Q.1 What is the primary objective of monetary policy?
To control inflation
To regulate foreign trade
To manage government expenditure
To set tax rates
Explanation - Monetary policy primarily aims to control inflation and stabilize the economy by regulating money supply and interest rates.
Correct answer is: To control inflation
Q.2 Which institution is responsible for formulating monetary policy in India?
Finance Ministry
Reserve Bank of India
Securities and Exchange Board of India
Planning Commission
Explanation - The Reserve Bank of India (RBI) is the central bank of India and is responsible for regulating monetary policy.
Correct answer is: Reserve Bank of India
Q.3 What does the repo rate refer to?
Rate at which RBI lends to commercial banks
Rate at which banks lend to customers
Rate of import duties
Rate of corporate tax
Explanation - Repo rate is the rate at which the central bank lends money to commercial banks for short-term needs.
Correct answer is: Rate at which RBI lends to commercial banks
Q.4 Which of the following is a tool of quantitative monetary policy?
Cash Reserve Ratio
Credit rationing
Credit rationing to specific sectors
Moral persuasion
Explanation - Quantitative tools regulate the overall money supply and include CRR, SLR, repo rate, and reverse repo rate.
Correct answer is: Cash Reserve Ratio
Q.5 What is the effect of increasing the cash reserve ratio (CRR)?
Banks have more money to lend
Banks have less money to lend
Inflation increases
Government spending increases
Explanation - An increase in CRR reduces the funds available with banks, thereby controlling inflation by reducing credit flow.
Correct answer is: Banks have less money to lend
Q.6 Which monetary policy tool directly influences liquidity in the economy?
Statutory Liquidity Ratio
Open Market Operations
Fiscal deficit
Public debt management
Explanation - Open Market Operations involve buying or selling government securities to control money supply and liquidity.
Correct answer is: Open Market Operations
Q.7 What is the reverse repo rate?
Rate at which RBI borrows from banks
Rate at which banks borrow from RBI
Rate of bank deposits
Rate of government borrowing
Explanation - Reverse repo rate is the rate at which RBI absorbs liquidity by borrowing from commercial banks.
Correct answer is: Rate at which RBI borrows from banks
Q.8 Which policy is followed to curb inflation?
Expansionary monetary policy
Contractionary monetary policy
Fiscal stimulus policy
Trade liberalization policy
Explanation - Contractionary monetary policy reduces money supply and increases interest rates to control inflation.
Correct answer is: Contractionary monetary policy
Q.9 What is the main objective of an expansionary monetary policy?
To reduce money supply
To encourage economic growth
To increase taxes
To control exports
Explanation - Expansionary policy increases money supply and reduces interest rates to boost investment and economic activity.
Correct answer is: To encourage economic growth
Q.10 Which of the following is NOT a function of monetary policy?
Price stability
Full employment
Regulation of money supply
Issuing coins and notes
Explanation - Issuing currency is a function of the RBI but not considered a monetary policy function directly.
Correct answer is: Issuing coins and notes
Q.11 What does SLR stand for in monetary policy?
Statutory Liquidity Ratio
Standard Loan Rate
State Level Reserve
Special Liquidity Requirement
Explanation - SLR is the minimum percentage of a commercial bank's net demand and time liabilities that it must maintain in liquid assets.
Correct answer is: Statutory Liquidity Ratio
Q.12 How does lowering the repo rate affect the economy?
Encourages borrowing and spending
Discourages borrowing
Reduces inflation immediately
Increases government revenue
Explanation - Lowering repo rate reduces borrowing costs for banks, encouraging lending to businesses and consumers.
Correct answer is: Encourages borrowing and spending
Q.13 Which monetary policy tool is used to regulate credit to specific sectors?
Quantitative tool
Qualitative tool
Repo rate
Cash Reserve Ratio
Explanation - Qualitative (selective) credit control tools regulate credit flow to certain sectors to achieve specific economic goals.
Correct answer is: Qualitative tool
Q.14 What is meant by tight monetary policy?
Increase in money supply
Decrease in money supply
Increase in government spending
Lowering taxes
Explanation - Tight or contractionary monetary policy reduces money supply to control inflation.
Correct answer is: Decrease in money supply
Q.15 Which of the following indicators signals the need for monetary tightening?
High inflation
Low interest rates
Economic recession
High unemployment
Explanation - High inflation indicates excess liquidity, prompting the central bank to adopt contractionary measures.
Correct answer is: High inflation
Q.16 Which term refers to money that can be used immediately for transactions?
Liquidity
Repo rate
Statutory Reserve
Credit rationing
Explanation - Liquidity refers to the ease with which assets can be converted to cash for immediate use in transactions.
Correct answer is: Liquidity
Q.17 Which of the following is an indirect method of credit control?
Cash Reserve Ratio
Credit rationing
Directives to banks
Priority sector lending
Explanation - CRR is an indirect or quantitative tool that influences the overall credit availability without targeting specific sectors.
Correct answer is: Cash Reserve Ratio
Q.18 What is the role of the Monetary Policy Committee (MPC) in India?
Formulate monetary policy
Set tax rates
Allocate government spending
Manage foreign exchange reserves
Explanation - The MPC, headed by RBI officials and external members, decides the policy interest rates to control inflation.
Correct answer is: Formulate monetary policy
Q.19 When the RBI wants to reduce inflation, it is likely to:
Increase repo rate
Decrease repo rate
Increase government spending
Reduce taxes
Explanation - Increasing repo rate makes borrowing costlier, reducing money supply and controlling inflation.
Correct answer is: Increase repo rate
Q.20 Which of the following is a limitation of monetary policy?
Cannot control fiscal deficit
Controls interest rates
Regulates money supply
Influences investment decisions
Explanation - Monetary policy cannot directly influence government borrowing or fiscal deficit, which is managed by fiscal policy.
Correct answer is: Cannot control fiscal deficit
Q.21 Selective credit control aims to:
Increase liquidity in the economy
Direct credit to specific sectors
Reduce government expenditure
Control tax rates
Explanation - Selective credit control ensures that credit flows to priority sectors like agriculture or small industries.
Correct answer is: Direct credit to specific sectors
Q.22 Monetary policy that increases money supply to boost growth is called:
Expansionary policy
Contractionary policy
Neutral policy
Selective credit control
Explanation - Expansionary monetary policy injects liquidity to encourage spending and investment, promoting growth.
Correct answer is: Expansionary policy
Q.23 Which of the following is considered a short-term monetary policy tool?
Repo rate
Statutory Liquidity Ratio
Government borrowing
Budget allocation
Explanation - Repo rate is used as a short-term tool to manage liquidity and credit conditions in the economy.
Correct answer is: Repo rate
Q.24 The main aim of 'Open Market Operations' is to:
Control money supply
Set tax rates
Increase government revenue
Allocate loans to banks
Explanation - Open Market Operations involve buying or selling government securities to regulate liquidity and control money supply.
Correct answer is: Control money supply