Prelims Revision Series | Economy | Monetary Policy | 15

May 4, 2023

Consider the following regarding fiscal policy:
An expansionary monetary policy is implemented by increasing key interest rates.
2. Monetary policy refers to control of money supply to achieve the objectives of economic policy.
3. An expansionary monetary policy is also known as dovish monetary policy.
Which of the statements given is/are correct?

(A) 1 and 3 only
(B) 2 and 3 only
(C) 1 and 2 only
(D) 1, 2 and 3 only

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Answer: (b)

Monetary policy refers to the use of monetary instruments under the control of the central bank to regulate magnitudes such as interest rates, money supply and availability of credit with a view to achieving the ultimate objective of economic policy.

Consider the following statements:
1. RBI exclusively fixes the range of inflation targets in India.
2. India follows a static inflation targeting system.
Which of the statements given below is/are correct?

(A) 1 only
(B) 2 only
(C) Both 1 and 2
(D) Neither 1 nor 2

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Answer: (d)

Flexible Inflation Targeting Framework: Now there is a flexible inflation targeting framework in India (after the 2016 amendment to the Reserve Bank of India (RBI) Act, 1934).

Which of the following statement(s) is/are correct?
1. Repo rate is the instrument of capital market.
2. Repo rate influences aggregate demand.
Select the answer using the codes given below:

(A) 1 only
(B) 2 only
(C) Both 1 and 2
(D) Neither 1 nor 2

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Answer: (b)

Repo rate changes transmit through the money market to the entire financial system, which, in turn, influences aggregate demand – a key determinant of inflation and growth

Which of the following statements is/are correct regarding Monetary policy Committee?
1. It is required to meet at least four times annually.
2. It is a statutory committee.
Select the answer using the codes:

(A) 1 only
(B) 2 only
(C) Both 1 and 2
(D) Neither 1 nor 2

Show Answer

Answer: (c)

Which of the following is/are correct?
1. SLR is the amount that commercial banks are required to maintain in government approved securities only.
2. Banks may borrow funds through Marginal Standing Facility during severe cash shortage.
Select the answer using the codes given below:

(A) 1 only
(B) 2 only
(C) Both 1 and 2
(D) None

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Answer: (b)

SLR is the amount that commercial banks are required to maintain in the form of gold or government approved securities before providing credit to the customers.

Which of the following is/are correct?
1. The margin refers to the proportion of the loan amount which is not financed by the bank.
2. Reserve Bank of India always remained Government owned in its history.
Select the answer using the codes given below:

(A) 1 only
(B) 2 only
(C) Both 1 and 2
(D) Neither 1 nor 2

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Answer: (a)

The margin refers to the “proportion of the loan amount which is not financed by the bank”.
It is that part of a loan which a borrower has to raise in order to get finance for his purpose.
Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India.

Which of the following are the roles of RBI?
1. Banker to the Government.
2. Manager of Foreign Exchange.
3. Monetary Authority.
4. Issuer of Currency.
Select the answer using the codes given below:

(A) 1, 2 and 3 only
(B) 2, 3 and 4 only
(C) 1, 3 and 4 only
(D) 1, 2, 3 and 4

Show Answer

Answer: (d)

Consider the following statements regarding the Marginal cost of funds-based lending rate:
1. It is the minimum interest rate below which no bank is permitted to lend money.
2. It is determined by banks internally, depending upon the loan repayment time.
Select the correct statement(s) using the code given below:

(A) 1 only
(B) 2 only
(C) Both 1 and 2
(D) Neither 1 nor 2

Show Answer

Answer: (c)

Marginal cost of funds-based lending rate:

It is the minimum interest rate below which no bank is permitted to lend money.
It is determined by banks internally, depending upon the loan repayment time.
The Reserve Bank of India introduced the MCLR methodology for fixing interest rates on 1 April 2016.
It replaced the base rate structure, which had been in place since July 2010.
The rate is determined internally by the bank depending on the period left for the repayment of a loan.
MCLR is calculated based on four components Marginal cost of fund, Negative carry on account of cash reserve ratio, Operating costs, Tenor premium

Which of the following is incorrect regarding monetary policy?

(A) Repo rate is the rate at which commercial banks take loans from the Reserve bank of India.
(B) Participants in the call money market in India currently include scheduled commercial banks.
(C) An accommodative stance indicates a willingness on the part of the central bank to expand money supply and increase interest rates.
(D) None of the above

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Answer: (c)

With reference to Indian economy, consider the following:
1. Bank rate.
2. Open market operations.
3. Public debt.
4. Public revenue
Which of the above is/are component/ components of Monetary Policy?

(A) 1 only
(B) 2, 3 and 4
(C) 1 and 2
(D) 1, 3 and 4

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Answer: (c)

The monetary policy of Reserve Bank of India targets which of the following Inflation Index?

(A) Wholesale Price Index (WPI)
(B) Consumer Price Index (CPI) Combined
(C) Consumer Price Index (CPI) Rural
(D) Producer Price Index

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Answer: (b)

Consider the following statements:
1 Consumer Price Index for Industrial Workers is compiled by the Office of Economic advisor.
2. Inflation target for monetary policy is set by the Government of India, in consultation with the Reserve Bank, once in every five years.
Which of the above given statement(s) is/are not correct?

(A) 1 only
(B) 2 only
(C) Both 1 and 2
(D) Neither 1 nor 2

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Answer: (a)

Which of the following is/are correct regarding Utkarsh 2022?
1. It is the three-year roadmap of the Reserve Bank of India.
2. It aims to improve regulation and supervision functions of the central bank. It is valid for the period 2023-2025.
Which of the above given statement(s) is/are correct?

(A) 1 and 3 only
(B) 2 and 3 only
(C) 1 and 2 only
(D) 1, 2, and 3

Show Answer

Answer: (d)

Utkarsh is a three-year roadmap of the Reserve Bank of India(RBI) to improve regulation and supervision among other functions of the central bank.
The first strategy framework (Utkarsh 2022) covering the period 2019-2022 was launched in 2019.
Utkarsh 2.0 addresses the period 2023-25.
It harnesses the strengths of Utkarsh 2022 by retaining the six vision statements as well as core purpose, values, and mission.

Which of the following is/are correct?
1 Urijit Patel Committee first proposed the idea for the formation of a five-member Monetary Policy Committee.
2. MPC was constituted as per Section 45ZB under the RBI Act of 1934.
3. The quorum for the meeting of the MPC is four members.
Which of the above given statement(s) is/are correct?

(A) 1 and 3 only
(B) 2 and 3 only
(C) 1 and 2 only
(D) 1, 2, and 3

Show Answer

Answer: (d)

Consider the following statements w.r.t. Flexible Inflation Targeting Framework:
1. Flexible Inflation Targeting Framework was introduced in 2016.
2. For this an amendment was made to the Reserve Bank of India (RBI) Act, 1934.
Which of the above given statement(s) is/are incorrect?

(A) 1 only
(B) 2 only
(C) Both 1 and 2
(D) Neither 1 nor 2

Show Answer

Answer: (d)