CBSE Class 12 Economics Money And Banking Worksheet Set B

 

Money is anything that has the general acceptability as a common medium of exchange & as a common measure of the value of the commodities.

 

 

It refers to the exchange of goods for goods. In other words, it refers to the direct exchange of goods & services with another.

 

 

The functions of money can be classified into Primary & Secondary functions.

 

 

• Medium of Exchange: Money act as a common medium of exchange which is the most essential function as it enables us to identify money as a commodity which is generally acceptable to all. It facilitates the exchange of goods & services, & thus facilitates multilateral trade. Consequently, it helps us to avoid the problem of double coincidence of wants as the seller can sell his products & get money which can be used to purchase his desired product. Thus it facilitates smooth exchange system.

 

• Unit of Account: Money act as a common measure of value because it has the general acceptability & it has a stable value in itself. This helps in promoting the trade and industry in an economy, & helps in facilitating the exchange process

among the different sector. This enables the products to be measured in terms of monetary units, & thus, standardization & gradation of products take place.

 

• Money act as a Standard of Deferred payment: i.e. the payments to be made in future. Money serves as the measure by which the value of future payments is regulated, since its value is more or less stable & it has the wide acceptability. As a result, the credit function in the economy develops which makes an easier trade & industry.

 

• Money acts as a Store of Value being it is a common measure of value and generally accepted means of payments. This implies that the purchasing power can be shifted from its present to its future. Moreover, money is the most economic & convenient way of hoarding. This enables the people to save a part of their current income & store it for future use. Consequently, the capital formation takes place which promotes the production & productivity.

 

Money act as a transfer of value as it helps in transferring the value of assets from one person to another person & one place to another place. This is possible because money is the most liquid asset. This facilitates the mobility of labour and other inputs which in turn accelerates the economic growth & development.

 

 

It refers to the total stock of money in an economy at any point of time, held by the general public i.e. the private individuals and business firms (money is in disposable form). In other words, it is the amount of money which is in circulation in an economy at a given point of time. The two constituents of money supply are currency held by the general public & demand deposits of general public held by the Commercial Banks. Thus, M = C + DD

 

 

Monetary Policy is one of the most important determinants of money supply. The dearer money policy leads to the decline in the money supply in the economy, & vice-versa. Policy of commercial Banks & their fund capacity decides the expansion or contraction of the supply of money. The capacity depends upon the availability of cash reserves in the banks. Larger the cash balance, the greater will be the volume of deposits & further greater the money supply.

 

Fiscal Policy of the Govt. also influences the money supply as this plays a vital role in regulating the money supply. When the Govt. adopts the Deficit budget policy, the money supply rises.

 

 

A Commercial bank is a financial institution which performs the function of accepting deposits from the public & advancing loans. This banks act as the financial intermediary between the idle resources & the productive sources of resources.

 

 

(a) Current account deposits or Chequeable deposits which are payable on cheques & the depositors can withdraw their deposits whenever they like. This account is generally maintained by the traders for day to day transactions. The banks pay no interest on this deposit.

(b) Saving Account deposits are those deposits on which the bank pay interest which is less than the interest paid on the fixed deposits. The bank imposes some restrictions on their withdrawal. The purpose of this deposit is to encourage & mobilize the small savings.

(c) Fixed or Time Deposits refers to the deposits which are accepted for the specified period & which are not payable on demand before the expiry of the period. The bank pay relatively high rate of interest on this deposit.

(d) The variant of this deposit is Recurring Deposit whose purpose is to encourage regular savings by the people. This deposit is based upon the installment payment for a fixed period of time on which the interest is paid after maturity of the account.

 

 

A Central Bank is an apex institution which directs, control, regulates & supervises the monetary system of a country. Central bank is the monetary authority which leads all banking & non – banking institutions. The name of the Central bank in India is Reserve Bank of India (RBI) which is established in 1935.The RBI occupies the highest position in the money & capital market. Functions of Central Bank

 

• Bank of Issue: It has the monopoly of issuing currency notes. It has the exclusive right to issue the currency notes in the country which leads to the uniformity of the currency throughout the nation. Moreover, this enables it to have a total control over the total money supply of the country which leads to the strengthening of the monetary policy during the crisis time.

 

• Banker to Government: It act as a banker of the govt. as it accepts the deposits of the govt. & makes payment on behalf of the it, gives financial advices, & advances the loans in the crisis times, remit the surplus funds of Govt., purchase & sell Govt. securities on its behalf.

 

• Banker’s Bank and Supervisor: It acts as a banker's bank in the form of lender of last resort, facilitates clearing house facilities & remit the surplus funds, supervise the banking activities & regulates credit-deposits of the Banks. Since RBI is the guardian of all the banks, the banks can get the benefit of easy & early credit during their financial requirements. As a facilitator of clearing, the RBI makes early settlement of financial claims & debts of the banks. As a result, the banks don't face any problem of cash liquidity, & thus they need not to remain depended on the bank credit or capital funds of the banks. As a regulator & supervisor, the banks are not in the position of any malpractice & the entire banking system remains transparent & accountable to public.

 

• Custodian of Gold Reserves and Foreign Exchange: It acts as a custodian of gold reserves& the nation's stock of foreign exchange reserve. The purchase & sale of Gold & foreign exchange at the global level is done by RBI only. As a custodian, RBI is responsible for maintaining the stock of gold & forex reserves, & the determination of their prices.

 

• Controller of Monetary Policy: It acts as a controller of credit which is one of the most important functions. Since it is an apex institution, therefore can play an effective role to combat or correct the inflationary or deflationary pressures of an economy. The RBI controls credit by using Quantitative (General) & Qualitative (Selective) credit control methods. The tools under quantitative methods are Bank/Repo rate, Reserve repo rate, CRR & SLR, Open market operations. Under selective methods, RBI use Margin, credit quota & rationing, moral suasion & direct action etc.

 

MULTIPLE CHOICE QUESTIONS

Question. Which of the following is not the function of Central bank?
a) Bank facilities to government
b) Lending to commercial bank
c) Bank facilities to Public
d) Lending to Public
Answer : C

1. Which bank is authorized to issue currency notes?
a) Central Bank
b) Commercial Bank
c) Cooperative Bank
d) Scheduled Bank
Answer : A

Question. Who regulates money supply in India?
a) Government of India
b) Reserve Bank of India
c) Commercial Banks
d) NITI Ayog
Answer : B

Question. Supply of money is a:
a) Flow variable
b) Stock variable
c) Real flow
d) None of these
Answer : A

Question. Which of the following is not a quantitative Method of credit control?
a) Open Market Operation
b) Margin Requirements
c) Variable reserve Ratio
d) Bank Rate Ratio
Answer : B

Question. The ratio of total deposits that a commercial Banks must 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

Question. In India, coins are issued by:
a) State bank of India
b) Reserve bank of India
c) Ministry of finance
d) Ministry of urban development
Answer : C

Question. Money that is issued by the authority of the government is called:
a) Full bodied money
b) Credit Money
c) Fiat Money
d) Fiduciary Money
Answer : C

Question. Central bank of a country does not deal with--------------------
a) State government
b) Central government
c) General public
d) Commercial banks
Answer : C

Question. Demand deposits include :
a) Cheque able deposits
b) Deposits which can be withdrawn on demand
c) Fixed deposits for a period
d) Both (a) and (b)
Answer : D

Question. Credit creation in commercial banks is determined by
a) Cash Reserve ratio
b) Statutory liquidity Ratio
c) Initial Deposits
d) All the above
Answer : D

Question. High powered money is equal to:
a) Money supplied by the RBI ONLY
b) Total supply of money in the economy
c) Notes and coins held by the people
d) Money (notes and coins) held by the public, vault cash of the commercial banks as well as cash reserves of the commercial banks with the RBI
Answer : D

Question. In India, Money supply (M1) is equal to:
a) Currency with people
b) Currency with people +Demand Deposits
c) Currency with people+ Net Demand deposits held by the commercial banks
d) None of these
Answer : C

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

Question. The percentage of demand deposits which the commercial banks are legally required to maintain as their liquid assets is called:
a) Statutory liquidity Ratio
b) Deposit ratio
c) Cash Reserve ratio
d) Legal reserve ratio
Answer : A

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

Question. ...................... banks were first nationalised.
(a) 12
(b) 24
(c) 14
(d) 15
Answer. C

Question. To reduce credit availability in the economy, the Central Bank may ........................... .
(a) buy securities in the open market.
(b) sell securities in the open market.
(c) reduce reserve ratio.
(d) reduce repo rate.
Answer. B

Question. ........................ is anything that serves as a medium of exchange.
(a) Goods
(b) Money
(c) Services
(d) None of these
Answer. B

Question. Lower interest rates are likely to ........................ .
(a) decrease consumption
(b) increase cost of borrowing
(c) encourage saving
(d) increase borrowing and spending
Answer. D

Question. ...................... increases money supply in the market.
(a) Cash deposit in banks
(b) Cash withdrawl from the banks
(c) Both (a) and (b)
(d) None of these
Answer. B

Question. Narrow concept of money supply is .................... .
(a) M1
(b) M2
(c) M3
(d) M4
Answer. A

Question. The main aim of monetary policy is .................
(a) to bring price stability in the economy.
(b) employment generation in the country.
(c) to increase trade surplus.
(d) to generate greater tax revenue.
Answer. A

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 Bank Rate
Answer. A

Question. To control excess demand, CRR is ................. .
(a) decreased
(b) increased
(c) does not change
(d) none of these
Answer. B

Question. ............... bank nurtures the market for govt. securities in India.
(a) commercial bank
(b) central bank
(c) world bank
(d) none of these
Answer. B

Question. Identify the incorrect statement from given below
a) Present currency can work as money as it is a legal tender.
b) Coins held by the public are limited legal tender.
c) Central bank prints currency in India.
d) Central bank do not deal with general public.

Answer. C

Question. As a custodian of nation’s reserves, RBI keeps
a) reserves of foreign currencies
b) reserves of gold
c) reserves of foreign treasury bills
d) All of the above

Answer. D

Question. …… involves discounting or purchasing of commercial bills arising out of credit sales.
a) Cash credit
b) Bill financing
c) Overdraft
d) None of the above

Answer. B

Question. Central Bank controls credit creation of banks by …… .
a) CRR
b) SLR
c) Both (a) and (b)
d) None of these

Answer. C

Question. Sum total of currency held by Public (c), Demand Deposits in Bank (DD) and Other Deposits with RBI(OD) are combindly known as
a) M₁
b) M₂
c) M₃
d) M₄

Answer. A

Question. Which of the following is/are primary functions of money?
a) Medium of Exchange
b) Store of Value
c) Unit of Account
d) (a) and (c)

Answer. D

Question. The component(s) of broad money is/are
a) currency held with the public
b) demand deposits held by commercial banks
c) net time deposits of commercial banks
d) All of the above

Answer. D

Question. The process of credit creation in an economy is affected by …… .
a) the amount of initial deposits
b) the LRR
c) Both (a) and (b)
d) None of the above

Answer. C

Question. The rate of interest offered by the bank to deposit holders is called the
a) bank rate
b) borrowing rate
c) lending rate
d) inflation rate

Answer. B

Question. Which of the following bank account provides overdraft facility?
a) Saving deposits account
b) Current account
c) Recurring deposits account
d) Fixed deposits account

Answer. B

Question. Banks not only accept deposits but also …… savings.
a) distribute
b) mobilise
c) convert
d) None of these

Answer. B

Question. Bank creates credit
a) on the basis of their securities
b) on the basis of their total assets
c) on the basis of their cash deposits
d) on the basis of their gross liabilities

Answer. C

Question. Choose the correct statement from given below
a) Commercial banks creates credit out of primary deposits.
b) Money multiplier is directly related to legal reserve ratio.
c) Central bank of the country is not authorised to maintain foreign exchange reserve.
d) All of the above

Answer. A

Question. Credit creation depends on
a) initial level of deposit
b) money multiplier
c) Both (a) and (b)
d) None of the above

Answer. C

Question. Which of the following is not a function of Commercial bank?
a) Creation of currency
b) Accepting deposits
c) Granting loans and advances
d) Printing of currency

Answer. D

Question. Which of the following is/are functions of Central Bank?
a) Bank of issue
b) Credit control
c) Banker of Banks
d) All of these

Answer. D

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 bank
(b) Primary deposits      (ii) Derivative Deposits
(c) Commercial bank     (iii) Advisor to the government
(d) Central bank            (iv) Provides ‘clearing house’ facility
Answer : D

Question. Match the followings: -
Column 1                                                 Column2
(A) CRR                                  (1) the rate of rediscount on securities
(B) Money Supply                    (2) total currency circulated in economy at a point of time
(C) Margin Requirements        (3) cash deposits of commercial banks total deposits with RBI
(D) RePO Rate                        (4) difference between amount of loan and value of asset
a) (A)(3),(B)(2),(C)(4),(D)(1)
b) (A)(1),(B)(4),(C)(3),(D)(2)
c) (A)(3),(B)(1),(C)(4),(D)(2)
d) (A)(3),(B)(4),(C)(2),(D)(1)
Answer :a) (A)(3),(B)(2),(C)(4),(D)(1)

Question. Identify the correct pair from the column I and II. 

Column I	Column II
Open market operations	Qualitative Measure
Margin Requirement	Minimum ratio of total bank deposits which they have to keep with themselves
Banker’s bank	Function of Central Bank
Reserve Requirement	Sale and Purchase of Securities

Alternatives:
(a) A-i
(b) B-ii
(c) C-iii
(d) D-iv
Answer. C

Question. Match the following

Column I	Column II
Repo rate	Percentage of total deposits of commercial banks
Reverse repo rate	Rate at which central bank borrows from commercial banks
Cash reserve ratio	Rate at which central bank offers loans to commercial banks
Statutory liquidity ratio	Rate at which commercial banks can borrow money from RBI
Bank rate	Commercial banks maintaining a fixed percentage of assets in cash form or other liquid assets.

Options :
(a) A - (iii), B - (ii), C - (i), D - (v), E - (iv)
(b) A - (i), B - (ii), C - (iii), D - (iv), E - (v)
(c) A - (ii), B - (i), C - (iii), D - (v), E - (iv)
(d) A - (iv), B - (iii), C - (ii), D - (v), E - (i)
Answer. A

Question. Match the columns:

Column I	Column II
Bill of exchange	M3
M2	M1 + saving deposit with post office
M1 = ........ + deposits with public	Near money
Broad Money	Currency

Options :
(a) A - (i), B - (ii), C - (iii), D - (iv)
(b) A - (iii), B - (ii), C - (iv), D - (i)
(c) A - (i), B - (iii), C - (iv), D - (ii)
(d) A - (ii), B - (iii), C - (iv), D - (i)
Answer. B

Question. Identify the correct sequence of alternatives given in Column II by matching them with respective terms in Column I.

Column I	Column II
Basis of credit	Contingent function
Exchange of goods for goods	Secondary function
Accepting deposits	Barter system
Standard of deferred payment	Primary fuction

Choose the correct alternative:
(a) A - (ii), B - (iii), C - (iv), D - (i)
(b) A - (iii), B - (ii), C - (i), D - (iv)
(c) A - (i), B - (ii), C - (iii), D - (iv)
(d) A - (i), B - (iii), C - (iv), D - (ii)
Answer. D

Question. The RBI cut its reverse repo rate by 25 basis points (bps) to 3.75% with immediate effect. Governor Shaktikanta Das told a video conference. The rate had already been cut by 90 bps on Mach 27. The surplus liquidity in the banking system has risen significantly in the wake of government spending and the various liquidity enhancing measures undertaken by the RBI, he added. In order to encourage banks to deploy these surplus funds in investments and loans in productive sectors of the economy, it has been decided to reduce the fixedrate reverse repo rate", RBI's measure of reduction in reverse repo rate is done
to enable commercial banks
(a) to use the surplus funds for investment
(b) to grant loans for productive purposes
(c) to widen economic and financial land space
(d) all of these
Answer. D

Question. The Reserve Bank of India unexpectedly cut its key deposit rate, for the second time in three weeks to discourage banks from parking idle funds with it and spur lending instead, to revive a flagging economy amid the corona virus lockdown.
When reverse repo rate is reduced, it………
(a) discourages the commercial banks to park their surplus funds with RBI
(b) encourages the commercial banks to park their surplus funds with RBI
(c) both (a) and (b)
(d) neither (a) nor (b)
Answer. A

Read the following news report and answer questions (i)-(iv) on the basis of the same :

Banking and banks are very important for the functioning of the modern world. Without banks the way we use money would not work. Banks enable people to save money, borrow money and to pay for things with ease and security. Each country in the world has its own well known banks that have branches in nearly every city so that they are convenient for people to use. People often have to visit the local branch of the bank when they want certain services. There are also some very big multinational banks that have branches in most countries in the world. As well as the local branches that are in most cities, each bank will also have a head office. This is where all central tasks are performed that let the local braches function. The people that work in the branches will be the bank manager, the person in charge, and various tellers who work behind the bank counter and help the customers. There will also likely be security guards to protect the money, workers and customers. Most customers will just need to see the tellers when they go to the bank if they are paying money into their account as either cash or a check. Also if they want to borrow money and get a loan the person will need to see the bank manager who will have to approve it. As well as being able to use cash or checks to pay for things, banks also offer their customers the more convenient methods of using either a debit card or credit card. These methods are very convenient as you just need to carry a small plastic card to be able to pay for anything. When paying with plastic you will need to either sign a receipt or enter a PIN number to conform the purchase and that you are authorized to use the card.

Question. According to the text, what do banks enable people to do?
(a) Buy products
(b) Save money for the future
(c) Get money now that they have to pay back later
(d) All of the above
Answer. D

Question. What is the purpose of the head office of a bank?
(a) To support the local branches to work properly.
(b) To offer services to local customers.
(c) To work with other banks.
(d) To look impressive.
Answer. A

Question. What do bank tellers do?
(a) They protect the money.
(b) They help the customers.
(c) They arrange loans for customers.
(d) They are in charge of the bank branch.
Answer. B

Question. What happens when a bank customer spend more money than they have in their account?
(a) They will need to see the security guard.
(b) They will have to go to the police station.
(c) They will have to have a meeting with the bank manager.
(d) They will have to borrow money from the bank.
Answer. C

Read the following news report and answer questions (i)-(iv) on the basis of the same :

The mid-term Monetary and Credit Policy for 2020- 21 has maintained status quo over the objectives and instruments of monetary policy. The overall stance continues to focus on ensuring adequate credit growth and supporting investment demand while keeping a vigil on movements in the price level. However, the two crucial policy parameters — Bank Rate and Cash Reserve Ratio (CRR) — are left untouched to rule at their current levels of 6 and 4.5 per cent respectively while the repo rate too is not disturbed. The Reserve Bank of India, in its recent Report on Trends and Progress of Banking in India, has hinted at raising the CRR in the coming months. First, this policy framework begs the central question of how to provide a soft rate regime by manipulating indirect policy instruments when the stock of government securities — the weapon — has already depleted substantially and is expected to decline further with continuous sterilisation of capital inflows. A few leading private sector banks have already expressed their unwillingness to reduce lending rates even if the official rates are reduced. Further, reduction in lending rate may not ensure larger credit offtake as demand for credit now is influenced by factors beyond interest rates. The issue calls for a thorough study so that the present policy can help achieve the objectives. One can observe multiple rates in the Indian market, reflecting the existence of a number of financial instruments with a continuum of maturity and risk profiles. Broadly, the structure of interest rates can be classified as the floor rate, the rates which prevail in the government securities market (sovereign rate) and the commercial lending rates. In recent times, there has been a steady decline in the yield on government securities due to a comfortable liquidity position in the market. Indeed, the yield and short term rates in the government security market are less than the Bank Rate. The irony is that the soft rate policy failed to bring down the prime lending rates (PLR) of commercial banks. The median lending rates on demand and term loans charged by public sector banks remained unchanged in a range of 11.5-14 per cent between March and June 2003. The prime lending rates of these banks ranged between 9 and 12.25 per cent during the same period. Concurrently, there has been a significant change in the mode of financing of the fiscal deficit. In recent years, it has been made mandatory that the Government must not issue fresh securities to the RBI.

Question. What are the parameters that were left untouched in the current policy?
(a) Bank rate
(b) Cash Reserve Rate
(c) Repo rate
(d) All (a) (b) and (c)
Answer. D

Question. Why does the policy framework seek the question of how to provide a soft rate regime?
(a) The manipulation of indirect money market instruments cannot provide soft rate regime
(b) Since, the depletion in stock of government securities is expected to continue
(c) The securities will not be issued by the central bank as of now
(d) Both (b) and (c)
Answer. D

Question. Why does the author say that there should be thorough study of the current policy ?
I. Demand for credit is only influenced by change in interest rates.
II. Reduction in lending rates can ensure larger credit offtakes.
III. Reduction in interest rate alone is not sufficient to boost credit offtake.
(a) Both I and II
(b) Only I
(c) II and III
(d) Only III
Answer. D

Question. How does the author come to a conclusion that the interest rates are misaligned?
(a) Since the median lending rates on demand and term loans remains unchanged
(b) Because the prime lending rates ranged between 9 and 12.25 per cent
(c) Since there is wider gap between the PLR and the Bank rate
(d) Both (a) and (b)
Answer. C

Following article and answer the questions given below :

The Reserve Bank of India unexpectedly cut its key deposit rate, for the second time in three weeks to discourage banks from parking idle funds with it and spur lending instead, to revive a flagging economy amid the corona virus lockdown.
This week, Prime Minister Narendra Modi extended until May 3 a lockdown of the population of 13 billion as India's tally of infections exceeded 10,000, despite the three-week shutdown ordered from March 24, The RBI cut its reverse repo rate by 25 basis points (bps) to 3.75% with immediate effect. Governor Shaktikanta Das told a video conference. The rate had already been cut by 90 bps on Mach 27. The surplus liquidity in the banking system has risen significantly in the wake of government spending and the various liquidity enhancing measures undertaken by the RBI, he added. In order to encourage banks to deploy these surplus funds in investments and loans in productive sectors of the economy, it has been decided to reduce the fixedrate reverse repo rate",

Question. The Reserve bank of India lowered reverse repo rate to discourage banks from parking idle funds with ........................ .
(a) RBI
(b) Commercial Banks
(c) Private Bank
(d) None of the above
Answer. A

Question. RBI's measure of reduction in reverse repo rate is done to enable commercial banks
(a) to use the surplus funds for investment
(b) to grant loans for productive purposes
(c) to widen economic and financial land space
(d) all of these
Answer. D

Question. Reverse Repo rate is .................. to correct excess demand.
(a) increased
(b) decreased
(c) not changed
(d) none of the above
Answer. A

Question. When reverse repo rate is reduced, it .............. .
(a) discourages the commercial banks to park their surplus funds with RBI
(b) encourages the commercial banks to park their surplus funds with RBI
(c) both (a) and (b)
(d) neither (a) nor (b)
Answer. A

Directions: In the following questions, a statement of assertion is followed by a statement of reason.
Mark the correct choice as:
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A).
(c) Assertion (A) is true but Reason (R) is false.
(d) Assertion (A) is false but Reason (R) is true.

Question. Assertion (A): A rupee in India is money.
Reason (R): It is commonly accepted as medium of exchange in India.
Answer. A

Question. Assertion (A): Double coincidence of wants means that, the two individuals are in possession of such goods which they are willing to exchange for the satisfaction of their wants.
Reason (R): Double coincidence of wants is an important feature of the barter system of exchange.
Answer. B

Question. Assertion (A): Cheques are fiduciary money.
Reason (R): These are accepted as a means of payment on the basis of trust, not on the basis of any order of the government.
Answer. A

Question.. Assertion (A): Full bodied money refers to that money of which money value is more than commodity value.
Reason (R): A rupee coin during the British period in India was made of silver.
Answer. D

Question. Assertion (A): Supply of money is a stock concept.
Reason (R): Supply of money does not include stock of money held by the government.
Answer. B

Question. Assertion (A): Money has separated the acts of sale and purchase.
Reason (R): An individual can buy or sell a thing without selling or buying anything in return.
Answer. B

Question. Assertion (A): High CRR implies higher capacity to create credit.
Reason (R): Credit multiplier is the reciprocal of CRR.
Answer. D

Question. Assertion (A): The central bank is a lender of last resort.
Reason (R): A central bank advances loan to a commercial bank when they are failed to get financial help from anywhere.
Answer. A

Question. Assertion (A): In India, CRR and SLR are fixed by the commercial banks.
Reason (R): In India, CRR and SLR are fixed by the RBI.
Answer. D

Question. Assertion (A): Market rate of interest tends to be positively related to the bank rate.
Reason (R): Change in bank rate is followed by change in market rate of interest.
Answer. B

ASSERTION AND REASON BASED QUESTIONS

Question. Assertion (A)-Money supply is a flow concept.
Reason (R)- money supply refers to total currency circulation at a point of time.
a) both (A) & (R) both are true and (R) is correct explanation of (A)
b) both (A) & (R) both are true and (R) is not correct explanation of (A)
c) (A) is true but (R) is false
d) (A) is false but (R) is true
Answer : D

Question. Assertion (A)-Central bank holds the foreign exchange reserves to influence exchange rate.
Reason (R)- selling and purchasing of foreign exchange influences the exchange rate.
a) both (A) & (R) both are true and (R) is correct explanation of (A)
b) both (A) & (R) both are true and (R) is not correct explanation of (A)
c) (A) is true but (R) is false
d) (A) is false but (R) is true
Answer : A

Question. Assertion (A)-settlement of liabilities of commercial banks is done by RBI.
Reason (R)- RBI holds the accounts of all commercial banks and commercial banks keep funds in it essentially.
a) both (A) & (R) both are true and (R) is correct explanation of (A)
b) both (A) & (R) both are true and (R) is not correct explanation of (A)
c) (A) is true but (R) is false
d) (A) is false but (R) is true
Answer : B

Question. Assertion (A)- Credit creation process increases the money supply in economy .
Reason (R)- through the credit creation process commercial banks can distribute loans many times as compare to their primary deposits.
a) both (A) & (R) both are true and (R) is correct explanation of (A)
b) both (A) & (R) both are true and (R) is not correct explanation of (A)
c) (A) is true but (R) is false
d) (A) is false but (R) is true
Answer : A

Question. Assertion (A)-Governor of RBI gives advises to central government regarding about tax, expenditure related decisions.
Reason (R)- it is essential for the government to follow the advises of RBI.
a) both (A) & (R) both are true and (R) is correct explanation of (A)
b) both (A) & (R) both are true and (R) is not correct explanation of (A)
c) (A) is true but (R) is false
d) (A) is false but (R) is true
Answer : C

Read the following case study paragraph carefully and answer the questions on the basis of the same.

The Indian economy has diversified quite significantly and been growing rapidly since 1991, and getting increasingly integrated with the global economy. Therefore, the fourth generation (1991-2014) of Indian banking saw landmark reforms such as issue of fresh licences to private and foreign banks to infuse competition, thereby enhancing productivity as well as efficiency by leveraging technology; introduction of prudential norms; providing operational flexibility coupled with functional autonomy; focus on implementation of best corporate governance practices; and strengthening of capital base as per the Basel norms.
Since 2014, the banking sector has witnessed the adoption of the JAM (Jan-Dhan, Aadhaar, and Mobile) trinity, and issuance of licences to Payments Banks and Small Finance Banks (SFBs) to achieve last-mile connectivity in the financial inclusion drive. For instance, SFBs had mobilised deposits of ₹82,488 crore and extended credit of ₹90,576 crore to small and marginal farmers, and MSMEs (micro small & medium enterprises) by the end of FY 2019-20.
Given the current challenges of a burgeoning population, the ongoing Covid-19 pandemic, and the West’s intention to shift its manufacturing base as well as supply/value chains from China to India and elsewhere, it is essential to say ‘yes’ to fifth generation (2014 and beyond) banking reforms. This calls for a paradigm shift in the banking sector to improve its resilience and maintain financial stability. The Narasimham Committee Report (1991), as well as the discussion paper on Banking structure in India – The way forward (Reserve Bank of India, 2013), emphasised that India should have three or four large commercial banks, with domestic and international presence, along with foreign banks. The second tier may comprise several mid-size lenders, including niche banks, with economy-wide presence.

Question. How does financial inclusion programme “jan dhan yojana” affect financial conditions of commercial banks:-
a) Availability of funds with commercial banks have increased
b) Availability of funds with commercial banks have decreased
c) Not affected in any way
Answer : A

Question. Small Finance Banks had mobilised deposits of ₹82,488 crore and extended credit of ₹90,576 crore to small and marginal farmers, and MSMEs (micro small & medium enterprises) by the end of FY 2019-20. How will it affect economy
a) Growth of MSME and agriculture sector become faster
b) Financial inclusion of people
c) Economic strengthening of rural areas
d) All of above
Answer : D

Question. What type of fourth generation reforms are made by government in banking sector:-
a) Reduction in mandatory reserves
b) Operational flexibility
c) Improvement in competition
d) All of above
Answer : D