Macroeconomics: Money, Banking, and RBI - MCQs with

answers - Part I
1) Which among the following is considered to be the most liquid asset?
a) Gold
b) Money
c) Land
d) Treasury bonds

ANSWER: b) Money
Liquid assets are those assets that can be exchanged most readily with minimum
number of obstacles and minimum time.

2) The number of times a unit of money exchanges hands during a unit period of time
is known as:
a) velocity of circulation of money
b) speed of circulation of money
c) momentum of circulation of money
d) count of circulation of money

ANSWER: a) velocity of circulation of money

3) Who is author of the ancient book on economics, Arthashastra?

a) Kautilya
b) Chanakya

c) Sushrut
d) Bhattacharya

ANSWER: b) Chanakya

4) Historically, the Indian rupee was a ____ coin:

a) Copper
b) Gold
c) Silver
d) Bronze

ANSWER: c) Silver

5) Currency notes and coins are called as:

a) Flat money
b) Legal tenders
c) Fiat money
d) Both b and c

ANSWER: d) Both b and c

6) In the terminology of economics and money demand, the terms M1 and M2 are
also known as :
a) Short money
b) Long money

c) Broad money
d) Narrow money

ANSWER: d) Narrow money

M1= Currency notes plus demand deposits, and M2 means M1 plus Savings deposits
with post office savings banks

7) In the terminology of economics and money demand, the terms M3 and M4 are
also known as :
a) Short money
b) Long money
c) Broad money
d) Narrow money

ANSWER: c) Broad money

M3 is M1 plus net time deposits of commercial banks. M4 is M3 plus Total deposits
with Post Office savings organisation (excluding National Savings certificate)

8) What is the currency deposit ratio (cdr)?

a) ratio of money held by the public in currency to that of money held in bank deposits
b) ratio of money held by public in bank deposits to that of money held by public in currency
c) ratio of money held in demand drafts to that of money held in treasury bonds
d) none of the above

ANSWER: a) ratio of money held by the public in currency to that of money held in
bank deposits

9) What is the reserve deposit ration (rdr)?

a) the proportion of money RBI lends to commercial banks
b) the proportion of total deposits commercial banks keep as reserves
c) the total proportion of money that commercial banks lend to the customers
d) none of the above

ANSWER: b) the proportion of total deposits commercial banks keep as reserves

10) What is the Cash Reserve Ratio (CRR)?

a) the fraction of the deposits that commercial banks lend to the customers
b) the fraction of the deposits that RBI must keep with commercial banks
c) the fraction of the deposits that commercial banks must keep with RBI
d) none of the above

ANSWER: c) the fraction of the deposits that commercial banks must keep with RBI
11) What is 'Bank rate'?
a) The rate at which commercial banks borrow money from RBI
b) The rate at which commercial banks lend money to customers
c) The rate at which commercial banks lend money to RBI
d) none of the above

ANSWER: a) The rate at which commercial banks borrow money from RBI
Bank rate is the rate at which commercial banks can borrow money from the RBI. If

the rate is higher, then taking money from RBI becomes difficult, so the banks will
lend less to public. And vice-versa.

12) In monetary terminology, what is called the 'monetary base' or 'high powered
money'?
a) the total assets of RBI
b) the total liability of RBI
c) the total debt of the government
d) the total foreign exchange of RBI

ANSWER: b) the total liability of RBI

This includes the currency (notes and coins in circulation and vault cash of
commercial banks) along with the deposits held by the Government of India ad
commercial banks with RBI.

13) The RBI can increase the money supply in the market by:
a) selling government securities
b) buying government securities
c) borrowing money from commercial banks
d) none of the above

ANSWER: b) buying government securities

14) The RBI can decrease the money supply in the market by:
a) selling government securities
b) buying government securities

c) borrowing money from commercial banks

d) none of the above

ANSWER: a) selling government securities

15) By increasing the 'Bank Rate', the RBI can:

a) provide incentives to commercial banks to lend more to public
b) provide incentives to commercial banks to lend less to public
c) increase the money supply in the market
d) none of the above

ANSWER: b) provide incentives to commercial banks to lend less to public

Bank rate is the rate at which commercial banks can borrow money from the RBI. If
the rate is higher, then taking money from RBI becomes difficult, so the banks will
lend less to public. And vice-versa.

16) The process by which RBI or any Central bank protects the economy against
adverse economic shocks is known as :
a) protection
b) liberalization
c) stabilization
d) sterilization

ANSWER: d) sterilization

RBI does this by performing a host of operations, for example controlling the Bank
Rate, buying or selling government securities, etc

17) What among the following is NOT an example of 'public goods'?

a) National defense
b) Roads
c) Cars
d) National Forests

ANSWER: c) Cars
Public goods are those goods that cannot be provided by market mechanisms.

18) The function of a government to provide goods that cannot normally be provided
by market mechanisms between individual customers and producers, is known as:
a) Distribution function
b) Allocation function
c) Stabilization
d) Protection

ANSWER: b) Allocation function

19) The function of a government to fairly share the public's resources is known as
a) Distribution function
b) Allocation function

c) Stabilization
d) Protection

ANSWER: a) Distribution function

20) The function of a government by which it seeks to seek a balance of employment,

demand-supply, and inflation, is known as:
a) Distribution function
b) Allocation function
c) Stabilization
d) Protection

ANSWER: c) Stabilization

21) The Government Budget consists of which main component/s?

a) Revenue Budget and Capital Budget
b) Capital Budget only
c) Revenue Budget only
d) None of the above

ANSWER: a) Revenue Budget and Capital Budget

22) Loans raised by the government from the public are known as:
a) Corporate borrowings
b) Common borrowings

c) Market borrowings
d) Private borrowings

ANSWER: c) Market borrowings

23) Whenever the government spends more than it collects through revenue, the
resulting imbalance is known as :
a) Public deficit
b) Market deficit
c) Government deficit
d) Budget deficit

ANSWER: d) Budget deficit

24) The idea that government's fiscal policy can be used to stabilize the level of
output and employment can be attributed to which of the following economists:
a) Frederich Hayek
b) Ludwig von Mises
c) Frederic Bastiat
d) John Maynard Keynes

ANSWER: d) John Maynard Keynes

John Maynard Keynes's 1936 book, 'The General Theory of Employment, Interest,
and Money' laid the foundations for Macroeconomics

25) The deliberate action of the government to stabilize the economy, as opposed to
the inherent automatic stabilizing properties of the fiscal system, is known as
a) Forced fiscal policy
b) Manual fiscal policy
c) Discretionary fiscal policy
d) Automatic fiscal policy

ANSWER: c) Discretionary fiscal policy

26) The idea that irrespective of how a government chooses to increase spending,
either by debt financing or tax financing, the outcome will be the same and demand
will remain unchanged, is popularly known as:
a) Ricardian theory of equivalence
b) Ricardian theory of competitive advantage
c) Ricardian theory of stability
d) None of the above

ANSWER: a) Ricardian theory of equivalence

David Ricardo was a British political economist and his most famous theory was that
of comparative advantage (along with above theory of Ricardian equivalence) .
Comparative advantage refers to the doctrine that any nation should use its
resources solely in industries where it has the most international competitiveness
The theory of Ricardian equivalence, as stated above in the question, was also
further developed by Harvard professor Robert Barro who took it much further

27) When was the Fiscal Responsibility and Budget Management Act implemented?

a) 1950
b) 1970
c) 1993
d) 2003

ANSWER: d) 2003
It was enacted in August 2003 that made it obligatory for the government to pursue a
prudent fiscal policy through the institutional framework. The rules under FRBMA,
2003 were notified with effect from July, 2004
The Act includes several provisions such as ensuring greater transparency in fiscal
operations