UPSC IAS Prelims 2021: Important Questions on Economics - Topic 6 (Money & Banking)

In this article, get 10 most important questions on the Money & Banking topic of Indian Economy Aspirants of UPSC Civil Services Prelims 2021 exams can solve these questions to test their knowledge on this topic of Economics. 

Created On: Feb 9, 2021 16:19 IST
UPSC IAS Prelims Important Questions on Economics Money & Banking
UPSC IAS Prelims Important Questions on Economics Money & Banking

Money may be defined as anything which is generally accepted as a medium of exchange and at the same time acts as a measure, store of value and standard of deferred payment. Commercial Banks are a financial institution who accepts deposits from the public and provide loans facilities for investment with the aim of earning profit. They are regulated by a Central Bank also known as the Reserve Bank of India. Money and banking are the basic tools of any economy. To help the aspirants in their preparation, we have provided the 10 most important questions from the Money & Banking of Indian Economy topic of Economics for UPSC Prelims 2021.

Also Check: Important Topics to study from Economics Syllabus

Ques 1: When the cash reserve ratio (CRR) is increased by the RBI, it will:

(a) Increase the supply of money in the economy

(b) Decrease the supply of money in the economy

(c) No impact on the supply of money in the economy

(d) Initially increase the supply but later on decrease automatically.

Ans: b

Explanation:

When RBI increases the CRR, fewer funds are available with banks as they have to keep larger portions of their cash in hand with RBI. Thus hike in CRR leads to an increase of interest rates on loans provided by the Banks. Reduction in CRR sucks money out of the system causing a decrease in the money supply.

Ques 2: Open Market Operations means:

(a) Sale of agricultural products in the government regulated Mandis.

(b) Sale and purchase of bonds and securities to the commercial banks by the RBI.

(c) Sale and purchase of bonds and securities by the RBI to the government.

(d) Sale and purchase of bonds and securities by the commercial banks to the customers.

Ans; b

Explanation: 

Open market operations (OMO) refers to when the Federal Reserve buys and sells primarily U.S. Treasury securities on the open market in order to regulate the supply of money that is on reserve in U.S. banks, and therefore available to loan out to businesses and consumers. 

Ques 3: Which of the following is not the monetary tool?

(a) CRR

(b) SLR

(c) Deficit financing

(d) Open market operations

Ans: c

Explanation:

Deficit financing means generating funds to finance the deficit which results from an excess of expenditure over revenue. The gap is covered by borrowing from the public by the sale of bonds or by printing new money.

Ques 4: Consider the following statements regarding the National Payments Corporation of India (NPCI):

  1. It is an initiative of the Reserve Bank of India (RBI) and the Indian Banks’ Association (IBA).
  2. RuPay card payment scheme was launched by the NPCI.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

© Both 1 and 2 

(d) Neither 1 nor 2

Ans: c

Explanation:

National Payments Corporation of India (NPCI), an umbrella organisation for operating retail payments and settlement systems in India, is an initiative of Reserve Bank of India (RBI) and Indian Banks’ Association (IBA) under the provisions of the Payment and Settlement Systems Act, 2007, for creating a robust Payment & Settlement Infrastructure in India.

Ques 5: Consider the following statements regarding the EASE 2.0 Index:

  1. It provides Public Sector Banks a comparative evaluation showing where banks stand on the Reforms Agenda.
  2. It has been released by the NITI Aayog.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

© Both 1 and 2 

(d) Neither 1 nor 2

Ans: a

Explanation:

EASE 2.0 Index Results has been released recently by the Indian Banking Association (IBA). Bank of Baroda, State Bank of India, and erstwhile Oriental Bank of Commerce were felicitated for being the top three (in that order) in the ‘Top Performing Banks’ category according to the EASE 2.0 Index Results.

Ques 6: Which of the following is/are the potential impact(s) of sale of Government securities by the Reserve Bank of India?

  1. Increase in liquidity in the market.
  2. Increase in interest rates.

Select the correct answer using the code given below:

(a) 1 only

(b) 2 only

© Both 1 and 2 

(d) Neither 1 nor 2

Ans: b

Explanation:

When the RBI feels that there is excess liquidity in the market, it resorts to sale of securities thereby sucking out the rupee liquidity. Similarly, when the liquidity conditions are tight, RBI may buy securities from the market, thereby releasing liquidity into the market.

Ques 7: The Committee on Financial Sector Reforms was headed by: 

(a) Rangarajan 

(b) Urjit Patel

(c) Raghuram Rajan 

(d) Viral Acharya

Ans: c

Explanation:

The Raghuram Rajan Committee on Financial Sector Reforms was a committee constituted by the Government of India in 2007 for proposing the next generation of financial sector reforms in India.

An Internal Working Group of the Reserve Bank of India (RBI) has recently recommended that corporate houses be given bank licenses. The Raghuram Rajan committee had said that it is premature to allow industrial houses to own banks.

Ques 8: What is the mandate of the KV Kamath Committee formed by the Reserve Bank of India?

(a) Financial parameters for restructuring of loans

(b) Forex Reserve Management

(c) Potential impact of COVID-19 pandemic on MSME credit

(d) Monetary Policy Framework Targets

Ans: a

Explanation:

The RBI had formed a committee under the chairmanship of former ICICI Bank CEO KV Kamath to make recommendations on the financial parameters to be considered in the restructuring of loans impacted by the COVID-19 pandemic.

Ques 9: Which of the following markets are independently regulated by Forward Market Commission?

(a) Mutual Funds

(b) Commodity Futures Market

(c) Stock Market

(d) Foreign Exchange Markets

Ans: b

Explanation:

Commodities futures contracts are agreements to buy or sell a raw material at a specific date in the future at a particular price. The contract is for a set amount. It specifies when the seller will deliver the asset. It also sets the price. Some contracts allow a cash settlement instead of delivery. 

Ques 10: Which one of the following is not a feature of "Value Added Tax"?

(a) It is multi-point destination-based system of taxation.

(b) It is a tax levied on value addition at each stage of transaction in the production distribution chain.

(c) It is a tax on the final consumption of goods or services and must ultimately be borne by the consumer.

(d) It is basically a subject of the central government and the state governments are only a facilitator for its successful implementation.

Ans: d

Explanation:

Value-Added Tax (VAT), also known as a goods and services tax (GST) in some countries, it is a form of tax that is assessed incrementally. It is levied on the actual transaction value of a product or service at each stage of production, distribution, or sale to the end consumer.

We sincerely hope that the given questions would have helped you in your Prelims preparation. You can also check the below link to keep yourself updated on the latest GK quiz and events. 

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