CBSE Class 12 Economics HOTs Money And Banking Set 03

1. Objective Type Questions (Remembering & Understanding based Questions)

A. Multiple Choice Questions

Question. Choose the correct option: In the context of commercial bank, which one of the following statements is correct?
(a) Note-issuing authority of the country
(b) Creates credit on the basis of cash reserves
(c) Accepts deposits of the general public
(d) Both (b) and (c)
Answer: (d) Both (b) and (c)

Question. Commercial banks create money by way of:
(a) time deposits
(b) demand deposits
(c) treasury bills
(d) bill of exchange
Answer: (b) demand deposits

Question. Which of the following is not concerned with banking organisation?
(a) Bank rate
(b) Fiscal deficit
(c) Credit creation
(d) Cash reserve ratio
Answer: (b) Fiscal deficit

Question. Credit cards issued by the banks:
(a) encourage consumer spending
(b) increase aggregate demand in the economy
(c) both (a) and (b)
(d) None of the options
Answer: (c) both (a) and (b)

Question. The main aim of the commercial banks is:
(a) social welfare
(b) to earn profits
(c) to provide services to the people
(d) None of the options
Answer: (b) to earn profits

Question. Maximum credit that the commercial banks can legally create depends on their:
(a) gold reserves
(b) cash reserves with the RBI
(c) statutory liquidity ratio
(d) term deposits
Answer: (b) cash reserves with the RBI

Question. Term deposits are those:
(a) against which no cheque can be issued
(b) against which no interest is paid to the depositors
(c) which are a part of \( M_1 \) supply of money
(d) None of the options
Answer: (a) against which no cheque can be issued

Question. The percentage of demand deposits which the commercial banks are legally required to maintain as their liquid assets is called:
(a) CRR
(b) repo rate
(c) SLR
(d) reverse repo rate
Answer: (c) SLR

Question. SLR requires the commercial banks to build their liquid assets by way of:
(a) reserves of cash
(b) reserves of gold
(c) reserves of unencumbered securities
(d) All of the options
Answer: (d) All of the options

Question. Central bank is an apex bank of the country that:
(a) controls the entire banking system of the country
(b) issues currency
(c) acts as a banker to the government
(d) All of the options
Answer: (d) All of the options

Question. In India, the central bank is:
(a) Federal Reserve System
(b) Federal System
(c) Reserve Bank of India
(d) both (a) and (b)
Answer: (c) Reserve Bank of India

Question. Maximum credit that the commercial banks can legally create is indicated by:
(a) \( \frac{1}{SLR} \)
(b) \( \frac{1}{CRR} \times \frac{1}{\text{Cash reserves with the RBI}} \)
(c) \( \frac{1}{CRR} \times \text{Total deposits} \)
(d) \( \frac{1}{CRR} \times \text{Cash reserves with the RBI} \)
Answer: (d) \( \frac{1}{CRR} \times \text{Cash reserves with the RBI} \)

Question. Credit control means:
(a) contraction of credit only
(b) extension of credit only
(c) extension and contraction of money supply
(d) None of the options
Answer: (c) extension and contraction of money supply

Question. Which of the following is not the instrument of credit control?
(a) CRR
(b) SLR
(c) Bank rate
(d) Managed floating
Answer: (d) Managed floating

Question. Which of the following does not come under quantitative methods of monetary policy?
(a) Open market operations
(b) Cash reserve ratio
(c) Moral suasion
(d) Repo rate
Answer: (c) Moral suasion

Question. Open market operations as an instrument of credit control are performed by:
(a) the central bank of the country
(b) the commercial bank of the country
(c) both (a) and (b)
(d) None of the options
Answer: (a) the central bank of the country

Question. With an increase in margin requirement, availability of credit in the economy:
(a) increases
(b) decreases
(c) unchanged
(d) None of the options
Answer: (b) decreases

Question. If inflation is to be combated, the RBI:
(a) raises SLR and lowers CRR
(b) lowers SLR and raises CRR
(c) raises both CRR as well as SLR
(d) None of the options
Answer: (c) raises both CRR as well as SLR

Question. If recession is to be combated:
(a) bank rate needs to be lowered
(b) CRR needs to be lowered
(c) both (a) and (b)
(d) repo rate needs to be lowered and CRR needs to be raised
Answer: (c) both (a) and (b)

Question. Reverse repo rate:
(a) generates interest income
(b) is increased to curb inflation
(c) is not a policy rate
(d) both (a) and (b)
Answer: (d) both (a) and (b)

B. Fill in the Blanks

Question. Choose appropriate word and fill in the blank: Commercial banks contribute to the supply of money by way of _______ (loans in cash/loans in demand deposits)
Answer: loans in demand deposits

Question. _______ deposits arise on account of loans by the banks to the people. (Primary/Secondary)
Answer: Secondary

Question. In case, a commercial bank fails to get financial accommodation from anywhere, it approaches the _______ as a last resort. (cooperative bank/central bank)
Answer: central bank

Question. _______ relates to instant (immediate) loan requirement of the commercial banks. (Bank rate/Repo rate)
Answer: Bank rate

Question. Demand Deposits = Primary deposits + _______. (Bank deposits/Secondary deposits)
Answer: Secondary deposits

Question. By selling the securities in the open market, the RBI _______ liquidity (cash) from/into the economy. (soaks/releases)
Answer: soaks

Question. Rationing of credit is the _______ method to control money supply in the economy. (quantitative/qualitative)
Answer: qualitative

Question. As an advisor to the government, central bank frames policies to regulate the _______. (capital market/money market)
Answer: money market

Question. Central bank conducts _______ to regulate exchange rate of the domestic currency. (managed floating/dirty floating)
Answer: managed floating

Question. Liquid assets of the commercial banks which they are required to maintain as a minimum percentage of their total deposits refer to _______. (cash reserve ratio/statutory liquidity ratio)
Answer: statutory liquidity ratio

C. True or False

Question. State whether the following statements are True or False: In India, LRR is determined by the commercial banks themselves.
Answer: False

Question. Banks lend money many times more than their cash reserves with the RBI.
Answer: True

Question. Higher the CRR, higher is the capacity to create money.
Answer: False

Question. The central bank focuses on growth and stability of the economy.
Answer: True

Question. Open market operations are conducted by the RBI to regulate the supply of money.
Answer: True

Question. When the supply of money is to be increased, CRR is raised.
Answer: False

Question. Credit creation is the principal function of the central bank.
Answer: False

Question. Margin requirement is a quantitative method of credit control.
Answer: False

Question. The notes issued by the central bank are an unlimited legal tender.
Answer: True

Question. With rationing of credit, supply of money is reduced.
Answer: True

D. Matching the Correct Statements

Question. From the set of statements given in Column I and Column II, choose the correct pair of statements:
Column I | Column II
(a) SLR | (i) Fixed by the commercial banks
(b) Primary deposits | (ii) Derivative deposits
(c) Commercial bank | (iii) Advisor to the government
(d) Central bank | (iv) Provides 'Clearing House' facility
(e) Secondary deposits | (v) Not a part of total demand deposits of the banks
Answer: (d) Central bank—(iv) Provides 'Clearing House' facility

Question. Identify the correct sequence of alternatives given in Column II by matching them with respective items in Column I:
Column I | Column II
(a) Demand deposits | (iv) \( \frac{1}{CRR} \times \text{Cash Reserves} \)
(b) Central bank | (v) An apex bank of the country
(c) Money multiplier | (i) \( \frac{1}{CRR} \)
(d) Repo rate | (iii) Repurchase rate
(e) CRR | (ii) Fixed by the RBI
Answer: (a)-(iv), (b)-(v), (c)-(i), (d)-(iii), (e)-(ii)