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Money and Banking Test - 12
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Money and Banking Test - 12

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  • Question 1/10
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    Directions: In the following questions, a statement of assertion (A) is followed by a statement of reason (R). Mark the correct choice as:

    Assertion (A): M1 is the least liquid measure of money supply.

    Reason (R): M1 includes the currency in circulation, demand deposits with the bank and other deposits with the RBI.

    Solutions

    M1 is the most liquid measure of money supply as it includes all forms of assets that are easily exchangeable as payment for goods and services.

    It includes coins and currency in circulation, demand deposits, traveler's checks, and other checkable deposits.

  • Question 2/10
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    Directions: In the following questions, a statement of assertion (A) is followed by a statement of reason (R). Mark the correct choice as:

    Assertion (A): Demand deposits are not legal tenders.

    Reason (R): They are with the bank, so only can be used as a legal tender when cheques are issued for the transfer.

    Solutions

    Legal tender money is that form of money that has a legal sanction by the government behind it. Checkable demand deposits are not legal tenders because a person can legally refuse to accept payment through checkable demand deposits.

  • Question 3/10
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    Directions: In the following questions, a statement of assertion (A) is followed by a statement of reason (R). Mark the correct choice as:

    Assertion (A): M4 is the least liquid measure of money supply.

    Reason (R): M4 is inclusive of all the money supply included in M3 as well as the Total Deposits with the Post Office.

    Solutions

    Money supply refers to the total stock of money of all types ( currency as well as demand deposits) held by the people of a country at a given point of time.

    Money supply is measured in several ways which includes M1 , M2 , M3 and M4 measurement of money supply. Every measurement has its own definition with different components varying from most liquid to most rigid form.

    M4 measurement of money supply is the least liquid money supply in India as it includes all the other deposits of post office savings other than national savings certificates.

    M4 = M3 + Total deposits with post offices other than in the form of national saving certificate

    In which, M3 = C+ DD+ OD + net time deposits with the commercial banks

    where,

    C: It refers to currency held by the public in terms of coins and paper notes.

    DD: It refers to the demand deposits of the people with the commercial bank.

    OD: These include other deposits with public financial institutions, foreign central banks and international financial institutions.

  • Question 4/10
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    Directions: In the following questions, a statement of assertion (A) is followed by a statement of reason (R). Mark the correct choice as:

    Assertion (A): Money is what money does.

    Reason (R): Money facilitates exchange of goods and services.

    Solutions

    Money is defined as anything that acts as a medium of exchange.

  • Question 5/10
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    Directions: In the following questions, a statement of assertion (A) is followed by a statement of reason (R). Mark the correct choice as:

    Assertion (A): Central Bank as a banker to the government, works as a custodian of cash reserves.

    Reason(R): The Central Bank acts as a clearinghouse for the transfer and settlement of mutual claims of commercial banks.

    Solutions

    Central bank is an apex regulatory institution that controls the entire banking system of a country. The central bank act as a custodian of the cash reserves of the commercial bank as the commercial banks have to maintain a proportion of their total deposits as reserves in the form of cash with the central bank as a part of legal requirement.

  • Question 6/10
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    Directions: In the following questions, a statement of assertion (A) is followed by a statement of reason (R). Mark the correct choice as:

    Assertion (A): Central bank as a banker to the banker to the government, works as a financial advisor.

    Reason (R): Government borrows internally from banks and the general public.

    Solutions

    The central Bank acts as a banker and financial advisor to the government. As a banker to the government, it performs the following functions.

    1. It manages the account of the government

    2 It accepts receipts from the government and makes payment on behalf of it.

    3 It grants short-term loans and credit to the government.

    4 It performs the task of managing the public debt.

    5 The central bank advises the government on all banking and financial matters.

  • Question 7/10
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    Directions: In the following questions, a statement of assertion (A) is followed by a statement of reason (R). Mark the correct choice as:

    Assertion (A): The currency notes do not carry as much value in them as is denominated, still have general acceptance.

    Reason (R): Currency notes are backed by a legal promise from the central bank and central government of the country.

    Solutions

    The face value of currency notes is more than its materialistic value. These notes are accepted by people because they are backed by the government of the country.

  • Question 8/10
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    Directions: In the following questions, a statement of assertion (A) is followed by a statement of reason (R). Mark the correct choice as:

    Assertion (A): Currency held by the public is a monetary liability of the central bank.

    Reason (R): The Central bank controls credit, whereas commercial banks create credit with the currency held by the public.

    Solutions

    The cash is a liability, because if the commercial bank goes back to the central bank and gives back the cash, the central bank will have to give back the loans (or government bonds). So while it's true that cash is not backed by gold, it is still backed by something.

  • Question 9/10
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    Directions: In the following questions, a statement of assertion (A) is followed by a statement of reason (R). Mark the correct choice as:

    Assertion (A): LRR is the fraction of deposits that are kept with the central bank as cash reserves.

    Reason (R): The value of LRR is decided by the central bank.

    Solutions

    CRR is the fraction of LRR that is kept as the ratio of demand deposits by the central bank. Thus Assertion is false. The value of LRR is decided by the central bank. Thus Reason R is True.

  • Question 10/10
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    Directions: In the following questions, a statement of assertion (A) is followed by a statement of reason (R). Mark the correct choice as:

    Assertion (A): Money supply includes the least liquid measure of the Money supply.

    Reason (R): Money supply includes the currency with public outside banks and demand deposits with banks.

    Solutions

    Assertion is false, Money supply includes a most liquid measure of Money supply.

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