A work UNIT 1: THE CONCEPT OF MONEY DEMAND: IMPORTANT

THEORIES

1. Barter exchange refers to the change of goods/services for goods/ services. Which of the following is
the limitation of Barter exchange?
a) Lack of Double coincidence of wants
b) Lack of store of value
c) Lack of common measure of value
d) All of the above

2. Which of the following is the primary function of money?

a) Medium of exchange
b) Standard of Deferred Payments
c) Store of value
d) All of the above

3. Which function of money is also known by the name of "Unit of Account"?

a) Medium of exchange
b) Standard of Deferred Payments
c) Measure of value
d) Store of value

4. If there were no money, we would be reduced to a

a) Non-Monetary Economy
b) Barter Economy
c) Monetary Economy
d) None of the above

5. Fiat money is materially ___but has simply ___ because a nation collectively agreed to ascribe a
value to it.
a) Worthless, value
b) Valuable, worthless
c) Transparent, liquid
d) Liquid, exchangeability

6. Which of the following is Not a Part of the general characteristics that money should possess in order
to make it serve its function as money?
a) Generally Acceptable & possessing uniformity
b) Durable or long-lasting
c) Portable & effortlessly recognizable
d) Easily counterfeitable
7. Any unit of money, whose face value and intrinsic value are equal, is known as
a) Full-Bodied Money
b) Representative full-bodied money
c) Credit money
d) All of the above

8. Which one of the following forms of legal tender money can be paid in discharge of a debt up to a
certain limit only?
a) Coins
b) Paper Notes
c) Cheques
d) Bank Draft

9. Choose the incorrect statement.

a) Anything that would act as a medium of exchange is money
b) Money has generalized purchasing power and is generally acceptable in the settlement of all
transactions
c) Money is a liquid asset and provides us with means to access goods and services
d) Currency which represents money does not necessarily have intrinsic value

10. Money performs all of the three functions mentioned below, namely:
a) Medium of exchange, price control, store of value
b) Unit of account, store of value, provide yields
c) Medium of exchange, unit of account, store of value
d) Medium of exchange, unit of account, income distribution

11. Demand for money is:

a) Derived demand
b) Direct demand
c) Real income demand
d) Inverse demand

12. Higher the ____, higher would be _____ of holding cash and lower will be the____
a) Demand for money, opportunity cost, interest rate
b) Price level, opportunity cost, interest rate
c) Real income, opportunity cost, demand for money
d) Interest rate, opportunity cost, demand for money
13. The money is demanded for its purchasing power. Therefore, the demand for money is in the nature
of
a) Purchasing power demand
b) Real power demand
c) Direct demand
d) Derived demand

14. The demand for money is actually

a) Demand for liquidity
b) Demand to store value
c) Both (a) and (b)
d) None of the above

15. The decision about how much of one's given stock of wealth should be held in the form of money
rather than as other assets (like bonds) is called as
a) Demand for money
b) Decision for money
c) Supply of money
d) None of above

16. The individuals, households as well as firms hold money which gives little or no return. This is
because _____.
a) Money is liquid
b) Money has a demonstration effect
c) Money gives authority
d) None of these

17. The quantity of nominal money or how much money people would like to hold in liquid form
depends on many factors. Which of the following is the variable on which this demand for money
demands?
a) Income
b) The general level of prices & rate of interest
c) Real GDP and the degree of financial innovation
d) All of the above

18. The quantity which people desire to hold is _____ proportional to their income.
a) Directly
b) Inversely
c) Regressive
d) None of these
19. The Demand for money depends upon the prevailing price level. _____ the prices, _____ should be
the holding of money.
a) Lower, Higher
b) Higher, Lower
c) Higher, Higher
d) Lower, Lower

20. Which of the following innovations, has reduced the need for holding liquid money?
a) Internet Banking
b) Application based transfer
c) Automated Teller Machines
d) All of the above

21. The rate of interest is a crucial factor on which the demand for money depends on. The demand for
money is _____ proportional to the interest rate.
a) Directly
b) Inversely
c) Progressively
d) None of the above

Theories of Demand for Money

22. Which one of the following is not a theory of Demand for money?
a) The quantity theory of money
b) Hicksian Theory of Demand
c) Cash Balance Approach
d) Keynesian theory of Demand for money

23. The quantity theory of money holds that:

a) Changes in the general level of commodity prices are caused by changes in the quantity of
money
b) There is a strong relationship between money and price level and the quantity of money is the
main determinant of the price
c) Changes in the value of money or purchasing power of money are determined first and
foremost by changes in the quantity of money in circulation
d) All of the above
24. Which theory was propounded in the book "The Purchasing Power of Money"?
a) Quantity theory of money
b) Cash Balance Approach.
c) Keynesian theory of Demand for money
d) None of these

25. As regards Fisher's quantity of money, which of the following is incorrect?

a) There is a direct relationship between money supply and inflation
b) There is an indirect relationship between the money supply and the value of money
c) Price is a passive factor
d) The economy is not at full employment

26. Both versions of the quantity theory of money demonstrate that there is a relationship between
money and price level and the quantity of money is the determinant of the price level or value of
money.
a) Weak, main
b) Strong, main
c) Weak, very passive
d) Strong, very passive

27. Which one of the following is the criticism of the Quantity theory of money?
a) The velocity of money (V) and the total number of transactions (T) are constant
b) There is full employment in the economy
c) Money is only used as a medium of exchange
d) (d) All of the above

28. Fisher's version is formally stated as MV = PT. In this equation of exchange.

a) M and V are constant
b) P and T are constant
c) M and P are constant
d) V and T are constant

29. Which are of the following is the expanded form of Fisher's equation of exchange?
a) MV = PT
b) MV+M'V' = PT'
c) MV = PT+PT
d) MV+M'V' = PT+P'T'
30. As per Fisher's expanded quantity theory of money, the total value of transactions made is equal to
_____ and the value of money to flow is equal to _____.
a) MV; PT
b) PT; MV
c) PT; MV+M'V'
d) MV+M'V'; PT

31. The Cambridge approach to quantity theory is also known as:

a) Cash balance approach.
b) Fisher's theory of money
c) Classical approach
d) Keynesian Approach

32. Fisher's approach and the Cambridge approach to the demand for money consider
a) Money's role in acting as a store of value and therefore, demand for money is for storing value
temporarily
b) Money as a means of exchange and therefore demand for money is termed as liquidity
preference
c) Money is a means of transaction and therefore, demand for money is only transaction demand
for money
d) None of the above

33. The Cambridge equation is:

Md = K.P.Y.
In the above equation, _____ is exogenous.
a) Md
b) K
c) P
d) Y

34. The Cambridge equation focuses on _____ instead of _____.

a) Money demand; money supply
b) Money supply; money demand
c) Money demand; money movement
d) Money supply; money movement
35. The cash balance approach was put forward by Cambridge economists. The economists associated
with this approach are:
i) Alfred Marshall
ii) A.C. Pigou
iii) D.H. Robertson
iv) John Maynard Keynes
a) (i) only
b) (i) and (ii)
c) (i), (ii) and (iii)
d) (i), (ii), (iii) and (iv)

36. The Cambridge money demand function is stated as follows:

Md = KPY.
In this equation, PY stands for:
a) National Income
b) Real National Income
c) Nominal Income
d) Real Income

37. In the Cambridge money demand function, _____ is a parameter reflecting the proportion of
national income (PY) that people want to hold as cash balance:
a) Md
b) K
c) P
d) Y

38. Real money is:

a) Nominal money adjusted to the price level
b) Real national income
c) Money demanded at a given rate of interest
d) Nominal GNP divided by price level

39. With reference to Cambridge theory, the product of the price level (P) and the real Income (Y) is
known
a) Nominal Income
b) National Income
c) Real Income
d) Equilibrium Income
 Money Market

40. The Keynesian Theory of Demand for money is also called:

a) Demand Preference Theory
b) Liquidity Preference Theory
c) Preference Demand Theory
d) Preference Liquidity Theory

41. The people hold their resources in liquid form when they can get interest by lending money or
buying bonds or stocks. According to Keynes, by which motive does the desire to hold money arise?
a) Transaction motive
b) Precautionary motive
c) Speculative motive
d) All of the above

42. The receipt of money and payments do not coincide. So, a certain amount of cash is kept in hand to
make current payments. Which motive is this, according to the Keynesian Theory?
a) Transaction motive
b) Precautionary motive
c) Speculative motive
d) Unforeseen motive

43. According to John Maynard Keynes, the transaction demand for money depends only on the _____
and is not influenced by the _____.
a) Rate of Interest, level of Income
b) Level of Income, Rate of Interest
c) Psychology of Individual, Real Income
d) Psychology of individual, Rate of Interest

44. As per liquidity preference theory, the transaction demand for money is a proportional function of
the level of income.
a) Direct, positive
b) Indirect, positive
c) Direct, negative
d) Indirect, negative

45. Under Keynesian theory, the aggregate transaction demand for money is a function of _____.
a) Specific Income
b) Individual Income
c) National Income
d) National Income
46. The precautionary money balances people want to hold _____.
a) As income elastic and not very sensitive to the rate of interest
b) As income is inelastic and very sensitive to the rate of interest
c) Are determined primarily by the level of transactions they expect to make in the future
d) Are determined primarily by the current level of transactions

47. Under _____ motive, people hold money in cash form or liquid form for unforeseen contingencies.
such as sickness, accident, danger of unemployment and other uncertain perils.
a) Transaction
b) Speculative
c) Precautionary
d) Non-contingency

48. Prof. J.M. Keynes regarded the Precautionary balances as income _____ and by itself not very
sensitive to _____.
a) Elastic, rate of interest
b) Inelastic, rate of interest
c) Elastic, level of income
d) Inelastic, level of income

49. The amount of money demanded under the precautionary motive depends on _____.
a) Size of income.
b) Prevailing economic/political conditions
c) Personal characteristics of individual
d) All of the above

50. Speculative demand for money _____.

a) Is not determined by interest rates
b) Is positively related to interest rates
c) Is negatively related to interest rates
d) Is determined by the general price level

51. Which one of the following motives reflects people's, desire to hold cash in order to be equipped to
exploit any attractive investment opportunity requiring cash expenditure?
a) Transaction motive
b) Precautionary motive
c) Speculative motive
d) Non-speculative motive
52. Under liquidity preference theory, Keynes assumed that the expected return on money is _____
while the expected return on bonds is _____ and _____.
a) Zero, interest payment, expected rate of capital gain
b) One, interest payment, expected rate of capital gain
c) Zero, fixed interest, fixed loss
d) None of the above

53. With reference to speculative demand for money, the market value of bonds and the market rate of
interest are related.
a) Positively
b) Inversely
c) Directly
d) Not

54. According to Keynes, if the current interest rate is high:

a) People will demand more money because the capital gain on bonds would be less than the
return on money
b) People will expect the interest rate to rise and bond prices to fall in the future
c) People will expect the interest rate to fall and bond prices to rise in the future
d) Either (a) or (b) will happen

55. Under liquidity preference theory, if the current rate of interest is lower than the critical rate of
interest, his asset portfolio would consist of _____.
a) Only government bonds
b) Wholly of cash
c) Both cash and bonds equally
d) Either cash or bonds

56. _____is an adverse economic situation that can occur when consumers and investors hoard cash
rather than spending or investing it even when interest rates are low.
a) Liquidity trap
b) Monetary trap
c) Precautionary trap
d) Stimulus trap

57. There is a liquidity trap at a short-term _____ per cent interest rate.
a) 10
b) 7.5
c) 5
d) Zero
58. Which of the following statements is correct, in the situation of a liquidity trap?
a) Investors would maintain cash savings rather than hold bonds
b) The speculative demand becomes perfectly elastic with respect to interest rate
c) The speculative money demand. the curve becomes parallel to the X-axis
d) All of the above

59. In the situation of a liquidity trap, the monetary authority is _____ to stimulate the economy with
monetary policy.
a) Unable
b) Able
c) Perfectly able
d) Very effective

Post-Keynesian Developments in the Theory of Demand for Money

60. The inventory-theoretic approach to the transactions demand for money _____.
a) Explains the negative relationship between money demand and the interest rate
b) Explains the positive relationship between money demand and the interest rate
c) Explains the positive relationship between money demand and general price level
d) Explains the nature of expectations of people with respect to interest rates and bond prices

61. In this approach, the money or real cash balance was essentially viewed as an inventory held for
transaction purposes.
a) Inventory explicit Approach
b) Inventory implicit Approach
c) Inventory theoretic Approach
d) Inventory regressive Approach

62. Who has developed the deterministic theory of transaction demand for money known as the
Inventory Theoretic approach?
a) Baumol and Tobin
b) Baumol and Fisher
c) Tobin and Fisher
d) Baumol and Marshall

63. According to Baumol which of the following formula can be used to calculate the average amount of
cash withdrawal which minimises cost?
a) C = √2byr
b) C = √2by/r
c) C = √byr/2
d) C = √2br/y
64. In accordance with the Inventory Theoretic Approach, an individual combines his asset portfolio of
___and _____in such proportions that his ___ of holding the assets is minimized.
a) Cash; bonds; overall cost
b) Shares; bonds; overall cost
c) Cash; bond; bond cost
d) Cash; bond; Cash cost

65. The nominal demand for money rises if:

a) The opportunity costs of money holdings i.e., bonds and stock returns, rb and re, respectively-
decline and vice versa
b) The opportunity costs of money holdings i.e., bonds and stock returns, rb and re, respectively-
rise and vice versa
c) The opportunity costs of money holdings i.e., bonds and stock returns, ra and rg, respectively
remain constant
d) (b) and (c) above

66. The considered demand for money is an application of a more general theory of demand for
capital assets.
a) Baumol
b) James Tobin
c) J. M. Keynes
d) Milton Friedman

67. As per Milton Friedman's re-statement of the quantity Theory, the nominal demand for
money is a function which is represented by permanent income divided by the rates, defined
as the average return on the asset classes in the monetarist theory world.
a) Total wealth, discount, five
b) Total wealth, Interest, five
c) Permanent wealth, Interest, six
d) None of these

68. As per Friedman's theory, the nominal demand for money is influenced by inflation, a
positive inflation rate the real value of money balances, thereby the opportunity costs of
money holdings.
a) Increases, reduces
b) Reduces, increasing
c) Stimulates, reduces
d) None of these
69. The present expected value of all future income is Friedman's measure of wealth. Friedman's
regarded this as
a) Permanent income
b) Current income
c) Temporary income
d) Flexible income

70. Under Friedman's Quantity theory, the nominal demand for money is related to the price level. is
a) Negatively
b) Positively
c) Regressively
d) Not

71. According to James Tobin's theory, an individual's behaviour shows risk aversion, which
means. They prefer risk to a given rate of return. risk
a) Less, more
b) More, less
c) Less, positive
d) More, negative

72. Tobin's theory holds that people prefer portfolios of money, bonds and shares, with each
person opting for a little different balance between risk and return.
a) Mixed
b) Diversified
c) Mixed or diversified
d) non-diversified

73. In Tobin's portfolio approach, the demand function for money as an asset slopes downwards,
where the horizontal axis shows, and the vertical axis shows
a) Demand for money, rate of interest
b) Rate of interest, demand for money
c) Supply for money, rate of interest
d) Demand for money, supply for money

74. The demand for money as behaviour towards "aversion to risk" was propounded by:
a) Fisher
b) Marshall
c) Friedman
d) Tobin

75. Which of the following statements holds true with reference to Tobin's Demand for money
theory involving an individual's behaviour towards risk?
 a) Money is a safe asset
b) Investors will be willing to exercise a trade-off
c) Investors sacrifice to some extent, the higher return from bonds for a reduction in risk
d) All of the above

76. According to Baumol and Tobin's approach to the demand for money, the optimal average
money holding is:
a) A positive function of income Y and the price level P
b) A positive function of transaction costs c
c) A negative function of the nominal interest rate i
d) All the above

UNIT 2: CONCEPT OF MONEY SUPPLY

Money Supply Rationale & Sources

77. The total stock of money held by the ___in an economy at a particular point in time is Called
Money Supply.
a) Public
b) Government
c) Banks
d) Corporate Entities

78. Money Supply is a variable.

a) Flow
b) Stock
c) Both (a) & (b)
d) None of the above

79. The money Supply does not include the stock of money held by the ___ as well as ___ of
the country.
a) The Public, government
b) The public, banking system
c) Government, banking system
d) The Public, banks

80. Which one of the following is the feature of money supply?

a) Money includes money held by the public only
b) Money does not include money- creating sector (suppliers of money)
c) Money is a stock concept, as it is concerned with a particular point in time
d) All of the above

81. Choose the correct statement from the following:

a) Money is deemed as something held by the public and therefore only currency held by
the public is included in the money supply
 b) Money is deemed as something held by the public and therefore inter-bank deposits are
included in the money supply
c) Since inter-bank deposits are not held by the public, therefore inter-bank deposits are
excluded from the measure of money supply
d) Both (a) and (c) above

82. Which one of the following is not the producer of money?

a) Government
b) Banking System
c) Household & Firms
d) All of the above

83. In the definition of money supply, the term public includes economic unit:
a) Households
b) Firms
c) Institutions
d) All of the above

84. While discussing the definition of "Supply of Money" and the Standard measures of money,
not included. Is/are
a) Interbank Deposits
b) Money held by the Government
c) Banking System
d) All of the above

85. In the definition of money supply, the word "public" includes:

a) All Local Authorities
b) Non-Banking Financial Institutions
c) Foreign Central Banks
d) All of the above

86. The Central Banks all over the World adopt a monetary policy which depends to a large
extent on the controllability of the:
a) Monetary base
b) Money Supply
c) Monetary Base & the Money Supply
d) Money Supply & Money Demand

87. The empirical analysis of facilitates analysis of monetary developments in order to provide a
deeper understanding of the causes of money growth.
a) Money Supply
b) Money Demand
c) Money supplied by households
d) Money demanded by Governments
88. The supply of money in the economy depends on the decision of:
a) Commercial Banks
b) Central Bank
c) Ministry of Finance
d) Central Government

89. Paper currency is a:

a) Representative Money
b) Full-bodied Money
c) Metallic Money
d) None of the above

90. The primary source of money supply in all countries is:

a) The Reserve Bank of India
b) The Central Bank of the country
c) The Bank of England
d) The Federal Reserve

91. The supply of money in an economy depends on.

a) The decision of the central bank is based on the authority conferred on it
b) The decision of the central bank and the supply responses of the commercial banking
system
c) The decision of the central bank in respect of high-powered money
d) Both (a) and (c) above

92. Under the 'minimum reserve system' the central bank is

a) Empowered to issue currency to any extent by keeping an equivalent reserve of gold
and foreign securities
b) Empowered to issue currency to any extent by keeping only a certain minimum reserve
of gold and foreign securities
c) Empowered to issue currency in proportion to the reserve money by keeping only a
minimum reserve of gold and foreign securities
d) Empowered to issue currency to any extent by keeping a reserve of gold and foreign
securities to the extent of ₹350 crores

93. The Money is a liability of an asset of the

a) Issuing central bank, holding public
b) Pubic, central bank
c) Issuing central bank, central government
d) The central government, issuing central bank
94. The currency issued by the Central Bank is "FIAT MONEY and is backed by support and its
value is guaranteed by the
a) Currency, Central Bank
b) Currency, government
c) Reserves, government
d) Reserves, central bank

95. Banks create a money supply in the process of borrowing and lending transactions with the
public. Money so created by the commercial Banks is called:
a) Credit Money
b) Artificial Money
c) Debit money
d) None of these

96. Which of the following is a type of money?

a) Metallic Currency
b) Paper Currency
c) Digital Currency
d) All of the above

97. With the advent of cutting-edge technologies and advancement in technology has made it
possible for the development of a new form of money viz. CBDC. What is the full form of
CBDC?
a) Central Bank Digital Certificate
b) Central Bank Dynamic Certificate
c) Central Bank Digital Currency
d) Central Bank Dynamic Currency

98. At present, which of the following statements is true about the cryptocurrencies?
a) These face Significant Legislative Uncertainties
b) These are not legally recognized in India as currency
c) These are not categorized as
d) All of the above

99. Banks in the country are required to maintain deposits with the central bank
a) To provide the necessary reserves for the functioning of the central bank
b) To meet the demand for money by the banking system
c) To meet the central Bank's prescribed reserve requirements and to meet settlement
obligations
d) To meet the money needs for the day-to-day working of the commercial banks
100. "Money" consists of currency while "High Powered Money Consists of currency and
a) Demand deposits, cash reserves with banks
b) Cash nerves with Banks, demand Deposits
c) public money, Paper money
d) Paper money, public money

Measurement of Money Supply

101. Till 1967-68, the RBI used to publish____ measure of money supply.
a) M1
b) M1 and M2
c) M1, M2 and M3
d) M1, M2, M3 and M4

102. In India, who releases data on the money supply?

a) RBI
b) Central Government
c) Ministry of Finance
d) Commercial Banks

103. M1 and M2 are generally known as ____supply concepts, whereas, M3, and M4, are known
as supply concepts.
a) Narrow Money, Broad Money
b) Broad Money, Narrow Money
c) Least Liquid Money, Narrow Money
d) Broad Money, Most liquid money

104. The four measures of money supply represent different degrees of liquidity. In this regard, is
the most liquid and is the least liquid.
a) M4, M1
b) M1, M4
c) M2, M3
d) M3, M2

105. Reserve money is also known as.

a) Central bank money
b) Base money
c) High powered money
d) All of the above

106. Reserve Money is composed of:

a) Currency in circulation + demand deposits of banks (Current and Saving accounts) +
Other deposits with the RBI
b) Currency in circulation + Bankers' deposits with the RBI + Other deposits with the RBI
 c) Currency in circulation demands deposits of banks + Other deposits with the RBI
d) Currency in circulation + demand and time deposits of banks + Other deposits with
the RBI

107. M, is the sum of

a) Currency and coins with the people+ demand deposits of banks (Current and Saving
accounts) + other deposits of the RBI
b) Currency and coins with the people+ demand and time deposits of banks (Current
and Saving
accounts) + other deposits of the RBI.
c) Currency in circulation + Bankers' deposits with the RBI + Other deposits with the RBI
d) None of the above

108. The empirical definition of measure M is

a) M3 = M1+M2
b) M3 = M1 + Saving deposits with post office saving banks
c) M3 = M1 + Time deposits with the banking system
d) M3 = M2 + Saving deposit with post office savings banks
Consider the following data and answer the following questions 109-111.
Currency with Public ₹ 45,000 crores

Demand Deposit with Banking System ₹ 45,000 crores

Time Deposits with Banking System ₹ 1,10,000 crores

Other deposit with RBI ₹ 1,40,000 crores

Saving Deposits of Post Office Saving ₹ 30,000 crores

Banks

109. What is the amount of Narrow Money (M₁)?

a) 2,85,000 crores
b) ₹3,15,000 crores
c) ₹3,95,000 crores
d) None of the above

110. The calculated value of M is

a) 2,85,000 crores
b) ₹3,95,000 crores
c) ₹3,15,000 crores
d) None of the above

111. The value of M will be_____

a) 2,85,000 crores
b) 3,95,000 crores
c) ₹3,15,000 crores
d) None of the above
 112. Consider the following data (crore).
Notes in circulation 26,09,005

Circulation of Rupee Coin 40,715

Circulation of Small Coins 1,080

Cash on hand and Bank 99,200

What is the currency with the Public?

a) 26,09,005 crores
b) 26,49,720 crores
c) 26,50,800 crores
d) 25,51,600 crores

113. Consider the following data:

М1 ₹ 42,90,550 crores
М2 ₹ 44,42,695 crores
Calculate the value of the Post Office savings bank deposit.
a) 87,33,245
b) 1,52,145
c) 3,04,290
d) None of these

Read the following data and answer the questions 114 to 116.
Mr. X has calculated the following four alternative measures of money supply:
M1 4,85,000 crores

M2 ₹5,50,000 crores

M3 5,90,000 crores

M4 ₹6,24,000 crores
114. What is the amount of "Time Deposits with the Banking System"?
a) ₹ 74,000 crores
b) ₹ 65,000 crores
c) ₹ 1,05,000 crores
d) ₹ 34,000 crores

115. What is the amount of "Saving deposits with Post Office Saving Bank"?
a) 74,000 crores
b) 65,000 crores
c) 1,05,000 crores
d) 34,000 crores

116. The Total Deposits with the Post Office Saving Organisation (excluding National Savings
certificates) is
a) 74,000 crores
b) 65,000 crores
c) 1,05,000 crores
d) 34,000 crores

117. Find M,, from the following information:

M4 ₹4,41,260 cr.

Saving deposits with post office saving ₹41,200 cr.

banks
Total Deposits with the Post Office ₹31,245 cr.
Saving Organization (excluding National
Savings Certificate)

Time Deposits with the Banking System ₹65,315 cr.

a) ₹4,10,015 cr.
b) ₹3,44,700 cr.
c) ₹3,85,900 сг.
d) Cannot be determined

118. On the recommendations of the Second Working Group on money supply, from April 1977,
the RBI has been publishing data on which of the following alternative measures of money
supply?
a) M1 only
b) M1 and M2
c) M1 , M2 and M3
d) M1 , M2, M3 and M4
 Read the following data, and answer the questions (119 to 121)
Particulars in crores

Notes in Circulation. 24,20,964

Circulation of Rupee Coin 25,572

Circulation of Small Coins 743

Post Office Saving Bank 1,41,786

Deposits

Cash on Hand with Banks 97,563

Deposit Money of the Public 17,76,199

Demand Deposits with 17.37,692

Banks

Other Deposits with RBI 38,507

Total Post Office Deposits 14,896

Time Deposits with Banks

1,78,694

119. Calculate M1
a) 43,04,609
b) 41,25,915
c) 42,07,046
d) 42,67,701

120. Calculate M2
a) 43,04,609
b) 41,25,915
c) 742,07,046
d) 42.67,701

121. Calculate M3
a) ₹43,04,609
b) ₹41,25,915
c) ₹42,07,046
d) ₹42,67,701

Money Multiplier Approach

122. The Money Multiplier Approach holds that the total Supply of nominal money in the economy
is determined by the behaviour of the
a) Single, Central Bank
b) Joint; Central Bank and Commercial Bank
c) Joint; Central Bank and Public
d) Joint; Central Bank, Commercial Banks and the Public

123. The ratio that relates the change in the money supply to a given change in the monetary
base is called the:
a) Required reserve ratio
b) Money multiplier
c) Deposit ratio
d) Discount rate

124. The money multiplier will be large:

a) For higher currency ratio (c), lower required reserve ratio (r) and lower excess reserve
ratio (e)
b) For constant currency ratio (c), higher required reserve ratio (r) and lower excess
reserve ratio (e)
c) For lower currency ratio (c), low- er required reserve ratio (r) and lower excess
reserve ratio (e)
d) None of the above

125. The money multiplier and the money supply are:

a) Positively related to the excess reserves ratio
b) Negatively related to the excess reserves ratio
c) Not related to the excess reserves ratio
d) Proportional to the excess reserves ratio

126. The currency ratio represents:

a) The behaviour of the central bank in the issue of currency
b) The behaviour of the central bank with respect cash reserve ratio
c) The behaviour of the public
d) The behaviour of commercial banks in the country

127. The size of the money multiplier is determined by:

a) The currency ratio (c) of the public
b) The required reserve ratio (r) at the central bank, and
c) The excess reserve ratio (e) of commercial banks.
d) All of the above

128. The required reserve ratio is 10% for every 2,00,000 deposited in the banking system. What
will be the Credit Multiplier and Credit Creation?
a) 10,720,00,000
b) 10, 20,000
 c) 8,20,00,000
d) 8,20,000

129. For an initial deposit of 75,00,000, the credit creation is calculated at 40,00,000. What is
RRR (required reserved ratio)?
a) 8
b) 0.8
c) 12.5%
d) Cannot be calculated

130. When there are excess reserves, the money multiplier (m) is expressed as____
a) m = 1+c/ r + e + c
b) m = 1+r/ r + e + c
c) m = 1+e/ r + e + c
d) m = c/ r + e + c

131. Which formula is used to find out Money Supply (m) where:
r = required reserve ratio
c = currency deposit ratio (C/D)
e = ratio of Excess Reserves to Deposits
H = Stock of high-powered money
a) m = 1+c/ r + e + c + H
b) m = 1+C/ r + e + c * H
c) m = 1+H/ r + e + c + C
d) m = 1+H/ r + e + c * C

132. If M is the money supply, m is the money multiplier and MB is the monetary base or high-
powered money, then which of the following value of the money multiplier will equation is
correct?
a) MB = M x m
b) m = MB x M
c) M = MB x m
d) M = MB + m

133. For a given level of the monetary base, an increase in the required reserve ratio will denote
a) A decrease in the money supply
b) An increase in the money supply
c) An increase in demand deposits
d) Nothing precise can be said

134. For a given level of the monetary base, an increase in the currency ratio causes the money
multiplier to ___ the money supply to____ and
 a) Decrease, increase
b) Increase, decrease
c) Decrease, decrease
d) Increase, increase

135. _____tells us how much new money will be created by the banking system for a given
increase in the high-powered money.
a) The currency ratio
b) The excess reserve ratio €
c) The credit multiplier
d) The currency ratio (c)

136. Consider the following data

Required Reserve Ratio 10 Per cent

Currency in circulation ₹400 Billion

Demand Deposits ₹1000 Billion

Excess Reserves ₹1 Billion

136. The value of the money multiplier will be

a) 1.74
b) 2.74
c) 1.79
d) 2.79

137. The in ratio, the reserve of each deposit ill bank loan out and the money multiplier.

a) Higher, less, smaller

b) Higher, high element, smaller
c) Smaller, less, smaller
d) None of these

138. Under the fractional reserve system:

a) The money supply is an increasing function of reserve money (or high-powered money)
and the money multiplier
b) The money supply is a decreasing function of reserve money (or high-powered money)
and the money multiplier
c) The money supply is an increasing function of reserve money (or high-powered money)
and a decreasing function of money multiplier
d) None of the above as the deter- ruminants of money supply are different
 139. If commercial banks reduce their holdings of excess reserves
a) The monetary base increases
b) The monetary base falls
c) The money supply increases
d) The money supply falls

140. The Money Multiplier is a function of the current ratio which depends on the:
a) Behaviour of the public
b) Excess reserve ratio of the banks
c) Required reserve ratio set by the Central Bank
d) All of the above

141. The excess reserves ratio (e) is related to the market interest ratio (i).
a) Positively
b) Negatively
c) Uniformly
d) Not

142. As a rule, an increase in the monetary base that goes into mot is multiplied, whereas an
increase in monetary base that goes into is multiplied
(a) Supporting deposits, currency
(b) Currency. Supporting deposits
(2) High Powered Currency
(d) Currency, High Powered Currency

143. If some portion of the increase in high-powered money finds its way into this portion, it does not
undergo multiple deposit expansion.
(a) Currency
Supporting deposits
Both (a) and (b)
Neither (a) nor (b)

144. The size of the money multiplier is reduced when funds are held as____ rather than as ___
(a) Term Deposits, Cash
(b) Cash, Term Deposits
(c) Demand deposits, Cash
(d) Cash, demand deposits

The Money Multiplier Approach to Supply of Money

145. The Money multiplier approach to money supply was propounded by

(a) Milton Friedman
(b) Milton Friedman and Anna Schwartz
(c) Milton Friedman and Irvin Fisher
(d) Milton Friedman and Marshall

146. The money multiplier approach to money Supply considers three factors as immediate
determinants of money supply. Which one of the following is not included in these factors?
(4) Stock of high-powered money (H)
(b) The ratio of reserves to deposits or reserve ratio (r)
(e) The ratio of currency to deposits of current deposit rate(c)
The ratio of high-powered money to deposits (h)

147. Whose behavior among the following, has been considered, under the Money Multiplier
approach?
(a) Central Bank
(b) Commercial Banks
(c) General Public
(d) All of the above

148. Under the Money Multiplier Approach, the behavior of the Central Bank which controls the issue
of currency is reflected in the______
(a) Supply of the Nominal High- Powered Money
(b) Total amount of nominal demand deposits
(c) Degree of adoption of banking habits by the people
(d) All of the above
149. If the behavior of the Public and the Commercial banks remain unchanged over time, the total
supply of nominal money in the economy will vary_____ with the supply of nominal high-powered
money issued by the______
(a) Directly, Central Bank
(b) Negatively, Central Bank
(c) Directly, Central Government
(d) Negatively, Central Government

150. The Money Multiplier and the money supply are related to the ratio of currency to deposits
(c) i.e. C/D.
(a) Negatively
(b) Positively
(c) Not
(d) Progressively

151. The behavior of Commercial Banks is important under money multiplier approach to supply of
money. By creating credit, the commercial banks determine the total amount of ____
(a) Nominal High-Powered Money
(b) Nominal Demand Deposits
(c) National High-Powered Money
(d) National Demand Deposits

152. Which of the following reflects the behavior of commercial banks in the economy regarding
money multiplier approach to supply of money?
(4) Ratio of cash reserves to deposits
(b) Ratio of currency to deposits
(c) Ratio of cash reserves to currency
(d) Ratio of High-powered money to currency

153. Considering all other variables remain the same, If ratio of cash re- serves to deposits (reserve
ratio) in- creases, then will decrease.
(a) Deposits
(b) Money Supply
(c) Reserves
(d) High-powered money
154. When the reserve ratio (r) is 8%, the money multiplier is calculated at 2.58. If the reserve ratio is
increased to 12%, the value of money multiplier will be
(4) Less than 2.58
(b) More than 2.58
(c) 2.58
(d) Cannot be decided

Monetary Policy and Effect of

Government Expenditure on Money Supply

155. The value of money multiplier is zero when:

(a) Interest rates are too low
(b) Banks prefer to hold the newly injected reserves as excess reasons with no risk attached to it
(d) Money Multiplier can never be zero

156. As a part of monetary policy, an open market purchase by Central Bank will and thereby supply.
the reserves the money
(a) Reduce, reduce
(b) Increase, increase
(c) Reduce, increase
(d) Increase, reduce

157. The credit creation process by the banking system in the country will create money to the tune of
∆ money supply = 1/R ∆Reserves. It holds true, when it assumed that
(a) Banks do not hold excess reserves
(b) People do not hold more currency than before
(c) There is demand for loans from businesses
(d) All of the above

158. If the Central Bank of a country wants to stimulate economic activity it does so by infusing
liquidity into the system. The high powered money (monetary base) is injected into the system when

(a) Government securities are purchased

(b) People do not hold more currency than before

(e) There is demand for loans from businesses.

(d) All of the above

158. If the Central Bank of a country wants to stimulate economic activity it does so by infusing
liquidity into the system. The high powered money (monetary base) is injected into the system when
(a) Government securities are purchased
(b) Government Securities are sold
(c) Any of (a) and (b)
(d) Both (a) and (b)

159. Whenever the Central and the State Government's cash balances
fall short of the minimum requirement, they are eligible to avail of a facility. What is the name of that
facility?
(a) Ways & Means Advances (WMA)
(b) Overdraft facility (OD)
(c) Both (a) & (b)
(d) None of the above

160. When the Reserve Bank of India lends to the governments under WMA/OD, it can potentially
lead to an____ in money supply through the money multiplier process.
(a) Increase
(b) Decrease
(c) Substantial Decrease
(d) No effect

[Link] the Correct Statement?

• (a) There is no difference between the type of money created by commercial bank and that which
are issued by the Central Bank
(b) Money creation is the same as the wealth creation
(e) The deposit multiplier and the money multiplier are identical
(d) In actual practice, all borTONCES spend every rupee they have rowed
162. If the required reserve ratio is 20%, then what will be the credit multiplier?
()0.2
(b) 0.8
(c) 1.2
(4) 5

163. What is the formula used to calculate credit Multiplier?

(a) 100- Required Reserve Ratio
(b) 100+ Required Reserve Ratio
(c) 100 x Required Reserve Ratio
(d) Required Reserve Ratio

164. The credit multiplier is also t referred to as the

(a) Deposit multiplier
(b) Deposit expansion multiplier
(c) Both (a) & (b)
(d) None of the above

165. Which describes the amount of additional money created by commercial banks through the
process of lending the available money it has in excess of the Central Bank reserve requirement?
(a) Credit multiplier
(b) Deposit multiplier
(c) Deposit Expansion
(d) All of the above

166. What will be the total deposit created if the initial deposit is of ₹ 800crores and the required
reserve ratio is 10%?
(a) ₹80 crores
(b) ₹800 crores
(c) ₹8000 crores
(d) None of these
167. The total deposits created by the commercial banks is₹ 16,800 crores and the required reserve
ratio is 12.5%. Calculate the amount of initial deposits.
(a) ₹16,800
(b) ₹2,100
(c) ₹18,900
(d) None of these

168. Initial Deposits of ₹ 1,521 crores led to the creation of total deposits of ₹12,168 crores by the
commercial banks. What is the required reserve ratio?
(a) 15%
12.5%
(c) 10%
7.5%
UNIT - 3 MONETARY POLICY

The Monetary Policy Framework

169. Monetary Policy refers to the use of monetary policy instruments which are at the disposal of the
Central Bank______
(a) To regulate the availability, cost, and use of money and credit
(b) To achieve price stability
(c) To promote economic growth optimum levels of output and employment, balance of payment
equilibrium, etc.
(d) All of the above

170. Which of the following is the function of monetary policy?

(a) Regulate the exchange rate and keep it stable
(b) Regulate the movement of credit to the corporate sector
Regulate the level of production and price
Regulate the availability, cost, and use of money and credit

171. Which of the following is a basic component of monetary policy framework?

(a) The objectives of monetary policy
(b) The analytics of monetary policy which focuses on the transmission mechanism
(c) The operating procedure which focuses on the operating targets and instruments
(d) All of the above are basic components

172. The main objective of monetary policy in India is_____

(a) Reduce food shortages to achieve stability
(b) Economic growth with price stability
(c) Overall monetary stability in the banking system
(d) Reduction of poverty and unemployment

173. When the Central Bank lowers interest rates, monetary policy is
(a) Easing
(b) Tightening
(c) Ineffective
(d) None of the above

174. Fundamentally, the primary objective of the monetary policy has been:
(a) To reduce price stability
(b) To curb economic growth
(c) To maintain judicious balance between price stability and economic growth
d) None of the above

175. Which of the following is an ex- -explicit objective Included in the monetary policy of developing
countries?
(a) Maintenance of economic growth
(b) Ensuring an adequate flow of credit to the productive sectors
(c) Sustaining a moderate structure of interest rates to encourage investments and the creation of an
efficient market for government securities
- (d) All of the above

176. The monetary transmission mechanism refers to:

(a) How money gets circulated in different sectors of the economy post-monetary policy
(b) The ratio of nominal interest and real interest rates consequent on a monetary policy
(c) The process or channels through which the evolution of monetary aggregates affects the level of
product and prices
(d) None of the above

177. A contractionary monetary policy-induced increase in interest rates.

(a) Increases the cost of capital and the real cost of borrowing for firms
(b) Increases the cost of capital and the real cost of borrowing for firms and households
(c) Decreases the cost of capital and the real cost of borrowing for firms
d) Has no interest rate effect on firms and households

178. During deflation:

(a) The RBI reduces the CRR in order to enable the banks to expand credit and increase the
supply of money available in the economy
(b) The RBI increases the CRR in order to enable the banks to expand credit and increase the
supply of money available in the economy
(c) The RBI reduces the CRR in order to enable the banks to contract credit and increase the
supply of money available in the economy
(d) The RBI reduces the CRR but increases SLR in order to enable the banks to contract credit
and increase the supply of money available in the economy

179. The analytics of monetary policy focus on the transmission mechanisms. Which of the
following is included in such a mechanism?
(a) The interest rate channel
(b) The exchange rate channel
(c) The quantum channel and the asset price channel
(d) All of the above

180. Which of the following statements is correct?

(a) The governor of the RBI in consultation with the Ministry of Finance decides the policy rate and
implements the same
(b) While CRR has to be maintained by banks as cash with the RBI, the SLR requires the holding
of approved assets by the bank itself
(c) When repo rates increase, it means that banks can now borrow money through Open Market
Operations (OMO)
(d) None of the above
181. Which of the following Statements is incorrect?
(a) Quantitative instruments are general in nature
(b) Quantitative instruments affect all the sectors making use of bank credit
(c) Quantitative controls are designed to regulate the direction of credit
(d) Quantitative Controls are also known as traditional methods of control

182. As a part of the credit control instruments of RBI, which of the following is not a part of the
Quantitative method?
(a) Cash Reserve Ratio (CRR)
- (b) Statutory Liquidity Ratio (SLR)
(c) Open Market Operations (OMO)
(d) Margin requirements

183. As a part of the open market operations, the sale of securities by the Central Bank ______ the
money supply
in the economy.
(a) Decreases
(b) Increases
(c) Brings no change in
(d) Either (a) or (b)

- 184. _____refers to the minimum percentage of net demand and time liabilities, to be kept by
commercial banks with the central bank.
(a) Statutory Liquidity Ratio
(b) Cash Reserve Ratio
(c) Bank Rate
(d) Repo Rate

185. To control the money supply, the RBI buys and sells government securities in the open market.
These operations conducted by the central bank are referred to as:
(a) Open Monetary Operations
(b) Open Money Operations
(c) Open Market Operations
(d) Open Marginal Operations
186. Commercial banks are required to maintain with themselves, a minimum percentage of Net
Demand & Time liabilities, in the form of designated liquid assets. This ratio is called as:
(a) Statutory Liquidity Ratio
(b) Cash Reserve Ratio
(c) Bank Rate
(d) Repo Rate

187. Which one of the following statements is incorrect about the Qualitative method of credit control
instruments of RBI?
(e) These include margin requirements, moral suasion, selective credit controls, etc.
(b) These are general and affect all the sectors
(c) These are designed to regulate the direction of credit
(d) These are also known as selective methods of control

188. Which one of the following is not a part of the Qualitative method of credit control instruments of
RBI?
(a) Open Market Operations
(b) Margin requirements
(c) Moral suasion
(d) Selective credit control

189. _____ is the interest rate at which RBI lends long-term funds to banks.
(a) Interest Rate
(b) Bank Rate
(c) Repo Ratc
(d) Marginal Rate

190. RBI provides financial accommodation to commercial banks _through repos/reverse repos
under:
(a) Market Stabilization Scheme (MSS)
(b) The Marginal Standing Facility (MSF)
(c) Liquidity Adjustment Facility (LAF)
(d) Statutory Liquidity Ratio (SLR)
191. In India, the term 'Policy rate' refers to:
=(a) The bank rate prescribed by the RBI in its half-yearly monetary policy statement
(b) The CRR and SLR prescribed by RBI in its monetary policy statement
(c) The fixed repo rate quoted for sovereign securities in the overnight segment of the Liquidity
Adjustment Facility (LAF)
(d) The fixed repo rate quoted for sovereign securities in the overnight segment of Marginal Standing
Facility (MSF)

192. is a money market instrument, which enables collateralized short-term borrowing and lending
through sale/purchase operations in debt instruments.
(a) OMO
(b) CRR
(c) SLR
(d) Repo

193. Reverse repo operation takes place when:

(a) RBI borrows money from banks by giving them securities
(b) Banks borrow money from RBI by giving them securities
(c) Banks borrow money in the overnight segment of the money market
(d) RBI borrows money from the central government

194. The Monetary Policy Framework Agreement is on_____

(a) The maximum repo rate that RBI can charge from the government
(b) The maximum tolerable inflation rate that RBI should target to achieve price stability
(c) The maximum repo rate that RBI p can charge from the commercial banks
(d) The maximum reverse repo rate that RBI can charge from the commercial banks

195. An open market operation is an instrument of monetary policy which involves buying or selling of
____from or to the public and banks.
(a) Bonds and bills of exchange
(b) Debentures and shares
(c) Government securities
(d) None of these
196. Monetary Policy Committee (MPC) determines the policy rate to achieve the inflation target
through debate and majority vote by a panel of experts. How many members does this MPC consists
of?
Three members
(b) Four members
(c) Five members
(d) Six members

197. Under _____ the Government of India borrows from the RBI (Such borrowing being additional to
its normal borrowing requirements) and issues treasury bills/dated se- securities.
(a) Market Stabilization Scheme (MSS)
(b) Minimum Statutory Scheme (MSS)
(c) Marginal Standing Facility (MSF)
(d) Minimum Statutory Facility (MSF)

198. ____is defined as an instrument for lending funds by purchasing securities with an agreement to
resell the securities on a mutually agreed future date at an agreed price which includes interest for
the funds lent.
(a) Reverse Repo
(b) Repo Rate
(c) Bank Ratc
(d) MSF

199. The Monetary Policy Frame- work Agreement is an agreement reached between the
Government of India and the Reserve Bank of India (RBI) to keep the Consumer Price Index (CPI)
inflation rate between
(a) 1 to 5 per cent
(b) 2 to 6 per cent
(c) 3 to 5 per cent
(d) 4 to per cent