CA Foundation Economics – Monetary Policy in India Multiple Choice Questions

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Monetary Policy Introduction

Question 1. Monetary policy in India is formulated and regulated by

  1. The Ministry of Finance.
  2. The Planning Commission of India.
  3. The Reserve Bank of India (RBI).
  4. The Securities and Exchange Board of India (SEBI).

Answer: 3. The Reserve Bank of India (RBI).

Explanation:

Monetary policy in India is formulated and regulated by the Reserve Bank of India (RBI). The RBI is the central banking institution of India and is responsible for formulating and implementing monetary policy to control the money supply and achieve price stability and economic growth.

Question 2. The primary objective of monetary policy in India is to

  1. Control government spending and fiscal deficits. >
  2. Regulate foreign trade and exchange rates.
  3. Control the money supply and inflation.
  4. Set interest rates for commercial banks

Answer: 3. Control the money supply and inflation.

Explanation:

The primary objective of monetary policy in India, as set by the Reserve Bank of India (RBI), is to control the money supply in the economy and manage inflation. By influencing the money supply, the RBI aims to achieve price stability and foster sustainable economic growth.

Question 3. Which of the following is an example of an expansionary monetary policy measure that the RBI may adopt in India?

  1. Increasing the Repo Rate.
  2. Decreasing the Cash Reserve Ratio (CRR).
  3. Selling government securities in the open market.
  4. Increasing the Statutory Liquidity Ratio (SLR).

Answer: 2. Decreasing the Cash Reserve Ratio (CRR).

Explanation:

An expansionary monetary policy aims to increase the money supply in the economy to stimulate economic growth. Decreasing the Cash Reserve Ratio (CRR) is an example of an expansionary measure, as it allows commercial banks to lend out more money and increases liquidity in the financial system.

Question 4. Contractionary monetary policy measures are designed to

  1. Increase government spending and investment.
  2. Decrease the money supply and control inflation.
  3. Encourage more borrowing and spending by the public.
  4. Reduce interest rates for businesses and individuals.

Answer: 2. Decrease the money supply and control inflation.

Explanation:

Contractionary monetary policy measures are designed to decrease the money supply in the economy to control inflation and prevent overheating. The RBI may implement measures such as raising the Repo Rate, increasing the Cash Reserve Ratio (CRR), or conducting open market operations to reduce excess liquidity and curb inflation.

Question 5. The primary transmission mechanism through which monetary policy affects the economy in India is

  1. The money multiplier effect.
  2. The fiscal policy multiplier.
  3. The currency-deposit ratio.
  4. The credit and interest rate channels.

Answer: 4. The credit and interest rate channels.

Explanation:

The primary transmission mechanism through which monetary policy affects the economy in India is the credit and interest rate channels. Changes in monetary policy instruments, such as the Repo Rate, influence borrowing and lending rates, credit availability, and investment decisions, thereby impacting overall economic activity.

Question 6. Monetary policy is the. the process by which the Central Bank of India controls the

  1. Government’s fiscal policy.
  2. Money supply and interest rates in the economy.
  3. Exchange rates and foreign trade.
  4. Stock market and financial institutions.

Answer: 2. Money supply and interest rates in the economy.

Explanation:

Monetary policy is the process by which the Central Bank of India, which is the Reserve Bank of India (RBI), controls the money supply and interest rates in the economy. It uses various monetary policy tools to influence economic activity, inflation, and growth.

Question 7. Which of the following is a primary objective of monetary policy in India?

  1. Controlling the government’s fiscal policy.
  2. Regulating the stock market and financial institutions.
  3. Achieving price stability and controlling inflation.
  4. Promoting international trade and investment.

Answer: 3. Achieving price stability and controlling inflation.

Explanation:

A primary objective of monetary policy in India is to achieve price stability and control inflation. The RBI aims to keep inflation at a moderate level to maintain purchasing power of the currency and ensure stable economic conditions.

Question 8. The Reserve Bank of India (RBI) uses various monetary policy tools to implement its policies. One such tool is the “Cash Reserve Ratio (CRR).” What does CRR represent?

  1. The rate at which commercial banks borrow from the RBI.
  2. The rate at which the RBI lends to commercial banks.
  3. The percentage of total deposits that banks must keep as reserves with the RBI.
  4. The rate at which the RBI buys government securities in the open market.

Answer: 3. The percentage of total deposits that banks must keep as reserves with the RBI.

Explanation:

The Cash Reserve Ratio (CRR) represents the percentage of total deposits that commercial banks must keep as reserves with the Reserve Bank of India (RBI). It is a tool used by the RBI to control the money supply in the economy.

Question 9. When the Reserve Bank of India (RBI) wants to increase the money supply in the economy, it is likely to

  1. Raise the Cash Reserve Ratio (CRR).
  2. Lower the Repo Rate.
  3. Increase the Statutory Liquidity Ratio (SLR).
  4. Conduct open market sales of government securities.

Answer: 2. Lower the Repo Rate.

Explanation:

When the RBI wants to increase the money supply in the economy, it is likely to lower the Repo Rate. The Repo Rate is the rate at which commercial banks can borrow funds from the RBI, and a lower Repo Rate encourages banks to borrow more, leading to increased lending, and money creation.

Question 10. What is the primary challenge faced by the central bank in implementing monetary policy in India?

  1. Political interference in monetary matters.
  2. Lack of coordination with the government’s fiscal policy.
  3. Exchange rate fluctuations in the global market.
  4. Limited control over the money supply.

Answer: 2. Lack of coordination with the government’s fiscal policy.

Explanation:

The primary challenge faced by the central bank in implementing monetary policy in India is the lack of coordination with the government’s fiscal policy. Effective monetary policy requires coordination with fiscal policy to achieve common economic objectives.

Question 11. Monetary policy is a tool used by the central bank to

  1. Regulate foreign trade
  2. Control inflation and stabilize the economy
  3. Manage government expenditures
  4. Influence fiscal policy

Answer:  2. Control inflation and stabilize the economy

Question 12. Which of the following is an example of an expansionary monetary policy?

  1. Increasing the reserve requirement ratio
  2. Selling government bonds in the open market
  3. Decreasing the discount rate
  4. Raising taxes

Answer: 3. Decreasing the discount rate

Question 13. Contractionary monetary policy aims to

  1. Boost economic growth and employment.
  2. Increase the money supply and lower interest rates
  3. Reduce inflation and cool down an overheated economy
  4. Encourage borrowing and spending

Answer: 3. Reduce inflation and cool down an overheated economy

Question 14. The interest rate at which the central bank lends to commercial banks is known as

  1. The discount rate
  2. The federal funds rate
  3. The prime rate
  4. The benchmark rate

Answer: 1. The discount rate

Question 15. When the central bank buys government bonds from the market, it

  1. Increases the money supply .
  2. Decreases the money supply
  3. Does not affect the money supply
  4. Increases government debt

Answer: 1. Increases the money supply .

Monetary Policy Defined

Question 1. Monetary policy in India refers to the

  1. Government’s control over the stock market and financial institutions.
  2. Regulation of foreign trade and exchange rates by the Reserve Bank of India (RBI).
  3. Central bank’s control over the money supply and interest rates in the economy.
  4. Government’s control over taxation and public spending.

Answer: 3. Central bank’s control over the money supply and interest rates in the economy.

Explanation:

Monetary policy in India refers to the control exercised by the central bank, which is the Reserve Bank of India (RBI), over the money supply and interest rates in the economy. It aims to achieve specific economic objectives such as price stability, economic growth, and employment.

Question 2. The main goal of monetary policy in India is to

  1. Control the government’s fiscal policy.
  2. Regulate foreign trade and international transactions.
  3. Control the money supply and maintain price stability.
  4. Promote international investments and trade.

Answer: 3. Control the money supply and maintain price stability.

Explanation:

The main goal of monetary policy in India is to control the money supply in the economy and maintain price stability. The Reserve Bank of India (RBI) uses various monetary policy tools to influence interest rates and credit availability to achieve this objective.

Question 3. Which of the following monetary policy tools can be used by the Reserve Bank of India (RBI) to reduce the money supply in the economy?

  1. Lowering the Cash Reserve Ratio (CRR).
  2. Lowering the Repo Rate.
  3. Conducting open market purchases of government securities.
  4. Increasing the Statutory Liquidity Ratio (SLR).

Answer: 3. Conducting open market purchases of government securities.

Explanation:

To reduce the money supply in the economy, the Reserve Bank of India (RBI) can conduct open market purchases of government securities. When the RBI buys government securities from the market, it removes money from circulation and decreases the money supply.

Question 4. When the Reserve Bank of India (RBI) aims to stimulate economic growth and increase the money supply, it is likely to

  1. Raise the Reverse Repo Rate.
  2. Raise the Cash Reserve Ratio (CRR).
  3. Conduct open market sales of government securities.
  4. Raise the Repo Rate.

Answer: 3. Conduct open market sales of government securities.

Explanation:

When the RBI aims to stimulate economic growth and increase the money, supply, it can conduct open-market sales of government securities. By selling government securities to the market, the RBI injects money into the economy and increases the money supply.

Question 5. The term “Monetary Policy Transmission Mechanism” refers to

  1. The process of converting fiscal policy into monetary policy.
  2. The channels through which monetary policy affects the economy.
  3. The coordination between the central bank and the government.
  4. The process of setting interest rates by the central bank.

Answer: 2. The channels through which monetary policy affects the economy.

Explanation:

The term “Monetary Policy-Transmission Mechanism” refers to the channels through which monetary policy affects the economy. It explains how changes in monetary policy instruments, such as interest rates and money supply, influence economic variables like consumption, investment, and inflation.

Question 6. Monetary policy in India refers to the process by which the Reserve Bank of India (RBI) controls

  1. The government’s fiscal policy.
  2. The stock market and financial institutions.
  3. The money supply and interest rates in the economy.
  4. Exchange rates and foreign trade.

Answer: 3. The money supply and interest rates in the economy. .

Explanation:

Monetary policy in India refers to the process by which the Reserve Bank of India (RBI) controls the money supply and interest rates in. the economy. The RBI uses various monetary policy tools to influence economic activity, inflation, and growth.

Question 7. The primary objective of monetary policy in India is to achieve

  1. Fiscal stability and balanced budget.
  2. Price stability and control inflation.
  3. High economic growth and full employment.
  4. Favorable balance of trade and exchange rate stability.

Answer: 2. Price stability and control inflation.

Explanation:

The primary objective of monetary policy in India is to achieve price stability and control inflation. The Reserve Bank of India (RBI) aims to keep inflation at a moderate level to maintain the purchasing power of the currency and ensure stable economic conditions.

Question 8. Which of the following is true regarding the formulation of monetary policy in India?

  1. The Ministry of Finance is solely responsible for formulating monetary policy.
  2. The Parliament plays a direct role in formulating monetary policy.
  3. The Reserve Bank of India (RBI) formulates and implements monetary policy independently.
  4. Monetary policy is formulated by a committee of commercial bank representatives.

Answer: 3. The Reserve Bank of India (RBI) formulates and implements monetary policy independently.

Explanation:

In India, the Reserve Bank of India (RBI) is responsible for formulating and implementing monetary policy independently. The RBI’s Monetary Policy Committee (MPC) makes decisions regarding interest rates and other monetary policy measures.

Question 9. When the Reserve Bank of India (RBI) wants to reduce the money supply and control inflation, it is likely to

  1. Lower the Cash Reserve Ratio (CRR).
  2. Raise the Repo Rate.
  3. Decrease the Statutory Liquidity Ratio (SLR).
  4. Conduct open market purchases of government securities.

Answer: 2. Raise the Repo Rate.

Explanation:

When the RBI wants to reduce the money supply and control inflation, it is likely to raise the Repo Rate. The Repo Rate is the rate at which commercial banks can borrow funds from the RBI, and by increasing this rate, the RBI discourages borrowing and spending, leading to a reduction in the money supply.

Question 10. The role of the Monetary Policy Committee (MPC) in India is to

  1. Formulate the government’s fiscal policy. ‘
  2. Implement exchange rate policies.
  3. Set interest rates and make decisions related to monetary policy.
  4. Regulate the stock market and financial institutions.

Answer: 3. Set interest rates and make decisions related to monetary policy.

Explanation:

The role of the Monetary Policy Committee (MPC) in India is to set interest rates and make decisions related to monetary policy. The MPC is responsible for determining the Repo Rate and other key policy rates to achieve the objectives of monetary policy.

Question 11. Monetary policy is a macroeconomic policy that is primarily concerned with

  1. Managing government expenditures
  2. Regulating foreign trade
  3. Controlling the money supply and interest rates
  4. Implementing tax policies

Answer: 3. Controlling the money supply and interest rates

Question 12. The main objective of monetary policy is to

  1. Maximize government revenue,
  2. Stabilize foreign exchange rates
  3. Promote economic growth and employment
  4. Control inflation and reduce government debt.

Answer: 3.  Promote economic growth and employment

Question 13. In a contractionary monetary policy, the central bank takes action to

  1. Increase the money supply and lower interest rates
  2. Reduce government spending and increase taxes
  3. Decrease the money supply and raise interest rates
  4. Encourage borrowing and spending

Answer: 3.  Decrease the money supply and raise interest rates

Question 14. The Federal Reserve in the United States and the European Central Bank are examples of

  1. Fiscal policy authorities
  2. Commercial banks
  3. Investment banks
  4. Central banks responsible for monetary policy

Answer: 4. Central banks responsible for monetary policy

Question 15. Which of the following is not a monetary policy tool used by central banks?

  1. Open market operations
  2. Reserve requirement ratio
  3. Government bonds issuance
  4. Discount rate

Answer: 3. Government bonds issuance

The Monetary Policy Framework

Question 1. The Monetary Policy Framework in India is governed by

  1. The Ministry of Finance.
  2. The Prime Minister’s Office (PMO).
  3. The Reserve Bank of India (RBI).
  4. The Securities and Exchange Board of India (SEBI).

Answer: 3. The Reserve Bank of India (RBI).

Explanation:

The Monetary Policy Framework in India is governed by the Reserve Bank of India (RBI). The RBI is responsible for formulating and implementing monetary policy in the country.

Question 2. The Monetary Policy Framework in India was transitioned from a fixed exchange rate system to a flexible exchange rate system in the year

  1. 1947
  2. 1951
  3. 1991
  4. 2000

Answer: 3. 1991.

Explanation:

The Monetary Policy Framework in India was transitioned from a fixed exchange rate system to a flexible exchange rate system in the year 1991. This move was part of the economic reforms initiated in India to liberalize the economy.

Question 3. The Monetary Policy Committee (MPC) in India consists of members from

  1. Commercial banks and financial institutions.
  2. The Ministry of Finance and the RBI.
  3. Academia, the RBI, and the government.
  4. The World Bank and the International Monetary Fund (IMF).

Answer: 3. Academia, the RBI, and the government.

Explanation:

The Monetary Policy Committee (MPC) in India consists of six members, with three members from the RBI (including the RBI Governor) and three external members. The external members are experts from academia, chosen by the central government in consultation with the RBI.

Question 4. The primary objective of the Monetary Policy Framework in India is to achieve

  1. High economic growth and full employment.
  2. Fiscal stability and balanced budget.
  3. Price stability and controlled inflation.
  4. Favorable balance of trade and exchange rate stability.

Answer: 3. Price stability and controlled inflation.

Explanation:

The primary objective of the Monetary Policy Framework in India is to achieve price stability and controlled inflation. The Reserve Bank of India (RBI) aims to keep inflation at a moderate level to maintain the purchasing power of the currency and ensure stable economic conditions.

Question 5. The “Liquidity Adjustment Facility (LAF)” is a significant instrument used in the Monetary Policy Framework in India. What does LAF primarily aim to do?

  1. Regulate the foreign exchange market.
  2. Control the money supply in the economy.
  3. Encourage foreign direct investment (FDI).
  4. Regulate the stock market.

Answer: 2. Control the money supply in the economy

Explanation:

The Liquidity Adjustment Facility (LAF) is an instrument used in the Monetary Policy Framework in India to control the money supply in the economy. Through LAF, the RBI manages the liquidity in the banking system by conducting daily repo and reverse repo operations.

Question 6. The monetary policy framework outlines the strategies and tools used by. the central bank to achieve its monetary policy objectives. Which of the following is not a typical
objective of a central bank’s monetary policy?

  1. Price stability and controlling inflation
  2. Promoting economic growth and employment
  3. Regulating foreign exchange rates
  4. Ensuring financial stability and supervision

Answer: 3. Regulating foreign exchange rates

Question 7. The two main types of monetary policy frameworks are

  1. Inflation targeting and exchange rate targeting
  2. Fiscal policy and monetary targeting
  3. Open market operations and reserve requirements
  4. Price stability and financial stability

Answer: 1. Inflation targeting and exchange rate targeting

Question 8. In an inflation targeting framework, the central bank aims to achieve a specific target for: 

  1. The money supply growth rate
  2. Unemployment rate
  3. Economic growth rate.
  4. Inflation rate

Answer: 4. Inflation rate

Question 9. Exchange rate targeting involves the central bank pegging the domestic currency to

  1. A basket of foreign currencies.
  2. Gold or other precious metals
  3. The inflation rate of a major trading partner
  4. The interest rate set by the central bank

Answer: 1. A basket of foreign currencies.

Question 10. An advantage of an inflation-targeting framework is that it provides

  1. Flexibility for the central bank to adjust its policy based on changing economic conditions ,
  2. Fixed and rigid monetary policy rules that do not require adjustments
  3. Complete independence of the central bank from the government’s fiscal policies
  4. No need for central bank communication with the public and financial markets

Answer:  1. Flexibility for the central bank to adjust its policy based on changing economic conditions

The Objectives Of Monetary Policy

Question 1. The primary objective of monetary policy in India is to

  1. Achieve high economic growth and full employment.
  2. Control the government’s fiscal policy.
  3. Regulate the stock market and financial institutions.
  4. Achieve price stability and controlled inflation.

Answer: 4. Achieve price stability and control inflation.

Explanation:

The primary objective of monetary policy in India is to achieve price stability and control inflation. The Reserve Bank of India (RBI) aims to keep inflation at a moderate level to maintain the purchasing power of the currency and ensure stable economic conditions.

Question 2. In addition to price stability, monetary policy in India also aims to

  1. Regulate foreign trade and exchange rates.
  2. Control the money supply and interest rates.
  3. Encourage foreign direct investment (FDI).
  4. Reduce the government’s fiscal deficit.

Answer: 2. Control the money supply and interest rates.

Explanation:

In addition to price stability, monetary policy in India also aims to control the money supply and interest rates in the economy. The Reserve Bank of India (RBI) uses various monetary policy tools to influence economic activity, inflation, and growth.

Question 3. One of the secondary objectives of monetary policy in India is to promote

  1. Government spending and fiscal expansion.
  2. Foreign trade and export-oriented industries
  3. Financial inclusion and banking services.
  4. Equity and social justice.

Answer: 3. Financial inclusion and banking services.

Explanation:

One of the secondary objectives of monetary policy in India is to promote financial inclusion and banking services. The RBI encourages initiatives to provide banking services to the unbanked and underserved population, promoting financial access and inclusion.

Question 4. Which of the following is NOT an objective of monetary policy in India

  1. Controlling inflation and maintaining price stability.
  2. Promoting foreign direct investment (FDI).
  3. Facilitating economic growth and development.
  4. Ensuring financial stability in the banking system.

Answer: 2. Promoting foreign direct investment (FDI).

Explanation: 

While promoting foreign direct investment (FDI) is essential for economic growth, it is not a direct objective of monetary policy in India. The primary objectives of monetary policy are price stability, controlled inflation, economic growth, and financial stability.

Question 5. The objectives of monetary policy in India are set by

  1. The Ministry of Finance.
  2. The Reserve Bank of India (RBI).
  3. The Securities and Exchange Board of India (SEBI).
  4. The Parliament of India.

Answer: 2. The Reserve Bank of India (RBI).

Explanation:

The objectives of monetary policy in India are set and implemented by the Reserve Bank of India (RBI). The RBI formulates and implements monetary policy independently to achieve its set objectives.

Transmission Of Monetary Policy

Question 1. The transmission of monetary policy in India refers to

  1. The process of formulating monetary policy objectives.
  2. The implementation of fiscal policy measures by the government
  3. The process by which changes in monetary policy affect the economy.
  4. The coordination between the Ministry of Finance and the Reserve Bank of India.

Answer: 3. The process by which changes in monetary policy affect the economy.

Explanation:

The transmission of monetary policy in India refers to the process by which changes in monetary policy, such as interest rates and liquidity measures, affect the various sectors of the economy, influencing economic activity, inflation, and growth.

Question 2. When the Reserve Bank of India (RBI) reduces the repo rate, it is likely to impact the economy by: 

  1. Increasing borrowing costs for consumers and businesses.
  2. Encouraging commercial banks to lower lending rates.
  3. Discouraging foreign direct investment (FDI).
  4. Lowering government expenditure.

Answer: 2. Encouraging commercial banks to lower lending rates.

Explanation:

When the RBI reduces the repo rate, it aims to encourage commercial banks to lower their lending rates. The lower lending rates make borrowing cheaper for consumers and businesses, stimulating spending and investment and supporting economic growth.

Question 3. The “Bank Rate” is one of the key policy rates used by the Reserve Bank of India (RBI). An increase in the Bank Rate is likely to impact the economy by

  1. Encouraging banks to increase their lending activities.
  2. Reducing interest rates for consumers and businesses.
  3. Discouraging borrowing and spending.
  4. Promoting exports and foreign trade.

Answer: 3. Discouraging borrowing and spending.

Explanation:

An increase in the Bank Rate by the RBI is likely to discourage borrowing and spending by making borrowing more expensive for commercial banks. Higher borrowing costs can lead to reduced credit availability and slower economic activity.

Question 4. How does the transmission of monetary policy impact the stock market in India?

  1. An expansionary monetary policy leads to a bearish market.
  2. A contractionary monetary policy leads to a bullish market.
  3. Monetary policy has no direct impact on the stock market.
  4. An expansionary monetary policy leads to a bullish market.

Answer: 4. An expansionary monetary policy leads to a bullish market.

Explanation:

An expansionary monetary policy, which involves measures to increase money supply and lower interest rates, can lead to a bullish stock market. Lower interest rates may encourage investors to shift from bonds to equities, driving up stock prices.

Question 5. The transmission of monetary policy in India occurs through various channels, including

  1. Fiscal policy measures implemented by the government.
  2. Changes in the foreign exchange rate.
  3. Changes in government borrowing and expenditure.
  4. Changes in bank lending rates and credit availability.

Answer: 4. Changes in bank lending rates and credit availability.

Explanation:

The transmission of monetary policy in India occurs through changes in bank lending rates and credit availability. When the RBI changes its policy rates, such as the Repo Rate or Cash Reserve Ratio (CRR), it affects the cost and availability of credit in the economy, influencing borrowing and spending behavior.

Channels Of Monetary Policy Transmission Saving And Investment Channel

Question 1. The Saving and Investment Channel of monetary policy in India refers to

  1. The process of promoting saving and investment through government policies.
  2. The impact of changes in interest rates on saving and investment behavior.
  3. The role of the stock market in mobilizing savings and facilitating investments.
  4. The coordination between the Ministry of Finance and the Reserve

Answer:  2. The impact of changes in interest rates on saving and investment behavior.

Explanation:

The Saving and Investment Channel of monetary policy in India refers to the impact of changes in interest rates on the saving and investment behavior of individuals, businesses, and financial institutions.

When the central bank adjusts its policy rates (example, Repo Rate, Reverse Repo Rate), it affects the cost of borrowing and lending, influencing the propensity to save and invest in the economy.

Question 2. When the Reserve Bank of India (RBI) lowers interest, it is likely to impact savings and investments by

  1. Encouraging more saving and less investment.
  2. Encouraging less saving and more investment.
  3. Discouraging both saving and investment.
  4. Having no impact on saving and investment.

Answer: 2. Encouraging less saving and more investment.

Explanation:

When the RBI lowers interest rates, it makes borrowing cheaper for businesses and individuals. As a result, the cost of investment

Question 3. The impact of the Saving and Investment Channel on the economy is that lower interest rates can lead to

  1. Increased aggregate demand and economic expansion.
  2. Reduced government expenditure and fiscal contraction.
  3. A decrease in foreign direct investment (FDI).
  4. A decrease in consumer spending and increased savings.

Answer: 1. Increased aggregate demand and economic expansion. –

Explanation:

Lower interest rates through the Saving and Investment Channel can lead to increased borrowing and investment by businesses, higher consumer spending, and overall increased aggregate demand. This can stimulate economic expansion and growth.

Question 4. When the RBI raises interest rates, the impact on saving and investment in India is likely to be

  1. Higher saving and lower investment.
  2. Lower saving and higher investment.
  3. A decrease in aggregate demand and economic contraction.
  4. An increase in the government’s fiscal deficit.

Answer: 1. Higher saving and lower investment.

Explanation:

When the RBI raises interest rates, it makes borrowing more expensive, leading to reduced borrowing and investment by businesses and individuals. Higher interest rates on savings deposits may also encourage higher saving rates.

Question 5. The Saving and Investment Channel is an essential mechanism through which monetary policy affects the real economy in India. How does this channel influence economic growth?

  1. By directly controlling government spending and fiscal policy.
  2. By influencing saving and investment behavior to stimulate economic activity.
  3. By regulating foreign trade and exchange rates.
  4. By promoting foreign direct investment (FDI) and exports.

Answer: 2. By influencing saving and investment behavior to stimulate economic activity.

Explanation:

The Saving and Investment Channel influences saving and investment behavior in India through changes in interest rates, which, in turn, can stimulate economic activity, leading to economic growth. This channel affects consumer spending, business investment decisions, and overall aggregate demand in the economy.

Cash-Flow Channel

Question 1. The Cash-flow Channel of monetary policy in India refers to

  1. The impact of changes in interest rates on cash flows of businesses v’- and households.
  2. The process of managing the government’s cash reserves.
  3. The role of the Reserve Bank of India (RBI) in printing and distributing currency notes.
  4. The coordination between the Ministry of Finance and the RBI in managing cash transactions.

Answer: 1. The impact of changes in interest rates on cash flows of businesses and households.

Explanation:

The Cash-flow Channel of monetary policy in India refers to the impact of changes in interest rates on the cash flows of businesses and households. When the central bank adjusts its policy rates (For example,  Repc Rate, Reverse Repo Rate).

It affects the cost of borrowing and lending, influencing the cash flows of borrowers and lenders, and subsequently impacting spending and investment decisions.

Question 2. When the Reserve Bank of India (RBI) lowers interest rates, the Cash-flow Channel is likely to affect the economy by

  1. Reducing the government’s fiscal deficit.
  2. Encouraging businesses to invest more and increase spending
  3. Encouraging individuals to save more and reduce spending. .
  4. Having no impact on the cash flows of businesses and households.

Answer: 2. Encouraging businesses to invest more and increase spending.

Explanation:

When the RBI lowers interest rates, it makes borrowing cheaper for businesses, leading to lower interest expenses and improved cash flows. This encourages businesses to invest more, increase spending, and undertake expansionary activities.

Question 3. The impact of the Cash-flow Channel on the economy is that lower interest rates can lead to

  1. Reduced government borrowing and increased fiscal discipline.
  2. A decrease in foreign direct investment (FDI). v
  3. An increase in consumer spending and economic growth.
  4. A decrease in aggregate demand and economic contraction.

Answer: 3. An increase in consumer spending and economic growth.

Explanation:

Lower interest rates through the Cash-flow Channel can lead to reduced interest expenses for households, increasing their disposable income. This can encourage higher consumer spending and contribute to economic growth through increased aggregate demand.

Question 4. When the RBI raises interest rates, the Cash-flow Channel is likely to impact the economy by

  1. Encouraging more borrowing and spending by households.
  2. Discouraging businesses from undertaking new investment projects.
  3. Having no impact on the cash flows of businesses and households.
  4. Reducing the fiscal deficit and promoting government savings.

Answer: 2. Discouraging businesses from undertaking new investment projects.

Explanation:

When the RBI raises interest rates, borrowing becomes more expensive for businesses, leading to higher interest expenses and reduced cash flows. This may discourage businesses from undertaking new investment projects and expansionary activities.

Question 5. The Cash-flow Channel is an essential mechanism through which monetary policy affects the real economy in India. How does this channel influence financial markets?

  1. By directly regulating stock market transactions.
  2. By influencing the flow of currency in the economy.
  3. By impacting the cash flows and investment decisions of financial institutions.
  4. By controlling the government’s fiscal policy.

Answer: 3. By impacting the cash flows and investment decisions of financial institutions.

Explanation:

The Cash-flow Channel influences the cash flows and ‘investment decisions of financial institutions, such as banks and non-banking financial companies. Changes in interest rates can affect their borrowing and lending activities, impacting liquidity conditions in the financial markets.

These two effects work in opposite directions, but a reduction in interest rates can be expected to increase spending in the Indian economy through this channel (with the first
effect larger than the second)

Asset Prices And Wealth Channel

Question 1. The Asset Prices and Wealth Channel of monetary policy in India refer to

  1. The impact of changes in interest rates on the prices of assets like stocks and real estate.
  2. The management of the country’s foreign exchange reserves.
  3. The role of the Reserve Bank of India (RBI) in controlling commodities. prices.
  4. The coordination between the Ministry of Finance and the RBI in managing financial assets.

Answer: 1. The impact of changes in interest rates on the prices of assets like stocks and real estate. •

Explanation:

The Asset Prices and Wealth Channel of monetary policy in India refers to the impact of changes in interest rates on the prices of various assets, such as stocks, real estate, and bonds. Changes in interest rates can influence asset prices and the overall wealth of households and businesses, thereby affecting their spending and investment decisions.

Question 2. When the Reserve Bank of India (RBI) lowers interest rates, the Asset Prices and Wealth Channel is likely to affect the economy by

  1. Encouraging more borrowing and spending by households and businesses.
  2. Decreasing the prices of assets like stocks and real estate.
  3. Increasing the value of financial assets and overall wealth.
  4. Having no impact on asset prices and wealth.

Answer: 3. Increasing the value of financial assets and overall wealth.

Explanation:

When the RBI lowers interest rates, it reduces the cost of borrowing, which can lead to higher investment and spending. Additionally, lower interest rates make bonds and other fixed-income assets less attractive, prompting investors to shift towards riskier assets like stocks and real estate, thereby increasing their prices and overall wealth.

Question 3. The impact of the Asset Prices and Wealth Channel on the economy is that rising asset prices and increased wealth can lead to

  1. Reduced consumption and decreased economic growth.
  2. Higher borrowing costs and decreased investment.
  3. Increased consumer spending and improved economic activity.
  4. A decrease in government expenditure and fiscal discipline.

Answer: 3. Increased consumer spending and improved economic activity.

Explanation:

Rising asset prices and increased wealth through the Asset Prices and Wealth Channel can lead to improved consumer confidence and increased spending by households. This increased consumer spending can contribute to improved economic activity and overall economic growth.

Question 4. When the RBI raises interest rates, the Asset Prices and Wealth Channel is likely to impact the economy by

  1. Increasing the prices of financial assets and overall wealth.
  2. Encouraging more borrowing and investment by businesses.
  3. Discouraging borrowing and spending by households and businesses.
  4. Reducing the government’s fiscal deficit.

Answer: 3. Discouraging borrowing and spending by households and businesses.

Explanation:

When the RBI raises interest rates, it increases the cost of borrowing, which can discourage borrowing and spending by households and businesses. Higher interest rates can lead to reduced investment and consumption, impacting economic activity.

Question 5. The Asset Prices and Wealth Channel is an essential mechanism through which monetary policy affects the real economy in India. How does this channel influence consumer behavior?

  1. By directly regulating consumer spending and saving rates.
  2. By influencing the prices of consumer goods and services.
  3. By impacting the overall wealth and financial positions of consumers.
  4. By controlling the government’s fiscal policy.

Answer: 3. By impacting the overall wealth and financial positions of consumers.

Explanation:

The Asset Prices and Wealth Channel impacts consumer behavior by affecting the overall wealth and financial positions of consumers. Changes in asset prices influence household wealth, which, in turn, can influence consumer spending and saving decisions.

Exchange Rate Channel

Question 1. The Exchange Rate Channel of monetary policy in India refers to

  1. The impact of changes in the exchange rate on the domestic economy.
  2. The management of the country’s foreign exchange reserves.
  3. The role of the Reserve Bank of India (RBI) in controlling import and export activities.
  4. The coordination between the Ministry of Finance and the RBI in managing exchange rates.

Answer: 1. The impact of changes in the exchange rate on the domestic economy.

Explanation:

The Exchange Rate Channel of monetary policy in India refers to the impact of changes in the exchange rate of the domestic currency (such as INR) on the domestic economy. Fluctuations in the exchange rate can affect import and export competitiveness, balance of trade, inflation, and overall economic conditions.

Question 2. When the Reserve Bank of India (RBI) allows the domestic currency to ‘ appreciate, it is likely to impact the economy by

  1. Making imports cheaper and increasing import volumes.
  2. Making exports more expensive and decreasing export volumes.
  3. Encouraging more foreign direct investment (FDI).
  4. Having no impact on the economy.

Answer: 2. Making exports more expensive and decreasing export volumes.

Explanation:

When the RBI allows the domestic currency to appreciate, it means that the value of the domestic currency strengthens compared to other currencies. This makes exports more expensive for foreign buyers and reduces the competitiveness of domestic goods in international markets, leading to a decrease in export volumes.

Question 3. The impact of the Exchange Rate Channel on the economy is that a depreciating domestic currency can lead to

  1. Increased export volumes and improved balance of trade.
  2. Higher import costs and increased inflation.
  3. A decrease in foreign direct investment (FDI).
  4. Decreased government spending and fiscal discipline.

Answer: 1. Increased export volumes and improved balance of trade.

Explanation:

A depreciating domestic currency makes exports cheaper for foreign buyers, leading to increased export volumes. This, in turn, improves the balance of trade by increasing export earnings and reducing the trade deficit.

Question 4. When the RBI intervenes in the foreign exchange market to stabilize the domestic currency, the Exchange Rate Channel is likely to impact the economy by

  1. Encouraging more borrowing and spending by households and businesses.
  2. Influencing the flow of currency in the economy.
  3. Having no impact on the economy’s external sector. INR) on the domestic economy.
  4. Maintaining stable exchange rates to support trade and investment.

Answer: 4. Maintaining stable exchange rates to support trade and investment.

Explanation:

When the RBI intervenes in the foreign exchange market, it aims to stabilize exchange rates and prevent excessive volatility in the domestic currency. Stable exchange rates support trade and investment by providing a predictable environment for international transactions.

Question 5. The Exchange Rate Channel is an essential mechanism through which monetary policy affects the real economy in India. How does this channel influence inflation?

  1. By directly regulating consumer prices and wages.
  2. By impacting the cost of imported goods and commodities.
  3. By controlling the government’s fiscal policy.
  4. By regulating the money supply in the economy.

Answer: 2. By impacting the cost of imported goods and commodities.

Explanation:

The Exchange Rate Channel influences inflation by impacting the cost of imported goods and commodities. A depreciating domestic currency makes imports more expensive, leading to higher prices for imported goods in the domestic market, contributing to inflationary pressures.

Operating Procedures And Instruments

Question 1. Operating Procedures and Instruments of Monetary Policy in India are designed to

  1. Manage the government’s fiscal deficit and public debt.
  2. Regulate the country’s foreign exchange reserves.
  3. Control the money supply and influence interest rates.
  4. Coordinate the monetary policy with fiscal policy measures.

Answer: 3. Control the money supply and influence interest rates.,

Explanation:

Operating Procedures and Instruments of Monetary Policy in India are designed to control the money supply in the economy and influence interest rates.’By adjusting policy rates, open market operations, and other instruments, the central bank (Reserve Bank of India – RBI) aims to regulate liquidity, credit availability, and interest rates to achieve its
monetary policy objectives.

Question 2. The primary instrument used by the Reserve Bank of India (RBI) to control short-term interest rates is

  1. The Cash Reserve Ratio (CRR). . ‘
  2. The Statutory Liquidity Ratio (SLR).
  3. The Repo Rate.
  4. The Bank Rate.

Answer: 3. The Repo Rate.

Explanation:

The primary instrument used by the RBI to control short-term interest rates is the Repo Rate. The Repo Rate is the rate at which the RBI lends money to commercial banks for a short duration, and changes in this rate have a direct impact on borrowing costs and short-term interest rates in the economy.

Question 3. Open Market Operations (OMOs) is one of the tools used by the RBI to influence the money supply. What do OMOs involve?

  1. The RBI’s intervention in the foreign exchange market.
  2. The sale and purchase of government securities in the open market.
  3. The regulation of foreign direct investment (FDI) flows.
  4. The control of inflation through price ceilings.

Answer: 2. The sale and purchase of government securities in the open market.

Explanation:

Open Market Operations (OMOs) involve the sale and purchase of government securities (bonds) in the open market by the RBI. When the RBI sells government securities, it reduces the money supply as banks buy these securities, and their reserves decrease. Conversely, when the RBI purchases government securities, it injects liquidity into the system and increases the money supply.

Question 4. The Cash Reserve Ratio (CRR) is another tool used by the RBI to regulate the money supply. What does CRR represent?

  1. The percentage of cash banks must maintain with the RBI as a reserve.
  2. The interest rate at which banks can borrow from the RBI.
  3. The percentage of cash banks must be kept with the RBI for foreign ” exchange transactions.
  4. The rate at which the RBI lends money to banks for long-term purposes.

Answer: 1. The percentage of cash banks must maintain with the RBI as a  reserve.

Explanation:

The Cash Reserve Ratio (CRR) is the percentage of cash that commercial banks are required to maintain as reserves with the RBI on their net demand and time liabilities. By adjusting the CRR, the RBI can influence the amount of funds available to banks for lending and thereby impact the money supply.

Question 5. The Reverse Repo Rate is an important tool used by the RBI for monetary policy operations. What does the Reverse Repo Rate represent?

  1. The rate at which the RBI borrows from commercial banks.
  2. The rate at which the RBI lends to commercial banks.
  3. The rate at which commercial banks borrow from.each other.
  4. The rate at which the RBI intervenes in the foreign exchange market.

Answer: 1. The rate at which the RBI borrows from commercial banks.

Explanation: 

The Reverse Repo Rate is the rate at which the RBI borrows money from commercial banks for a short duration. It is used to absorb excess liquidity from the banking system and control inflationary pressures.

The Organisational Structure For Monetary Policy Decisions

Question 1. In India, the responsibility for formulating and implementing monetary policy lies with

  1. The Ministry of Finance.
  2. The Reserve Bank of India (RBI).
  3. The Securities and Exchange Board of India (SEBI).
  4. The Indian Parliament.

Answer: 2. The Reserve Bank of India (RBI).

Explanation:

In India, the responsibility for formulating and implementing monetary policy lies with the Reserve Bank of India (RBI), which is the central bank of the country. The RBI is entrusted with the task of regulating the money supply, credit availability, and interest rates to achieve the monetary policy objectives.

Question 2. The highest decision-making body for monetary policy in India is

  1. The Board of Directors of the Reserve Bank of India (RBI).
  2. The Finance Minister of India.
  3. The Prime Minister of India.
  4. The Monetary Policy Committee (MPC) of the RBI.

Answer: 4. The Monetary Policy Committee (MPC) of the RBI.

Explanation:

The highest decision-making body for monetary policy in India is the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI). The MPC is responsible for setting the policy interest rates and making decisions regarding monetary policy to achieve the targeted inflation rate.

Question 3. The Monetary Policy Committee (MPC) consists of members from

  1. The Ministry of Finance and external economists.
  2. The Indian Parliament and the banking sector.
  3. The Ministry of Commerce and the corporate sector
  4. The Reserve Bank of India (RBI) and foreign central banks.

Answer: 1. The Ministry of Finance and external economists.

Explanation:

The Monetary Policy Committee (MPC) consists of six members, including three officials from the Reserve Bank of India (RBI) and three external economists appointed by the Government of India’s Ministry of Finance. The committee follows a collective decision-making process to arrive at monetary policy decisions.

Question 4. The Governor of the Reserve Bank of India (RBI) serves as the

  1. Chairman of the Monetary Policy Committee (MPC).
  2. Secretary of the Ministry of Finance.
  3. Chief Executive Officer (CEO) of the RBI.
  4. Head of the Indian Parliament.

Answer: 1. Chairman of the Monetary Policy Committee (MPC).

Explanation:

The Governor of the Reserve Bank of India (RBI) serves as the Chairman of the Monetary Policy Committee (MPC). The Governor presides over the meetings of the MPC and has the casting vote in case of a tie in the voting process.

Question 5. The primary mandate of the Monetary Policy Committee (MPC) is to

  1. Regulate the foreign exchange market and maintain exchange rate stability.
  2. Control inflation and achieve the targeted inflation rate.
  3. Manage the government’s fiscal deficit and public debt.
  4. Promote economic growth and increase employment opportunities.

Answer: 2. Control inflation and achieve the targeted inflation rate.

Explanation:

The primary mandate of the Monetary Policy Committee (MPC) is to 1 control inflation and achieve the targeted inflation rate set by the Government of India. The MPC formulates monetary policy measures to keep inflation within a specified range while supporting economic growth.

Question 6. The Monetary Policy Committee (MPC) in India is responsible for

  1. Managing the country’s foreign exchange reserves.
  2. Setting the government’s fiscal policy measures.
  3. Formulating and determining monetary policy decisions.
  4. Implementing the government’s public expenditure programs.

Answer: 3. Formulating and determining monetary policy decisions.

Explanation:

The Monetary Policy Committee (MPC) in India is responsible for formulating and determining the country’s monetary policy decisions, including setting policy interest rates such as the Repo Rate and Reverse Repo Rate. It consists of members from the Reserve Bank of India (RBI) and external experts appointed by the government.

Question 7. The MPC in India meets at regular intervals to review and decide on monetary policy actions. How often does the MPC typically hold its meetings?

  1. Monthly
  2. Quarterly
  3. Biannually
  4. Annually

Answer: 2. Quarterly.

Explanation:

The MPC in India typically holds its meetings every quarter (once every three months) to review the economic conditions, inflation trends, and other relevant factors to decide on monetary policy actions, including changes in policy interest rates.

Question 8. The Governor of the Reserve Bank of India (RBI) is the ex-officio chairperson of the Monetary Policy Committee. Additionally, how many external members are appointed by the government to the MPC?

  1. Two
  2. Three
  3. Four
  4. Five

Answer: 2. Three

Explanation:

The Governor of the RBI is the ex-officio chairperson of the Monetary Policy Committee, and there are three external members appointed by the government to the MPC. Thus, the total strength of the MPC is six members.

Question 9. The decisions of the Monetary Policy Committee (MPC) are taken by a majority vote. What is the casting vote rule in case of a tie?

  1. The RBI Governor gets the casting vote.
  2. The external members get the casting vote.
  3. The government’s representative gets the casting vote.
  4. The Deputy Governor of RBI gets the casting vote.

Answer: 1. The RBI Governor gets the casting vote.

Explanation:

In case of a tie in the voting on monetary policy decisions, the RBI Governor, who is the ex-officio chairperson of the MPC, gets the casting vote. This provision is to ensure a decisive outcome in case of an equal number of votes.

Question 10. What is the primary objective of the Monetary Policy Committee (MPC) in India?

  1. To promote economic growth and employment.
  2. To manage the government’s fiscal deficit.
  3. To regulate the country’s foreign exchange rates.
  4. To oversee the functioning of commercial banks.

Answer: 1. To promote economic growth and employment.

Explanation:

The primary objective of the Monetary Policy Committee (MPC) in India is to maintain price stability while keeping in mind the objective of economic growth. It aims to achieve an inflation target set by the government, which ultimately contributes to sustainable economic growth and employment generation.

Question 11. In most countries, monetary policy decisions are made by

  1. The President or Prime Minister.
  2. The Treasury Department
  3. The Ministry of Finance
  4. The central bank’s monetary policy committee or board

Answer: 4. The central bank’s monetary policy committee or board

Question 12. The central bank’s monetary policy committee or board is responsible for

  1. Implementing fiscal policies
  2. Setting interest rates and managing the money supply
  3. Regulating foreign trade
  4. Issuing government bonds

Answer: 2. Setting interest rates and managing the money supply

Question 13. The monetary policy committee or board typically consists of

  1. Elected government officials
  2. Financial market analysts
  3. Representatives from commercial banks
  4. Key decision-makers from the central bank

Answer: 4. Key decision-makers from the central bank

Question 14. The primary objective of the monetary policy committee or board is to

  1. Maximize government revenue
  2. Control foreign exchange rates
  3. Achieve price stability and economic growth ‘
  4. Influence fiscal policy decisions

Answer: 3. Achieve price stability and economic growth ‘

Question 15. In some countries, the central bank’s monetary policy decisions may be influenced by the: 

  1. Ministry of Foreign Affairs
  2. World Bank
  3. International Monetary Fund (IMF)
  4. Ministry of Education

Answer: 3. International Monetary Fund (IMF)

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