Money and Banking (12 Economics)
Practise chapter-wise MCQs for Class 12 Economics — Money and Banking. Every question comes with the correct answer and an explanation.
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:
- Decrease in credit creation capacity
- Increase in money supply ✓ (correct)
- Decrease in money supply
- No change in money supply
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:
- 25 rupee deposit creation
- 100 rupee deposit creation
- 400 rupee deposit creation ✓ (correct)
- 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:
- Repo rate
- Liquidity ratio
- Reverse repo rate
- Spread ✓ (correct)
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?
- Issuing currency ✓ (correct)
- Facilitating fund transfer
- Accepting deposits
- Granting loans
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:
- Precautionary demand for money
- Transactions demand for money ✓ (correct)
- Asset demand for money
- Speculative demand for money
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:
- Limited in supply to maintain its value
- Primarily used for international transactions
- Issued by government decree and not backed by a physical commodity ✓ (correct)
- Backed by precious metals like gold or silver
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:
- Open market operations
- Moral suasion
- Discount rate
- Legal Reserve Ratio (LRR) ✓ (correct)
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?
- Bank rate ✓ (correct)
- Moral suasion
- Rationing of credit
- 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:
- Commercial banks only
- Central and State governments ✓ (correct)
- General public
- Foreign banks
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?
- Ministry of Finance
- National Bank for Agriculture and Rural Development (NABARD)
- Reserve Bank of India (RBI) ✓ (correct)
- Securities and Exchange Board of India (SEBI)
Explanation: The RBI is the apex institution that oversees and regulates all commercial banks in India.
More 12 Economics MCQs
- Introduction to Microeconomics
- Theory of Consumer Behaviour
- Production and Costs
- The Theory of the Firm under Perfect Competition
- Market Equilibrium
- Non-competitive Markets
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