All three statements correctly describe important functions of the Reserve Bank of India (RBI). Statement 1 is correct because the RBI is the sole authority responsible for issuing currency notes in India (except the one-rupee note and coins, which are issued by the Government of India). Statement 2 is correct because the RBI regulates the money supply using quantitative monetary policy tools such as the Cash Reserve Ratio (CRR), Repo Rate, Bank Rate, Statutory Liquidity Ratio (SLR), and Open Market Operations (OMO). Statement 3 is correct because the RBI is the custodian of India's foreign exchange reserves and manages them under the Foreign Exchange Management Act (FEMA). Since all three statements are correct, Option D is the correct answer.

The Assertion is false because increasing the reserve ratio (such as the CRR) requires commercial banks to keep a larger proportion of deposits with the RBI. Consequently, banks have fewer funds available for lending, leading to a reduction in credit creation and money supply. The Reason is also false because the money multiplier is calculated as: Money Multiplier = 1 ÷ Reserve Ratio When the reserve ratio increases, the denominator becomes larger, causing the money multiplier to decrease—not increase. Thus: Assertion → False Reason → False Therefore, Option A is correct.

The Cash Reserve Ratio (CRR) specifies the percentage of deposits that commercial banks must keep as reserves with the RBI. Given: • Total Deposits = Rs 500 • CRR = 20% Required Reserves = 20% × 500 = Rs 100 Maximum Loans = Total Deposits − Required Reserves = 500 − 100 = Rs 400 The question also mentions that the deposits originated from an initial reserve of Rs 100. Since the money multiplier is 1/0.20 = 5, the initial reserve of Rs 100 supports total deposits of Rs 500. Therefore, Option D is correct.

The Bank Rate is the rate at which the RBI lends money to commercial banks without any repurchase agreement. When the RBI reduces the Bank Rate, borrowing becomes less expensive for commercial banks. Banks can obtain funds at a lower cost and extend more loans to businesses and households. This increases credit creation and expands the overall money supply. Thus: • Less expensive borrowing • Increased lending • Increased money supply Hence, Option B is correct.

An Outright Open Market Purchase permanently injects liquidity into the banking system. The correct sequence is: 1. The RBI purchases government securities. 2. The RBI pays the seller through a cheque or electronic credit. 3. The cheque is deposited in a commercial bank, increasing bank reserves. 4. Commercial banks expand credit based on higher reserves, permanently increasing the money supply. Therefore, the correct sequence is 1 → 2 → 3 → 4, making Option C correct.

When the RBI wants to permanently absorb excess liquidity, it conducts an Outright Open Market Sale of government securities. Buyers purchase these securities by paying money to the RBI. As a result, money flows out of the banking system, reducing commercial bank reserves and their lending capacity. Since there is no agreement to repurchase, the withdrawal of liquidity is permanent. Therefore, Option A is correct.

The correct matching is: • 1 → a (Bank Rate → Lending rate without resale agreement) • 2 → b (Repo Rate → Injects money with an agreement to resell) • 3 → c (Reverse Repo Rate → Withdraws money with an agreement to repurchase) • 4 → d (CRR → Percentage of deposits kept as cash reserves) Each tool serves a distinct role in monetary policy. Therefore, Option D is correct.

The Assertion is true because Reverse Repo operations withdraw excess liquidity from the banking system. Commercial banks purchase securities from the RBI, transferring funds to the central bank. The Reason is also true because under a Reverse Repo Agreement, the RBI sells securities with an agreement to repurchase them later at a predetermined price and date. This temporary sale removes liquidity from the banking system. Since the reason correctly explains the assertion, Option C is correct.

Moral suasion is a qualitative credit control tool through which the RBI persuades commercial banks to either encourage or discourage lending to particular sectors depending on economic priorities. Unlike quantitative tools, it does not directly affect the total money supply but influences the direction of credit. Therefore, Option B is correct.

Margin requirements specify the difference between the value of collateral and the amount of loan granted. By increasing or decreasing the margin requirement, the RBI can discourage or encourage borrowing for specific purposes. This makes margin requirements a qualitative (selective) credit control measure, since they influence targeted lending rather than the total money supply. Therefore, Option B is correct.

The Assertion is true because the Reserve Bank of India (RBI) is known as the Lender of Last Resort. Whenever commercial banks face temporary shortages of funds and cannot obtain loans from other sources, the RBI provides emergency financial assistance. The Reason is also true because the RBI always stands ready to lend to commercial banks whenever they require funds for maintaining liquidity and creating credit. This role helps prevent banking failures and maintains confidence in the financial system. Since the reason directly explains the assertion, Option C is correct.

All three statements correctly describe the RBI's role in supporting the banking system. Statement 1 is correct because the RBI functions as the banker to all commercial banks. Statement 2 is correct because commercial banks maintain reserve balances with the RBI to meet CRR requirements and facilitate inter-bank settlements. Statement 3 is correct because the RBI provides liquidity through Repo operations whenever banks require short-term funds. Hence, all three statements are correct, making Option C the correct answer.

The present value of a bond is obtained by discounting future coupon payments and the face value using the prevailing market interest rate. When the market interest rate falls from 6% to 5%, future cash flows are discounted at a lower rate. Lower discounting increases the present value of the bond. Thus, the bond's present value increases from approximately Rs 107.33 to Rs 109.29, making Option A correct. This inverse relationship between interest rates and bond prices is the basis of Keynes' speculative demand for money.

In a liquidity trap, the market interest rate has already reached its minimum possible level (r_min). Since people expect future interest rates to rise, they anticipate capital losses on bonds and therefore prefer holding money rather than investing in bonds. Any additional money supplied by the RBI is simply absorbed as idle cash balances. Consequently, the interest rate remains unchanged despite an increase in money supply. Therefore, Option A is correct.

The correct sequence is: 1. An investor purchases a bond. 2. Market interest rates rise unexpectedly. 3. Rising interest rates reduce the present value and market price of the existing bond. 4. The bondholder incurs a capital loss because the bond can now be sold only at a lower price. This sequence reflects the inverse relationship between bond prices and market interest rates, an important concept in Keynes' speculative demand for money. Therefore, Option D is correct.

The correct matching is: • 1 → a (r = r_max → Speculative demand is absolutely zero) • 2 → b (r = r_min → Speculative demand is infinite) • 3 → c (Bond Price vs Interest → Inversely related) • 4 → d (Liquidity Trap Demand → Infinite elasticity) When interest rates are at their maximum, people prefer bonds over money, making speculative demand for money nearly zero. At the minimum interest rate, people expect rates to rise and bond prices to fall, so they hold all additional wealth as money. This creates the liquidity trap where speculative demand becomes infinitely elastic. Therefore, Option D is correct.

The Assertion is true because one objective of demonetisation was to encourage people to deposit their cash into the formal banking system. This increased transparency and strengthened the formal financial sector. The Reason is false because demonetisation actually increased deposits in commercial banks. As more money entered banks, they obtained greater resources for lending instead of experiencing a permanent decline in funds. Therefore, Option B is correct.

The NCERT explains that demonetisation helped tax administration by encouraging people to shift transactions from the cash economy to the formal payment system. Digital transactions create a transparent financial record, making tax collection easier and reducing opportunities for tax evasion. Therefore, the correct completion is Cash, formal, making Option A correct.

The passage explains that demonetisation encouraged households and firms to move from cash transactions to electronic payment technologies. This shift reduces dependence on cash, increases transparency, and discourages informal or unrecorded economic activities. As more transactions occur through formal payment channels, tax compliance improves and the shadow economy is reduced. Therefore, Option B is correct.

The passage clearly states that shifting transactions from the cash economy to the formal payment system helps improve tax administration. Since digital and formal transactions leave a verifiable financial record, tax authorities can more effectively identify taxable income and reduce tax evasion. This promotes greater transparency and strengthens the formal economy. Therefore, Option C is the correct answer.