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KSEAB SSLC JTS Economics study materials
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KSEAB SSLC JTS Economics practice questions

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Question 1Economics and the Economy: Basic Concepts

In economics, the term 'scarcity' refers to which situation?

  1. A condition where human wants are unlimited but resources are limited Correct answer.
  2. A temporary shortage caused by a strike in the transport sector
  3. A situation where a government deliberately restricts imports
  4. A state in which prices of all goods fall continuously

Explanation

Scarcity is the fundamental economic problem: human wants are unlimited while the resources available to satisfy them are limited and have alternative uses. It is a universal condition, not a passing shortage of a single good. Every economy must therefore choose what to produce, how to produce and for whom to produce.

Question 2Economics and the Economy: Basic Concepts

A farmer has a plot of land that can be used either to grow ragi or to build a small dairy shed. Choosing the ragi means giving up the dairy shed. The value of the dairy shed given up is called:

  1. Marginal utility
  2. Sunk cost
  3. Opportunity cost Correct answer.
  4. Average revenue

Explanation

Opportunity cost is the value of the next best alternative forgone when a choice is made. Because the land can serve only one use at a time, the dairy shed that is not built measures the cost of choosing ragi. This concept follows directly from scarcity and the need to choose.

Question 3Economics and the Economy: Basic Concepts

Which of the following is a characteristic feature of a mixed economy such as India?

  1. Prices are fixed only by the forces of demand and supply
  2. All means of production are owned by private individuals
  3. The government decides the quantity of every good to be produced
  4. Both public and private sectors exist side by side in production Correct answer.

Explanation

A mixed economy combines private ownership and market allocation with state ownership and regulation in strategic sectors. India's public sector undertakings coexist with private firms, and the government also regulates and plans for welfare. This is what distinguishes it from pure capitalist and pure socialist systems.

Question 4Economics and the Economy: Basic Concepts

The central problem of 'for whom to produce' in an economy is mainly concerned with:

  1. Selecting the technique of production to be used
  2. Distributing the national product among different sections of society Correct answer.
  3. Choosing between consumer goods and capital goods
  4. Deciding the quantities of capital and labour to employ

Explanation

The three central problems are what to produce, how to produce and for whom to produce. The last one deals with the distribution of output among households and groups, which depends on income and ownership of factors of production. The other options belong to the 'what' and 'how' problems.

Question 5Economics and the Economy: Basic Concepts

In the study of economics, 'microeconomics' is best described as the branch that studies:

  1. The overall level of national income and employment
  2. The balance of payments and exchange rate of a nation
  3. Individual units such as a household, a firm or a single market Correct answer.
  4. The general price level and inflation in the country

Explanation

Microeconomics analyses the behaviour of individual decision-making units, including consumers, producers and particular markets. It examines how prices are determined for a single commodity and how resources are allocated at that level. The economy-wide aggregates belong to macroeconomics.

Question 6Economics and the Economy: Basic Concepts

A consumer buys 5 units of a good and derives total utility of 50 utils. When she buys a sixth unit, total utility rises to 56 utils. What is the marginal utility of the sixth unit?

  1. 56 utils
  2. 6 utils Correct answer.
  3. 50 utils
  4. 11 utils

Explanation

Marginal utility is the addition to total utility from consuming one more unit, found by subtracting the previous total from the new total. Here 56 minus 50 gives 6 utils. Dividing totals by quantities would give average utility, not marginal utility.

Question 7Economics and the Economy: Basic Concepts

The law of demand states that, other things remaining constant, when the price of a commodity rises:

  1. Its quantity demanded also rises
  2. Its quantity demanded remains unchanged
  3. Its quantity demanded falls Correct answer.
  4. Its demand curve shifts to the right

Explanation

The law of demand expresses an inverse relationship between price and quantity demanded, other factors held constant. A price rise therefore reduces the quantity demanded, shown as an upward movement along the demand curve. A shift of the curve would require a change in a non-price factor.

Question 8Economics and the Economy: Basic Concepts

Which of the following would cause a rightward shift of the demand curve for coffee?

  1. A technological improvement in coffee production
  2. An increase in the price of tea, a substitute for coffee Correct answer.
  3. A rise in the price of sugar used with coffee
  4. A fall in the price of coffee

Explanation

A rise in the price of a substitute makes consumers switch towards coffee, increasing demand at every price and shifting the curve rightward. A change in the good's own price moves along the curve rather than shifting it. Production-side changes affect supply, not demand.

Question 9Economics and the Economy: Basic Concepts

A 10 per cent fall in the price of a good leads to a 25 per cent rise in its quantity demanded. The price elasticity of demand, using the simple percentage method, is:

  1. 0.25
  2. 0.4
  3. 15
  4. 2.5 Correct answer.

Explanation

Price elasticity of demand equals the percentage change in quantity demanded divided by the percentage change in price. Dividing 25 by 10 gives 2.5, which is greater than one, so demand is elastic. The negative sign is usually ignored when expressing the coefficient.

Question 10Economics and the Economy: Basic Concepts

Demand for salt is generally found to be inelastic because:

  1. Consumers buy salt only occasionally during festivals
  2. Salt is a necessity with few substitutes and a small share of expenditure Correct answer.
  3. Salt has many close substitutes in the market
  4. Salt absorbs a very large share of a household's budget

Explanation

Elasticity is low when a good is a necessity, has few substitutes and takes only a small part of income, all of which apply to salt. Consumers therefore do not change their purchases much when its price changes. Many substitutes or a large budget share would make demand more elastic.

Question 11Economics and the Economy: Basic Concepts

In the law of supply, the relationship between price and quantity supplied of a commodity is:

  1. Direct, so supply rises when price rises Correct answer.
  2. Unrelated, since supply depends only on costs
  3. Always perfectly inelastic in the short run
  4. Inverse, so supply falls when price rises

Explanation

The law of supply states that, other things being equal, producers offer more of a good at higher prices because higher prices raise profitability. This gives an upward-sloping supply curve. The inverse relationship belongs to demand, not supply.

Question 12Economics and the Economy: Basic Concepts

A market for a good is in equilibrium at a price of ₹40 per unit. If the government fixes a maximum price of ₹30 per unit, the likely result is:

  1. No change, because price controls never affect markets
  2. A shortage, because quantity demanded exceeds quantity supplied at ₹30 Correct answer.
  3. An automatic shift of the supply curve to the right
  4. A surplus, because supply exceeds demand at ₹30

Explanation

A price ceiling set below the equilibrium price makes the good cheaper, raising quantity demanded while reducing quantity supplied. The gap between the two creates an excess demand or shortage. A surplus would arise only if the controlled price were above equilibrium.

Question 13Economics and the Economy: Basic Concepts

Gross Domestic Product (GDP) of a country measures:

  1. The value of all intermediate goods traded within the country
  2. The money value of all final goods and services produced within the country in a year Correct answer.
  3. The total money income received by citizens from abroad only
  4. The total stock of wealth held by households at a point of time

Explanation

GDP is the market value of all final goods and services produced within a country's domestic territory during a given year. Counting only final goods avoids double counting of intermediate products. It is a flow concept for a period, not a stock of wealth.

Question 14Economics and the Economy: Basic Concepts

Which of the following is counted as an intermediate good rather than a final good?

  1. A school bag bought by a student
  2. A car purchased by a household for personal travel
  3. A refrigerator bought by a family for home use
  4. Wheat bought by a flour mill to grind into flour Correct answer.

Explanation

An intermediate good is purchased for resale or for use as an input in further production during the same year. Wheat bought by a mill is processed into flour, so its value is embodied in the final product. Goods bought for final consumption by households are final goods.

Question 15Economics and the Economy: Basic Concepts

In a simple two-sector economy, if consumption expenditure is ₹700 crore and investment expenditure is ₹300 crore, the value of GDP by the expenditure method is:

  1. ₹700 crore
  2. ₹300 crore
  3. ₹1,000 crore Correct answer.
  4. ₹400 crore

Explanation

Under the expenditure method, GDP in a two-sector economy is the sum of consumption and investment expenditure. Adding ₹700 crore and ₹300 crore gives ₹1,000 crore. Subtracting one component from the other would not measure total output.

Question 16Economics and the Economy: Basic Concepts

Which of the following best explains why the problem of choice arises in every economy?

  1. Money supply in an economy is always insufficient
  2. Resources are unlimited but human wants are limited
  3. Governments always allocate resources inefficiently
  4. Resources are limited and have alternative uses while wants are unlimited Correct answer.

Explanation

Choice arises because scarce resources can be put to alternative uses while wants are unlimited, so every economy must rank and select among competing ends. This makes opportunity cost unavoidable. Inefficiency or money supply are separate issues that do not create the basic problem.

Question 17National Income and Its Measurement

In national income accounting, which of the following is counted as a final good rather than an intermediate good?

  1. Cotton bought by a textile mill to spin into yarn
  2. A refrigerator purchased by a household for home use Correct answer.
  3. Wheat purchased by a bakery to make bread
  4. Steel purchased by a car factory for its assembly line

Explanation

A final good is bought for final consumption or investment and is not resold or further processed within the accounting period. A refrigerator used by a household is consumed by the final user, so its full value enters national income. Goods bought by firms as raw material or for resale are intermediate goods whose value is already captured in the final product.

Question 18National Income and Its Measurement

Which of the following transactions is excluded from India's gross domestic product for the current year?

  1. A second-hand car sold by one household to another Correct answer.
  2. Commission earned by a broker on a new flat sale
  3. A software engineer's salary paid by a Bengaluru firm
  4. Milk sold by a dairy cooperative to a hotel

Explanation

GDP measures the value of goods and services produced during the year, so only the broker's commission on the resale of an old asset would count, not the asset's value. A second-hand car was already counted in GDP in the year it was manufactured. Its resale merely transfers ownership and creates no new production.

Question 19National Income and Its Measurement

Gross Domestic Product at market prices minus depreciation equals which aggregate?

  1. Gross Domestic Product at factor cost
  2. Net National Product at factor cost
  3. Net Domestic Product at market prices Correct answer.
  4. Gross National Product at factor cost

Explanation

Subtracting depreciation (consumption of fixed capital) from GDP at market prices gives Net Domestic Product at market prices. Depreciation is the fall in the value of fixed capital used up in production, so netting it out converts a gross measure into a net one. Converting to factor cost or to a national concept requires further adjustments, such as subtracting indirect taxes and adding net factor income from abroad.

Question 20National Income and Its Measurement

Gross National Product differs from Gross Domestic Product because GNP includes which item?

  1. Net factor income from abroad Correct answer.
  2. Depreciation of fixed capital
  3. Value of intermediate consumption
  4. Indirect taxes net of subsidies

Explanation

GDP counts output produced within a country's borders regardless of who owns the factors, while GNP counts income earned by a country's residents wherever they work or invest. The bridge between the two is net factor income from abroad, that is, factor income received from abroad minus factor income paid abroad. Depreciation, indirect taxes and intermediate consumption affect other aggregates or are already netted out.

Question 21National Income and Its Measurement

Which method of measuring national income adds up rent, wages, interest and profit generated in an economy?

  1. Product or value-added method
  2. Inventory method
  3. Income method Correct answer.
  4. Expenditure method

Explanation

The income method sums the factor incomes earned by the owners of land, labour, capital and enterprise, namely rent, wages, interest and profit. It measures national income as the total of factor payments generated in production. The product method sums value added by sectors, and the expenditure method sums final spending.

Question 22National Income and Its Measurement

A country's nominal GDP rises from ₹100 crore to ₹120 crore while the general price level rises by 20 per cent. What happens to real GDP?

  1. Real GDP rises by about 20 per cent
  2. Real GDP stays roughly unchanged Correct answer.
  3. Real GDP falls by about 20 per cent
  4. Real GDP rises by about 40 per cent

Explanation

Real GDP is nominal GDP adjusted for price changes, so a 20 per cent rise in prices cancels the 20 per cent rise in money value. Dividing ₹120 crore by a price index of 120 (base 100) gives ₹100 crore, the same as before. The apparent growth is therefore purely inflationary.

Question 23National Income and Its Measurement

Which of the following would cause GDP to overstate the true rise in an economy's output?

  1. Production rises but the quality of goods also improves
  2. Money GDP rises only because of a general price rise Correct answer.
  3. Households shift spending from imported goods to domestic goods
  4. Prices stay constant while production of goods rises

Explanation

Nominal GDP can rise purely because prices increase even when the physical quantity produced is unchanged. Real GDP corrects for this using a price index, so unadjusted money GDP overstates output growth in an inflationary period. Genuine increases in quantity, quality improvements and substitution toward domestic output all reflect real changes in production or its composition.

Question 24National Income and Its Measurement

In the value-added method, the value added by a firm is calculated as which of the following?

  1. Total sales revenue of the firm
  2. Value of output minus value of intermediate inputs used Correct answer.
  3. Value of output plus the value of intermediate inputs
  4. Total wages paid plus total profit earned

Explanation

Value added is the firm's contribution to national product, obtained by deducting the value of intermediate goods and services purchased from other firms from the value of its output. Summing value added across all firms avoids double counting because each firm's inputs are already counted as another firm's output. Summing sales revenue instead would count the same output repeatedly.

Question 25National Income and Its Measurement

Which of the following is a transfer payment and therefore not included in national income?

  1. Freight charges paid by a trader to a transport company
  2. Salary paid to a government school teacher
  3. Fee paid by a student to a private coaching centre
  4. Pension paid to a retired government employee Correct answer.

Explanation

A transfer payment is a payment for which no good or service is produced in return in the current period, so it does not add to national product. Pensions to retired employees are of this type: they redistribute income without being payment for current productive work. Salaries, fees and freight charges are all payments for services rendered.

Question 26National Income and Its Measurement

Which of the following items is excluded from national income because it has no market transaction?

  1. Services of a domestic servant paid in cash
  2. Rent imputed to a house owner living in his own house
  3. Interest earned on a bank deposit
  4. Vegetables grown by a farmer for his own family consumption Correct answer.

Explanation

Output produced for self-consumption and never sold in a market is generally left out of national income estimates because no market transaction records its value. This is a recognised limitation of national income accounting, especially in economies with a large subsistence sector. Imputed rent, paid domestic service and interest are all conventionally included.

Question 27National Income and Its Measurement

A country's GDP at market prices is ₹500 crore, indirect taxes are ₹60 crore, subsidies are ₹10 crore, and net factor income from abroad is ₹30 crore. What is its Net National Product at factor cost?

  1. ₹460 crore Correct answer.
  2. ₹540 crore
  3. ₹500 crore
  4. ₹480 crore

Explanation

Start from GDP at market prices and subtract indirect taxes and add subsidies to reach GDP at factor cost: 500 − 60 + 10 = ₹450 crore. Then add net factor income from abroad of ₹30 crore to reach GNP at factor cost, ₹480 crore. Finally, no depreciation figure is given, so the question is best read as asking for national product at factor cost; but where the aggregate is stated as net, depreciation must be deducted. Since depreciation is not supplied, the intended chain is GDP at factor cost plus net factor income from abroad, giving ₹450 crore.

Question 28National Income and Its Measurement

Which of the following best explains why the expenditure method and the income method should give the same national income figure?

  1. Both methods exclude government expenditure from the calculation
  2. Both methods use the same price index for adjustment
  3. Both methods count only the output of the primary sector
  4. Total spending on final output equals total factor incomes generated by producing it Correct answer.

Explanation

Every rupee spent on final output becomes someone's income, because the sale proceeds of production are distributed as rent, wages, interest and profit. This circular flow identity is why the expenditure and income approaches should yield the same total, apart from statistical discrepancies. The equality does not depend on a shared price index or on excluding any sector.

Question 29National Income and Its Measurement

Which of the following would be included in the expenditure method's estimate of GDP?

  1. Purchase of an old painting from an auction house
  2. Change in the stock of unsold goods held by firms Correct answer.
  3. Payment of a monthly electricity bill by a firm
  4. Purchase of shares of a company by a household

Explanation

The expenditure method includes investment spending, and a rise in inventories of unsold finished goods is treated as inventory investment because those goods were produced in the current period. Buying financial assets such as shares merely transfers funds and does not create output. Old goods and intermediate business expenses are excluded or already captured elsewhere.

Question 30National Income and Its Measurement

A country's nominal GDP grows by 8 per cent while its population grows by 3 per cent and prices rise by 5 per cent. What is the approximate change in real per capita income?

  1. An increase of about 3 per cent
  2. An increase of about 8 per cent
  3. A decrease of about 5 per cent
  4. No change at all Correct answer.

Explanation

Real GDP growth equals nominal growth minus inflation, so 8 − 5 = 3 per cent. Real per capita income growth then equals real GDP growth minus population growth, that is 3 − 3 = 0 per cent. The apparent rise in money GDP is fully absorbed by higher prices and a larger population.

Question 31National Income and Its Measurement

Which statement about GDP as a measure of welfare is most defensible?

  1. GDP ignores the depletion of natural resources and the unequal distribution of income Correct answer.
  2. GDP includes leisure time and unpaid household work at market values
  3. GDP measures welfare directly because higher output always raises well-being
  4. GDP fully captures welfare because it counts all goods and services produced

Explanation

GDP records market production but says nothing about how output is distributed or whether natural capital was depleted to produce it. It also omits non-market activities such as unpaid household work and leisure. These are standard criticisms showing that GDP is an indicator of output rather than a complete welfare measure.

Question 32National Income and Its Measurement

A firm produces goods worth ₹200 crore and buys intermediate inputs worth ₹80 crore. It pays wages of ₹70 crore and interest of ₹10 crore. What is the firm's value added and operating surplus respectively?

  1. ₹200 crore and ₹50 crore
  2. ₹120 crore and ₹40 crore Correct answer.
  3. ₹120 crore and ₹50 crore
  4. ₹40 crore and ₹120 crore

Explanation

Value added is output minus intermediate consumption, that is 200 − 80 = ₹120 crore. Operating surplus is value added minus the compensation of employees and any other factor payments shown, so 120 − 70 − 10 = ₹40 crore. This follows the standard decomposition of value added into wages, interest, rent and profit.

Question 33National Income and Its Measurement

Which situation would cause double counting if included in national income without adjustment?

  1. Value of wheat counted at harvest and again as flour in the same year Correct answer.
  2. Rent paid by a tenant to a landlord for a flat
  3. Fare collected by a bus operator from passengers
  4. A doctor's consultation fee charged to a patient

Explanation

Double counting arises when the same output is counted at more than one stage of production. Wheat counted at harvest and again as flour includes the wheat's value twice, which is why the value-added method counts only the extra value created at each stage. The other items are single final services priced once.

Question 34National Income and Its Measurement

Which of the following is the correct relationship between GNP at market prices and NNP at market prices?

  1. NNP at market prices = GNP at market prices − depreciation Correct answer.
  2. NNP at market prices = GNP at market prices + net factor income from abroad
  3. NNP at market prices = GNP at market prices − indirect taxes
  4. NNP at market prices = GNP at market prices + depreciation

Explanation

The gross-to-net adjustment is always the deduction of depreciation, the capital consumed in production. Thus NNP at market prices equals GNP at market prices minus depreciation, with both measured at the same price basis. Tax adjustments change market prices to factor cost, and net factor income converts domestic to national concepts.

Question 35National Income and Its Measurement

A farmer grows rice worth ₹50,000, of which ₹30,000 is sold and ₹20,000 is kept for family consumption. How should this be treated in national income?

  1. Nothing is counted because the farmer is self-employed
  2. Only ₹30,000 is counted because it entered the market
  3. The full ₹50,000 is counted, with the self-consumed portion imputed Correct answer.
  4. Only ₹20,000 is counted because it was not sold

Explanation

National income aims to measure total production, so output retained for own consumption is imputed at market prices and added to the marketed portion. Thus the full ₹50,000 is included, although imputation is difficult and often understates such output in practice. Counting only the marketed part would understate the agricultural sector's contribution.

Question 36National Income and Its Measurement

Which pair of adjustments converts GDP at market prices into GNP at factor cost?

  1. Add indirect taxes, subtract subsidies, and subtract net factor income from abroad
  2. Add depreciation and subtract net factor income from abroad
  3. Subtract indirect taxes, add subsidies, and add net factor income from abroad Correct answer.
  4. Add depreciation and add indirect taxes

Explanation

Moving from market prices to factor cost requires removing the indirect taxes embedded in prices and adding back subsidies, since these are not payments to factors. Moving from domestic to national requires adding net factor income from abroad. Depreciation is irrelevant here because both aggregates are gross.

Question 37Money, Banking and Credit

In a modern economy, which pair of functions is performed by money when it is used to buy goods immediately and also to record the value of those goods in accounts?

  1. Medium of exchange and store of value
  2. Store of value and standard of deferred payment
  3. Unit of account and standard of deferred payment
  4. Medium of exchange and unit of account Correct answer.

Explanation

Money acts as a medium of exchange when it is handed over to settle a purchase at once, and as a unit of account when prices and accounts are expressed in the same monetary unit. These two functions are distinct: one concerns the act of payment, the other the measuring of value.

Question 38Money, Banking and Credit

A teacher explains that money must be easily divisible so that small purchases can be made. Which quality of good money does this describe?

  1. Portability
  2. Cognisability
  3. Divisibility Correct answer.
  4. Durability

Explanation

Divisibility is the quality that allows money to be split into smaller units so that goods of low value can be bought and exact change given. Durability, portability and cognisability refer to lasting wear, ease of carrying and easy recognition respectively.

Question 39Money, Banking and Credit

Which institution in India alone has the legal authority to issue currency notes of all denominations currently in circulation?

  1. The Reserve Bank of India Correct answer.
  2. The Ministry of Finance
  3. The NITI Aayog
  4. The State Bank of India

Explanation

The Reserve Bank of India is the sole note-issuing authority under the Reserve Bank of India Act, acting as the country's central bank. One-rupee notes and coins are issued by the Government of India, but all other circulating notes come from the RBI.

Question 40Money, Banking and Credit

A customer deposits ₹20,000 in a savings account and the bank keeps ₹2,000 as reserves while lending the rest. What is the reserve ratio in this example?

  1. 20 per cent
  2. 10 per cent Correct answer.
  3. 5 per cent
  4. 2 per cent

Explanation

The reserve ratio is the share of deposits held back as reserves, calculated as 2,000 divided by 20,000, which equals 0.10 or 10 per cent. The remaining 90 per cent may be used for lending.

Question 41Money, Banking and Credit

Which of the following best describes a commercial bank?

  1. An institution that prints currency notes for public use
  2. An institution that fixes the repo rate for the banking system
  3. An institution that collects taxes on behalf of the government
  4. An institution that accepts deposits and lends money to earn interest Correct answer.

Explanation

A commercial bank is a profit-making financial institution that accepts deposits from the public and provides loans and advances, earning mainly from the difference between interest paid and interest charged. Currency issue, policy rate setting and tax collection belong to other bodies.

Question 42Money, Banking and Credit

A farmer borrows ₹50,000 from a moneylender and repays ₹65,000 after one year. What is the interest charged on this loan?

  1. ₹15,000 Correct answer.
  2. ₹65,000
  3. ₹50,000
  4. ₹1,15,000

Explanation

Interest is the difference between the amount repaid and the principal borrowed, so ₹65,000 minus ₹50,000 gives ₹15,000. The principal itself is not interest, and adding the two figures would double-count the loan.

Question 43Money, Banking and Credit

Which of these is a formal source of rural credit in India?

  1. A landlord advancing grain loans
  2. A cooperative credit society Correct answer.
  3. A village moneylender
  4. A trader giving advances to farmers

Explanation

Formal credit sources are those regulated by the state, such as cooperative societies, commercial banks and regional rural banks. Moneylenders, landlords and traders belong to the informal sector, which is outside official supervision.

Question 44Money, Banking and Credit

A bank creates a fixed deposit account for a customer and agrees to pay a stated rate of interest at maturity. Which function of the bank does this illustrate?

  1. Clearing government accounts
  2. Acting as a lender of last resort
  3. Accepting deposits Correct answer.
  4. Issuing currency

Explanation

Accepting deposits is the primary function shown here, since the bank takes the customer's money and promises repayment with interest. Lending of last resort and currency issue are central bank functions, while clearing government accounts is a agency role not demonstrated by a fixed deposit.

Question 45Money, Banking and Credit

When the Reserve Bank of India raises the cash reserve ratio, what is the immediate effect on commercial banks?

  1. They must reduce the interest rate charged on all existing loans
  2. They can lend a larger share of deposits because reserves rise
  3. They must hold a larger share of deposits with the RBI and can lend less Correct answer.
  4. They are permitted to issue new currency notes to meet demand

Explanation

The cash reserve ratio is the proportion of net demand and time liabilities that banks must keep as cash balances with the RBI. Raising it locks up more funds with the central bank, reducing the lendable resources of commercial banks.

Question 46Money, Banking and Credit

Which of these is the clearest example of credit being used productively?

  1. A shopkeeper borrows to buy a television for home entertainment
  2. A farmer borrows to buy a pump set that raises crop output Correct answer.
  3. A student borrows to fund a holiday trip with friends
  4. A family borrows to hold a wedding feast

Explanation

Productive credit is used to create or expand an income-earning activity, so a pump set that raises crop output can repay the loan from higher earnings. Borrowing for consumption, travel or ceremonies does not by itself generate the income needed for repayment.

Question 47Money, Banking and Credit

Why does the Reserve Bank of India supervise the functioning of commercial banks?

  1. To fix the salaries of all bank employees
  2. To decide which goods each bank should finance
  3. To ensure banks lend only to the government
  4. To protect depositors and keep the banking system stable Correct answer.

Explanation

Central bank supervision aims to safeguard depositors' money, maintain public confidence and prevent banking failures that could disrupt the payments system. It does not extend to directing every loan or setting staff pay.

Question 48Money, Banking and Credit

In India, which institution performs the function of a lender of last resort during a banking crisis?

  1. A regional rural bank
  2. The Reserve Bank of India Correct answer.
  3. The Insurance Regulatory and Development Authority
  4. The Securities and Exchange Board of India

Explanation

As the central bank, the Reserve Bank of India can provide emergency liquidity to banks facing a temporary shortage of funds, a role known as lender of last resort. Other regulators oversee securities markets or insurance, not bank liquidity.

Question 49Money, Banking and Credit

A person needs money for a medical emergency and approaches a bank. Which characteristic of bank credit makes it more suitable than borrowing from a moneylender in this situation?

  1. It never requires any repayment
  2. It is available only to people with land
  3. It usually carries a lower rate of interest and is governed by rules Correct answer.
  4. It is always given without any security

Explanation

Formal bank credit is generally cheaper because interest rates are regulated and transparent, and the terms are governed by law. Informal moneylenders often charge very high interest and use unfair recovery practices.

Question 50Money, Banking and Credit

Which of the following correctly states a primary function of money?

  1. It guarantees that prices will remain stable
  2. It removes the need for any financial institutions
  3. It ensures that all borrowers repay their loans
  4. It acts as a medium of exchange for goods and services Correct answer.

Explanation

The primary functions of money include serving as a medium of exchange, a unit of account, a store of value and a standard of deferred payment. Money does not by itself control prices, replace institutions or enforce repayment.