Introduction The global economy is facing unprecedented challenges due to rapid urbanization, resource depletion, climate…
MCQs on Monetary Policy in India: Role of RBI in Economic Stabilization
- What is the primary objective of the Reserve Bank of India (RBI) in formulating monetary policy?
- A) To promote trade
- B) To ensure price stability
- C) To increase exports
- D) To control fiscal deficits
Answer: B) To ensure price stability
- Which of the following tools is NOT used by the RBI to implement monetary policy?
- A) Repo rate
- B) Reverse repo rate
- C) Public Debt Management
- D) Cash Reserve Ratio (CRR)
Answer: C) Public Debt Management
- The RBI’s Monetary Policy Committee (MPC) is responsible for:
- A) Implementing fiscal policy
- B) Formulating monetary policy
- C) Regulating insurance companies
- D) Monitoring foreign exchange
Answer: B) Formulating monetary policy
- What is the current monetary policy framework adopted by the RBI?
- A) Fixed exchange rate
- B) Flexible exchange rate
- C) Inflation targeting
- D) Growth targeting
Answer: C) Inflation targeting
- Which of the following is a consequence of an increase in the repo rate?
- A) Increase in money supply
- B) Decrease in money supply
- C) Increase in liquidity
- D) Lower interest rates
Answer: B) Decrease in money supply
- The Cash Reserve Ratio (CRR) refers to:
- A) The percentage of a bank’s deposits that must be held in reserve
- B) The amount a bank can lend
- C) The minimum capital requirement
- D) The percentage of total assets in government securities
Answer: A) The percentage of a bank’s deposits that must be held in reserve
- What does the term ‘liquidity’ refer to in monetary policy?
- A) The amount of money in circulation
- B) The speed at which assets can be converted to cash
- C) The level of inflation
- D) The interest rates on loans
Answer: A) The amount of money in circulation
- Which of the following monetary policy tools can be used to control inflation?
- A) Reducing the repo rate
- B) Increasing the Cash Reserve Ratio (CRR)
- C) Lowering the reverse repo rate
- D) Increasing government spending
Answer: B) Increasing the Cash Reserve Ratio (CRR)
- What is the primary measure of inflation used by the RBI?
- A) Wholesale Price Index (WPI)
- B) Consumer Price Index (CPI)
- C) Gross Domestic Product (GDP) deflator
- D) Producer Price Index (PPI)
Answer: B) Consumer Price Index (CPI)
- Which of the following statements is true about the RBI’s role in foreign exchange management?
- A) It only regulates the supply of foreign currency
- B) It does not intervene in foreign exchange markets
- C) It manages the Foreign Exchange Management Act (FEMA)
- D) It directly sets foreign exchange rates
Answer: C) It manages the Foreign Exchange Management Act (FEMA)
- The term ‘monetary transmission mechanism’ refers to:
- A) The method through which monetary policy decisions affect the economy
- B) The process of transferring funds between banks
- C) The flow of credit to foreign investors
- D) The exchange of currency between countries
Answer: A) The method through which monetary policy decisions affect the economy
- When the RBI sells government securities in the open market, it is known as:
- A) Expansionary policy
- B) Contractionary policy
- C) Fiscal policy
- D) Regulatory policy
Answer: B) Contractionary policy
- What is the primary goal of the RBI’s monetary policy in the context of economic stabilization?
- A) Maximizing exports
- B) Maintaining a stable exchange rate
- C) Ensuring financial inclusion
- D) Controlling inflation and stabilizing growth
Answer: D) Controlling inflation and stabilizing growth
- Which of the following is NOT a part of the RBI’s functions related to monetary policy?
- A) Conducting monetary policy
- B) Issuing currency
- C) Regulating credit
- D) Collecting taxes
Answer: D) Collecting taxes
- The RBI uses ‘open market operations’ primarily to:
- A) Control inflation
- B) Manage liquidity
- C) Increase public debt
- D) Increase government revenue
Answer: B) Manage liquidity
- Which of the following factors can lead to a tightening of monetary policy by the RBI?
- A) High unemployment rates
- B) Rising inflation
- C) Decreasing GDP
- D) Low consumer spending
Answer: B) Rising inflation
- What role does the RBI play in regulating commercial banks?
- A) It provides loans to consumers
- B) It sets the interest rates for loans
- C) It regulates the minimum capital requirements
- D) It issues credit cards
Answer: C) It regulates the minimum capital requirements
- Which of the following actions is an example of expansionary monetary policy?
- A) Increasing the repo rate
- B) Increasing the CRR
- C) Reducing the reverse repo rate
- D) Selling government securities
Answer: C) Reducing the reverse repo rate
- The term ‘deflation’ refers to:
- A) A rise in the general price level
- B) A decrease in the general price level
- C) A stable price level
- D) An increase in demand
Answer: B) A decrease in the general price level
- Which of the following is a potential risk of a loose monetary policy?
- A) Deflation
- B) Economic slowdown
- C) High inflation
- D) Increased savings
Answer: C) High inflation
- The RBI’s financial inclusion policy aims to:
- A) Increase corporate lending
- B) Ensure access to banking services for all citizens
- C) Limit foreign investments in banking
- D) Increase interest rates on loans
Answer: B) Ensure access to banking services for all citizens
- In the context of monetary policy, ‘reverse repo rate’ is:
- A) The rate at which banks lend to the RBI
- B) The rate at which the RBI lends to banks
- C) The rate at which the RBI borrows from banks
- D) The rate at which the RBI sells securities to banks
Answer: A) The rate at which banks lend to the RBI
- Which of the following is a non-conventional monetary policy tool?
- A) Cash Reserve Ratio (CRR)
- B) Liquidity Adjustment Facility (LAF)
- C) Repo Rate
- D) Quantitative Easing
Answer: D) Quantitative Easing
- The Monetary Policy Framework Agreement signed in 2015 emphasizes:
- A) Only growth stabilization
- B) Inflation targeting
- C) Regulation of banks
- D) Currency devaluation
Answer: B) Inflation targeting
- Which of the following best describes a ‘credit squeeze’?
- A) Excess liquidity in the market
- B) An increase in lending rates
- C) Reduced availability of credit
- D) A decrease in demand for loans
Answer: C) Reduced availability of credit
- What is the primary impact of reducing the CRR on banks?
- A) Decreased lending capacity
- B) Increased liquidity in the banking system
- C) Lower interest rates
- D) Increased government borrowing
Answer: B) Increased liquidity in the banking system
- Which of the following is a consequence of a contractionary monetary policy?
- A) Increased consumer spending
- B) Lower unemployment
- C) Reduced inflation
- D) Higher economic growth
Answer: C) Reduced inflation
- Which of the following statements about the RBI is false?
- A) The RBI is the central bank of India.
- B) The RBI can set fiscal policy.
- C) The RBI regulates foreign exchange.
- D) The RBI manages the country’s gold reserves.
Answer: B) The RBI can set fiscal policy.
- The main purpose of the ‘Marginal Standing Facility’ (MSF) is to:
- A) Provide short-term loans to banks
- B) Manage liquidity in the economy
- C) Help banks meet their cash reserve requirements
- D) Encourage savings among the public
Answer: A) Provide short-term loans to banks
- What is the significance of the ‘Bank Rate’ in monetary policy?
- A) It is the rate at which the RBI lends to commercial banks.
- B) It is the interest rate for deposits by the public.
- C) It is the rate for government securities.
- D) It determines the rate of inflation.
Answer: A) It is the rate at which the RBI lends to commercial banks.
