Monetary Policy & Credit Instruments MCQs

📘 INDIA GENERAL KNOWLEDGE

MODULE 7: Banking, Finance & Financial Awareness MCQs

Topic: Monetary Policy & Credit Instruments (India)

🔹 SUB-TOPIC 1: Basics of Monetary Policy

Q1. What is meant by Monetary Policy in India?

A. Policy related to government expenditure
B. Policy related to taxation
C. Policy regulating money supply and credit
D. Policy regulating foreign trade

✅ Correct Answer: C

📝 Explanation:
Monetary policy refers to the actions taken by the central bank to control money supply and credit availability in the economy to achieve macroeconomic objectives such as price stability and economic growth.

Q2. Which institution formulates and implements Monetary Policy in India?

A. Ministry of Finance
B. NITI Aayog
C. State Bank of India
D. Reserve Bank of India

✅ Correct Answer: D

📝 Explanation:
The Reserve Bank of India (RBI) is the central bank of the country and is solely responsible for designing and implementing India’s monetary policy.

Q3. The primary objective of Monetary Policy in India is to:

A. Promote exports
B. Control inflation
C. Increase government revenue
D. Reduce fiscal deficit

✅ Correct Answer: B

📝 Explanation:
The primary objective of India’s monetary policy is price stability, which essentially means controlling inflation while supporting economic growth.

Q4. Which of the following is NOT an objective of monetary policy?

A. Price stability
B. Economic growth
C. Exchange rate stability
D. Fiscal deficit management

✅ Correct Answer: D

📝 Explanation:
Fiscal deficit management falls under fiscal policy, not monetary policy. Monetary policy focuses on inflation, growth, and financial stability.

🔹 SUB-TOPIC 2: Types of Monetary Policy

Q5. An expansionary monetary policy is adopted when:

A. Inflation is high
B. Economic growth is slow
C. Budget deficit increases
D. Exports decline

✅ Correct Answer: B

📝 Explanation:
Expansionary policy is used to stimulate economic growth by increasing money supply and reducing interest rates during slowdown or recession.

Q6. Which policy is used to control rising inflation?

A. Expansionary policy
B. Neutral policy
C. Contractionary policy
D. Fiscal stimulus

✅ Correct Answer: C

📝 Explanation:
Contractionary monetary policy reduces money supply and credit to curb inflationary pressures in the economy.

Q7. Tight money policy refers to:

A. Increase in credit availability
B. Lower interest rates
C. Restriction of money supply
D. Government borrowing

✅ Correct Answer: C

📝 Explanation:
A tight money policy restricts liquidity and credit to control inflation and speculative activities.

🔹 SUB-TOPIC 3: Quantitative Instruments of Monetary Policy

Q8. Which of the following is a quantitative tool of monetary policy?

A. Moral suasion
B. Bank rate
C. Credit rationing
D. Selective credit control

✅ Correct Answer: B

📝 Explanation:
Quantitative tools affect the overall volume of money and credit. Bank Rate is one such tool.

Q9. Bank Rate is the rate at which:

A. Banks lend to customers
B. RBI lends to commercial banks
C. Government borrows from RBI
D. Banks borrow from NBFCs

✅ Correct Answer: B

📝 Explanation:
Bank Rate is the rate charged by RBI on long-term loans to commercial banks.

Q10. Increase in Bank Rate leads to:

A. Cheaper loans
B. Increased borrowing
C. Reduced credit demand
D. Inflation rise

✅ Correct Answer: C

📝 Explanation:
Higher bank rate makes borrowing expensive, thereby reducing credit demand and inflation.

Q11. Cash Reserve Ratio (CRR) refers to:

A. Cash kept by banks with customers
B. Cash kept by banks with RBI
C. Cash kept by RBI with banks
D. Cash invested in government securities

✅ Correct Answer: B

📝 Explanation:
CRR is the percentage of deposits that banks must keep with RBI in cash form, reducing lendable resources.

Q12. An increase in CRR will:

A. Increase liquidity
B. Increase bank profits
C. Reduce lending capacity
D. Increase inflation

✅ Correct Answer: C

📝 Explanation:
Higher CRR means banks must keep more funds with RBI, thereby reducing their ability to lend.

Q13. Statutory Liquidity Ratio (SLR) requires banks to maintain:

A. Cash only
B. Gold only
C. Liquid assets like cash, gold, securities
D. Foreign exchange only

✅ Correct Answer: C

📝 Explanation:
SLR mandates banks to hold a certain portion of deposits in liquid assets to ensure solvency.

Q14. Open Market Operations (OMO) involve:

A. Issue of new currency
B. Buying and selling of government securities
C. Foreign exchange trade
D. Bank mergers

✅ Correct Answer: B

📝 Explanation:
RBI uses OMOs to control liquidity by buying (inject liquidity) or selling (absorb liquidity) government securities.

🔹 SUB-TOPIC 4: Policy Rates under Monetary Policy

Q15. Repo Rate is the rate at which:

A. RBI borrows from banks
B. Banks borrow short-term funds from RBI
C. Banks lend to customers
D. Government borrows from banks

✅ Correct Answer: B

📝 Explanation:
Repo rate is the short-term lending rate at which RBI provides liquidity to banks against securities.

Q16. Reverse Repo Rate is the rate at which:

A. RBI lends to banks
B. Banks lend to RBI
C. Banks lend to customers
D. RBI lends to government

✅ Correct Answer: B

📝 Explanation:
Reverse repo rate is the rate at which banks park excess funds with RBI, helping absorb surplus liquidity.

Q17. Increase in Repo Rate leads to:

A. Cheaper loans
B. Increase in money supply
C. Costlier loans
D. Higher inflation

✅ Correct Answer: C

📝 Explanation:
Higher repo rate makes borrowing from RBI costly, leading to higher interest rates for borrowers.

Q18. Marginal Standing Facility (MSF) allows banks to:

A. Borrow overnight funds beyond SLR
B. Lend to RBI
C. Invest in bonds
D. Issue currency

✅ Correct Answer: A

📝 Explanation:
MSF allows banks to borrow emergency overnight funds from RBI by pledging securities beyond SLR limits.

🔹 SUB-TOPIC 5: Qualitative (Selective) Credit Controls

Q19. Selective Credit Controls aim to:

A. Control overall money supply
B. Control specific sector credit
C. Increase exports
D. Control fiscal deficit

✅ Correct Answer: B

📝 Explanation:
Selective credit controls regulate credit flow to specific sectors like agriculture, real estate, or speculative activities.

Q20. Moral Suasion refers to:

A. Legal enforcement by RBI
B. Penal action
C. Persuasion and advisory by RBI
D. Increase in CRR

✅ Correct Answer: C

📝 Explanation:
Moral suasion involves non-statutory persuasion by RBI to guide banks’ lending behavior.

Q21. Credit rationing means:

A. Unlimited credit supply
B. Allocation of credit to priority sectors
C. Fixing minimum interest rate
D. Ban on lending

✅ Correct Answer: B

📝 Explanation:
Credit rationing ensures priority sectors receive adequate credit, even during tight monetary conditions.

🔹 SUB-TOPIC 6: Credit Instruments in India

Q22. Which of the following is a short-term credit instrument?

A. Equity shares
B. Treasury Bills
C. Debentures
D. Fixed deposits

✅ Correct Answer: B

📝 Explanation:
Treasury Bills are short-term government securities with maturities up to one year.

Q23. Commercial Bills are used mainly in:

A. Agricultural credit
B. Industrial finance
C. Trade transactions
D. Consumer loans

✅ Correct Answer: C

📝 Explanation:
Commercial bills facilitate short-term trade credit between buyers and sellers.

Q24. Call Money Market deals with funds for:

A. One year
B. Six months
C. Overnight to 14 days
D. Five years

✅ Correct Answer: C

📝 Explanation:
Call money market is a very short-term market for overnight and short-duration funds.

Q25. Certificate of Deposit (CD) is issued by:

A. RBI only
B. Commercial banks
C. Government
D. NBFCs only

✅ Correct Answer: B

📝 Explanation:
Certificates of Deposit are negotiable money market instruments issued by banks to raise short-term funds.

Q26. Commercial Paper (CP) is issued by:

A. RBI
B. Government
C. Large corporates
D. Cooperative banks

✅ Correct Answer: C

📝 Explanation:
Commercial Paper is an unsecured short-term instrument issued by financially strong corporates.

🔹 SUB-TOPIC 7: Monetary Policy Framework in India

Q27. Monetary Policy Committee (MPC) consists of:

A. 4 members
B. 5 members
C. 6 members
D. 7 members

✅ Correct Answer: C

📝 Explanation:
The MPC has 6 members—3 from RBI and 3 appointed by the Government of India.

Q28. Inflation targeting in India focuses on:

A. Wholesale Price Index
B. Consumer Price Index
C. GDP Deflator
D. Core inflation only

✅ Correct Answer: B

📝 Explanation:
India follows CPI-based inflation targeting, with a target of 4% ± 2%.

Q29. Who chairs the Monetary Policy Committee?

A. Finance Minister
B. RBI Deputy Governor
C. RBI Governor
D. Prime Minister

✅ Correct Answer: C

📝 Explanation:
The Governor of RBI is the ex-officio Chairperson of the MPC.

Q30. Credit instruments mainly help in:

A. Controlling inflation only
B. Mobilizing savings and providing finance
C. Increasing taxation
D. Reducing fiscal deficit

✅ Correct Answer: B

📝 Explanation:
Credit instruments play a crucial role in mobilizing savings, facilitating investment, and supporting economic activity.

✅ Exam Relevance Note

These MCQs are strictly aligned with India-specific GK syllabus and are highly relevant for UPSC, SSC, Banking (IBPS, SBI), RBI, State PSCs, Railways, Defence exams, School & University examinations.

• Monetary Policy MCQs India

• Credit Instruments MCQs

• RBI Monetary Policy Questions

• Repo Rate and CRR SLR MCQs

• Banking and Finance MCQs India

• Monetary Policy Committee MCQs

• Money Market Instruments MCQs

• Indian Economy Banking MCQs

⭐

The Monetary Policy & Credit Instruments MCQs presented in this module provide a conceptually strong, exam-focused understanding of RBI policy tools, interest rates, money market instruments, and credit control measures. With elaborate explanations and systematic topic-wise coverage, this resource is ideal for mastering Banking, Finance & Financial Awareness—a high-scoring section in almost all competitive examinations in India.

❓ FAQ Section

Q1. What is Monetary Policy in India?

Monetary policy refers to actions taken by the RBI to regulate money supply and credit to control inflation and support economic growth.

Q2. Who controls Monetary Policy in India?

The Reserve Bank of India (RBI), through the Monetary Policy Committee (MPC), formulates and implements monetary policy.

Q3. Which topics are covered under Monetary Policy MCQs?

Key topics include Repo Rate, Reverse Repo, CRR, SLR, Open Market Operations, MPC, inflation targeting, and credit instruments.

Q4. Are these MCQs useful for Banking and RBI exams?

Yes. These MCQs are highly relevant for IBPS, SBI, RBI Grade B, RBI Assistant, and other banking examinations.

Q5. What are Credit Instruments in Banking?

Credit instruments include Treasury Bills, Commercial Paper, Certificates of Deposit, Commercial Bills, and Call Money instruments.

🎯 Targeting Exams 

These Monetary Policy & Credit Instruments MCQs are carefully designed to meet the syllabus requirements of:

• UPSC (Prelims – Indian Economy)

• SSC CGL, CHSL, MTS

• Banking Exams – IBPS PO/Clerk, SBI PO/Clerk, RRB

• RBI Grade B & RBI Assistant

• State Public Service Commission (PSC) Exams

• Railways & Insurance Exams

• School, College & University Examinations (India GK & Economics)