Money & Banking Archives

121. The monetary policy in India uses which of the following tools? 1. B

The monetary policy in India uses which of the following tools?

1. Bank rate
2. Open market operations
3. Public debt
4. Public revenue

Select the correct answer using the code given below.

[amp_mcq option1=”1 and 2 only” option2=”2 and 3 only” option3=”1 and 4 only” option4=”1, 2, 3 and 4″ correct=”option1″]

This question was previously asked in

UPSC CDS-2 – 2017

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The monetary policy in India, conducted by the Reserve Bank of India (RBI), uses tools like the Bank Rate and Open Market Operations.

Monetary policy aims to control the money supply, credit conditions, and interest rates to achieve macroeconomic objectives. Public debt and public revenue are instruments of fiscal policy, which is handled by the government.

Other monetary policy tools used by the RBI include the Repo Rate, Reverse Repo Rate, Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), and Marginal Standing Facility (MSF). Fiscal policy involves government spending, taxation, and public borrowing (leading to public debt) and revenue.

122. Which of the following is/are credit rating agency/agencies in India?

Which of the following is/are credit rating agency/agencies in India?

[amp_mcq option1=”CRISIL” option2=”CHRE” option3=”ICRA” option4=”All of the above” correct=”option4″]

This question was previously asked in

UPSC CDS-2 – 2016

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Based on the likely intent of the question format including “All of the above” and the presence of known rating agencies, the correct option is D) All of the above.

CRISIL (Credit Rating Information Services of India Limited) and ICRA (Investment Information and Credit Rating Agency of India Limited) are well-known and major credit rating agencies operating in India. While “CHRE” is not a widely recognized standard name for a credit rating agency in India and may be a typo or reference to an obscure entity, the inclusion of “All of the above” as an option, alongside two definite rating agencies, strongly suggests that the question setter intended to list three entities considered to be credit rating agencies, making option D the intended answer if all three are assumed correct by the source.

Other prominent credit rating agencies in India include CARE Ratings, Fitch India, India Ratings and Research (formerly Fitch Ratings India), and Brickwork Ratings. Credit rating agencies assess the creditworthiness of individuals, corporations, and governments, providing ratings on debt instruments that help investors evaluate risk.

123. Which of the following will be the outcome if an economy is under the

Which of the following will be the outcome if an economy is under the inflationary pressure?

1. Domestic currency heads for depreciation.
2. Exports become less competitive with imports getting costlier.
3. Cost of borrowing decreases.
4. Bondholders get benefitted.

Select the correct answer using the code given below.

[amp_mcq option1=”1 and 2″ option2=”2 and 3″ option3=”1 and 3 only” option4=”1, 3 and 4″ correct=”option1″]

This question was previously asked in

UPSC CDS-2 – 2016

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The outcome if an economy is under inflationary pressure will be that domestic currency heads for depreciation and exports become less competitive.

Inflation reduces the purchasing power of a currency. If a country experiences higher inflation relative to its trading partners, its goods become more expensive for foreigners, reducing the competitiveness of exports. This higher domestic price level and reduced export competitiveness often lead to a decrease in demand for the domestic currency on the international market, potentially causing it to depreciate.

Statement 1 is correct because high inflation typically leads to currency depreciation. Statement 2 is correct because inflation makes domestically produced goods more expensive, hurting export competitiveness. Statement 3 is incorrect; inflation generally leads to higher nominal interest rates, increasing the cost of borrowing, though real interest rates might vary. Statement 4 is incorrect; bondholders, who receive fixed nominal payments, are typically harmed by unexpected inflation as the real value of their payments decreases.

124. Which of the following with regard to the term ‘bank run’ is correct?

Which of the following with regard to the term ‘bank run’ is correct?

[amp_mcq option1=”The net balance of money a bank has in its chest at the end of the day’s business” option2=”The ratio of bank’s total deposits and total liabilities” option3=”A panic situation when the deposit holders start withdrawing cash from the banks” option4=”The period in which a bank creates highest credit in the market” correct=”option3″]

This question was previously asked in

UPSC CDS-2 – 2016

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A ‘bank run’ is a panic situation when the deposit holders start withdrawing cash from the banks.

A bank run occurs when a large number of customers withdraw their money from a bank simultaneously because they lose confidence in the bank’s solvency and fear they will lose their deposits if the bank fails.

Bank runs can lead to the bank’s collapse, even if it was initially solvent, because banks operate on a fractional reserve system and do not keep all deposits in cash. Such events can trigger financial crises. Deposit insurance and central bank lender-of-last-resort facilities are mechanisms used to prevent bank runs.

125. Which of the following are included in M1 definition of money for the

Which of the following are included in M1 definition of money for the Indian economy?

1. Reserves
2. Currency
3. Time deposits
4. Demand deposits

Select the correct answer using the code given below.

[amp_mcq option1=”1 and 3 only” option2=”2 and 3″ option3=”2 and 4″ option4=”1, 3 and 4″ correct=”option3″]

This question was previously asked in

UPSC CDS-1 – 2024

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C) 2 and 4

– In India, the Reserve Bank of India (RBI) defines different measures of money supply (M0, M1, M2, M3, M4).
– The definition of M1 is: M1 = Currency with the Public + Demand Deposits with the Banking System + ‘Other’ Deposits with the RBI.
– Based on this definition:
– 1. Reserves: These refer to cash reserves held by commercial banks with the RBI. They are part of the monetary base (M0), not M1. M1 is the money supply held by the non-bank public.
– 2. Currency: Currency notes and coins held by the public are a component of M1.
– 3. Time deposits: These include fixed deposits and recurring deposits. They are less liquid than demand deposits and are included in broader measures of money supply like M2, M3, and M4, but not M1.
– 4. Demand deposits: These are deposits held in current and savings accounts that can be withdrawn on demand (e.g., through cheques or ATM withdrawals). They are a component of M1.
– Therefore, currency and demand deposits are included in the M1 definition of money for the Indian economy.

– The M definitions represent different degrees of liquidity. M1 is the most liquid measure. M0 is the monetary base (Currency in Circulation + Banks’ Reserves with RBI). M3 (also known as Broad Money) is M1 + Time Deposits with the banking system, and is the most commonly used measure of money supply in India.

126. Which of the following statements is/are correct? A price index capt

Which of the following statements is/are correct?

A price index captures the change in the average price of a constant basket of commodities.
If the price index takes values 100, 110 and 121 in three consecutive years respectively, then the inflation rates in the 2nd and 3rd years are 10% and 21% respectively.

Select the correct answer using the code given below.

[amp_mcq option1=”1 only” option2=”2 only” option3=”Both 1 and 2″ option4=”Neither 1 nor 2″ correct=”option1″]

This question was previously asked in

UPSC CDS-1 – 2024

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A) 1 only

– Statement 1 is correct. A price index (like the Consumer Price Index or CPI) is typically constructed to measure the average change over time in the prices of a constant basket of consumer goods and services. While the GDP deflator uses a changing basket, the statement refers to “a price index,” and indices using a constant basket are fundamental examples.
– Statement 2 is incorrect. The inflation rate in a given year is the percentage change in the price index compared to the *previous* year.
– Inflation rate in the 2nd year = [(Index in Year 2 – Index in Year 1) / Index in Year 1] * 100 = [(110 – 100) / 100] * 100 = 10%. This part is correct.
– Inflation rate in the 3rd year = [(Index in Year 3 – Index in Year 2) / Index in Year 2] * 100 = [(121 – 110) / 110] * 100 = (11 / 110) * 100 = 10%. The statement says 21%, which is incorrect. The 21% represents the cumulative increase from Year 1 to Year 3.

– The inflation rate calculation is a year-on-year percentage change. Cumulative percentage changes over multiple years are calculated differently.

127. Consider the following statements regarding instruments of monetary po

Consider the following statements regarding instruments of monetary policy:

1. Standing deposit facility (SDF) rate was introduced in April 2022.
2. SDF rate replaced fixed reverse repo rate as the floor of the LAF corridor.

Which of the statements given above is/are correct?

[amp_mcq option1=”1 only” option2=”2 only” option3=”Both 1 and 2″ option4=”Neither 1 nor 2″ correct=”option3″]

This question was previously asked in

UPSC CDS-1 – 2024

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Statement 1 is correct: The Standing Deposit Facility (SDF) was introduced by the Reserve Bank of India in April 2022 as an additional tool for absorbing liquidity without providing collateral.
Statement 2 is correct: The SDF rate was set below the repo rate and replaced the fixed reverse repo rate as the effective floor of the Liquidity Adjustment Facility (LAF) corridor. The LAF corridor is now defined by the Marginal Standing Facility (MSF) rate (ceiling) and the SDF rate (floor).

SDF was introduced in April 2022 and functions as the floor of the LAF corridor, replacing the fixed reverse repo rate.

The SDF aims to provide the RBI with a more flexible tool to manage liquidity compared to the reverse repo window which requires collateral. It also helps in better anchoring the overnight money market rates within the LAF corridor.

128. Which of the following indicators is/are used to observe the monetary

Which of the following indicators is/are used to observe the monetary transmission mechanism in the economy?

1. Weighted average lending rate
2. Weighted average domestic term deposit rate
3. 1-year median MCLR
4. SDF rate

Select the correct answer using the code given below.

[amp_mcq option1=”1 and 2 only” option2=”1, 2 and 3″ option3=”3 and 4″ option4=”4 only” correct=”option2″]

This question was previously asked in

UPSC CDS-1 – 2024

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The monetary transmission mechanism (MTM) describes how changes in the central bank’s policy rate are transmitted through the economy to influence inflation and output. Observing this mechanism involves tracking how various interest rates and credit conditions respond to policy changes. Weighted average lending rate (WALR), weighted average domestic term deposit rate (WADTDR), and 1-year median MCLR (Marginal Cost of Funds based Lending Rate) are key indicators of how policy rate changes affect the rates charged by banks to borrowers and offered to depositors. These are crucial steps in the transmission process to the real economy.

WALR, WADTDR, and MCLR are standard indicators used to assess the pass-through of monetary policy changes to bank interest rates in India.

The SDF rate is a policy rate set by the RBI and is part of the monetary policy framework. While changes in the SDF rate *drive* the initial stages of transmission (especially in the money market), the rates like WALR, WADTDR, and MCLR are used to *observe* how the policy signal has been transmitted to the banking system’s retail rates. All four rates (including money market rates influenced by SDF) are tracked to understand MTM, but 1, 2, and 3 are direct indicators of transmission to the banking system’s interface with the public.

129. Which of the following policies help to raise interest rate unambiguou

Which of the following policies help to raise interest rate unambiguously and thereby lead to appreciation of currency?

[amp_mcq option1=”Expansionary fiscal and monetary policy” option2=”Contractionary fiscal and monetary policy” option3=”Contractionary fiscal policy and expansionary monetary policy” option4=”Contractionary monetary policy and expansionary fiscal policy” correct=”option4″]

This question was previously asked in

UPSC CDS-1 – 2023

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The correct answer is D) Contractionary monetary policy and expansionary fiscal policy. Contractionary monetary policy (e.g., raising interest rates, selling bonds) directly increases interest rates. Higher interest rates attract foreign capital seeking higher returns, increasing demand for the domestic currency and leading to its appreciation. Expansionary fiscal policy (e.g., increased government spending, lower taxes) increases aggregate demand and can also lead to higher interest rates due to increased government borrowing (crowding out) and increased economic activity, further reinforcing the upward pressure on interest rates and potentially the currency. This combination is known to lead to higher interest rates and currency appreciation in open economies with capital mobility.

– Monetary policy directly influences interest rates and money supply. Contractionary monetary policy raises interest rates.
– Fiscal policy influences aggregate demand through government spending and taxation. Expansionary fiscal policy increases demand.
– In open economies with capital mobility, higher domestic interest rates relative to foreign rates attract capital inflows, increasing demand for the domestic currency and causing appreciation.
– Contractionary monetary policy is the most unambiguous tool to raise interest rates. Combined with expansionary fiscal policy, which also puts upward pressure on rates (via crowding out and demand), it creates a strong force for higher interest rates and currency appreciation.

This policy mix can lead to a stronger currency and potentially higher interest payments on government debt but may have mixed effects on output depending on the relative strength of the policies and the degree of capital mobility. Option B (Contractionary fiscal and monetary) would also raise interest rates and appreciate the currency but by reducing overall demand, potentially leading to lower output compared to option D. However, option D provides a clearer and more direct path to higher interest rates and appreciation driven by both capital inflow incentives (monetary policy) and potential crowding out/demand pressures (fiscal policy).

130. Which one of the following situations can lead to inflation?

Which one of the following situations can lead to inflation?

[amp_mcq option1=”Rapid growth of aggregate demand outweighing supply” option2=”Sluggish growth of aggregate demand” option3=”Reduction in the money supply” option4=”Higher levels of unemployment” correct=”option1″]

This question was previously asked in

UPSC CDS-1 – 2023

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The correct answer is A) Rapid growth of aggregate demand outweighing supply. Inflation is a general increase in the price level. When the total demand for goods and services in an economy (aggregate demand) grows faster than the economy’s ability to produce those goods and services (aggregate supply), it leads to demand-pull inflation as consumers bid up prices.

– Inflation can be caused by factors affecting demand (demand-pull inflation) or factors affecting supply (cost-push inflation).
– Rapid growth of aggregate demand relative to supply creates upward pressure on prices.
– Sluggish demand growth typically leads to disinflation or deflation.
– Reduction in money supply is a monetary policy tool usually used to *combat* inflation by reducing aggregate demand.
– Higher levels of unemployment are usually associated with slack in the economy and low demand, which reduces inflationary pressure.

Other causes of inflation include increases in the cost of production (cost-push inflation), expectations of future inflation, and structural rigidities in the economy. However, excess aggregate demand is a fundamental driver of inflation.