Q. What is the effect of a decrease in the repo rate by the RBI?
A.
Increased borrowing costs
B.
Decreased liquidity in the market
C.
Encouragement of borrowing and spending
D.
Reduction in bank profits
Solution
A decrease in the repo rate lowers borrowing costs for banks, encouraging them to borrow more from the RBI, which in turn increases liquidity and encourages borrowing and spending in the economy.
Correct Answer:
C
— Encouragement of borrowing and spending
Q. What is the significance of the Marginal Standing Facility (MSF) in the RBI's monetary policy?
A.
It allows banks to borrow overnight funds at a higher rate
B.
It is used to control inflation directly
C.
It provides long-term loans to the government
D.
It regulates the foreign exchange market
Solution
The Marginal Standing Facility (MSF) allows banks to borrow overnight funds from the RBI at a higher rate, providing a safety valve against liquidity shortages.
Correct Answer:
A
— It allows banks to borrow overnight funds at a higher rate
Q. Which tool does the RBI use to control the money supply in the economy?
A.
Cash Reserve Ratio (CRR)
B.
Fiscal policy
C.
Public debt management
D.
Foreign exchange reserves
Solution
The Cash Reserve Ratio (CRR) is a tool used by the RBI to control the money supply by requiring banks to hold a certain percentage of their deposits as reserves.
