TRB PG Assistant - Central bank and its functions - money supply in India Online Test (MCQ Quiz)

1. What is the primary role of a central bank in an economy?

A) To regulate stock markets B) To manage the nation's currency, money supply, and interest rates C) To collect taxes from citizens D) To directly fund private businesses

2. Which institution is the central bank of India?

A) Securities and Exchange Board of India (SEBI) B) Reserve Bank of India (RBI) C) Industrial Development Bank of India (IDBI) D) National Bank for Agriculture and Rural Development (NABARD)

3. What is the main objective of monetary policy as conducted by the central bank?

A) To reduce unemployment and maintain price stability B) To increase government spending C) To directly control the prices of essential commodities D) To manage the foreign exchange reserves of commercial banks

4. Which of the following is a tool used by central banks to control the money supply?

A) Fiscal policy adjustments B) Government bond issuance C) Open market operations D) Direct price controls

5. What does 'Open Market Operations' by the RBI involve?

A) Lending directly to the public B) Buying and selling government securities in the open market C) Setting interest rates for agricultural loans D) Regulating the prices of gold and silver

6. When the RBI buys government securities, what is the typical impact on the money supply?

A) It decreases the money supply B) It increases the money supply C) It has no impact on the money supply D) It leads to a temporary decrease followed by an increase

7. When the RBI sells government securities, what is the typical impact on the money supply?

A) It increases the money supply B) It decreases the money supply C) It has no impact on the money supply D) It leads to a temporary increase followed by a decrease

8. What is the 'Repo Rate'?

A) The rate at which commercial banks deposit money with the RBI B) The rate at which the RBI lends money to commercial banks against government securities C) The rate at which commercial banks lend to each other D) The rate of interest on government bonds

9. What is the 'Reverse Repo Rate'?

A) The rate at which the RBI borrows money from commercial banks B) The rate at which commercial banks borrow from the RBI C) The rate at which commercial banks lend to each other D) The rate of interest on corporate bonds

10. How does an increase in the Repo Rate typically affect the money supply?

A) It increases the money supply by making borrowing cheaper B) It decreases the money supply by making borrowing more expensive C) It has no direct impact on the money supply D) It leads to a direct increase in government spending

11. How does a decrease in the Reverse Repo Rate typically affect the money supply?

A) It increases the money supply as banks have less incentive to park funds with RBI B) It decreases the money supply as banks are encouraged to deposit more with RBI C) It has no impact on the money supply D) It leads to a reduction in the cash reserve ratio

12. What is the 'Cash Reserve Ratio' (CRR)?

A) The percentage of total deposits that commercial banks must keep as cash with the RBI B) The percentage of total deposits that commercial banks must keep as liquid assets C) The percentage of profits that banks must pay to the government D) The minimum interest rate that banks can charge on loans

13. How does an increase in the CRR affect the money supply?

A) It increases the money supply by freeing up more funds for lending B) It decreases the money supply by reducing the funds available for lending C) It has no impact on the money supply D) It leads to a decrease in the bank rate

14. What is the 'Statutory Liquidity Ratio' (SLR)?

A) The percentage of total deposits that commercial banks must maintain in the form of gold B) The percentage of total deposits that commercial banks must maintain in specified liquid assets, including government securities C) The percentage of a bank's capital that must be held in reserve D) The maximum amount of cash a bank can hold in its vaults

15. How does an increase in the SLR affect the money supply?

A) It increases the money supply by allowing banks to lend more B) It decreases the money supply by reducing the funds available for lending C) It has no impact on the money supply D) It leads to a reduction in the repo rate

16. What is 'Money Supply' in economics?

A) The total value of all goods and services produced in an economy B) The total amount of money in circulation or in existence in a country at a specific time C) The total revenue earned by the government D) The total value of exports from a country

17. Which measure of money supply includes currency with the public, demand deposits with the banking system, and 'other' deposits with the RBI?

A) M0 B) M1 C) M2 D) M3

18. What does M3 (Broad Money) in India primarily include?

A) Currency and coins only B) M1 plus time deposits with the banking system C) Savings deposits and current account deposits D) Only demand deposits

19. Which of the following is considered a component of 'currency with the public' in money supply calculations?

A) Cash held by commercial banks B) Coins and banknotes in circulation C) Deposits held by the government with the RBI D) Foreign currency held by Indian residents

20. What are 'Demand Deposits' in the context of money supply?

A) Deposits that can be withdrawn on demand without prior notice B) Fixed deposits with a maturity period C) Deposits held by foreign banks D) Deposits held by the central government

21. The RBI acts as the banker to the government. What does this function entail?

A) Collecting taxes directly from individuals B) Managing the government's accounts, receipts, and payments C) Lending money directly to government employees D) Printing currency notes for government use only

22. Besides managing money supply, what is another crucial function of the RBI?

A) Regulating insurance companies B) Managing the country's foreign exchange reserves C) Setting the prices of agricultural produce D) Directly supervising stock exchanges

23. What is the role of the RBI in managing foreign exchange?

A) To allow the rupee to float freely without any intervention B) To manage the country's foreign exchange reserves and maintain the stability of the rupee C) To ban all foreign currency transactions D) To issue foreign currency to tourists only

24. The RBI is responsible for the issue and management of currency. What does this include?

A) Designing all currency notes and coins B) Issuing and managing the circulation of currency notes and coins C) Deciding the denominations of foreign currencies D) Regulating the value of foreign currencies against the rupee

25. What is the primary objective of regulating the banking system by the RBI?

A) To encourage banks to engage in risky ventures B) To ensure the stability and soundness of the banking system and protect depositors' interests C) To allow banks to operate without any supervision D) To set interest rates for all loans, regardless of the bank

26. What is the 'Bank Rate'?

A) The rate at which commercial banks lend to their most creditworthy customers B) The rate at which the RBI lends to commercial banks without any collateral C) The rate at which the RBI lends to commercial banks for long-term needs, and it is usually higher than the repo rate D) The average interest rate charged by all commercial banks

27. How does a change in the Bank Rate affect the overall cost of credit in the economy?

A) It has no effect on the cost of credit B) It directly influences the lending rates of commercial banks, affecting the cost of credit C) It only affects government borrowing costs D) It only affects the interest rates on savings accounts

28. What does the RBI's role as a 'Lender of Last Resort' mean?

A) The RBI provides loans to any individual who needs them B) The RBI provides liquidity or financial accommodation to sound financial institutions that are facing temporary liquidity shortages C) The RBI lends money to failing banks to encourage their closure D) The RBI guarantees all bank deposits

29. Which of the following is a 'credit control' function of the RBI?

A) Managing government debt B) Regulating foreign investment C) Using tools like CRR, SLR, Repo Rate, and Reverse Repo Rate D) Issuing new currency notes

30. What is the main purpose of 'Moral Suasion' as a tool used by the RBI?

A) To force banks to lend at extremely low rates B) To persuade banks to follow the monetary policy directives and guidelines C) To nationalize commercial banks D) To impose heavy fines on all banks

31. What is the RBI's role in promoting financial inclusion?

A) Restricting access to banking services B) Encouraging the expansion of banking services to all sections of society C) Focusing only on urban banking D) Setting high minimum balance requirements

32. Which of the following is NOT a direct function of the RBI?

A) Issuing currency B) Acting as a banker to the government C) Regulating the stock market (this is SEBI's role) D) Managing foreign exchange

33. What is the primary impact of an increase in the money supply, assuming other factors remain constant?

A) Deflation (fall in general price level) B) Inflation (rise in general price level) C) Stagnation in economic growth D) Decrease in consumer spending

34. What is the primary impact of a decrease in the money supply, assuming other factors remain constant?

A) Inflation (rise in general price level) B) Deflation (fall in general price level) C) Increased investment D) Higher consumer spending

35. The RBI's Monetary Policy Committee (MPC) is responsible for setting which key interest rate?

A) Prime Lending Rate B) Repo Rate C) Savings Account Interest Rate D) Fixed Deposit Rate

36. What is the main purpose of a central bank maintaining adequate foreign exchange reserves?

A) To fund domestic infrastructure projects B) To manage the country's balance of payments and stabilize the exchange rate C) To provide loans to foreign governments D) To purchase gold for national reserves

37. Which of the following is a component of M1 money supply in India?

A) Time deposits with banks B) Savings deposits with banks C) Currency notes and coins with the public D) Post office savings bank deposits

38. What is the significance of the RBI's 'developmental role'?

A) To exclusively focus on profit generation for the government B) To promote economic development and financial stability through various institutions and policies C) To directly manage public sector undertakings D) To reduce the number of banks in the country

39. When the RBI aims to curb inflation, it typically adopts a policy of:

A) Increasing the Repo Rate and selling government securities B) Decreasing the Repo Rate and buying government securities C) Reducing the CRR and SLR D) Encouraging banks to lend more freely

40. When the RBI aims to stimulate economic growth during a slowdown, it typically adopts a policy of:

A) Increasing CRR and SLR B) Increasing the Repo Rate C) Decreasing the Repo Rate and buying government securities D) Selling government securities

41. What is the primary purpose of the RBI's supervision of commercial banks?

A) To ensure banks take excessive risks B) To ensure banks operate soundly, adhere to regulations, and protect depositors C) To dictate the interest rates all banks must charge D) To manage the daily operations of each bank branch

42. Which of the following is a component of 'time deposits'?

A) Current account balances B) Fixed deposits C) Demand drafts D) Cheques

43. The RBI's mandate includes maintaining financial stability. What does this entail?

A) Allowing banks to fail without consequence B) Ensuring the resilience of the financial system against shocks C) Promoting speculative trading in financial markets D) Reducing the number of financial institutions

44. What is the primary function of the RBI regarding the printing of currency?

A) It prints all currency notes and coins itself B) It authorizes and oversees the printing of currency notes by government-owned presses C) It allows private companies to print currency D) It only authorizes the printing of coins

45. How does the RBI influence the lending capacity of commercial banks?

A) By directly setting loan quotas for each bank B) By managing reserve requirements (CRR, SLR) and influencing their liquidity C) By providing subsidies for all loans D) By guaranteeing the repayment of all bank loans

46. What is a 'call money' market?

A) A market for long-term corporate loans B) A market where banks lend and borrow funds on a very short-term basis, often overnight C) A market for agricultural credit D) A market for consumer loans

47. Which of the following is a key responsibility of the RBI in managing inflation?

A) Implementing fiscal policies like taxation and government spending B) Controlling the money supply and interest rates through monetary policy C) Directly subsidizing the prices of goods D) Imposing price caps on essential services

48. What is the RBI's role in the clearing and settlement of payments?

A) To manually process every cheque issued B) To provide and operate payment and settlement systems, facilitating the smooth transfer of funds between banks C) To issue physical cash for all transactions D) To only handle international payments

Central bank and its functions - money supply in India - Online Test

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