Money and Banking

Banks, along with other banking systems, are the primary stewards of the nation’s money supply and a major source of funding for individuals and businesses alike. This refers to markets where money and other assets can be bought and sold. Economists classify fiat money, commercial money, commodity, and fiduciary money as four distinct sorts of money. Money, like gold and other precious metals, has value because it represents something of value to most people. In finance, we learn Our economy’s well-being is dependent on a wide range of economic variables that can be affected by money.

Multiple Choice Questions

Q:1 Whenever the central bank offers securities in the open market, the credit creation capability of the banking industry is expected to

1. 1. Fall
   2. Rise
   3. No effect
   4. May rise or may fall

Answer: (B) Rise

Explanation

when the central bank sells stocks and bonds in the market. Because these investments are safe, most people buy them. When they pay, they write out a check from their account at the commercial bank to pay for things. The amount of money in the bank falls.

Q:2 What distinguishes a bank from other financial institutions?

1. 1. Accepting time deposits as a courtesy
   2. Accepting demand deposits
   3. Lending
   4. Accepting loans and borrowings

Answer: (B) Accepting demand deposits

Explanation

Demand deposits are exclusively accepted by the bank, not by any other financial institution. The money in the account can be withdrawn at any time by the Depositor via check, ATM, or online banking. Demand deposits include things like savings and checking accounts.

Q:3 Given CRR = 4% and SLR = 16%, the value of the money multiplier is:

1. 1. 5
   2. 25
   3. 8.33
   4. 6.25

Answer: (A) 5

Explanation

Money Multiplier corresponds to 1/LRR. LRR is equivalent to SLR plus CRR. Hence Money Multiplier denotes 1/20%. And after trying to solve it comes to 5.

Q:4 On which things were not included in the Supply of money measure?

1. 1. inter-bank deposits
   2. Demand deposits with financial institutions on a net basis
   3. Currency and coins are available to the general population
   4. Deposits with the Reserve Bank of India (RBI) in addition to the above

Answer: (A) inter-bank deposits

Explanation

Currency and coins with the public, as well as Net Demand deposits with banks, and other deposits with the RBI, make up the money supply.

Q:5 The term “Money Supply” relates to:

1. 1. Overall money held by the general public over a specified period of time
   2. The total volume of money held by the public at a particular point in time
   3. The total amount of money that the government possesses.
   4. Both a) and b)

Answer: (B) Total volume of money held by the public at a particular point in time

Explanation

The money supply is a stock concept, and it is the money held by the public in the form of coins and currency and public deposits in the bank at a point in time.

Q:6 The amount of money in India is controlled by?

1. 1. Planning Commission
   2. Commercial Banks
   3. Government of India
   4. Reserve Bank of India

Answer: (D) Reserve Bank of India

Explanation

It is the country’s central bank, the Reserve Bank of India (RBI). The money supply is controlled by the country’s central bank.

Q:7 If indeed the deposits made by banks are ₹ 10,000 crore and legitimate reserve requirements are 40 percent, then the amount of initial deposits will be

1. 1. ₹ 4000 crore
   2. ₹ 14000 crore
   3. ₹ 3000 crore
   4. ₹ 2000 crore

Answer:  (A) ₹ 4000 crore

Explanation

The money multiplier equals 2.5. So dividing 10,000 by 2.5, we arrive at an initial deposit figure of 4000 crores.

Q:8 To help the country’s credit situation, the RBI may:

1. 1. Repo Rates Should Be Reduced
   2. Purchase stocks and bonds in the open market.
   3. Reduce the cash reserve to debt ratio.
   4. Sell securities in the open market

Answer: (D) Sell securities in the open market

Explanation

Selling security on the open market decreases a commercial bank’s deposit base. Additionally, it limits lending capability.

Q:9  Which of the following isn’t really a central bank’s responsibility:

1. 1. Banking facilities for the public
   2. Providing credit to commercial banks
   3. Providing financial assistance to the government
   4. Banking facilities for government

Answer : (A) Banking facilities for the public

Explanation

The central bank doesn’t really offer financial services to the general public. It provides banking services to both public and private banks.

Q:10 Which bank is in charge of India’s banking and monetary system?

1. 1. State Bank of India
   2. Axis Bank
   3. World Bank
   4. Reserve bank of India

Answer: (D) Reserve bank of India

Explanation

The central bank is empowered to regulate the banking and monetary systems. In India, the central bank is referred to as the Reserve Bank of India.

Q:11 What is the value of the money multiplier when initial deposits are ₹500 crores and LRR is 10%.

1. 1. 0.2
   2. 0.1
   3. 10
   4. 20

Answer:  (C) 10

Explanation

Money Multiplier is 1/LRR, which equates to ten times.

Q:12 What happens when margin requirements are increased.

1. 1. There has been no change in the amount of money in circulation.
   2. more likely to borrow more money resulting in a rise in the money supply
   3. It decreases borrowing capacity and money supply
   4. None of the following

Answer:  (C) It decreases borrowing capacity and money supply

Explanation

The margin requirement is the difference between the value of the mortgage security and the amount of the loan. The higher the margin requirement, the smaller the loan amount. A smaller loan amount dissuades the borrower from obtaining a loan from the bank.

Q:13 Identify the institution that accepts deposits, makes loans, and makes investments with the intent of profiting.

1. 1.  Neither
   2.  Central Bank
   3.  Both 1 and 2
   4.  commercial Bank

Answer: (D) Commercial Bank

Explanation

Commercial banks accept all types of deposits, advance loans, and invest deposit money in various investment schemes in order to earn profit.

Q:14 Commercial banks create money in the following ways:

1. 1. Issuing currency
   2. Creation of bank deposits
   3. Neither (1) nor (2)
   4. Both (1) and (2)

Answer: (B) Creation of bank deposits

Explanation

Loans are made by commercial banks using bank deposits received from depositors. When a bank makes a loan, it does not make a cash payment. A demand deposit account is opened in the borrower’s name, and the loan proceeds are placed there. The borrower may pay from these demand deposits through a cheque, ATM, or internet banking.

Q:15 The central bank’s reduction of the CRR has the following effect on the commercial banks’ capacity to create credit:

1. 1. Positive
   2. No effect
   3. Negative
   4. Can be negative or can be positive

Answer : (A) Positive

Explanation 

Reduced CRR increases the level of deposits available for lending. It increases the commercial bank’s lending capacity.

Q:16 By lowering the central bank’s margin requirements, borrowers’ borrowing capacity increases:

1. 1. Falls
   2. No effect
   3. Rises
   4. May rise or may fall

Answer: (C) Rises

Explanation

Lending Rates are the difference between the Collateral security’s face value and the loan amount specified. The smaller the margin restrictions, the larger the sanctioned loan amount.

Q:17 Which of the statements below is true?

1. 1.  M3 is the most liquid money supply measure
   2.   M2 is the most liquid money supply measure 
   3. M1 is the most liquid money supply measure
   4. All of the statements are true

Answer: (C) M1 is the most liquid money supply measure

Explanation

M1 is a group of assets that can be easily traded for goods and services. These assets are called M1. It includes coins and money that are in circulation and that people use to pay for things and services.

Q:18 Which of the following is not true?

1. 1. term deposits aren’t legal currency
   2. wheat is not legal tender
   3. Demand deposits are not legal tender
   4. issued currency notes are not legal tender

Answer: (D) issued currency notes are not legal tender

Explanation

A legal tender is a form of money that a court of law must accept as sufficient payment for any financial department. Coins and notes are the Reserve Bank of India’s recognised legal money in India.

Q:19 Which one of the below is not a central bank function?

1. 1.  Lending to commercial banks
   2. Banking facilities for public
   3.  Financial services to the government
   4. Lending to government

Answer: (B) Banking facilities for public

Explanation

Commercial banks interact directly with the public by receiving and lending deposits.

Q:20 What happens when margin requirements are increased.

1. 1. It decreases borrowing capacity and money supply
   2.  It increases borrowing capacity and money supply
   3.  It encourages people to borrow more, resulting in a rise in the money supply.
   4. There is no change in the money supply

Answer: (A) It decreases borrowing capacity and money supply

Explanation

The margin requirement is the difference between the value of the mortgage security and the loan amount. The higher the margin requirement, the smaller the loan amount. A smaller loan amount dissuades the borrower from obtaining a loan from the bank.

Q:21 Which of the following is the closest to the money?

1. 1.  Securities
   2.  Bonds
   3.  Insurance policy
   4.  All of these

Answer:  (D) All of these

Explanation

The term “near money” refers to non-monetary assets that can be converted into cash quickly because of their high liquidity. Bills of exchange, savings bonds, and gilt-edged securities, for example, are considered close to money since they are liquid assets that may be easily turned into cash.

Q:22 The central bank can boost the availability of credit in a number of ways, including:

1. 1.  Selling government securities
   2.  Buying government securities
   3.  Raising reverse repo rate
   4.  Raising repo rate

Answer: (B) Buying government securities

Explanation

This leads to the transfer of money from the Central bank to the commercial banks, as well as an increase in the credit creation capacity of the financial institutions. As a result, the central bank has the capacity to boost the supply of credit by purchasing government assets.