CUET UG Categorised PYQ Economics Unit 8

(Detailed) → Money supply is a stock concept because it is measured at a particular point of time. → In the narrow sense, money supply includes currency with the public and demand deposits of the public with commercial banks. → Therefore, Statement (A) is correct. → Statement (C) is also correct because it correctly defines money supply as currency with public plus demand deposits. → Statement (B) is incorrect because money supply is not measured over a period of time. → Statement (D) is incorrect because currency held by banks is not counted as money supply with the public. → Statement (E) is incorrect because money supply is not a real flow concept. → Hence, Option A is the correct answer.

(Detailed) → Quantitative tools of monetary policy affect the total money supply and overall credit availability in the economy. → Bank Rate influences the cost of borrowing from the central bank. → Cash Reserve Ratio controls the amount of deposits banks must keep with RBI. → Open Market Operations involve buying and selling government securities to control liquidity. → Therefore, Bank Rate, CRR, and Open Market Operations are quantitative tools. → Moral suasion and margin requirement are qualitative or selective credit control tools. → Hence, Option B is the correct answer.

(Detailed) → Given: Reserve Ratio = 10% = 0.10. → Initial Deposit = ₹450 Cr. → Money Multiplier = 1 / Reserve Ratio. → Money Multiplier = 1 / 0.10 = 10. → Total Money Creation = Initial Deposit × Money Multiplier. → Total Money Creation = 450 × 10 = ₹4,500 Cr. → Therefore, the total money creation by the banking system will be ₹4,500 Cr. → Hence, Option D is the correct answer.

(Detailed) → Monetary base is closely linked with currency and reserves. Therefore, (A) matches with (III). → Loans given by banks are assets because they generate income for banks. Therefore, (B) matches with (I). → Deposits accepted by banks are liabilities because banks must repay depositors. Therefore, (C) matches with (IV). → RBI controls credit through monetary policy instruments. Therefore, (D) matches with (II). → Hence, Option B is the correct answer.

(Detailed) → RBI performs several central banking functions. → One important function of RBI is to act as banker, agent, and adviser to the government. → It manages government accounts, public debt, and financial transactions of the government. → Therefore, "Banker to the government" is a function of RBI. → Hence, Option C is the correct answer.

(Detailed) → The Central Bank performs functions such as issuing currency, controlling credit, acting as banker to the government, banker's bank, and lender of last resort. → Bank rate and open market operations are instruments used by the Central Bank to regulate money supply. → Lender of last resort is also a major Central Bank function because it provides support to commercial banks during financial difficulty. → Deficit financing refers to financing the excess of government expenditure over revenue. → It is mainly related to government budgetary operations, not a core central bank function. → Hence, Option D is the correct answer.

(Detailed) → In a repo open market operation, the central bank buys securities from commercial banks. → The agreement includes the condition that the securities will be resold later at a fixed date and price. → This is called a repurchase agreement or repo operation. → Since the resale date and price are already specified, the transaction is not an outright sale or purchase. → Hence, Option B is the correct answer.

(Detailed) → When the central bank buys securities without any promise to sell them later, it is an outright open market operation. → The option uses "Output open market operation," which represents "Outright open market operation" in this context. → Since there is no resale agreement, it is not a repo transaction. → This type of transaction permanently injects money into the economy unless later reversed by another operation. → Hence, Option B is the correct answer as per the given wording.

(Detailed) → The money multiplier determines how much total money is created from an initial deposit. → Formula: Money Multiplier = 1 / CRR. → CRR = 20% = 20/100 = 0.20. → Money Multiplier = 1 / 0.20 = 5. → Therefore, the value of the money multiplier is 5. → Hence, Option D is the correct answer.

(Detailed) → To control inflation, the central bank uses contractionary monetary policy. → The sequence begins with the central bank increasing the bank rate. Therefore, Statement (C) comes first. → As a result, loans taken by commercial banks from the central bank become more expensive. Therefore, Statement (B) comes second. → This reduces the reserves held by the commercial banks because they borrow less. Therefore, Statement (D) comes third. → Finally, the reduction in reserves restricts credit creation, so the money supply in the economy decreases. Therefore, Statement (A) comes last. → Therefore, the correct order is C, B, D, A. → Hence, Option B is the correct answer.

(Detailed) → When the central bank reduces the bank rate, borrowing by commercial banks becomes cheaper. → Commercial banks are encouraged to borrow more funds and reduce their own lending rates. → This expands credit creation in the economy. → As borrowing and lending increase, the money supply also increases. → Hence, Option A is the correct answer.

(Detailed) → For a commercial bank, deposits are liabilities because the bank has to repay the depositors. → Loans are assets because borrowers have an obligation to repay the bank with interest. → The statement "Liabilities = Loans" suggests that loans are a liability. → This is incorrect because loans are assets for a bank. → Hence, Option C is the correct answer.

(Detailed) → The Central Bank performs functions like issuing currency, controlling money supply, acting as a banker to the government, and banker's bank. → Money creation or credit creation through the multiplier effect of deposits and loans is mainly performed by commercial banks. → The Central Bank controls this credit creation process through CRR, bank rate, repo rate and other monetary tools. → However, it does not perform commercial bank-style money creation directly. → Hence, Option C is the correct answer.

(Detailed) → Currency notes and coins in circulation are legal tender because people are legally bound to accept them as a means of payment. → They are called fiat money because their value comes from government order and public trust. → They do not have intrinsic value equal to their face value. → For example, a ₹500 note is not made of ₹500 worth of paper. → Therefore, the statement "They have intrinsic value" is not true. → Hence, Option C is the correct answer.

(Detailed) → Bank Rate refers to the rate at which the central bank lends money to commercial banks. → It is usually associated with long-term lending needs and monetary policy regulation. → When the Bank Rate increases, borrowing from RBI becomes costlier for commercial banks. → Commercial banks may then raise their own lending rates. → Therefore, Bank Rate is correctly defined as the rate at which RBI gives loans to commercial banks. → Hence, Option B is the correct answer.

(Detailed) → High-powered money is primarily the currency issued by the central bank. Therefore, (A) matches with (IV). → The Central Bank is the apex monetary authority of the country. Therefore, (B) matches with (III). → The money multiplier depends on reserve requirements like the Cash Reserve Ratio. Therefore, (C) matches with (I). → Cash Reserve Ratio is fixed by the RBI. Therefore, (D) matches with (II). → Hence, Option D is the correct answer.

(Detailed) → The Cash Reserve Ratio is the specified minimum fraction of total deposits that commercial banks have to keep with the central bank. → In India, commercial banks keep this required reserve with RBI. → Higher CRR reduces the funds available with banks for lending. → Lower CRR increases the lending capacity of commercial banks. → Hence, Option A is the correct answer.

(Detailed) → The institution that accepts public deposits is the Commercial Bank. Therefore, (A) matches with (IV). → The central bank of India is the Reserve Bank of India. Therefore, (B) matches with (III). → Issuance of currency notes is a primary function of the Central Bank. Therefore, (C) matches with (I). → Acceptance of deposits from the public is a primary function of the Commercial Bank. Therefore, (D) matches with (II). → Hence, Option B is the correct answer.

(Detailed) → Money supply generally includes currency with the public and deposits with the banking system. → Saving deposits and recurring deposits are included in broader measures of money supply. → Reserve money is high-powered money and forms the basis of money creation. → E-wallets are digital payment instruments acting as prepaid channels. → However, wallet balances are not treated as a standard, distinct component of money supply in the basic NCERT classification. → Hence, Option B is the correct answer.

(Detailed) → When the central bank buys securities, it pays money to the sellers. → This increases the money supply in the economy and is called injecting liquidity. → Therefore, Statement (A) is correct. → RBI directly influences the money supply in the economy through open market operations. → Therefore, Statement (E) is correct. → Statement (B) is wrong because open market operations refer to the buying and selling of securities by the central bank, not commercial banks. → Statement (C) is wrong because open market operations do not directly change the bank rate. → Statement (D) is wrong because when the central bank sells securities, it absorbs money from the economy; it is not called injecting. → Hence, Option A is the correct answer.

(Detailed) → Major functions of the central bank include issuing currency, acting as banker to the government, and acting as banker's bank. → It is called the banker's bank because commercial banks maintain accounts with it and receive financial support from it. → Therefore, Statement (D) is correct. → The central bank also has the sole authority to issue currency. → Therefore, Statement (E) is correct. → SLR, CRR, and open market operations are instruments of monetary policy. → These are used to control credit, but they are not the basic functions asked here. → Hence, Option A is the correct answer.

(Detailed) → Reverse repo rate is the rate at which the Reserve Bank of India borrows money from commercial banks. → Commercial banks park their surplus funds with RBI and earn interest at the reverse repo rate. → Since the question asks about the rate at which RBI borrows from commercial banks, the correct answer is Reverse Repo Rate. → Hence, Option B is the correct answer.

(Detailed) → The most important and primary function of money is to act as a medium of exchange. → Money allows people to buy and sell goods and services efficiently. → In a barter system, exchange requires double coincidence of wants. → Money removes this problem because it is generally accepted as a means of payment. → Since money first enables exchange, it is called a medium of exchange. → Hence, Option B is the correct answer.

(Detailed) → Bank Rate refers broadly to the rate at which RBI lends to commercial banks. Therefore, (A) matches with (III). → Open Market Operation refers to the buying and selling of government securities or bonds. Therefore, (B) matches with (IV). → Repo Rate refers specifically to the rate at which RBI lends to commercial banks for short periods against securities. Therefore, (C) matches with (I). → Interest Rate is determined by commercial banks at which loans are given to normal borrowers. Therefore, (D) matches with (II). → Hence, Option B is the correct answer.

(Detailed) → The Reserve Bank of India is the central bank of India. → The Reserve Bank of India Act was passed in 1934. → However, RBI actually began its operations on 1 April 1935. → Therefore, India got its central bank in 1935. → Hence, Option B is the correct answer.

(Detailed) → When the central bank raises the repo rate, commercial banks face a higher borrowing cost. → As a response, commercial banks increase their interest rates. Therefore, Statement (D) comes first. → Consequently, borrowing becomes costlier for consumers and firms. Therefore, Statement (C) comes second. → Because of the higher cost, people take fewer loans. Therefore, Statement (A) comes third. → This reduces money supply in the economy. Therefore, Statement (B) comes fourth. → Finally, the lower money supply reduces spending, causing aggregate demand to decrease. Therefore, Statement (E) comes last. → Therefore, the correct sequence is D, C, A, B, E. → Hence, Option C is the correct answer.

(Detailed) → Money acts as a unit of account or measure of value when it is used to measure and express the value of goods and services. → For example, the price of a book, a pen, or a service is expressed in rupees. → This makes calculation, accounting, and comparison between different items easier. → Therefore, expressing values in monetary units is the unit of account function. → Hence, Option A is the correct answer.

(Detailed) → Currency deposit ratio means the ratio of currency held by the public to bank deposits. → During the festive season, people usually withdraw more cash from banks for purchases, gifts, and celebrations. → This increases the currency held by the public relative to deposits in banks. → Therefore, the currency deposit ratio increases during the festive season. → Hence, Option B is the correct answer.

(Detailed) → During a deflationary situation, aggregate demand is low and prices tend to fall. → To revive the economy, RBI uses expansionary monetary policy to increase credit and demand. → Decreasing the margin requirement means borrowers can get a larger loan against the same collateral value. → This makes borrowing easier and increases credit availability. → Increased credit raises purchasing power and helps fight deflation. → Hence, Option C is the correct answer.

(Detailed) → Statement (A) is correct because CRR controls the reserve requirement of commercial banks. → Higher CRR reduces the money multiplier, while lower CRR increases the money multiplier. → Therefore, CRR determines the extent of money creation in an economy. → Statement (D) is correct because when RBI sells government bonds, commercial banks or the public pay money to RBI. → This reduces the reserves and liquidity of commercial banks. → Statement (E) is correct because RBI influences money supply by changing the rate at which it gives loans to commercial banks, such as bank rate or repo rate. → Statement (B) is incorrect because the given phrase "outright and upright" is wrong. The correct classification is generally outright and repo operations. → Statement (C) is incorrect because a fall in bank rate makes borrowing cheaper and generally increases money supply, not decreases it. → Hence, Option D is the correct answer.

(Detailed) → Bank Rate refers to the minimum rate at which funds are provided for the long term. Therefore, (A) matches with (II). → Marginal Standing Facility is a short-term emergency borrowing facility, usually at a higher rate. It is also known as Penal Interest Rate. Therefore, (B) matches with (III). → Repo Rate is the rate at which RBI lends to commercial banks where securities are pledged in order to repurchase. Therefore, (C) matches with (I). → Reverse Repo Rate is the rate at which the Central Bank borrows funds from commercial banks. Therefore, (D) matches with (IV). → Hence, Option B is the correct answer.

(Detailed) → The Central Bank performs macroeconomic functions such as issuing currency, controlling the money supply, acting as a banker to the government, and serving as the banker's bank. → It does not interact directly with the general public for retail banking. → Therefore, it does not accept deposits from the general public or give loans to people. → These retail banking services are functions of commercial banks. → Hence, Option C is the correct answer.

(Detailed) → Statutory Liquidity Ratio requires commercial banks to maintain a certain fraction of their demand and time liabilities in the form of approved liquid assets. → Liquid assets include cash, gold, or approved government securities. → Since SLR applies to both demand liabilities and term/time liabilities, the correct base is total demand and term deposits. → Hence, Option D is the correct answer.