CBSE Class 12 Economics Money And Banking VBQs

Question. Which of the following is/are provided by the platform of CERSAI?
A. Registrations of transactions of securitisation
B. Asset Reconstruction
C. Security Interest
D. All of the Above
E. None of these

Answer : D. All of the Above
Explanation: The Company is providing the platform for filing registrations of transactions of securitisation, asset reconstruction and security interest by the banks and financial institutions.

Question. Which of the following defines the objectives of CERSAI?
A. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
B. Companies Act, 1956
C. Banking Regulation Act, 1949
D. Both (A) and (B)
E. None of these

Answer : A. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
Explanation: The object of the company is to maintain and operate a Registration System for the purpose of registration of transactions of securitisation, asset reconstruction of financial assets and creation of security interest over property, as contemplated under Chapter IV of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. (SARFAESI Act).

Question. With which card company has Axis bank launched its contactless debit cards?
A) MasterCard
B) RuPay
C) EuroPay
D) Visa
E) None of these

Answer : D. Visa
Explanation: Axis Bank, on Wednesday announced the launch of its Contactless Secure+ Debit Card for regular savings account customers, to provide access to a larger customer base with contactless technology. The card, launched on the Visa payWave platform, will enable Axis Bank‘s customers to conveniently ‗Just Wave to Pay‘ at NFC-enabled point of sale (POS) terminals and also use the card as a normal debit card at any POS terminal.

Question. Which bank recently tied up with Chillr for cashless transactions?
A) Federal Bank
B) DCB Bank
C) IDFC Bank
D) Karnataka Bank
E) IndusInd Bank

Answer : A. Federal Bank
Explanation: Federal Bank announced its partnership with with Chillr, a mobile banking application, to provide cashless transactions. Chillr, India‘s first and only multi-bank mobile application, allows users to connect seamlessly with multiple bank accounts and manage all their banking needs on a single platform, making money transfer between bank accounts easier, faster and safer than sending a text message.

Question. CERSAI was registered as a government-licensed company, under section 25 of_________
A. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
B. Companies Act, 1956
C. Banking Regulation Act, 1949
D. Both (A) and (B)
E. None of these

Answer : B. Companies Act, 1956
Explanation: Central Registry of Securitisation Asset Reconstruction and Security Interest of India is a company licensed under section 25 of the Companies Act, 1956

Question. CERSAI incorporated with majority share holding of ________
A. Government of India
B. National Housing Bank
C. Public Sector Banks
D. Both (B) and (C)
E. (A), (C) and (B)

Answer : A. Government of India
Explanation: 51% of the equity is owned by the government, and the rest is owned equally by National Housing Bank and 10 other public sector banks.

Question. After Mumbai, Doha bank is now going to open its branches in which city?
A) Palakkad
B) Kochi
C) Idukki
D) Kasaragod
E) None of these

Answer : B. Kochi
Explanation: Qatar-based Doha Bank will open a state-of-the-art branch in Kochi, the only branch of a Gulf Cooperation Council (GCC)-based bank in India.

Question. Who has been named as the new RBI Governor?
A) Subir Gokarn
B) Arundhati Bhattacharya
C) R. Gandhi
D) Urjit R Patel
E) Arvind Subramanian

Answer : D. Urjit R Patel
Explanation: The choice of Urjit Patel as RBI governor was made by PM Narendra Modi himself.

Question. IndusInd Bank has tied up with which company to use its Cloud commerce solutions to transform customer engagements and enhance its cross-sell platforms?
A) Accenture
B) Infosys
C) Wipro
D) TCS
E) IBM

Answer : E. IBM
Explanation: As a part of a three year strategic agreement, IBM will provide a cloud and predictive analytics based multi-channel campaign management solution that enables IndusInd Bank to strengthen its online banking presence while improving the product holding per customer.

Question. For customers of how many banks, the UPI mobile application is going to launch in the first phase?
A) 21
B) 19
C) 15
D) 25
E) None of these

Answer : A. 21
Explanation: According to NPCI, the UPI application of 19 banks can be downloaded from Google Play Store in next two to three working days.The list of banks providing the app on Google Play Store are: Andhra Bank, Axis Bank,Bank of Maharashtra, Bhartiya Mahila Bank, Canara Bank, Catholic Syrian Bank, DCB Bank, Federal Bank, ICICI Bank, TJSB Sahakari Bank, Oriental Bank of Commerce, Karnataka Bank, UCO Bank, Union Bank of India, United Bank of India, Punjab National Bank, South Indian Ban k The customers of IDBI Bank and RBL Bank can download any UPI enabled apps and link their account.

Question. Which two banks have been given the tag “too big too fail” for the year 2016?
A) ICICI and Axis Bank
B) Axis Bank and Punjab National Bank
C) Punjab National bank and SBI
D) SBI and ICICI
E) SBI and Axis Bank

Answer : D. SBI and ICICI
Explanation: The Reserve Bank of India retained the tag of ―too big to fail‖ banks for SBI and ICICI second year in a row. This means that the banking regulator considers failure of these banks to be dangerous for the economy, which renders them ‗too big to fail‘. RBI had designated both these banks as domestic systemically important banks (D-SIBs) last year in August for the first time.Both these banks are required to make additional capital requirements after they were named as D-SIBs.

Question. SBI has been named as domestic systemically important banks (D-SIBs) this year. What additional capital it will have to maintain as a percent of loans and investments?
A) 0.2%
B) 0.4%
C) 0.6%
D) 0.8%
E) None of these

Answer : C. 0.6%
Explanation: Based on the methodology announced by the central bank, SBI will need to maintain additional capital equivalent to 0.6 per cent of its loans and investments while ICICI will need to maintain 0.2 per cent more.

Question. What is the full form of CERSAI?
A. Combined Registry of Securitisation Asset Reconstruction and Security Interest
B. Central Registry of Securitisation Agency Reconstruction and Security Interest
C. Combined Registry of Securitisation Agency Reconstruction and Security Interest
D. Central Registry of Securitisation Asset Reconstruction and Security Interest
E. None of these

Answer : D. Central Registry of Securitisation Asset Reconstruction and Security Interest
Explanation: Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI) is a central online security interest registry of India. It was primarily created to check frauds in lending against equitable mortgages, in which people would take multiple loans on the same asset from different banks.

Question. The headquarters of CERSAI located in ________
A. Mumbai
B. New Delhi
C. Hyderabad
D. Gurugram
E. None of these

Answer : B. New Delhi
Explanation: The headquarters of Central Registry of Securitisation Asset Reconstruction and Security Interest(CERSAI) located in New Delhi.

Question. Financial institutions must register details of security interests created by them with CERSAI within howmany days of its creation?
A. 30
B. 60
C. 15
D. 90
E. None of these

Answer : A. 30
Explanation: Financial institutions must register details of security interests created by them with CERSAI within 30 days of its creation.

Question. The headquarter of CARE is ______
A. Mumbai
B. New Delhi
C. Noida
D. Gurugram
E. Hyderabad

Answer : A. Mumbai
Explanation: Credit Analysis & Research Limited(CARE) is located in Mumbai.

Question. SME Rating Agency of India Limited (SMERA), a third party rating agency is situated in _______
A. Mumbai
B. New Delhi
C. Noida
D. Gurugram
E. Hyderabad

Answer : A. Mumbai
Explanation: SME Rating Agency of India Limited (SMERA) is a third party rating agency exclusively set up for micro, small and medium enterprises (MSME) in India for ratings on creditworthiness.

Question. According to _________, Any person can also search and inspect the records maintained by the Registry on payment of fees.
A. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
B. Companies Act, 1956
C. Both (A) and (B)
D. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Central Registry) Rules, 2011
E. None of these

Answer : D. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Central Registry) Rules, 2011
Explanation: Any person can also search and inspect the records maintained by the Registry on payment of fees prescribed under the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest (Central Registry) Rules, 2011. For the general public, especially for home buyers, it enables them to check the registry‘s records to ensure that any property they are planning to purchase, is free of any loan/security interest created by a lender.

Question. Which of the following is/are functions of CERSAI?
A. check frauds in lending against equitable mortgages
B. maintains a central registry of equitable mortgages
C. Provides loan
D. Both (A) and (B)
E. None of these

Answer : D. Both (A) and (B)
Explanation: CERSAI was primarily created to check frauds in lending against equitable mortgages, in which people would take multiple loans on the same asset from different banks. CERSAI to start registration of security interests created on movable and intangible assets such as accounts receivables, book debt, and hypothecation as well as to start registration of all other types of mortgages used in India.

Question. Which of the following was/were established under the Recovery of Debts Due to Banks and Financial Institutions Act (RDDBFI Act), 1993?
A. DRTs
B. DRATs
C. ATs
D. Both (A) and (B)
E. None of the Above

Answer : D. Both (A) and (B)
Explanation: The Debts Recovery Tribunals (DRTs) and Debts Recovery Appellate Tribunal (DRATs) were established under the Recovery of Debts Due to Banks and Financial Institutions Act (RDDBFI Act), 1993 with the specific objective of providing expeditious adjudication and recovery of debts due to Banks and Financial Institution.

Question. Which of the following is governed by the provisions of Section 42 of the Reserve Bank of India Act, 1934?
A. Bank rate
B. Reverse Repo Rate
C. SLR
D. CRR
E. None of the Above

Answer : D. CRR
Explanation: CRR is governed by the provisions of Section 42 of the Reserve Bank of India Act, 1934.
There is no minimum & maximum level of CRR. We could go upto zero CRR (negative values are of course absurd).

Question. NCAER is located in _______
A. Mumbai
B. New Delhi
C. Noida
D. Chennai
E. Hyderabad

Answer : B. New Delhi
Explanation: National Council of Applied Economic Research or NCAER is a New Delhi based nonprofit think tank of economics.

Question. Which company is providing free 4G sims to certain smartphone users like Samsung, LG, etc.?
A) Airtel
B) Vodafone
C) Reliance
D) Aircel
E) Tata

Answer : C Reliance
Explanation: Reliance is providing its 4G sims free of cost to some companies smartphone users on which they will have free calls and net for 3 months

Question. Which bank has become the first private sector bank to sell Indian gold coins?
A) Dhanlaxmi Bank
B) Federal Bank
C) ICICI Bank
D) IndusInd Bank
E) Karur Vysya Bank

Answer : B Federal Bank
Explanation: Kerala based private sector lender, Federal Bank has tied up with MMTC for distribution of Indian Gold Coins (IGC), the first-Ever national gold offering by the government,which was launched by Prime Minister Narendra Modi In November 2015.

Question. Headquarter of Agriculture of Finance Corporation(AFC) is situated at_______
A. Mumbai
B. New Delhi
C. Noida
D. Gurugram
E. Hyderabad

Answer : A. Mumbai
Explanation: Headquarter of AFC is situated at Mumbai. The Company has three Regional Offices at Kolkata, New Delhi and Bangalore besides three Branch Offices at Lucknow, Hyderabad and Pune and Field Offices at Kalahandi, Bargarh (Orissa) and Godda (Jharkhand).

Question. The headquarters of Investment Information & Credit Rating Agency(ICRA) Limited is located in _________
A. Mumbai
B. New Delhi
C. Noida
D. Gurugram
E. Hyderabad

Answer : D. Gurugram
Explanation: ICRA is second largest Indian rating comapany in term of customer base. It was a jointventure between Moody‘s and various Indian commercial banks and financial services companies. Headquarters is in Gurgaon (Haryana),India

Question. Trade Gap means
A. Gap between total GDP and total consumption
B. Gap between total imports and total exports
C. Gap between available liquidity and expected demand in next five months
D. Gap between budgeted revenue collection and actual collection of the same
E. None of the above

Answer : B. Gap between total imports and total exports
Explanation: The amount by which the value of a country‘s visible imports exceeds that of visible exports; an unfavourable balance of trade.

Question.Which of the following agencies in India is responsible for computation of national income?
A. NCAER
B. CSO
C. NSS
D. RBI
E. None of the Above

Answer : B. CSO
Explanation: The Central Statistical Office which is one of the two wings of the National Statistical Organisation (NSO) is responsible for coordination of statistical activities in the country and for evolving and maintaining statistical standards. Its activities include compilation of National Accounts.

Question. Credit Information Bureau India Limited (CIBIL) is India‟s first Credit Information Company (CIC) headquartered at ________
A. Mumbai
B. New Delhi
C. Noida
D. Gurugram
E. Hyderabad

Answer : A. Mumbai
Explanation: Credit Information Bureau (India) Limited (CIBIL) is India‘s first Credit Information Company (CIC) founded in August 2000. CIBIL collects and maintains records of an individual‘s payments pertaining to loans and credit cards.

Question. STANDARD & POOR‟S (S&P) is located in _______
A. New York
B. Washington D.C
C. Los Angeles
D. San Francisco
E. Chicago

Answer : A. New York
Explanation: Standard & Poor‘s Financial Services LLC is an American financial services company. It is a division of S&P Global that publishes financial research and analysis on stocks,bonds and commodities.

Question. The headquarter of ONICRA is ______
A. Mumbai
B. New Delhi
C. Noida
D. Gurugram
E. Hyderabad

Answer : D. Gurugram
Explanation: Onicra-leading Credit and Performance Rating agencies in India providing ratings, risk assessment and analytical solutions.

Question. The rules framed in the Clayton‟s case have been incorporated in _________
A. Banking Regulation Act, 1949
B. Reserve Bank of India Act, 1934
C. Negotiable Instruments Act, 1881
D. Indian Contract Act, 1872
E. None of the Above

Answer : D. Indian Contract Act, 1872
Explanation: The rules framed in the Clayton‘s case was incorporated in Section 59 of the Indian Contract Act, 1872.

Question. The Definition of „Banking‟ is given in _______
A. Negotiable Instrument Act, 1881
B. RBI Act, 1934
C. The Banking Regulation Act, 1949
D. Indian Contract Act, 1872
E. None of the Above

Answer : C. The Banking Regulation Act, 1949
Explanation: As per Section 5(b) of the Banking Regulation Act, 1949 , ―banking‖ means the accepting, for the purpose of lending or investment, of deposits of money from the
public, repayable on demand or otherwise, and withdraw-able by cheque, draft, order or otherwise.

Question. Which of the following is/are share holders of CERSAI?
A. GOI
B. RBI
C. PSBs
D. NHB
E. (A), (C) and (D)

Answer : E. (A), (C) and (D)
Explanation: The Company is a Government Company with a shareholding of 51% by the Central Government and select Public Sector Banks and the National Housing Bank are also shareholders of the Company.

Question. Banks are required to maintain SLR under_____
A. Section 24 of the Banking Regulation Act
B. Section 35 of the Negotiable Instrument Act, 1881
C. Section 24 of RBI Act
D. Section 40 of Indian Contract Act, 1872
E. None of the Above

Answer : A. Section 24 of the Banking Regulation Act
Explanation: SLR is governed by the provisions of Section 24 of the Banking Regulation Act. There is no minimum stipulation on SLR (earlier there used to be a minimum stipulated SLR of 25% – but this was removed with an amendment to the Banking Regulation Act in 2007).
However, SLR can not exceed 40%.

Question. Sub-prime lending refers to ________
A. lending done by banks at rates below PLR
B. Funds raised by the banks at sub-libor rates
C. Group of banks which are not rated as prime banks as per Banker‘s Almanac
D. lending done by financing institutions including banks to customers not meeting with normally required credit appraisal standards
E. All of the Above

Answer : D. lending done by financing institutions including banks to customers not meeting with normally required credit appraisal standards
Explanation: In finance, subprime lending (also referred to as near-prime, non-prime, and secondchance lending) means making loans to people who may have difficulty maintaining the repayment schedule, sometimes reflecting setbacks, such as unemployment, divorce, medical emergencies, etc.

Question. Currency Swap is an instrument to manage _______
A. currency risk
B. interest rate risk
C. currency and interest rate risk
D. cash flows in different currency
E. All of the above

Answer : D. cash flows in different currency
Explanation: A currency swap (or a cross currency swap) is a foreign exchange derivative between two institutions to exchange the principal and/or interest payments of a loan in one currency for equivalent amounts, in net present value terms, in another currency.

Question. A negotiable instrument delivered to a person conditionally or for safe custody, but not for the purpose of negotiation is called _________
A. Protest
B. Escrow
C. Noting
D. All of the Above
E. None of the Above

Answer : B. Escrow
Explanation: An escrow account is a temporary pass through account held by a third party during the process of a transaction between two parties.

Question. __________ is the process by which the ownership of the credit instrument is transferred from one person to another.
A. Assignment
B. Endorsement
C. Negotiation
D. All of the Above
E. None of the Above

Answer : C. Negotiation
Explanation: In documentary credit, usually the beneficiary‘s bank which agrees to pay the beneficiary by purchasing a negotiable instrument (importer‘s or buyer‘s draft). Also called accrediting party.

Question. A Shareholder has been defined by ________
A. Banking Regulation Act, 1949
B. Reserve Bank of India Act, 1934
C. Negotiable Instruments Act, 1881
D. Indian Contract Act, 1872
E. The companies act, 1956

Answer : E. The companies act, 1956
Explanation: The Companies Act, 1956
―Small Shareholder‖ means a shareholder holding shares of nominal value of twenty thousand rupees or less in a public company to which section 252 of the Act applies.

Question. Spurious coins detected at the counter are sent to _____
A. RBI
B. GOI
C. IBRD
D. Mint
E. None of the Above

Answer : D. Mint
Explanation: when Spurious coins tendered over the counter, it should be cut and handed over to the tenderer. If the tenderer disputes it, the coins should be sent to the mint at his cost, for examination.

Short Answer: question 

Question.Money acts as a yardstick of standard measure of value to which all other things can be compared. Discuss it.
Answer. Money serves as a measure of value in terms of unit of account. Measurement of value was the main difficulty of the barter system. Introduction of money has removed this difficulty. It acts as a yardstick of standard measure of value to which all other things can be compared.” Money measures the value of everything or the prices of all goods and services can be expressed in terms of money.

Question.Give meaning of money supply. State its components.
Answer. It refers to stock of money available with the public/people at a point of time.

Measures of Money Supply
▪ M₁ = C + DD + OD
▪ M₂ = M₁+ Post office savings deposits
▪ M₃ = M₁+ Time deposits of commercial banks
▪ M₄= M₃+ Total deposits with the post office saving deposit excluding the deposits on NSC

Question.Explain the role of the Reserve Bank of India as the “lender of last resort”
Answer. As banker to the banks, the central bank acts as the lender of the last resort. In other words, in case the commercial banks fail to meet their financial requirements from other sources, they can, as a last resort, approach to the central bank for loans and advances. The central bank assists such banks through discounting of approved securities and bills of exchange.

Question.Explain ‘Banker’s Bank’ function of central bank.
Answer. Central bank acts as the banker to the banks in three ways:
(i) custodian of the cash reserves of the commercial banks;
(ii) as the lender of the last resort; and
(iii) as clearing agent.

(i) Custodian of the cash reserves of the commercial banks:
Every commercial bank has to keep a certain percent of its cash reserves with the central bank by law.
(ii) Lender of the Last Resort.
As banker to the banks, the central bank acts as the lender of the last resort, in case the commercial banks fail to meet their financial requirements from other sources, they can, as a last resort, approach to the central bank for loans and advances.
(ii) Clearing Agent Since it is the custodian of the cash reserves of the commercial banks, the central bank can act as the clearinghouse for these banks.

Question. Explain ‘banker to the government’ function of the Central Bank
Answer. Central bank everywhere in the world acts as banker, fiscal agent and adviser to their respective government.
(i) As Banker: As a banker to the government, the central bank performs same functions as performed by the commercial banks to their customers.
(ii) As Fiscal Agent: As a fiscal agent, it performs the following functions:
• It manages the public debt.
• It collects taxes and other payments on behalf of the government.
(iii) As Adviser
• The central bank also acts as the financial adviser to the government.

Question. Explain central bank’s function as currency authority.
Answer. The central bank has the sole monopoly to issue currency notes. Commercial banks cannot issue currency notes. Currency notes issued by the central bank are the legal tender money. Central Bank is obliged to back the currency with assets of equal value (usually gold coins, gold bullions, foreign securities etc.)

Question. ‘Banks required to keep only a fraction of deposits as cash reserves’. Why?
Answer. Banks are required to keep only a fraction of deposits as cash reserves because of the following two reasons: (a) First, the banking experience has revealed that not all depositors approach the banks for withdrawal of money at the same time and also that normally they withdraw a fraction of deposits.
(b) Secondly, there is a constant flow of new deposits into the banks. Therefore, to meet the daily demand for withdrawal of cash, it is sufficient for banks to keep only a fraction of deposits as a cash reserve.

Question. What do you mean by Money Multiplier/Credit Multiplier?
Answer. It refers to the fraction by which commercial banks would be able to multiply money from their initial level of deposits.
Money Multiplier = 1/LRR

Question. What do you mean by Legal reserve ratio (LRR)? Explain the components of Legal Reserve Ratio.
Answer.The minimum percentage of a bank’s total demand and time deposits, that is required to be maintained in the form of cash or specified liquid assets by the commercial banks with the Central Bank is termed as Legal Reserve Ratio. The components of Legal Reserve Ratio are as follows:
(i) Cash Reserve Ratio : The percentage of total deposits, which a commercial bank needs to keep as reserve with the Central Bank.
(ii) Statutory Liquidity Ratio : Every commercial bank is required to maintain a fixed percentage of its assets in the form of cash or other liquid assets.

Question. Distinguish between ‘Qualitative and Quantitative tools’ of credit control as may be used by a Central Bank.
Answer.Two types of methods are adopted by the central bank to control credit. These are quantitative methods and qualitative methods. (a) Quantitative methods aim at controlling the cost and volume of credit created by commercial banks by using instruments like bank rate, open market operation, legal reserve ratios, repo rate and reverse repo rate.
(b) Qualitative methods regulate the direction of flow of credit among various users rather than influencing just the availability of credit. Example: margin requirement, credit rationing, direct action and moral suasion.

Question. What are the quantitative instruments of credit control? The quantitative instruments of credit control include:
Answer. Bank Rate Policy - It refers to the rate at which the central bank lends money to commercial banks as a lender of the last resort.
Repo Rate Policy – It is the rate at which the central bank of the country (RBI) lends money to the commercial banks to meet their short-term needs.
Reverse Repo Rate – It is the rate at which RBI borrows money from the commercial banks.
Open Market Operations - It refers to the buying and selling of securities by the Central Bank from/ to the public and commercial banks.
Legal Reserve Ratio - R.B.I. can influence the credit creation power of commercial banks by making changes in CRR and SLR.

Question. What are the qualitative instruments of credit control?
Answer.The qualitative instruments of credit control include:
(i) Marginal Requirements
(ii) Rationing of Credit
(iii) Moral Suasion
(iv) Direct Action

Long Answer: questions (6Marks)

Question. What are the functions of money?
OR
Explain primary and secondary functions of money
Answer. Primary Function
i) Medium of exchange:
It means that money can be used to make payments for all the transactions of goods and services. A buyer can buy goods through money and a seller can sell goods for money. It is an essential function of money.
ii) Measure of value:
Money serves as a measure of value. Th  e value of all goods and services is expressed in terms of money.
Secondary Function
i) Standard of deferred payments:
It means that money acts as a ‘standard’ for making future payments. It has made deferred payments much easier than before.
Example: When we borrow money from somebody, we have to return both the principal as well as the interest amount in the future.
ii) Store of value:
A store of value implies a store of wealth. Money can be easily stored for future use. It is the most convenient and economical means to store earnings and wealth.
iii) Transfer of value:
Money also serves for transfer of value. It facilitates buying and selling of goods not only in the domestic country but also in other parts of the world 2. How does a central bank control the availability of credit by open market operation? Open market operation is the policy of the central monetary authority to sell and buy the government securities in the market. RBI purchases government securities from commercial banks and general public in a bid to increase the stock of high-powered money in the economy. Similarly, RBI sells government securities to commercial banks and general public in a bid to decrease the stock of high-powered money in the economy.

Question. Explain the effect of an increase in bank rate on credit creation by commercial banks. The bank rate is the minimum rate at which the central bank discounts the first-class bills of exchange and provides credit to the commercial banks.
Answer. Increase in the bank rate makes the borrowings from the central bank costlier than before. This reduces the lending or credit creation capacity of the commercial banks as they get funds at a higher interest rate from the central bank. Increase in bank rate also increases the rate at which commercial banks lend to the general public. Consequently, credit contracts in the economy.

Question. 4.Explain the process of Money creation by the commercial banks with the help of a numerical example.
or
What role does it play in determining the credit creation power of the banking system? Use a numerical illustration to explain.
Answer. Credit creation is the most important functions of Commercial bank. The capacity of banks to create money or credit depends on:
a) Amount of primary deposits
b) Legal reserve ratio(LRR).
Let us understand the process of credit creation with the following example.
Suppose there is an initial deposit of Rs. 1000 and L.R.R. is 20% i.e., the banks have to keep Rs. 200 and lend Rs. 800/-. All the transactions are routed through banks.

The deposit creation comes to end when the total cash reserves become equal to the initial deposit.
Money Multiplier = 1/LRR
Credit creation = Initial deposit X 1/LRR.
Credit creation = 1000 x 1/20% 1000 x 100/20=Rs 5000
In this way, commercial banks create credit many more times than their cash reserves and contributes to increase money supply in the economy.

Case Study/Source based Questions

1.Read the following case study paragraph carefully and Answer: the questions on the basis of the same.

The central bank of India i.e. Reserve Bank of India, is the apex institution that control the

entire financial market. It's one of the major functions is to maintain the reserve of foreign exchange. Also, it intervenes in the foreign exchange market to stabilise the excessive fluctuations in the foreign exchange rate.
In other words, it is the central bank's job to control a country's economy through monetary policy; if the economy is moving slowly or going backward, there are steps that central bank can take to boost the economy. These steps, whether they are asset purchases or printing more money, all Involve injecting more cash into the economy. The simple supply and demand economic projection occur and currency will devalue.
When the opposite occurs, and the economy is growing, the central bank will use various methods to keep that growth steady and in-line with other economic factors such as wages and prices. Whatever the central bank does or in fact don't do, will affect the currency of that country. Sometimes, it is within the central bank's interest to purposefully effect the value of a currency. For example, if the economy is heavily reliant on exports and their currency value becomes too high, importers of that country's commodities will seek cheaper supply; hence directly effecting the economy.

Question. Which of the following tools are used by the central bank to control the flow of money in domestic economy?
(a) Fiscal tools
(b) Quantitative monetary tools
(c) Qualitative monetary tools
(d) Both (b) and (c)
Answer. D

Question. Dear money policy of central bank, which is used to keep the growth steady and in-line with other economic factors, refers to
a) Tighten the money supply in the economy
b) Ease the money supply in the economy
c) Allow commercial banks to work under less strict environment
d) Both (b) and (c)
Answer. A

Question. Which of the following steps should be taken by the central bank if there is an excessive rise in the foreign exchange rate?
(a) Supply foreign exchange from its stock
(b) Demand more of other foreign exchange
(c) Not intervene in the market as the exchange rate is determined by the market forces
(d) Help central government to stabilize the foreign exchange rate.
Answer. A

2.Read the para given below and Answer: the questions that follow:

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 perform 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

3.Read the para given below and Answer: the questions that follow:

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 M3 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

4.Read the para given below and Answer: the questions that follow:

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

5.Read the following case study paragraph carefully and Answer: the questions on the basis of the same.

India’s total Money Supply (M3) stood at Rs 18907383 crore as on April 9th 2020, recording a rise of 11.3% over the same time last year. Currency with the public stood at Rs 2787941
crore, up 16.7% over the year. Demand deposits with banks were up 17% at Rs 1867606 crore.
Time deposits with banks were also up 9.6% at Rs 14205545 crore. The bank credit to commercial sector edged up 5.1% on year to Rs 11552069 crores. However, this indicates moderation from 7.2% at the same time last year.

Question. How does increase in deposits with commercial banks will affect credit creation process: -
a) Credit creation process will increase
b) Credit creation process will remain unaffected
c) Credit creation process will reduce
d) None of above
Answer. A

Question. M3 is consist of: -
a) C +OD + Time deposits
b) C + DD + OD + time deposits with commercial bank
c) M1 + deposits of post office saving bank
d) All of above
Answer. B

Question. What is indicated by increasing deposits?
a) People prefer to save more now
b) Income level of people are increasing
c) People prefer to keep money in the bank accounts after demonetisation
d) All of above
Answer. D

7.Read the 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 population of 1.3 billion as India’s tally of infections exceeded 10000, despite the 3-week shutdown order from March 24.
The RBI cut its reverse repo rate by 25 basis points (bps) to 3.75 percent with immediate
effect. Governor Shaktikanta Das told a video conference. The rate had already been cut by 90bps on March 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 fixed-rate reverse repo rate”.
(Source: Business Today, April17 2020)

Question. The Reserve Bank of India lowered reverse repo rate to discourage banks from parking idle funds with ________ (RBI/Commercial Banks)
Answer. RBI

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 _______(increased/decreased) to correct excess demand
Answer. increased

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

Question. Out of the Bank rate policy and open market operations, which will you prefer in India?
Answer. The bank rate policy should be preferred by the RBI because the policy of open market operations cannot be used effectively in our country.

Question. Why should be the top most role of the Central Bank in a developing economy like India?
Answer. It should be to adopt measures like expansion, promotion and strengthen the banking and financial structures.

Question. Suppose all the customers of a commercial bank demand for their deposits at the same time then how does Central bank help the Commercial bank in this situation?Answer.Central Bank helps as ―Lender of last resort‖. It gives financial accommodation to the commercial bank
a) By rediscounting its bills of exchange and promissory notes b) By providing loans against its securities. Thus it saves commercial banks from financial crisis.

Question. When barter system was in use, a merchant had to incur cost in the absence of money. What were those costs?
Answer.a) Search cost, which is the cost of searching a person, to exchange goods and b) Disutility of waiting, which means cost of equivalent to wastage of time period spent on finding out required person.

Question. Although increase in money supply is an effective measure to control economic depression, yet it creates burden of borrowing in an economy. Explain two measures to control economic depression in such a situation.
Answer. Decrease in Bank rate, Decrease in SLR and purchase of Government securities by RBI.

Question. RBI has reduced CRR from 4.25% to 4%. Will this help in controlling inflation in India?
Answer.It increases the lending capacity of commercial banks. This adds to inflationary pressure in the economy.

Question. Why is Central Bank sole authority for the issue of currency in the country?
Answer.
♦ It ensures uniformity in note circulation
♦ It builds up public faith in the currency system
♦ It enables government to control money supply through RBI