Q.1 What is the primary objective of monetary policy?
Increase government revenue
Control inflation and stabilize currency
Reduce population growth
Promote exports only
Explanation - Monetary policy is primarily aimed at controlling inflation, stabilizing the currency, and promoting economic growth through regulation of money supply and interest rates.
Correct answer is: Control inflation and stabilize currency
Q.2 Which institution is primarily responsible for implementing monetary policy in India?
Finance Ministry
Reserve Bank of India
Securities and Exchange Board of India
World Bank
Explanation - The Reserve Bank of India (RBI) regulates monetary policy to control money supply, inflation, and interest rates in the economy.
Correct answer is: Reserve Bank of India
Q.3 Which of the following is an instrument of monetary policy?
Income tax
Repo rate
Corporate tax
Import duty
Explanation - The repo rate is a key monetary policy tool used by the central bank to control liquidity and influence interest rates in the economy.
Correct answer is: Repo rate
Q.4 What is the effect of reducing the cash reserve ratio (CRR)?
Banks have more funds to lend
Banks lend less money
Government revenue increases
Exports decrease
Explanation - Reducing the CRR allows banks to keep less money with the central bank, increasing their lending capacity, which stimulates economic activity.
Correct answer is: Banks have more funds to lend
Q.5 What type of monetary policy is adopted to curb inflation?
Expansionary policy
Contractionary policy
Neutral policy
Supply-side policy
Explanation - Contractionary monetary policy reduces money supply and raises interest rates to control inflation.
Correct answer is: Contractionary policy
Q.6 Which rate is used by RBI to borrow money from banks?
Reverse repo rate
Repo rate
Bank rate
Discount rate
Explanation - The reverse repo rate is the rate at which the RBI borrows money from commercial banks to control liquidity in the economy.
Correct answer is: Reverse repo rate
Q.7 What is the primary goal of an expansionary monetary policy?
Reduce money supply
Increase government borrowing
Encourage investment and consumption
Decrease exports
Explanation - Expansionary monetary policy increases money supply and lowers interest rates to boost investment and consumer spending.
Correct answer is: Encourage investment and consumption
Q.8 Which of the following is NOT a quantitative tool of monetary policy?
Repo rate
Cash reserve ratio
Open market operations
Credit rationing
Explanation - Credit rationing is a qualitative tool, whereas repo rate, CRR, and open market operations are quantitative tools affecting overall money supply.
Correct answer is: Credit rationing
Q.9 Open market operations involve:
Buying or selling government securities
Changing tax rates
Setting minimum wages
Regulating imports
Explanation - Open market operations are conducted by the central bank to regulate liquidity by buying or selling government securities in the market.
Correct answer is: Buying or selling government securities
Q.10 Which policy rate influences short-term borrowing in the economy?
Repo rate
Bank rate
Income tax rate
Export duty
Explanation - The repo rate directly affects short-term borrowing by banks and, in turn, influences interest rates for loans in the economy.
Correct answer is: Repo rate
Q.11 What happens if the RBI raises the repo rate?
Banks lend more money
Inflation typically decreases
Economic activity increases
Exports rise
Explanation - Raising the repo rate makes borrowing costlier, reducing spending and investment, which helps control inflation.
Correct answer is: Inflation typically decreases
Q.12 Which type of monetary policy aims to maintain economic stability without favoring growth or contraction?
Neutral policy
Expansionary policy
Contractionary policy
Quantitative easing
Explanation - A neutral monetary policy maintains money supply and interest rates at a level that neither stimulates nor restricts economic growth.
Correct answer is: Neutral policy
Q.13 Bank rate is best defined as the rate at which:
Commercial banks borrow from RBI
RBI borrows from commercial banks
Public borrows from banks
Banks pay on deposits
Explanation - Bank rate is the interest rate charged by the central bank for long-term borrowing to commercial banks.
Correct answer is: Commercial banks borrow from RBI
Q.14 Which of the following tools is a qualitative method of monetary policy?
Open market operations
Credit rationing
Cash reserve ratio
Repo rate
Explanation - Credit rationing is a selective credit control measure where the central bank regulates credit to specific sectors of the economy.
Correct answer is: Credit rationing
Q.15 The objective of a tight monetary policy is to:
Boost consumer spending
Reduce inflation
Increase money supply
Lower interest rates
Explanation - Tight (contractionary) monetary policy reduces money supply and raises interest rates to control inflation.
Correct answer is: Reduce inflation
Q.16 Liquidity Adjustment Facility (LAF) is used to:
Control inflation and liquidity in short term
Set government taxes
Control population growth
Regulate foreign trade
Explanation - LAF allows banks to borrow or lend money from RBI for short durations to manage liquidity and control inflation.
Correct answer is: Control inflation and liquidity in short term
Q.17 Selective credit control refers to:
Restricting credit to particular sectors
Increasing overall money supply
Reducing tax rates
Setting minimum wages
Explanation - Selective credit control is a qualitative tool to ensure credit is directed to priority sectors and not misused in non-essential areas.
Correct answer is: Restricting credit to particular sectors
Q.18 Expansionary monetary policy is most likely adopted during:
Economic boom
High inflation
Recession
Stable prices
Explanation - During a recession, expansionary monetary policy increases liquidity and lowers interest rates to stimulate economic activity.
Correct answer is: Recession
Q.19 Which of the following is NOT a goal of monetary policy?
Price stability
Full employment
Economic growth
Setting tax rates
Explanation - Monetary policy aims at controlling money supply, inflation, and economic growth, but setting taxes is a fiscal policy function.
Correct answer is: Setting tax rates
Q.20 Repo rate reduction generally leads to:
Higher loan interest rates
Lower borrowing costs for banks
Reduced money supply
Increased inflation immediately
Explanation - When the RBI reduces repo rate, banks can borrow funds at a cheaper rate, which can reduce lending rates to consumers.
Correct answer is: Lower borrowing costs for banks
Q.21 Which of the following is a short-term monetary policy instrument?
Cash Reserve Ratio (CRR)
Repo rate
Bank rate
Capital adequacy ratio
Explanation - Repo rate is a short-term tool used to manage liquidity and influence short-term interest rates.
Correct answer is: Repo rate
Q.22 Which type of monetary policy would the RBI adopt to encourage lending and spending?
Expansionary
Contractionary
Neutral
Tight
Explanation - Expansionary monetary policy increases money supply and reduces interest rates to encourage borrowing and spending.
Correct answer is: Expansionary
Q.23 What does a high Cash Reserve Ratio (CRR) imply for banks?
More funds available for lending
Less funds available for lending
Reduced borrowing costs
Increased investment
Explanation - A higher CRR requires banks to keep more funds with the central bank, reducing the amount available for lending and slowing economic activity.
Correct answer is: Less funds available for lending
Q.24 Which monetary policy tool directly affects the interest rate at which banks borrow from the RBI?
Repo rate
CRR
Open market operations
Selective credit control
Explanation - The repo rate determines the cost at which banks borrow short-term funds from the RBI, influencing lending and borrowing rates in the economy.
Correct answer is: Repo rate
Q.25 Monetary policy can be categorized into:
Expansionary and contractionary
Direct and indirect taxes
Fiscal and trade policies
Capital and revenue policies
Explanation - Monetary policy is broadly classified as expansionary (to increase money supply) or contractionary (to reduce money supply).
Correct answer is: Expansionary and contractionary