Money and Banking (Class 12 Economics)

Practise chapter-wise MCQs for Class 12 Economics — Money and Banking. Every question comes with the correct answer and an explanation.

Money and Banking (Class 12 Economics)

Practise chapter-wise MCQs for Class 12 Economics — Money and Banking. Every question comes with the correct answer and an explanation.

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TL;DR: Practise chapter-wise MCQs for Class 12 Economics — Money and Banking. Every question comes with the correct answer and an explanation.

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Practise chapter-wise MCQs for Class 12 Economics — Money and Banking. Every question comes with the correct answer and an explanation.

Money and Banking MCQs with Answers & Explanations

Q1. When the central bank buys government securities from the open market, it leads to:

  1. No change in money supply
  2. Decrease in money supply
  3. Decrease in credit creation capacity
  4. Increase in money supply ✓ (correct)

Explanation: Buying government securities injects money into the economy, increasing the money supply.

Q2. A 'credit multiplier' of 4 implies that a 100 rupee deposit can lead to a maximum of:

  1. 400 rupee deposit creation ✓ (correct)
  2. 25 rupee deposit creation
  3. 100 rupee deposit creation
  4. 500 rupee deposit creation

Explanation: Credit multiplier is calculated as 1/Required Reserve Ratio. If the multiplier is 4, the maximum increase in deposits is 4 times the initial deposit.

Q3. The difference between the interest rate charged by banks on loans and the interest rate paid on deposits is known as:

  1. Repo rate
  2. Spread ✓ (correct)
  3. Liquidity ratio
  4. Reverse repo rate

Explanation: The spread represents the net interest margin of a bank, reflecting its profitability from lending activities.

Q4. Which of the following is NOT a primary function of a commercial bank?

  1. Accepting deposits
  2. Granting loans
  3. Issuing currency ✓ (correct)
  4. Facilitating fund transfer

Explanation: Issuing currency is a primary function of the central bank, not commercial banks.

Q5. The demand for money that arises from the need to make everyday transactions is known as:

  1. Precautionary demand for money
  2. Asset demand for money
  3. Speculative demand for money
  4. Transactions demand for money ✓ (correct)

Explanation: Transactions demand for money relates to the need for money to carry out regular purchases and payments.

Q6. Fiat money is money that is:

  1. Issued by government decree and not backed by a physical commodity ✓ (correct)
  2. Primarily used for international transactions
  3. Backed by precious metals like gold or silver
  4. Limited in supply to maintain its value

Explanation: Fiat money's value comes from government order (fiat) rather than intrinsic value or commodity backing.

Q7. When the central bank requires banks to hold a certain percentage of their total deposits as reserves, it is known as:

  1. Discount rate
  2. Legal Reserve Ratio (LRR) ✓ (correct)
  3. Moral suasion
  4. Open market operations

Explanation: Legal Reserve Ratio includes both Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), which mandate banks to hold reserves.

Q8. Which of the following is a tool of quantitative credit control used by the central bank?

  1. Rationing of credit
  2. Moral suasion
  3. Bank rate ✓ (correct)
  4. Margin requirements

Explanation: The bank rate is a direct measure to control the overall volume of credit in the economy.

Q9. The Reserve Bank of India (RBI) acts as the banker to the:

  1. General public
  2. Commercial banks only
  3. Foreign banks
  4. Central and State governments ✓ (correct)

Explanation: The RBI functions as the banker to the central government and also advises and acts as a banker to state governments.

Q10. Which institution is responsible for regulating the Indian banking system?

  1. Reserve Bank of India (RBI) ✓ (correct)
  2. National Bank for Agriculture and Rural Development (NABARD)
  3. Ministry of Finance
  4. Securities and Exchange Board of India (SEBI)

Explanation: The RBI is the apex institution that oversees and regulates all commercial banks in India.

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