InterviewSolution
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InterviewSolution
This section includes InterviewSolutions, each offering curated multiple-choice questions to sharpen your knowledge and support exam preparation. Choose a topic below to get started.
| 1. |
All financial institutions are treated as banking institutions. |
| Answer» Correct Answer - False because a financial institution can be termed as a bank only whent it performs at least two functions namely, (i) accepting deposits and (ii) advancing loans. | |
| 2. |
______ is the main function of the Central Bank.A. Notes issueB. Credit creationC. Accepting deposits from the publicD. none of these |
| Answer» Correct Answer - A | |
| 3. |
Full bodied money is that money whose money value and commodity value are :A. equal in the marketB. declared as equal in the marketC. declared as equal by RBID. different in the market |
| Answer» Correct Answer - B | |
| 4. |
Explain money as a medium exchange . |
| Answer» Money came into use to remove the inconveniences of barter as money has separated the act of purchase from sale. Medium of exchange is the basic or primary function of money. People exchange goods and services through the medium of money. Money acts as a medium of exchange or as a medium of payments. Money by itself has no utility (except perhaps to the miser). It is only an intermediary.The use of money facilitates exchange, exchange promotes specialisation Increases productivity and efficiency A good monetary system is, therefore, of immense utility to human society. Money is also called a bearer of options or generalised purchasing power because it provides freedom of choice to buy things he wants most from those who offer best bargain. | |
| 5. |
What are time deposits |
| Answer» a deposit in a bank account that cannot be withdrawn before a set date or for which notice of withdrawal is required. | |
| 6. |
Define a bank . |
| Answer» A bank is a financial institution licensed to receive deposits and make loans. | |
| 7. |
What is the name of Central Bank in India ? |
| Answer» Reserve bank of India. | |
| 8. |
What do you understand by liquidity of money ? |
| Answer» Liquidity means how quickly you can get your hands on your cash. In simpler terms, liquidity is to get your money whenever you need it. | |
| 9. |
What is meant by a Commercial bank ? |
| Answer» A commercial bank is a type of financial institution that accepts deposits, offers checking account services, makes various loans, and offers basic financial products like certificates of deposit (CDs) and savings accounts to individuals and small businesses. | |
| 10. |
What is bank money ? |
| Answer» A medium of exchange consisting chiefly of checks and drafts. | |
| 11. |
Credit money is the money whose face value is more than its intrinsic ( commodity ) value. |
| Answer» Correct Answer - True | |
| 12. |
The creation of ______ is called credi creation .A. time depositsB. primary depositsC. secondary depositsD. none of these |
| Answer» Correct Answer - C | |
| 13. |
________ is the ratio of interest charged by the Central Bank on loan given to commerical banks.A. Bank rate (Repo rate )B. CRRC. Statutory liquidity RatioD. Reserve Repo Rate |
| Answer» Correct Answer - A | |
| 14. |
In order to reduce credit in the country, Reserve Bank of IndiaA. Reduces Repo RateB. Buys Securities in the open marketC. Sells securities in the open marketD. Adopts Moral Suasion. |
| Answer» Correct Answer - C | |
| 15. |
Describe two components of money supply. |
| Answer» The two components of Money Supply are Currency and Demand Deposits. | |
| 16. |
Reserve Bank of India has reduced CRR from 4.25% to 4%. Will this step help in controlling inflation in India ? Name any one value violated in the question. |
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Answer» This step is not likely to check inflation because a cut in CRR is supposed to releases more liquidity in the economy. This will increase lending capacity of commercial banks resulting in more consumption expenditure and investment expenditure. Hence, this step may prove inflationary instead of checking price rise. Value violated - Social responsibility. |
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| 17. |
Initial deposits made by the people from their own resources are called _____A. time depositsB. secondary depositsC. primary depositsD. none of these |
| Answer» Correct Answer - C | |
| 18. |
How does a Central bank control availability of credit by open market operations ? |
| Answer» Central bank uses various tools to control inflation and money available for banks to lend. One of such tools is using open market operations(OMO), in OMO the central banks mainly sell and buy government secutiries to control the money available with bank, when the central bank decides to suck out the liquidity in the banking sector they introduce more bonds, and when they want to liqiufy the banks with more money they start buying back the government secutiries.Based on the bond availability or price the banks cost to buy money from other banks reserve will be affected thus it effects the interest rate of advances and deposits in banking system has a whole. | |
| 19. |
What is meant by CRR ? How does it create money supply in the country ? |
| Answer» Cash Reserve Ratio is the proportion of total deposits that the banks are required to maintain with the RBI has reserves. By changing this ratio RBI can influence the amount of cash that is available for the banks to lend. A high CRR implies less money to lend, thus contraction in money supply. | |
| 20. |
Explain the process of money creation by commercial bank with the help of a numerical examples . |
| Answer» Creation of credit is one of the crucial functions performed by a commercial bank in modern times. The commercial bank is responsible for putting money (produced/created by central bank) in circulation through the process of credit creation or the lending process. Numercial Illustration, may be based on the following assumption: (i) There is only one bank in the economy. (ii) Initial deposits are say Rs.10000 crores and the legal reserve requirement proposed by the central bank is 10%. (iii) Credit Creation = Initial deposits x 1/LRR = 10000/0.1 = Rs.100000 crores | |
| 21. |
Define bank rate . |
| Answer» It is the rate at which central bank lends money to the commerical banks. | |
| 22. |
Which of the following statement is correct ?A. Supply of money refers to stock of money held by public at a point of timeB. Supply of money is a flow variableC. Supply of money includes cash reserves of banksD. Supply of money refers to bank money |
| Answer» Correct Answer - A | |
| 23. |
Which of the following is the qualitative measures of credit control ?A. Margin rquirementB. Cash reserve RatioC. Bank rateD. Open market operation |
| Answer» Correct Answer - A | |
| 24. |
Which of the following is bank money ?A. CoinsB. CurrencyC. Cash reserves of banksD. Demand deposits in banks |
| Answer» Correct Answer - D | |
| 25. |
Currency is issued by central bank yet we say that commercial banks create money. Explain, How is this money creation by commercial banks likely to affect the national income? |
| Answer» Money supply has two components namely currency held by the people and demand deposits with commercial banks. It is by creating additional demand deposits in the guise of advancing loans with commercial bank are said to create money ( credit ) . When commercial banks lend money to investors, they invest in productive acitivities leading to rise in national income through multiplier effect. | |
| 26. |
Explain High Powered money . |
| Answer» High powered money or powerful money refers to that currency that has been issued by the Government and Reserve Bank of India. Some portion of this currency is kept along with the public while rest is kept as funds in Reserve Bank. | |
| 27. |
Which of the following is the central bannk in India ?A. State Bank of IndiaB. Punjab National BankC. Reserve Bank of IndiaD. New Bank of India |
| Answer» Correct Answer - C | |
| 28. |
Give meaning of money. |
| Answer» a current medium of exchange in the form of coins and banknotes; coins and banknotes collectively. | |
| 29. |
Banks are able to create credit many time more than initial through ______A. secondary depositsB. advancing loansC. accepting depositsD. providing overdraft facility |
| Answer» Correct Answer - C | |
| 30. |
Name two secondary functions of money |
| Answer» Standard of deferred payments, store of value and transfer of value. | |
| 31. |
_______ is primary function of money .A. Transfer of valueB. Medium of exchangeC. Store of ValueD. Standard of defferred payment |
| Answer» Correct Answer - B | |
| 32. |
Name the primary functions of money |
| Answer» Money has two primary functions. It is a medium of exchange and a unit of account. | |
| 33. |
What is reverse repo rate |
| Answer» It is the rate which the commercial banks park their surplus funds with the central bank. | |
| 34. |
Define repo rate . |
| Answer» Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. | |
| 35. |
How does Central Bank control the supply of money in an economy ? |
| Answer» Central banks affect the quantity of money in circulation by buying or selling government securities through the process known as open market operations (OMO). When a central bank is looking to increase the quantity of money in circulation, it purchases government securities from commercial banks and institutions | |
| 36. |
Define a Central Bank. What are the function of Central Bank ? |
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Answer» A Central Bank is the bank in any country to which has been entrusted the duty of regulating the volume of currency and credit in that country. (i) Bank of issue (ii) Government’s banker, agent, and advisor (iii) Custodian of cash reserves of commercial banks (iv) Lender of last resort |
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| 37. |
To reduce the supply of money in the economy , Central Bank _______A. raises CRRB. lowers the Repo RateC. lowers the marginD. buys Govt. securities from the market |
| Answer» Correct Answer - A | |
| 38. |
Explain store of value function of money . |
| Answer» A major disadvantage of using commodities — such as wheat or salt or even animals like horses or cows — as money is that after a time they deteriorate and lose economic value. They are, thus, not at all satisfactory as a means of storing wealth. To realise the problems of saving in a barter economy let us consider a farmer. He wanted to save some wheat each week for future consumption. But this would be of no use to him in his old age because the ‘savings’ would have gone off.Again, if a coal miner wanted to set aside a certain amount of coal each week for the same purpose, he would have problems of finding enough storage space for all his coal. By using money, such problems can be overcome and people are able to save for the future. Modern form of money (such as coins, notes and bank deposits) permit people to save their surplus income.Thus money is used as a store of purchasing power. It can be held over a period of time and used to finance future payments. Moreover, when people save money, they get the assurance that the money saved will have value when they wish to spend it in the future. However, this statement holds only if there is no severe inflation (or deflation) in the country.In other words, it is quite obvious that money can only act effectively as a store of value if its own value is stable. If, for example, most people feel that their savings would become worthless very soon, they would spend them at once and save nothing. For the last few years the value (or the purchasing power) of money has been falling in India. Yet in the short run—for day-to-day purposes—money has sufficient stability of value to serve quite well as a store of value. | |
| 39. |
_________ is the ratio of bank deposits that a commercial bank must keep as reserve in cash with the Central Bank.A. Statutory Liquidity Ratio (SLR)B. Cash reserve Ratio (CRR)C. Bank rateD. Reserve Repo Rate |
| Answer» Correct Answer - B | |
| 40. |
Can low interest rates benefit the government ? If yes, how ? |
| Answer» public sector debt has risen significantly so lower interest rates will lead to lower debt cost. | |
| 41. |
In what respect Central Bank is different from a commecial Bank ? |
| Answer» (i) Central Bank is an apex bank wheras a commercial bank functions under the control of Central Bank. (ii) Central Bank does not deal directly with the public whereas commerical bank accepts deposits and advances loans to the general public. (iii) The central Bank has the sole monopoly in the issue of currency whereas a commercial bank does not. (iv) The central Bank focuses on stability and growth of the economy whereas a commercial bank focuses on maximisation of profit. | |
| 42. |
How has money solved the problem of barter ? |
| Answer» The only alternative to using money is to go back to the barter system. However, as a system of exchange the barter system would be highly impracticable today.For example, if the baker who supplied the green-grocer with bread had to take payment in onions and carrots, he may either not like these foodstuff or he may have sufficient stocks of them.The baker would, therefore, have to re-sell the product which would take time and be very inconvenient. By replacing these complicated sales by the use of money it is possible to save a lot of trouble. If the baker accepts payment in money this can be spent in whatever way the baker wishes. The use of money as a medium of exchange overcomes the drawbacks of barter.Thus, money provides the most efficient means of satisfying wants. Each consumer has a different set of wants. Money enables him (her) to decide which wants to satisfy, rank the wants in order of urgency and capacity (income) and act accordingly.This type of system also enables specialisation to extend. Take, for example, a person who performs only a single task in a shoe factory. He has not actually produced anything himself. So what could he exchange if a barter system were in operation? With money system the problem is removed. He can be paid in terms of money and can use that money to buy what he wants. | |
| 43. |
What is barter system ? |
| Answer» A barter is a system of market in which goods are exchanged for goods. There is no common unit for exchanging goods in the market. | |
| 44. |
Explain function of money as a Unit of Account/ Measure of Value. How has it solved the related problem of barter ? |
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Answer» Under the barter system, it is very difficult to measure the value of goods. For example, a horse may be valued as worth five cows or 100 quintals of wheat, or a Maruti car may be equivalent to 10 two- wheelers. Thus one of the disadvantages of the barter system is that any commodity or service has a series of exchange values. Money is the measuring rod of everything. By acting as a common denominator it permits everything to be priced, that is, valued in terms of money. Thus, people are enabled to compare different prices and thus see the relative values of different goods and services. This serves two basic purposes: (1) Households (consumers) can plan their expenditure and (2) Business people can keep records of income and costs in order to work out their profit and loss figures. |
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| 45. |
Explain medium of exchange function of money. How has it solved the related problem of barter ? |
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Answer» The only alternative to using money is to go back to the barter system. However, as a system of exchange the barter system would be highly impracticable today. For example, if the baker who supplied the green-grocer with bread had to take payment in onions and carrots, he may either not like these foodstuff or he may have sufficient stocks of them. The baker would, therefore, have to re-sell the product which would take time and be very inconvenient. By replacing these complicated sales by the use of money it is possible to save a lot of trouble. If the baker accepts payment in money this can be spent in whatever way the baker wishes. The use of money as a medium of exchange overcomes the drawbacks of barter. Thus, money provides the most efficient means of satisfying wants. Each consumer has a different set of wants. Money enables him (her) to decide which wants to satisfy, rank the wants in order of urgency and capacity (income) and act accordingly. This type of system also enables specialisation to extend. Take, for example, a person who performs only a single task in a shoe factory. He has not actually produced anything himself. So what could he exchange if a barter system were in operation? With money system the problem is removed. He can be paid in terms of money and can use that money to buy what he wants. |
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| 46. |
Explain standard of deferred payment function of money. How has it solved related problem of barter ? |
| Answer» When goods are bought on hire-purchase, they are given to the buyer upon payment of a deposit, and he then pays the remaining amount in a number of installments.Under the barter system this type of transaction could involve problems. Imagine a farmer buying a video-recorder and agreeing to pay for it in terms of a fixed amount of wheat each week for a certain number of weeks. After a few weeks the seller of the video recorder might have more than enough wheat.Yet he will have to receive more wheat in the coming weeks. If money had been used, the seller could then use it to buy whatever he wanted, whether it is wheat or something else—now or in future. In other words, the use of money permits postponement of spending from the present to some future occasion.In a modern economy, most transactions (buying and selling) are made on the basis of credit. For example, it is possible to purchase consumer durables such as T.V. sets or washing machines on hire-purchase; houses may be purchased by means of L.I.C. or H.D.F.C. loan; most business dealings permit payment in the future for goods delivered now; and employees wait for a month or a week to receive their wages and salaries. Thus, the use of money permits the members of society to defer their spending from the present to some future date.We, therefore, see that a money system clearly has advantages over a barter system. But what is money? Note the first five words in our definition – “anything which is generally acceptable.” We use notes and coins to buy things but can do so only as long as shopkeepers and traders are prepared to accept those notes and coins in payment for the goods they are selling.If all sellers decided that they would no longer accept these notes and coins, then these would cease to be money. If they decided instead to accept chair legs as money, then we would have to use chair legs which we would have to use when buying something! This example, of course, is rather ridiculous but what it points out is that anything can be money as long as it is generally acceptable as such. | |
| 47. |
Whether or not the following measures taken by RBI will increase the money supply ? (i) Increase in Repo rate (ii) Decrease in Cash Reserve Ratio (CRR) (iii) Purchase of securities in the open market (iv) Increase in Margin Rqequirement. |
| Answer» Measure (ii) and (iii) will increase the money supply whereas (i) and (iv) will decrease the money supply. | |
| 48. |
_________ is the rate of interest at which banks their surplus fund with RBI.A. Cash Reserve RatioB. Reserve Repo RateC. Bank rateD. Legal Reserve Ratio |
| Answer» Correct Answer - B | |
| 49. |
When face value of money is equal to intrinsic value of money , it is called:A. credit moneyB. full bodied moneyC. fiat moneyD. fiduciary money |
| Answer» Correct Answer - B | |
| 50. |
Explain the distinction between Statutory Liquidity Ratio and Legal Reserve Ratio. |
| Answer» Legal reserve ratio consists of both CRR and SLR. However, SLR is the percentage of liquid assets as a ratio of total deposits at a bank to be maintained by the bank with itself. | |