Monetary Policy and RBI Functions

Monetary Policy and RBI Functions - Applications

Q. What does a decrease in the repo rate by the RBI typically indicate?

A. Tighter monetary policy
B. Easier monetary policy
C. Increase in inflation
D. Decrease in bank lending

Solution

A decrease in the repo rate indicates an easier monetary policy, encouraging banks to borrow more and lend more.

Correct Answer: B — Easier monetary policy

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Q. What does the term 'monetary policy transmission' refer to?

A. The process of changing interest rates
B. The impact of monetary policy on the economy
C. The regulation of foreign exchange rates
D. The issuance of new currency

Solution

Monetary policy transmission refers to the process through which changes in monetary policy affect the economy, particularly through interest rates and credit availability.

Correct Answer: B — The impact of monetary policy on the economy

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Q. What is the main goal of the RBI's monetary policy framework?

A. Economic growth
B. Price stability
C. Employment generation
D. Balance of payments stability

Solution

The main goal of the RBI's monetary policy framework is to achieve price stability, which is essential for sustainable economic growth.

Correct Answer: B — Price stability

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Q. What is the primary objective of the Reserve Bank of India (RBI) in terms of monetary policy?

A. To control inflation
B. To increase government revenue
C. To regulate foreign exchange
D. To promote exports

Solution

The primary objective of the RBI's monetary policy is to control inflation and ensure price stability.

Correct Answer: A — To control inflation

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Q. What is the purpose of the Cash Reserve Ratio (CRR)?

A. To control inflation
B. To ensure liquidity in the economy
C. To regulate the money supply
D. To provide funds for government projects

Solution

The Cash Reserve Ratio (CRR) is used to regulate the money supply by requiring banks to hold a certain percentage of their deposits with the RBI.

Correct Answer: C — To regulate the money supply

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Q. Which financial instrument is primarily used by the RBI to control inflation?

A. Government bonds
B. Treasury bills
C. Reverse repo rate
D. Equity shares

Solution

The reverse repo rate is used by the RBI to control inflation by absorbing excess liquidity from the banking system.

Correct Answer: C — Reverse repo rate

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Q. Which of the following is a direct consequence of an increase in the SLR?

A. Increased lending capacity of banks
B. Decreased liquidity in the banking system
C. Lower interest rates
D. Increased foreign investment

Solution

An increase in the Statutory Liquidity Ratio (SLR) reduces the funds available for banks to lend, leading to decreased liquidity in the banking system.

Correct Answer: B — Decreased liquidity in the banking system

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

A. Moral suasion
B. Open market operations
C. Bank rate
D. Cash Reserve Ratio

Solution

The Cash Reserve Ratio (CRR) is a quantitative tool used by the RBI to control the amount of funds that banks can lend.

Correct Answer: D — Cash Reserve Ratio

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Q. Which tool does the RBI use to manage liquidity in the banking system?

A. Cash Reserve Ratio (CRR)
B. Statutory Liquidity Ratio (SLR)
C. Bank Rate
D. Open Market Operations

Solution

Open Market Operations (OMO) involve the buying and selling of government securities to manage liquidity in the banking system.

Correct Answer: D — Open Market Operations

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Monetary Policy and RBI Functions - Applications

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