CBSE Class 12 Economics Money And Banking Worksheet Set D

Multiple Choice Questions (MCQs)

Question. The rate at which Commercial Banks borrow from Central Bank is called ________.
(a) Bank rate
(b) Legal reserve ratio
(c) Reverse repo rate
(d) Cash reserve ratio
Answer: (a)

Question. The short term borrowing rate at which Reserve Bank of India borrows money from Commercial Banks is called ________.
(a) Bank rate
(b) Discount rate
(c) Repo rate
(d) Reverse repo rate
Answer: (d)

Question. What would be the total money creation in the economy, If initial fresh deposits with banks = \( Rs 50,000 \) and LRR = \( 20\% \).
(a) \( Rs 2,50,000 \)
(b) \( Rs 5,00,000 \)
(c) \( Rs 10,00,000 \)
(d) \( Rs 12,00,000 \)
Answer: (a)

Question. ________ is the main source of money supply in an economy.
(a) Central Bank
(b) Commercial Banks
(c) Government
(d) Both (a) and (b)
Answer: (d)

Question. Measuring the value of goods and services refers to which of the following functions of money?
(a) Store of value
(b) Unit of value
(c) Standard of deferred payments
(d) Medium of exchange
Answer: (b)

Question. Which of the following functions of money simplifies the process of borrowing and lending?
(a) Store of value
(b) Medium of exchange
(c) Standard of deferred payments
(d) Unit of value
Answer: (c)

Question. Which of the following is not included in money supply?
(a) Currency held by public
(b) Inter-bank-deposits
(c) Demand deposits in Banks
(d) Saving deposits with post office banks.
Answer: (b)

Question. Read the following dialogue between two people.
Ramesh: I want 1 kg of potatoes.
Suresh: What will you give in exchange?
Ramesh: I can give you two litres of milk in return for the potatoes.
Suresh: I don’t need milk. I want a pair of shoes.
Which of the following problem is being faced by Ramesh and Suresh in their exchange process?
(a) Lack of double coincidence of wants
(b) Absence of common unit of value
(c) Lack of store of value
(d) Lack of standard of deferred payment
Answer: (a)

Question. \( M_1 \) of money supply does not include.
(a) Currency held by public
(b) Other deposits in RBI
(c) Demand deposits with the Commercial Banks
(d) Net time deposits with banks
Answer: (d)

Question. Which Bank is authorised to issue currency?
(a) Central Bank
(b) Commercial Bank
(c) Cooperative Bank
(d) Scheduled Bank
Answer: (a)

Question. Which one of the following is a qualitative measure of credit control by the Central Bank?
(a) Bank rate
(b) Open market operations
(c) Marginal requirements
(d) Cash reserve ratio
Answer: (c)

Question. ________ refers to the proportion of total deposits which Banks are required to keep in the form of reserves with themselves.
(a) Cash deposit ratio
(b) Statutory liquidity ratio
(c) Bank rate
(d) Reserve deposit ratio
Answer: (d)

Question. Which one of the following is a quantitative tool of credit control used by RBI?
(a) Bank rate policy
(b) Marginal requirements
(c) Moral suasion
(d) Direct action
Answer: (a)

Question. Which of the following is not the function of the Central Bank?
(a) Banking facilities to government
(b) Lending to commercial banks
(c) Banking facilities to public
(d) Lending to government
Answer: (c)

Question. The ratio of total deposits that a commercial Banks has to keep with Reserve Bank of India is called
(a) Deposit ratio
(b) Cash reserve ratio
(c) Legal reserve ratio
(d) Statutory liquidity ratio
Answer: (b)

Assertion-Reason Questions

DIRECTION: Read the following statements— Assertion (A) and Reason (R). Choose one of the correct alternatives given below:
(a) Assertion and Reason both are correct statements and Reason is correct explanation for Assertion.
(b) Assertion and Reason both are correct statements but Reason is not correct explanation for Assertion.
(c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.

Question. Assertion: Supply of money is a flow variable.
Reason: It is measured at a point of time.
(a) Assertion and Reason both are correct statements and Reason is correct explanation for Assertion.
(b) Assertion and Reason both are correct statements but Reason is not correct explanation for Assertion.
(c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.
Answer: (d)
Supply of money is a stock variable.

Question. Assertion: Coins are limited legal tender money.
Reason: Coins represent money which is accepted by the people to an unlimited extent.
(a) Assertion and Reason both are correct statements and Reason is correct explanation for Assertion.
(b) Assertion and Reason both are correct statements but Reason is not correct explanation for Assertion.
(c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.
Answer: (c)
No person can be forced to accept beyond a certain limit.

Question. Assertion: Demand deposits are also called bank money.
Reason: Demand deposits are created by commercial banks.
(a) Assertion and Reason both are correct statements and Reason is correct explanation for Assertion.
(b) Assertion and Reason both are correct statements but Reason is not correct explanation for Assertion.
(c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.
Answer: (a)

Question. Assertion: LRR represents the minimum reserve ratio essential to be maintained by banks.
Reason: Banks create deposits in the process of making loans to their customers.
(a) Assertion and Reason both are correct statements and Reason is correct explanation for Assertion.
(b) Assertion and Reason both are correct statements but Reason is not correct explanation for Assertion.
(c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.
Answer: (b)
LRR is maintained to meet the cash requirements of the depositors.

Question. Assertion: Open market operations are used to influence money supply in the economy.
Reason: Central bank sells government securities to increase the flow of credit in the economy.
(a) Assertion and Reason both are correct statements and Reason is correct explanation for Assertion.
(b) Assertion and Reason both are correct statements but Reason is not correct explanation for Assertion.
(c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.
Answer: (c)
The Central Bank, through purchase and sale of government securities, influences money supply in the economy as money is ultimately routed through banks.

Question. Assertion: Bank rate is decreased when credit is to be expanded.
Reason: Selective credit control involves specifying the amount and purpose for which credit is to be given.
(a) Assertion and Reason both are correct statements and Reason is correct explanation for Assertion.
(b) Assertion and Reason both are correct statements but Reason is not correct explanation for Assertion.
(c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.
Answer: (b)
A low bank rate reduces the cost of borrowing of commercial banks and encourages them to use a greater proportion of their funds for giving out loans.

Question. Assertion: The Central Bank is also known as the bank of issue.
Reason: The Central Bank enjoys the sole monopoly of issuing currency to ensure control over volume of currency and money supply.
(a) Assertion and Reason both are correct statements and Reason is correct explanation for Assertion.
(b) Assertion and Reason both are correct statements but Reason is not correct explanation for Assertion.
(c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.
Answer: (a)

Question. Assertion: Demand deposits are created by commercial banks.
Reason: Demand deposits form a significant part of the total money supply in the economy.
(a) Assertion and Reason both are correct statements and Reason is correct explanation for Assertion.
(b) Assertion and Reason both are correct statements but Reason is not correct explanation for Assertion.
(c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.
Answer: (b)
Accepting deposits is an important function of commercial banks.

Question. Assertion: Only net demand deposits held by commercial banks are taken as part of money supply.
Reason: Only deposits of the public held by the banks are included in money supply.
(a) Assertion and Reason both are correct statements and Reason is correct explanation for Assertion.
(b) Assertion and Reason both are correct statements but Reason is not correct explanation for Assertion.
(c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.
Answer: (a)

Question. Assertion: Credit creation is inversely related to the Legal Reserve Ratio.
Reason: LRR is fixed by the market forces of demand and supply.
(a) Assertion and Reason both are correct statements and Reason is correct explanation for Assertion.
(b) Assertion and Reason both are correct statements but Reason is not correct explanation for Assertion.
(c) Assertion is true but Reason is false.
(d) Assertion is false but Reason is true.
Answer: (c)
Lower the money multiplier, lesser will be the total credit creation by commercial banks.

Case Based Questions

The Reserve Bank of India (RBI) on Friday kept interest rates on hold while assuring to maintain support for reflecting the economy by ensuring ample liquidity to manage the government's near-record borrowing. The six-member Monetary Policy Committee (MPC) voted to continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of Covid-19 on the economy while ensuring that inflation remains within the target, Governor Shaktikanta Das said. While the Union Budget 2021 laid down an expansive fiscal strategy over the medium term to strengthen the growth engine in the economy, the RBI affirmed its support to such a plan through appropriate monetary tools. To absorb higher government borrowings, the Central Bank provided retail investors a direct option to invest in government securities. It also sapped some funds from banks by raising the Cash Reserve Ratio (CRR) and using the money for more targeted market operations. The MPC, which cut borrowing costs by 115 basis points last year, kept the repurchase or repo rate unchanged at 4 percent. Consequently, the reverse repo rate will also continue to earn 3.35 per cent for banks for their deposits kept with the RBI. Das announced the restoration of CRR - the amount of deposits lenders must set aside as reserves - to 3.5 per cent in March and 4 per cent in May. The cash returning to the central bank can be used by it for open market operations and other liquidity measures.

Question. The two essential conditions for a financial institution to become a bank are:
(a) accepting deposits and lending
(b) printing currency notes
(c) both (a) and (b)
(d) neither (a) nor (b)
Answer: (a)

Question. Which of the following is not a quantitative method of credit control?
(a) open market operation
(b) bank rate policy
(c) legal reserve requirements
(d) margin requirements
Answer: (d)

Question. The central bank does not performs the following functions.
(a) conducts sale and purchase of securities for foreign governments securities.
(b) acts as a lender of the last resort.
(c) controls money supply and credit.
(d) manages the nation’s reserves of international currency.
Answer: (a)

Question. Loans offered by commercial banks _______ (increase/decrease) the money supply in the economy.
Answer: increase

The money supply is all the currency and other liquid instruments in a country’s economy on the date measured. The money supply roughly includes both cash and deposits that can be used almost as easily as cash. Governments issue paper currency and coins through some combination of their central banks and treasuries. Bank regulators influence money supply available to the public through the requirements placed on banks to hold reserves, how to extend credit and other regulations. Economists analyze the money supply and develop policies revolving around it through controlling interest rates and increasing or decreasing the amount of money flowing in the economy. An increase in the supply of money typically lowers interest rates, which in turn, generates more investment and puts more money in the hands of consumers, thereby stimulating spending. Businesses respond by ordering more raw materials and increasing production. The increased business activity raises the demand for labour. The opposite can occur if the money supply falls or when its growth rate declines.

Question. Which of the following statement is not true regarding money supply?
(a) It is a stock variable.
(b) It does not include money held by government and the banking system.
(c) It includes term deposits with the banks.
(d) It includes currency held by the public.
Answer: (c)

Question. From the set of statements given in Column I and II, choose the correct pair of statements:
Column I | Column II
1. Bank money | A. exchange of money for goods
2. Barter exchange | B. a component of money supply.
3. Demand deposits with banks | C. demand deposits created by commercial banks
4. Legal tender | D. money which can be legally used to make payment of debts
(a) 1-A
(b) 2-B
(c) 3-C
(d) 4-D
Answer: (d)

Question. Who regulates money supply in India?
(a) Government of India
(b) Reserve Bank of India
(c) Commercial banks
(d) Planning Commission
Answer: (b)

Question. Which of the following is not a function of The Reserve Bank of India?
(a) It helps in barter exchange.
(b) It issues the currency of the country.
(c) It acts as a bank of the banking system.
(d) It is the custodian of the foreign exchange reserves of the economy.
Answer: (a)

Heightened uncertainty in India caused by the Coronavirus pandemic led to a surge in the currency in circulation as people hoarded cash or put money in accessible deposits to safeguard themselves against salary cuts or job losses. According to RBI data, India’s \( M_3 \) money supply rose \( 6.7\% \) in the first five months of 2020 compared with the same period in 2019, the highest growth in seven years. Currency in circulation, which measures money with the public and in banks has also surged. Gross capital formation, or total investments toward fixed capital in the country, fell significantly. Savings and current account deposits fell \( 8\% \) due to higher withdrawals. The growth in currency notes held by the public was much higher than the deposits made in banks. A rise in money supply usually is seen as a leading indicator of growth in consumption and business investments, but the rise this time was unlikely to bolster either, analysts said. The increase was a reflection of higher cash withdrawals by depositors to meet the needs during the lockdown period, until normalcy returns.

Question. _________ (quantitative/qualitative) instruments of monetary policy affect the direction of credit in the economy.
Answer: qualitative

Question. Choose the correct pair of statements from the given statements in Column I and II:
Column I | Column II
1. LRR | A. rate of interest at which Central Bank lends to commercial banks for long term
2. Reverse Repo Rate | B. rate at which the RBI borrows money from commercial banks
3. Bank Rate | C. rate at which Central Bank advances short term loans to commercial banks
4. Repo Rate | D. minimum reserve maintained by a commercial bank
(a) 1-A
(b) 2-B
(c) 3-C
(d) 4-D
Answer: (b)

Question. Which of the following statements is true?
(a) Money Multiplier is inversely related to LRR.
(b) Loans given by Commercial banks are equal to the amount of deposits they receive.
(c) CRR is decreased to control inflation
(d) Demand deposits refer to the cash reserves of Commercial Banks.
Answer: (a)

Question. The moral influence that the Central Bank applies on member banks in order to get them to act in line with its policy is called as________.
Answer: moral suasion

The Reserve Bank of India is the Central Bank of India, which means it is at the apex of the banking structure of the economy. It is one of the main governing bodies and regulatory bodies in India and helps the government in its role as a business facilitator. The RBI was first established on the 1st of April 1935 and nationalized in 1949. The governing of the RBI is done in accordance to the RBI Act by the government. Its day to day affairs are taken care of by the Board of Directors who are chosen by the government. The RBI is the only authorized body that can issue currency in the country. So they print, distribute and regulate the flow of currency in the economy. The RBI provides the central and state government with basic banking functions and facilities like depositing money, remittances etc. It can also make advances and provide loans to the government whenever necessary. It also supervises all other commercial banks in the country and provides financial assistance to these banks like short-term loans and advances. It is the function of the RBI to maintain the value of the rupee in the global economy. It does so by acting as the custodian of foreign exchange reserves in the country. It maintains enough reserves to battle against fluctuations. The RBI also maintains control of credit and money in the market. It uses qualitative and quantitative methods to either expand or contract the available credit in the economy according to circumstances.

Question. If the legal reserve ratio is \( 20\% \), the value of money multiplier would be:
(a) 2
(b) 3
(c) 5
(d) 4
Answer: (c)

Question. In order to encourage investment in the economy, the central bank may:
(a) reduce cash reserve ratio.
(b) increase cash reserve ratio.
(c) sell government securities in open market.
(d) increase the bank rate.
Answer: (a)

Question. The monetary policy generally targets to ensure:
(a) price stability in the economy.
(b) employment generation in the country.
(c) stable foreign relations.
(d) greater tax collections for the government.
Answer: (a)

Question. Lowering the bank rate is a measure to:
(a) encourage foreign investment in the economy.
(b) increase money supply in the economy.
(c) discourage investment activity in the economy.
(d) increase government expenditure.
Answer: (b)