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RBSE VU Economics study materials
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RBSE VU Economics practice questions

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Question 1Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

In the circular flow of income, which of the following is a leakage from the domestic income stream?

  1. Earnings from exports of textiles to other countries
  2. Purchase of new machinery by a manufacturing firm
  3. Saving of households deposited with commercial banks Correct answer.
  4. Government spending on the construction of new national highways

Explanation

Leakages are the parts of household income that do not return to firms as demand for domestic output: saving, taxes and spending on imports. Injections such as investment, government expenditure and exports add to the flow. Deposit saving therefore withdraws purchasing power from the circular flow.

Question 2Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

A Japanese-owned factory operating in Rajasthan earns ₹50 crore in a year. How is this value treated in India's national accounts?

  1. Recorded in both India's GDP and India's GNP without any adjustment
  2. Included in India's GDP but excluded from India's GNP Correct answer.
  3. Included in India's GNP but excluded from India's GDP
  4. Excluded from both India's GDP and India's GNP

Explanation

GDP is a domestic concept: it counts output produced within India's borders regardless of who owns the factors. GNP is a national concept: it counts income earned by a country's residents wherever the production occurs. The factory's output is inside India, so it belongs to India's GDP, but the profit accrues to a Japanese resident, so it is excluded from India's GNP.

Question 3Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

Which of the following transactions is included in the GDP of the current year?

  1. Sale of a residential plot of land by its owner
  2. Purchase of a ten-year-old car from its first owner
  3. Purchase of shares of an existing company on the stock exchange
  4. Sale of a newly constructed house by a builder Correct answer.

Explanation

GDP covers only goods and services produced during the accounting period. A newly built house is current production, so its market value enters GDP. Sales of land, existing shares and second-hand cars merely transfer ownership of assets that were produced earlier or are not production at all.

Question 4Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

Which combination of expenditures is summed under the expenditure method of measuring GDP at market price?

  1. Value of output of the primary sector plus value of output of the secondary sector
  2. Private final consumption, intermediate consumption, government spending and exports
  3. Final consumption expenditure, gross capital formation, government expenditure and net exports Correct answer.
  4. Rent, wages, interest and profit earned by all factors of production plus depreciation and net factor income from abroad

Explanation

The expenditure method adds the final uses of output: household consumption, gross capital formation, government consumption and net exports. Intermediate consumption is deliberately excluded because its value is already embodied in the value of final goods. The list of factor incomes belongs to the income method instead.

Question 5Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

Nominal GDP rises from ₹1,000 crore to ₹1,200 crore between two years while the GDP deflator rises from 100 to 120. What happens to real GDP?

  1. It remains unchanged at ₹1,000 crore Correct answer.
  2. It rises to ₹1,100 crore
  3. It rises to ₹1,200 crore because nominal GDP has increased
  4. It falls to ₹900 crore because prices have risen

Explanation

Real GDP equals nominal GDP divided by the deflator, multiplied by 100. Here (1,200 ÷ 120) × 100 = ₹1,000 crore, exactly the base-year figure. A 20 per cent rise in nominal GDP fully matched by a 20 per cent rise in prices means the quantity of output has not changed.

Question 6Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

A farmer sells cotton to a mill for ₹500 and the mill sells cloth made from that cotton to a retailer for ₹800. How much do these two units together contribute to GDP?

  1. ₹500
  2. ₹1,300
  3. ₹300
  4. ₹800 Correct answer.

Explanation

Only value added at each stage is counted, so intermediate purchases are not added again; this avoids double counting. The farmer adds ₹500 and the mill adds ₹800 − ₹500 = ₹300, giving ₹800 in total. This total equals the value of the final sale to the retailer.

Question 7Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

National income is ₹5,000 crore, corporate profit tax is ₹200 crore, undistributed profits are ₹300 crore, transfer payments are ₹150 crore and personal income tax is ₹250 crore. What is personal disposable income?

  1. ₹4,150 crore
  2. ₹4,400 crore Correct answer.
  3. ₹4,650 crore
  4. ₹4,900 crore

Explanation

Personal income is national income minus corporate profit tax and undistributed profits plus transfer payments: 5,000 − 200 − 300 + 150 = ₹4,650 crore. Disposable income then deducts personal income tax: 4,650 − 250 = ₹4,400 crore. This is the amount households can actually spend or save.

Question 8Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

GDP at market price is ₹1,000 crore, indirect taxes are ₹120 crore and subsidies are ₹20 crore. What is GDP at factor cost?

  1. ₹880 crore
  2. ₹1,120 crore
  3. ₹1,140 crore
  4. ₹900 crore Correct answer.

Explanation

GDP at factor cost equals GDP at market price minus net indirect taxes, where net indirect taxes are indirect taxes minus subsidies. Here 1,000 − (120 − 20) = ₹900 crore. Market price includes the tax wedge, whereas factor cost measures the payments actually received by the factors of production.

Question 9Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

Which of the following is excluded from national income because it is a transfer payment rather than a payment for a current productive service?

  1. Commission earned by a broker on the sale of a house
  2. Salary paid by the state government to a serving school teacher in a government school
  3. Fee paid by a student to a private coaching centre
  4. Old-age pension paid by the government to a retired teacher Correct answer.

Explanation

National income counts only payments made in return for a current productive service. A pension is a transfer: the government gives income without receiving any good or service in exchange, so no output is created. Salaries, coaching fees and brokerage commissions all reward services rendered in the current period.

Question 10Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

A country's GDP at market price is ₹3,000 crore, depreciation is ₹200 crore, net factor income from abroad is −₹100 crore and net indirect taxes are ₹300 crore. What is its national income?

  1. ₹2,400 crore Correct answer.
  2. ₹3,100 crore
  3. ₹2,700 crore
  4. ₹2,800 crore

Explanation

NNP at market price equals GDP at market price minus depreciation plus net factor income from abroad: 3,000 − 200 − 100 = ₹2,700 crore. National income is NNP at factor cost, so net indirect taxes must also be removed: 2,700 − 300 = ₹2,400 crore. Net indirect taxes convert market prices into factor cost.

Question 11Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

Which of the following is an injection into the circular flow of income?

  1. Imports of machinery from abroad
  2. Investment expenditure by firms on new plant Correct answer.
  3. Household saving deposited in a bank
  4. Direct taxes paid by households to the government

Explanation

Injections are additions to the circular flow and include investment, government expenditure and exports. Household saving, imports and direct taxes are leakages because they withdraw purchasing power from the domestic income stream. Spending by firms on new plant is investment, so it injects income.

Question 12Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

Which of the following purchases is treated as a final good in national income accounting?

  1. A car bought by a household for personal use Correct answer.
  2. Steel bought by an automobile factory
  3. Sugar bought by a sweet shop for resale
  4. Cotton bought by a textile mill

Explanation

A final good is bought for final consumption or capital formation and is not resold or further processed in the same year. A household car is consumed by the household, so its full value is included. The cotton, sugar and steel are intermediate goods and would be double counted if added separately.

Question 13Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

Which of the following is included in the GDP of the current year?

  1. Sale of a used car by one household to another
  2. Purchase of shares of a company on the stock exchange
  3. Cooking and cleaning done by a homemaker for the family
  4. Construction of a new house for residential use Correct answer.

Explanation

GDP covers newly produced final output within the domestic economy during the year. Construction of a new house is capital formation and is included. A second-hand sale, unpaid homemaking services and purchases of existing financial assets do not add new current output.

Question 14Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

Personal income is ₹900 crore, direct taxes paid are ₹120 crore, and miscellaneous fees and fines are ₹30 crore. What is personal disposable income?

  1. ₹750 crore Correct answer.
  2. ₹780 crore
  3. ₹810 crore
  4. ₹900 crore

Explanation

Personal disposable income is personal income after direct taxes and miscellaneous fees and fines. Here it is ₹900 crore − ₹120 crore − ₹30 crore = ₹750 crore. This is the amount households can allocate between consumption and saving.

Question 15Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

Why is the imputed rent of an owner-occupied house included in national income?

  1. It is a transfer payment from the government
  2. It reflects housing services used without rent Correct answer.
  3. It is a capital gain on the house
  4. It is intermediate consumption by households

Explanation

National income includes the estimated rental value of owner-occupied housing because the house supplies housing services during the year. Even though no actual rent is paid, omitting the value would understate consumption. The imputation is not a transfer payment or a capital gain.

Question 16Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

Which of the following is included in compensation of employees in the income method?

  1. Mixed income of self-employed
  2. Retained earnings of companies
  3. Employer's social security contribution Correct answer.
  4. Corporation tax

Explanation

Compensation of employees includes wages and salaries in cash and kind plus employers' contributions to social security and pension funds. Corporation tax and retained earnings belong to operating surplus. Mixed income is the income of self-employed persons and is recorded separately.

Question 17Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

Which statement correctly distinguishes nominal GDP from real GDP?

  1. Real GDP is valued at current prices.
  2. Nominal GDP changes only when output changes.
  3. Real GDP is valued at constant base-year prices. Correct answer.
  4. Nominal GDP is valued at constant base-year prices.

Explanation

Nominal GDP is measured at current-year prices, so it changes when either output or prices change. Real GDP is measured at constant base-year prices and isolates changes in output. A rise in real GDP therefore reflects an increase in physical production.

Question 18Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

A country's GDP at market price is ₹1,000 crore and net factor income from abroad is −₹50 crore. What is its GNP at market price?

  1. ₹950 crore Correct answer.
  2. ₹1,000 crore
  3. ₹900 crore
  4. ₹1,050 crore

Explanation

GNP at market price equals GDP at market price plus net factor income from abroad. With GDP of ₹1,000 crore and NFIA of −₹50 crore, GNP is ₹950 crore. Negative NFIA means factor income paid abroad exceeds factor income received from abroad.

Question 19Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

If subsidies exceed indirect taxes in an economy, then GDP at factor cost is

  1. less than GDP at market price
  2. greater than GDP at market price Correct answer.
  3. equal to net domestic product at market price
  4. equal to GDP at market price

Explanation

GDP at factor cost equals GDP at market price minus indirect taxes plus subsidies. When subsidies are larger than indirect taxes, the net adjustment is positive, so factor-cost GDP exceeds market-price GDP. This can happen when the government subsidises production heavily.

Question 20Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

If a country's GDP deflator is 80, then nominal GDP is

  1. 125% of real GDP
  2. equal to real GDP
  3. 20% of real GDP
  4. 80% of real GDP Correct answer.

Explanation

The GDP deflator is calculated as nominal GDP divided by real GDP, multiplied by 100. A deflator of 80 therefore means nominal GDP is 80 per cent of real GDP. In other words, current prices are, on average, lower than base-year prices.

Question 21Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

Which of the following best defines GDP at market price?

  1. Total sales value of all goods, including imported goods, in the domestic market during a year
  2. Market value of final goods and services produced by normal residents in a year, wherever they are
  3. Market value of final goods and services produced within domestic territory during a year Correct answer.
  4. Sum of all incomes earned by factors of production owned by residents during a year

Explanation

GDP at market price is a domestic-territory concept: it counts the market value of final goods and services produced inside the country's economic territory during the year, whatever the nationality of the producer. Imports are not domestic production, and output produced abroad by residents enters GNP rather than GDP.

Question 22Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

In national income accounting, the term 'national income' refers to which aggregate?

  1. NNP at factor cost Correct answer.
  2. GNP at market price
  3. GDP at market price
  4. NDP at market price

Explanation

National income is NNP at factor cost: GNP at market price minus depreciation and minus net indirect taxes. It measures the factor incomes (compensation of employees, rent, interest, profit, mixed income) earned by normal residents of the country.

Question 23Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

In a simple two-sector circular flow model containing only households and firms, which identity must hold?

  1. Consumption equals investment equals national income
  2. Exports equal imports equal net factor income
  3. Saving equals investment equals government spending
  4. Total output equals total income equals total expenditure Correct answer.

Explanation

In the two-sector model households supply factors and spend all their income on firms' output, so the same circular flow can be measured as production, income or expenditure and all three totals coincide. Introducing saving, government or foreign trade breaks the strict equality by creating leakages and injections.

Question 24Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

A firm buys a machine for ₹20 lakh to be used in its factory for the next ten years. How is this purchase treated in national income accounting?

  1. As inventory investment, because the firm holds the machine as an asset
  2. As intermediate consumption, because the machine is used up in production
  3. As a transfer payment, because no current output is produced
  4. As gross domestic fixed capital formation, because it is a durable producer good Correct answer.

Explanation

Durable capital goods used repeatedly in production are final capital goods, so their purchase is recorded as gross domestic fixed capital formation; only the annual depreciation becomes a cost of production in later years. Intermediate consumption is confined to inputs used up within the accounting year.

Question 25Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

Under the value-added (product) method, value added by a producing unit equals which of the following?

  1. Sales revenue plus closing stock minus opening stock
  2. Value of output minus intermediate consumption Correct answer.
  3. Value of output minus depreciation
  4. Factor income plus net indirect taxes

Explanation

Value added avoids double counting by deducting inputs purchased from other units from the unit's output; summing such value added across all units yields GDP at market price. Depreciation is deducted later to move from gross to net, not inside the value-added calculation itself.

Question 26Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

Which of the following is treated as part of India's domestic territory for estimating GDP?

  1. A factory in Nepal owned and operated by an Indian company
  2. The Indian embassy located in Kathmandu Correct answer.
  3. An office in Dubai of a company registered in India
  4. A ship sailing between two foreign ports under a foreign flag

Explanation

The domestic territory of a country includes its embassies, consulates and military establishments located abroad, because these are treated as enclaves of the home economy. Production carried out in factories or offices physically located abroad belongs to the host country's GDP.

Question 27Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

Which of the following is a factor income from abroad for India?

  1. Export earnings of an Indian software firm from clients in the United States
  2. Money sent by a relative working in Qatar to a family in Kerala
  3. Salary earned by an Indian citizen employed in a Dubai firm Correct answer.
  4. Dividend paid by an Indian company to a resident shareholder

Explanation

Factor income from abroad consists of compensation of employees and property income earned by normal residents from production carried out in the rest of the world. The salary earned in Dubai is paid for work done abroad by an Indian resident, so it enters India's GNP through net factor income from abroad.

Question 28Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

The GDP deflator is best described as which of the following?

  1. The ratio of consumption expenditure to national income
  2. The ratio of real GDP to nominal GDP, expressed as a percentage
  3. The ratio of nominal GDP to real GDP, expressed as a percentage Correct answer.
  4. The percentage change in nominal GDP between two years

Explanation

The deflator compares output valued at current prices with the same output valued at base-year prices, so it equals nominal GDP divided by real GDP, multiplied by 100. It covers all domestically produced final goods and services, unlike the CPI, which uses a fixed consumption basket.

Question 29Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

Nominal GDP grows by 20 per cent in a year while the GDP deflator rises by 5 per cent. What is the approximate growth of real GDP?

  1. About 4.8 per cent
  2. About 25.0 per cent
  3. About 14.3 per cent Correct answer.
  4. About 15.0 per cent

Explanation

Real GDP equals nominal GDP divided by the deflator expressed as a ratio, so real growth is 1.20 divided by 1.05 minus 1, which is about 0.1429 or 14.3 per cent. Simply subtracting the inflation rate gives an approximation that overstates real growth here.

Question 30Introduction to Macroeconomics and National Income Accounting (circular flow, GDP/GNP/NNP, aggregates, methods of measurement, real vs nominal)

Which expression correctly gives national income (NNP at factor cost) starting from GNP at market price?

  1. GNP at market price minus depreciation minus net indirect taxes Correct answer.
  2. GNP at market price minus depreciation plus net indirect taxes
  3. GNP at market price minus net indirect taxes plus net factor income from abroad
  4. GNP at market price plus depreciation minus net indirect taxes

Explanation

Converting GNP at market price into NNP at factor cost requires two adjustments: subtract depreciation to move from gross to net, and subtract net indirect taxes (indirect taxes minus subsidies) to move from market price to factor cost. Net indirect taxes are excluded because they do not accrue to factors of production.

Question 31Money and Banking (functions of money, money supply aggregates, commercial banks and credit creation, central bank functions and monetary policy tools)

In a modern economy, which function of money allows a shopkeeper to quote a single price for a shirt instead of a list of exchange ratios against every other good?

  1. Store of value
  2. Unit of account Correct answer.
  3. Medium of exchange
  4. Standard of deferred payment

Explanation

Money as a unit of account provides a common denominator in which all prices are quoted, so a shirt needs only one money price rather than a separate exchange ratio against every other commodity. The store-of-value function concerns holding purchasing power over time, while the medium-of-exchange and deferred-payment functions concern settling current and future transactions respectively.

Question 32Money and Banking (functions of money, money supply aggregates, commercial banks and credit creation, central bank functions and monetary policy tools)

Which monetary aggregate is the narrowest and most liquid measure, consisting mainly of currency with the public plus demand deposits with banks?

  1. M1 Correct answer.
  2. M3
  3. M2
  4. M4

Explanation

M1 is the narrowest and most liquid measure, comprising currency held by the public plus demand deposits and other deposits with the central bank, which can be used for payments immediately. M2 adds savings deposits with post office savings banks, M3 adds time deposits with banks, and M4 adds total post office deposits, so each of these is broader and less liquid than M1.

Question 33Money and Banking (functions of money, money supply aggregates, commercial banks and credit creation, central bank functions and monetary policy tools)

Which institution performs the lender-of-last-resort function in an economy?

  1. A cooperative credit society
  2. A regional rural bank
  3. The central bank Correct answer.
  4. A scheduled commercial bank

Explanation

The central bank is the lender of last resort because it can provide emergency liquidity to banks facing a temporary shortage of reserves when no other source is available. Commercial banks, regional rural banks and cooperative credit societies are users of this facility, not providers of it.

Question 34Money and Banking (functions of money, money supply aggregates, commercial banks and credit creation, central bank functions and monetary policy tools)

A commercial bank receives a new deposit of ₹1,000. If the cash reserve ratio is 20 per cent and banks lend out the maximum possible amount with no leakages, what is the total deposit creation in the banking system?

  1. ₹8,000
  2. ₹4,000
  3. ₹5,000 Correct answer.
  4. ₹1,000

Explanation

The deposit multiplier equals one divided by the cash reserve ratio, so with a 20 per cent ratio the multiplier is 5. A new deposit of ₹1,000 therefore supports total deposit creation of ₹1,000 × 5 = ₹5,000, of which ₹4,000 is credit created beyond the initial deposit.

Question 35Money and Banking (functions of money, money supply aggregates, commercial banks and credit creation, central bank functions and monetary policy tools)

The central bank wants to reduce the lending capacity of commercial banks without changing the policy repo rate. Which action achieves this directly?

  1. Reduce the bank rate
  2. Raise the cash reserve ratio Correct answer.
  3. Purchase government securities in the open market
  4. Lower the marginal standing facility rate

Explanation

Raising the cash reserve ratio forces banks to keep a larger share of deposits as reserves with the central bank, reducing the funds available for lending. Purchasing securities adds reserves and lowering the bank rate or the marginal standing facility rate makes liquidity cheaper, so those actions would encourage lending rather than restrict it.

Question 36Money and Banking (functions of money, money supply aggregates, commercial banks and credit creation, central bank functions and monetary policy tools)

If the public shifts part of its currency holdings into demand deposits, what happens to M1 and to the reserves of the banking system, other things equal?

  1. M1 stays unchanged and bank reserves fall
  2. M1 rises and bank reserves fall
  3. M1 falls and bank reserves fall
  4. M1 stays unchanged and bank reserves rise Correct answer.

Explanation

M1 equals currency with the public plus demand deposits, so moving cash into a demand deposit changes the composition but not the total. The bank receiving the cash gains reserves, which raises the reserve base of the banking system, other things equal.

Question 37Money and Banking (functions of money, money supply aggregates, commercial banks and credit creation, central bank functions and monetary policy tools)

A central bank conducts an open market sale of government securities. What is the immediate effect on the banking system?

  1. Bank reserves fall and credit contraction is encouraged Correct answer.
  2. Bank reserves are unaffected because securities are not money
  3. The currency-deposit ratio of the public falls
  4. Bank reserves rise and credit expands

Explanation

An open market sale withdraws reserves from the banking system because banks pay the central bank for the securities. With fewer reserves, the reserve-deposit ratio constrains lending, so credit contraction is encouraged and the money supply tends to fall.

Question 38Money and Banking (functions of money, money supply aggregates, commercial banks and credit creation, central bank functions and monetary policy tools)

Which activity of a commercial bank is a primary function rather than a secondary function?

  1. Accepting public deposits Correct answer.
  2. Safe custody of valuables
  3. Issuing letters of credit
  4. Dealing in foreign exchange

Explanation

Accepting deposits from the public is a primary function of a commercial bank, along with advancing loans, because these activities create the bank's main liabilities and assets. Safe custody, letters of credit and foreign exchange dealings are secondary agency or utility services provided alongside the core business.

Question 39Money and Banking (functions of money, money supply aggregates, commercial banks and credit creation, central bank functions and monetary policy tools)

Which combination of conditions would most strongly limit the ability of commercial banks to create credit?

  1. A stable repo rate together with a rising volume of demand deposits
  2. A low cash reserve ratio together with strong demand for bank loans
  3. A high volume of bank reserves together with low lending rates
  4. A high cash reserve ratio with large currency leakages Correct answer.

Explanation

A high cash reserve ratio lowers the deposit multiplier, and large currency leakages mean that a substantial part of any new deposit is not redeposited in the banking system. Together these conditions shrink the base on which secondary credit expansion depends.

Question 40Money and Banking (functions of money, money supply aggregates, commercial banks and credit creation, central bank functions and monetary policy tools)

The central bank lowers the repo rate, but the economy is in a deep recession with pessimistic firms. Which transmission problem best explains why bank credit may still not expand?

  1. A lower repo rate reduces the money multiplier by increasing currency in circulation
  2. The fall in the bank rate automatically raises the cash reserve ratio
  3. Banks may hold excess reserves while creditworthy borrowers are unwilling to borrow Correct answer.
  4. Open market operations become impossible when the repo rate is lowered

Explanation

In a deep recession, lowering the policy rate may fail to stimulate credit if banks prefer to hold excess reserves and creditworthy firms are unwilling to invest. This breakdown in transmission, rather than a mechanical change in reserve ratios, explains weak credit expansion.

Question 41Money and Banking (functions of money, money supply aggregates, commercial banks and credit creation, central bank functions and monetary policy tools)

When a person holds cash balances to buy goods next month rather than investing in a fixed deposit, money is mainly performing which function?

  1. Medium of exchange
  2. Standard of deferred payment
  3. Unit of account
  4. Store of value Correct answer.

Explanation

Holding money as a temporary abode of purchasing power is the store-of-value function. It links present purchasing power with future spending, while the other functions concern current exchange, price quotation, or deferred payment.

Question 42Money and Banking (functions of money, money supply aggregates, commercial banks and credit creation, central bank functions and monetary policy tools)

Which instrument is a quantitative tool of monetary policy used by the central bank?

  1. Moral suasion
  2. Open market operations Correct answer.
  3. Margin requirements on loans
  4. Direct action against banks

Explanation

Open market operations are a quantitative instrument because the central bank buys or sells government securities to change reserve money and the general level of credit. Moral suasion, margin requirements, and direct action are selective or qualitative tools.

Question 43Money and Banking (functions of money, money supply aggregates, commercial banks and credit creation, central bank functions and monetary policy tools)

Which monetary aggregate is the broadest measure and includes total post office deposits along with M3?

  1. M2
  2. M3
  3. M4 Correct answer.
  4. M1

Explanation

M4 is the broadest monetary aggregate; it equals M3 plus total post office deposits. M1 is the narrowest, M2 adds post office savings deposits to M1, and M3 adds time deposits with commercial banks to M1.

Question 44Money and Banking (functions of money, money supply aggregates, commercial banks and credit creation, central bank functions and monetary policy tools)

A commercial bank sanctions a loan of ₹2 lakh and credits the borrower's deposit account instead of paying cash. What is the immediate effect on the bank's balance sheet?

  1. Time deposits fall and loans fall
  2. Bank share capital rises and loans fall
  3. Demand deposits rise and loans rise Correct answer.
  4. Cash reserves rise and loans rise

Explanation

When a bank credits a loan to the borrower's deposit account, it creates a demand deposit liability at the same time as a loan asset. No cash is paid out at that moment, so the bank's total deposits and loans both rise.

Question 45Money and Banking (functions of money, money supply aggregates, commercial banks and credit creation, central bank functions and monetary policy tools)

Which function of the central bank is performed when it holds the cash reserves of commercial banks and clears interbank settlements?

  1. Banker's bank Correct answer.
  2. Custodian of foreign exchange
  3. Banker to the government
  4. Currency authority

Explanation

As the banker's bank, the central bank holds commercial banks' cash reserves and operates the clearing and settlement system for interbank payments. It also can lend to banks in distress, but that is the lender-of-last-resort function.

Question 46Money and Banking (functions of money, money supply aggregates, commercial banks and credit creation, central bank functions and monetary policy tools)

The central bank raises the margin requirement on loans against durable goods. This is best classified as which type of policy action?

  1. Repo operation
  2. Selective credit control Correct answer.
  3. Open market operation
  4. Cash reserve ratio adjustment

Explanation

Margin requirements prescribe the minimum down payment a borrower must make, so they influence credit for particular goods rather than overall reserve availability. They are therefore a selective credit control, not a general quantitative instrument.

Question 47Money and Banking (functions of money, money supply aggregates, commercial banks and credit creation, central bank functions and monetary policy tools)

Other things remaining equal, which change would raise the money multiplier?

  1. A rise in currency held by the public
  2. A rise in the statutory liquidity ratio
  3. A fall in banks' excess reserves Correct answer.
  4. A rise in the cash reserve ratio

Explanation

A fall in excess reserves means banks hold a smaller idle reserve cushion and can lend a larger fraction of any new deposit, which raises the deposit multiplier. Higher CRR, higher SLR, or more currency held by the public all reduce the multiplier.

Question 48Money and Banking (functions of money, money supply aggregates, commercial banks and credit creation, central bank functions and monetary policy tools)

When the central bank conducts a reverse repo operation, what does it do?

  1. Changes the cash reserve ratio directly
  2. Injects liquidity by buying government securities
  3. Absorbs liquidity by borrowing against securities Correct answer.
  4. Lends to the government at a concessional rate

Explanation

In a reverse repo, the central bank absorbs liquidity by borrowing rupees from commercial banks and lending them government securities against that collateral. A repo does the opposite: it injects liquidity by lending against securities.

Question 49Money and Banking (functions of money, money supply aggregates, commercial banks and credit creation, central bank functions and monetary policy tools)

Which statement correctly distinguishes deposit creation by a single commercial bank from deposit creation by the banking system?

  1. A single bank creates a multiple; the system creates only excess reserves
  2. Neither a single bank nor the banking system can create deposits beyond its cash reserves
  3. A single bank creates deposits up to its excess reserves; the system creates a multiple Correct answer.
  4. Both a single bank and the system create only excess reserves

Explanation

A single bank can safely lend only its excess reserves because it must honour withdrawal of the original deposit. The banking system as a whole can multiply those reserves through successive deposits and loans, so system deposit creation exceeds that of one bank.

Question 50Money and Banking (functions of money, money supply aggregates, commercial banks and credit creation, central bank functions and monetary policy tools)

If the public's currency-deposit ratio rises while the central bank keeps reserve money constant, what is the likely effect on the money multiplier and broad money?

  1. The money multiplier falls and broad money falls Correct answer.
  2. The money multiplier falls and broad money rises
  3. The money multiplier is unchanged and broad money is unchanged
  4. The money multiplier rises and broad money rises

Explanation

A higher currency-deposit ratio drains reserves from banks because more of the public's money is held as cash rather than deposited. That leakage lowers the money multiplier and, with reserve money unchanged, reduces broad money such as M3.