Money Markets & Monetary Policy GK MCQs With Answer & Explanation in English offers readers essential insights into the workings of money markets and the role of monetary policy in economic stability. This article provides multiple-choice questions (MCQs) with detailed answers and explanations to enhance understanding of these financial concepts.
It’s a valuable resource for students, professionals, and anyone interested in mastering key topics in money markets and monetary policy.
1. What is the number of members in the Monetary Policy Committee (MPC)?
- 4
- 5
- 6
- 7
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Answer: 6
The Monetary Policy Committee (MPC) in India consists of six members, and its composition is essential for the formulation of monetary policy. It is responsible for setting the key policy interest rates to control inflation and support economic growth. The committee comprises three officials from the Reserve Bank of India (RBI) and three external members nominated by the Government of India. The Governor of RBI chairs the MPC, which convenes at regular intervals to assess economic conditions and make decisions regarding interest rates and other monetary policy measures.
2. Which of the following rates is used by banks in India as a reference to price the rupee loans and advances?
- Bank Rate
- Base Rate
- MCLR Rate
- Repo Rate
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Answer: MCLR Rate
Banks in India use the Marginal Cost of Funds Based Lending Rate (MCLR) as a reference to price rupee loans and advances. The MCLR framework was introduced by the RBI to make lending rates more responsive to changes in policy rates and improve transparency in interest rate determination. It is a critical benchmark for determining the lending rates offered to borrowers and helps align them with the prevailing market conditions.
3. Which among the following is a correct definition of the Fiduciary Issue of notes?
- The issue of currency notes without metallic backing
- The issue of currency notes with metallic backing
- The issue of currency notes with partial metallic backing
- The issue of currency notes with proportional metallic backing
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Answer: The issue of currency notes without metallic backing
Fiduciary issue refers to the part of the issue of notes and coins in an economy that is not backed by a physical reserve like gold or any specific asset. In modern monetary systems, all notes and coins in circulation are considered fiduciary, meaning their value is derived from trust and the issuing authority’s guarantee, rather than being backed by a commodity like gold.
4. A mutual fund that invests in other mutual funds belonging to the same fund house or belonging to other fund houses is called?
- FOF (Fund of Funds)
- Pool
- Portfolio
- None of the above
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Answer: FOF (Fund of Funds)
A fund of funds (FOF) is a type of mutual fund that invests in other funds or hedge funds rather than individual securities. This investment strategy is known as multi-manager investment. FOFs offer advantages such as broad diversification and appropriate asset allocation because they invest in a variety of underlying funds, providing investors with access to a range of investment opportunities through a single investment vehicle.
5. Through open market operations, RBI plays a very important role in which of the following markets?
- Gilt-edged market
- Primary market
- Secondary market
- None of the above
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Answer: Gilt-edged market
Open market operations (OMO) conducted by the Reserve Bank of India (RBI) are essential tools for influencing the Gilt-edged market. Gilt-edged securities are high-quality debt instruments with very high creditworthiness, often issued by governments or corporates. By conducting OMOs, the RBI can control liquidity in the financial system and influence interest rates, which can impact the prices and yields of gilt-edged securities.
6. Interest Rate Policy is a part of which of the following?
- Fiscal Policy
- Monetary policy
- Industrial Policy
- All of the above
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Answer: Monetary policy
Interest rate policy is a vital component of monetary policy used by a central bank to control either interest rates or the money supply in an economy. By altering policy interest rates like the repo rate, the central bank can influence borrowing and lending rates in the broader economy, affecting economic activity and inflation.
7. Which among the following defines ‘currency depreciation’ of a currency?
- Fall in the exchange rate of one currency in terms of other currencies
- Fall in the exchange rate of other currencies in terms of one currency
- Decrease in the volume of a particular currency
- Increase in the exchange rate of a currency
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Answer: Fall in the exchange rate of one currency in terms of other currencies
Currency depreciation refers to the reduction in the value of a country’s currency concerning one or more foreign reference currencies. This phenomenon primarily occurs in a floating exchange rate system, where currency values are determined by market forces rather than being pegged or fixed by the country’s central bank. Depreciation can have various economic consequences, including boosting exports and increasing the cost of imports.
8. Which among the following effects will be seen on “deposit rates” if RBI tightens its policy?
- The deposit rates will increase
- The deposit rates will decrease
- The deposit rates will remain unaltered
- Either Increase or decrease
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Answer: The deposit rates will decrease
When the Reserve Bank of India (RBI) tightens its monetary policy, it may decide to increase the repo rate. An increase in the repo rate is aimed at reducing liquidity in the financial system and controlling inflation. As a result, deposit rates in the banking system tend to decrease because higher borrowing costs make it less attractive for banks to offer higher interest rates on deposits.
9. Bring out the qualitative control instrument of Reserve Bank of India from the given statements?
- RBI increases Reverse Repo rate in the quarterly review of the monetary policy
- RBI decreases the CRR rate in the quarterly review of the monetary policy
- RBI decreases the Bank rate in the quarterly review of the monetary policy
- RBI announces selective credit control in the quarterly review of the monetary policy
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Answer: RBI announces selective credit control in the quarterly review of the monetary policy
Selective credit controls are qualitative tools used by the RBI to manage credit flow to specific sectors or industries. These controls are implemented to regulate lending to sectors where excess credit growth may pose risks to financial stability or economic conditions.
10. Which of the following is/are instruments of monetary policy?
- Bank Rate Policy
- Reserve Ratio Requirements
- Liquidity Adjustment Facility
- All of the above
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Answer: All of the above
The major instruments of monetary policy in India include the Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), Bank Rate, Repo Rate, Reverse Repo Rate, and Open Market Operations (OMO). These tools enable the RBI to manage money supply, influence interest rates, and control inflation and economic stability.
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