds in other commercial banks, are not
to be regarded as part of money supply.
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion
(A).

(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of
Assertion (A)

(c) Assertion (A) is true but Reason (R) is false.

(d) Assertion (A) is false but Reason (R) is true.

22. Assertion (A): Credit creation is inversely related to the legal reserve ratio (LRR).
Reason(R): Credit creation Initial Deposits x 1/LRR Any increase in LRR will decrease the credit
creation pow of the commercial banks (banking system) and vice-versa.

(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion
(A).
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of
Assertion (A).

(c) Assertion (A) is true but Reason (R) is false.

(d) Assertion (A) is false but Reason (R) is true.

23. Assertion (A): Credit creation is directly related to money multiplier.

Reason(R): Credit creation Initial deposits Money Multipler (1/LRR) With the same initial deposit,
total credit creation decreases with an increase in the value of money multiplier.

(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion
(A).
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of
Assertion (A)

(c) Assertion (A) is true but Reason (R) is false.

(d) Assertion (A) is false but Reason (R) is true.

24. Assertion (A): The currency issued by the central bank (Reserve Bank of India in India) can be held
by the public or by the commercial banks, and is called the high-powered monry of monetary hase".

Reason(R) It acts as a basis for credit creation. With the same initial deposit, total credit creation
decreases with an increase in the value of money multiplier.

(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Asertion
(A).

(b) Both Asertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of
Assertion (A).

(c) Assertion (A) is true but Reason (R) is false.

(d) Asertion (A) is fabe but Reason (R) is true.
25. Statement 1: Tune deposin are those deposits in banks which have a fined period of maturity.eg.
Fixed Deposits (FD).
Statement 2: The basic measure of money supply (M1) includes only demand deposits, not time
deposits.

(A) Statement 1 is truc and statement 2 is false.

(b) Statement 2 is true and statement 1 is false.

(c) Both the statements are true.

(d) Both the statements are false

26.Statement 1: The currency issued by the central bank is called the high-powered money.
Statement 2: Demand deposits are created by the commercial banks and are called bank money.

(a) Statement 1 is true and statement 2 is false.

(b) Statement 2 is true and statement 1 is false.

(c) Both the statements are true.

(d) Both the statements are false.

27. Statement 1: Only deposits of the public held by the banks are to be included in money supply.
Statement 2: The inter-bank deposits, which a commercial bank holds in other commercial banks,are
not to be regarded as part of money supply.
(a) Statement 1 is true and statement 2 is false.

(b) Statement 2 is true and statement 1 is false.

(c) Both the statements are true.

(d) Both the statements are false.

28. Statement 1: India got its central bank in 1935. Its name is the 'Reserve Bank of India (RBI).
Statement 2: RBI acts as a banker to the central government only, not state governments.

(a) Statement 1 is true and statement 2 is false.

(b) Statement 2 is true and statement 1 is false.

(c) Both the statements are true.
(d) Both the statements are false.

29. Statement 1: Conventionally, the assets of a commercial bank are recorded on the left hand side and
liabilities on the right hand side.

Statement 2: The interest rate paid by the banks to depositors is lower than the rate charged from the
borrowers. This difference between these two types of interest rates, called the 'spread' is the profit
appropriated by the bank.
(a) Statement 1 is true and statement 2 is false.

(b) Statement 2 is true and statement 1 is false.

(c) Both the statements are true.

(d) Both the statements are false.

30. Read the following stamment carefully and choose the corect alternative Statement 1. Reserves are
deposits which commercial banke keep with the Central bank, Reserve Bank of

(RBI) and in canh.

Statement 2: These reserves are kept partly as cash and partly in the form of financial instrumeno this

treamiry bills) issued by the RBL

(4) Statement 1 is true and statement 2 is fabe.

(b) Statement 2 is true and statement 1 is false.

(C) Both the statements are true.

(d) Both the statements are false.

31. Read the following statements -Assertion (A) and Reason(R), Choose one of the correct alternatives
given belo Assertion (A): Apart from currency notes and coins, the balance in serings, or current
account deposits, held by public in commercial banks is also considered money.

Reason(R): Since cheques drawn on these accounts are used to settle transactions. (a) Both Assertion
(A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A)
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of
Assertion (A).

(c) Assertion (A) is true but Reason (R) is false.

(d) Assertion (A) is false but Reason (R) is true.

32. Read the following statements -Assertion (A) and Reason(R), Choose one of the correct alternatives
given below Assertion (A): The balance in savings, or current account deposits are called demand
deposits. Reason(R): They are payable by the bank on demand from the account-holder.

(a) Boch Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion
(A).

(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of
Assertion (A).

(c) Assertion (A ) is true but Reason (R) is false.

33. Read the following statements Assertion (A) and Reason(R), Choose one of the correct alternatives
given below: Assertion (A): The value of the currency notes and coins is derived from the guarantee
provided by the issuing

(d) Assertion (A) is false but Reason (R) is true.

authority of these items. Reason(R): Every currency note bears on its face a promise from the Governor
of RBI that if someone produces the note to RBI, or any other commercial bank, RBI will be
responsible for giving the person purchasing power equi to the value printed on

the note. The same is also true of coins.

(a) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of
Assertion (A),

(b) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion
(A).

(c) Assertion (A) is true but Reason (R) is false.

(d) Assertion (A) is false but Reason (R) is true.

34. Read the following statements carefully and choose the correct alternative: notes and coins do not
have intrinsic value like a gold or silver coin.

Statement 1: Currency Statement 2: Currency notes and coins are also called legal tenders as they
cannot be refused by any citizen of th

country for settlement of any kind of transaction. (a) Statement 1 is true and statement 2 is false.

(b) Statement 2 is true and statement 1 is false.

(c) Both the statements are true.

(d) Both the statements are false.

35. Statement 1: Cash reserve ratio (CRR) is the fraction of demand deposits that commercial banks
must keep cash reserves with the Central Bank.

Statement 2: Statutory liquidity ratio (SLR) is the fraction of time deposits that commercial banks must
keep with themselves in the form of specified liquid assets
(a) Statement I is true and statement 2 is false. (b) Statement 2 is true and statement 1 is false.

(c) Both the statements are true. (d) Both the statements are false.

36. Statement I: Primary deposits refer to initial deposits with the commercial banks.

Statement 2: Total credit creation (or money creation) Primary deposits x Legal Reserve Ratio

(a) Statement I is true and statement 2 is false.

(b) Statement 2 is true and statement 1 is false.

(c) Both the statements are true.

(d) Both the statements are false.

37. Assertion (A): How much are the deposits created is determined by primary deposits and Legal
Reverve Deposit Ratio.
Reason(R): Total deposits creation - Primary deposits x 1/Legal Reserve Deposit Ratio.

(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion
(A).
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of
Assertion (A).
(c) Assertion (A) is true but Reason (R) is false. (d) Assertion (A) is fabe but Reason (R) is true.

38. Statement 1: The deposits creation comes to an end when total reserves become equal to the initial
deposit.
Statement 2: Credit creation is inversely related to the legal reserve ratio.

(a) Statement I is true and statement 2 is false.

(b) Statement 2 is true and statement 1 is false.

(c) Both the statements are true.

(d) Both the statements are false.

39. Statement 1: The Central Bank acts as a banker and a financial advisor to the government (both
Central government as well as State governments).

Statement 2: The Central Bank also provides a large number of routine banking functions to the
commercial banks, like cheque clearing, remittance facilities, etc.

(a) Statement 1 is true and statement 2 is false.

(b) Statement 2 is true and statement I is false.

(c) Both the statements are true.

(d) Both the statements are false.

40. Read the following statements -Assertion (A) and Reason(R), Choose one of the correct alternatives
given below. are legally required to keep only a fraction of deposits as cash reserves.

Assertion (A). Commercial banks are legally required to keep only a fraction of deposits as cash
reserves.
Reason(R): This is because not all depositors approach the banks for withdrawal of money at the same
time, and also that normally they withdraw a fraction of deposits. Secondly, there is a constant flow of
new deposits into the banks. Therefore, to meet the daily demand for withdrawal of cash, it is sufficient
for banks to keep only a fractionof deposits as cash reserves.
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion
(A).

(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of
Assertion (A).

(c) Assertion (A) is true but Reason (R) is false.

(d) Assertion (A) is false but Reason (R) is true.

41. Statement 1: The policy adopted by the Central Bank of a country in the direction of credit control
or money supply is known as Monetary Policy.
Statement 2: Instruments of Monetary Policy are Bank Rate, Cash Reserve Ratio (CRR), Open Market
Operations (OMO), etc.
(a) Both the statements are true.

(b) Both the statements are false.

(c) Statement 1 is true and statement 2 is false.

(d) Statement 2 is true and statement 1 is false.

42. Statement 1: RBI is the sole authority for the issue of all currency notes and coins in India.
Statement 2: The central government controls the money supply and credit in the best interests of the
economy by taking recourse to various quantitative and qualitative tools.

(a) Statement 1 is true and statement 2 is false.

(b) Statement 2 is true and statement 1 is false.

(c) Both the statements are true.

(d) Both the statements are false.

43. Statement 1: Bank Rate is the rate of interest at which Central Bank lends to the commercial banks
for long term.
Statement 2: Repo Rate is the rate of interest at which Central Bank lends to commercial banks for their
short term requirements.

(a) Statement 1 is true and statement 2 is false.

(b) Statement 2 is true and statement 1 is false.

(c) Both the statements are true.

(d) Both the statements are false.

44. Assertion (A): By selling government securities the Central Bank soaks liquidity from the
economy.
Reason(R): Those who buy make payments by cheques to the Central Bank. This reduces the reserves
of commercial banks and adversely affects bank's ability to create credit and thus, reduces the money
supply in the hands of general public.
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion
(A).

(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of
Assertion (A).

(c) Assertion (A) is true bur Reason (R) is false.

(d) Assertion (A) is false but Reason (R) is true.

45. Read the following statements carefully and choose the correct alternative:

Statement 1: If the Central bank increases the reserve ratio, this would lead to increase in lending by
the banks.
Statement 2: Reverse repo rate is the rate at which Central Bank borrows money from commercial
banks.

(a) Statement 1 is true and statement 2 is false.

(b) Statement 2 is true and statement 1 is false.

(c) Both the statements are true.

(d) Both the statements are false.

 Case Study
CASE STUDY 1: Read the following News Report and answer Q. 1-4 on the basis of the sames

The Monetary Policy Committee of the Reserve Bank of India kept interest rates on hold Thursday
even as it vowed to keep policy sufficiently loose to help revive the coronavirus-battered economy.
Accepting a key demand of lenders and the corporate sector, the central bank cleared a one-time
restructuring of loan accounts to bail out stressed borrowers, including personal, small and medium
loans.

The details of the loan restructuring scheme expected to kick in after the moratorium on loan
repayments ends August 31-will be worked out by a committee headed by former ICICI Bank
Chairman KV Kamath. The RBI also continued to provide support on the liquidity front and opened a
new targeted window for small lenders. The central bank kept the repo rate unchanged at 4 per cent and
reduced the reverse repo rute to 3.35 per cent.

Q.1 Suppose you are a member of the Monetary Policy Committee of the RBI. You have suggested the
money supply be ensured to help revive the coronavirus-battered economy.

(a) restriction

(b) release
(c) doubling
(d) no change

Q.2 "The Monetary Policy Committee of the RBI kept interest rates on hold..." Which of the following
is highlighted above by the term "interest rates?

(a) Bank Rate and Repo Rate

(b) Bank Rate and Lending Rate

(c) Repo Rate and Reverse Repo Rate

(d) Bank Rate and Reverse Repo Rate

Q.3 What does the 'Repo Rate' mean?

(a) Rate at which banks borrow from the RBI for short-term.
(b) Rate at which banks borrow from the RBI for long-term.
(c) Rate at which banks deposit excess funds with the RBI

(d) Rate at which banks lend funds to the public.

Q.4 'Reduction in Repo Rate by RBI' is likely to

(a) increase

(b) decrease

(c) double of the the demand for goods and services in the economy.

(d) not affect

CASE STUDY 2: Read the following News Report and answer Q.5-8 on the basis of the same:
RBI Monetary Policy 2020
The key indicators of RBI Monetary Policy along with their current rates in the the tabled given below:

Indicators Current Rate

CRR 3%
SLR 18.50%
Repo Rate 4.00%
Reverse Repo Rate 3.35%
Bank Rate 4.65%
On 9th October 2020, RBI has kept the Repo Rate unchanged at 4.00% and reduced reverse repo rate to
3.35%. In addition to that, the bank rate stands at 4.65%. This has been done to limit the damage to the
economy caused by the Covid-19 and subsequent lockdowns.

Q.5 What does RBI Monetary Policy 2020 mean?

(a) It is the policy formulated by the RBI in 2020 related to expenditure and taxation of the
government.

(b) It is the policy formulated by the RBI in 2020 related to money matters of the country,
(c) It is the policy formulated by the RBI in 2020 related to the government budget.
(d) It is the policy formulated by the RBI in 2020 related to the distribution of credit among users as
well as the rate of interest on borrowing and lending
Q.6 What does the 'Bank Rate' mean?

(a) Rate at which banks borrow from the RBI for short-term.
(b) Rate at which banks borrow from the RBI for long-term.

(c) Rate at which banks deposit excess funds with the RBI.

(d) Rate at which banks lend funds to the public.

Q.7 Which of the following is a quantitative credit control technique of RBI?

(a) CRR
(b) SLR
(c) Repo Rate
(d) All of these

Q.8 Cut in Reverse Repo Rate is likely to the demand for goods and services in the economy during
Covid-19 lockdowns.

(a) increase

(b) decrease

(c) double

(d) not affect

CASE STUDY 3 Read the following News Report and answer Q. 9-12 on the basis of the sames RBI
extends CRIR and SLR relaxations for three more mantha

(c) double

Keeping in view the continuing of hardships faced by banks in terms of swxial distancing of staff and
consequent strains on reporting requirements, the Reserve Bank of Indies has extended the of sal dit
ning aimun daily maintenance of the ip to September of 80% for up to 25, 2020. Currently CRR is 3%
and SLR is 18.50% "As announced in the Statement of Developmental and Regulatory Policies of
March 27, 2020, the minimum dally, mainernance of CRR was reduced from of and Policies of Marche
fornight beginning March 28, 2020 till June 26, 2020 that has now been extended up to September 25,
2020," said the RBI.

Q.9 The full forms of CRR and SLR are:

(a) Current Reserve Ratio and Statutory Legal Reserves (b) Cash Reserve Ratio and Statutory Legal
Reserves
(c) Current Required Ratio and Statutory Legal Reserves

(d) Cash Reserve Ratio and Statutory Liquidity Ratio

Q.10 What will be the value of money multiplier!

(a) 33.33

(b) 5.4

(c) 4.65

(d) None of these

Q.11 SLR implies:

(a) Certain percentage of the total bank's deposits has to be kept in the current account with RBI. total
demand and time deposits has to be kept by the bank with themselves.

(b) Certain percentage of net

(c) Certain percentage of net demand deposits has to be kept by the banks with RBI.

(d) None of the above

Q.12 Decrease in CRR will lead to

(a) fall in aggregate demand in the economy

(b) rise in aggregate demand in the economy

(c) no change in aggregate demand in the economy

(d) fall in general price level in the economy

CASE STUDY 4. Read the following News Report and answer Q. 13-16 on the basis of the sames Due
to Covid-19, the Reserve Bank of India (RBI), cut Repo Rate to 4.4% the lowest in at least 15 years.
Also, it reduced the CRR by 100 basis points. Previously, it was 4%. RBI governor Dr. Shaktikanta Das
predicted a big global recessiom and said India will not be immune. It all depends how India responds
to the situation. Aggregate demand may weaken ane ease core inflation.

Q.13 CRR stands for:

(a) Cash Reserve Ratio
(b) Current Reserve Ratio
(c) Cash Required Rate
(d) Current Required Rate
Q.14 Cut in Repo Rase by RBI is likely to ________________ the aggregate demand in the Indian
economy.

(a) increase

(b) decrease

(c) double

(d) not affect

Q.15 reduced the CRR by 100 basis points. Previously, it was 4%. Thus, CRR is reduced to

(a) 5%

(b) 3%

(c) 96%

(d) 104%

Q.16 Besides reduction in CRR and Repo Rate, what other measures can be taken by the Government
of India through its budgetary policy to combat recession?

(a) Decrease the bank rate

(b) Sell government securities in the open market

(c) Increase margin requirements on secured loans

(d) Decrease taxes and increase government expenditure

CASE STUDY 5 Q. No. 17-22 are to be answered on the basis of the following text and data:
Money plays a crucial role in the smooth functioning of the economy. Money supply is considered as a
very important tool to control other macro economic variables. Central bank and commercial banks are
the two main sources of money supply. Measurement of money supply is an important task performed
by the central bank. RBI in its presa release on 22 September, 2021 has released data on money supply
for the fortnight ended 10 September, 2021 as follows:

S.No. Items Outstanding as on 10 september,

 2021(in crores)
(i) Currency with Public 28,43,296
(ii) Demand Deposits with Banks 18,88,130
(iii) Time Deposits with Banks 1,46,21,448
(iv) Other deposits with world bank 46,722
837486 837486
Q.17 The value of money supply in the economy is Crores

(a) 1.30.78.148

(c) 47.78.148

(b) 1,93,99,596

(d) 47.31.426

Q.18 Mancy supply is a variable, measured at a point of time.

(a) Stock

(b) Flow

(c) Both Stock and Flow

(d) Neither Stock, nor Flow

Q.19 Demand deposits are

(a) Chequable deposits

(b) Non-chequable deposits

(c) Fixed deposits Q.20Suppose primary

(d) Recurring deposits

Q.20. Suppose primary deposits are 2,000 crores and reserve deposit ratio is 10%. The money created
by commercial banks would be ___________ crores in the economy.

(a) 10,000
(b) 20,000

(c) 2,000

(d) 1,000

Q.21 Read the following statements, carefully - Assertion (A) and Reason (R) and choose the correct
alternative:

Assertion (A): Money supply includes money held by all the financial institutions. Reason (R): Money
held by the government does not come into circulation.

(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion
(A).
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of
Assertion (A).
(c) Assertion (A) is true, but Reason (R) is false.

(d) Assertion (A) is false, but Reason (R) is true.

Q.22 ________________ releases data on money supply in India.
(a) Government of India (b) Reserve Bank of India
(c) Commercial Banks (d) State bank of India