MCQs on Money and Banking

Money can be defined as a currency that has become the generally accepted medium of exchange within a market. It acts as a measure, a store of value and a standard of deferred payment within an economy. Banking is defined as a business activity that involves accepting and safeguarding money owned by other parties and lending it to conduct economic activities with the intention of making a profit and covering operating expenses.

We have compiled a list of multiple-choice questions on Money and Banking to help students understand the topic better.

  1. Which of the following is a step that the central bank will take to encourage greater investment in the economy?
    1. It will look to increase the cash reserve ratio
    2. It will look to reduce the cash reserve ratio
    3. It will look to increase the bank rate
    4. It will look to sell the government securities in the open market
  2. Answer: b

  3. Which of the following is a step that the central bank will take to increase the overall availability of credit?
    1. It will sell the government securities in the market
    2. It will buy more government securities from the market
    3. It will raise the reverse repo rate
    4. It will raise the repo rate
  4. Answer: a

  5. Which of the following statements is true about the Indian monetary system?
    1. The Indian monetary system is based on the gold standard
    2. The Indian monetary system is based on the credit money standard
    3. The Indian monetary system is based on the paper standard
    4. The Indian monetary system is based on the metallic standard
  6. Answer: c

  7. Which of the following statements represents the main function of the central bank in a country?
    1. It is responsible for the regulation over the supply of money in the market
    2. It is responsible for the issuance of notes within the country
    3. It acts as a banker both to the government and to other banks in the country
    4. All of the above
  8. Answer: d

  9. Which of the following statements is true about demand deposits?
    1. It includes both fixed deposits and current account deposits
    2. It includes both savings account deposits and fixed deposits
    3. It includes both current account deposits and savings account deposits
    4. It includes fixed deposits, current account deposits and savings account deposits
  10. Answer: c

  11. Which of the following statements is true about the central bank?
    1. It regulates the entire banking system in the country
    2. It is under the ownership of the central government of a country
    3. It is the apex bank of a country
    4. All of the above
  12. Answer: d

  13. Which of the following statements about the bank rate is true?
    1. Bank rate is different from interest rate
    2. Bank rate is the discount rate provided by the central bank of a country
    3. Bank rate is defined as the rate at which the central bank of a country gives credit to the commercial banks
    4. All of the above
  14. Answer: d

  15. Which of the statements gives a true picture of the effect of the central bank selling securities in the market?
    1. The credit creation capacity of commercial banks will fall
    2. The credit creation capacity of commercial banks will rise
    3. The credit creation capacity of commercial banks may rise or fall
    4. There is no effect on the credit creation capacity of commercial banks
  16. Answer: a

  17. Which of the statements gives a true picture of the effect of lowering the cash reserve ratio by the central bank of a country?
    1. The lending capacity of commercial banks will increase
    2. The lending capacity of commercial banks will decrease
    3. The lending capacity of commercial banks may increase or decrease
    4. There is no effect on the lending capacity of commercial banks
  18. Answer: a

  19. Which of the statements gives an accurate picture of the effect of the rise of the reverse repo rate by the central bank of a country?
    1. The demand for goods and services in the country will decrease
    2. The demand for goods and services in the country will increase
    3. The demand for goods and services in the country may increase or decrease
    4. There is no effect on the demand for goods and services in the country
  20. Answer: a

  21. Which of the statements gives an accurate picture of the effect of the increase in the repo rate?
    1. The money supply in the country will decrease
    2. The money supply in the country will increase
    3. The money supply in the country will increase initially and then decrease
    4. There is no effect on the money supply in the country
  22. Answer: a

  23. Which of the following statements is true about credit creation by banks?
    1. Banks create credit on the basis of their total assets
    2. Banks create credit on the basis of their total deposits
    3. Banks create credit on the basis of their total securities
    4. Banks create credit out of nothing
  24. Answer: b

  25. Which of the following is not the function of the central bank of a country?
    1. Being the custodian of foreign exchange reserves
    2. Accepting deposits from the general public
    3. Both a and b are correct
    4. Both a and b are incorrect
  26. Answer: b

  27. Which agency regulates the money supply in India?
    1. The Government of India
    2. Commercial banks
    3. Reserve Bank of India
    4. None of the above
  28. Answer: c

  29. Which of the following statements is true about the money supply?
    1. It is the total volume of money that is held by the government of a country
    2. It is the total volume of money that is held by the general public of a country over a time period
    3. It is the total volume of money that is held by the general public of a country at a particular point in time
    4. All of the above
  30. Answer: c

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