The Central Bank and Monetary Policy for CUET Economics

AnswerB · the Reserve Bank of India

1. The RBI was set up in 1935 under the RBI Act, 1934, and was nationalised in 1949.

AnswerA · 1935

1. The RBI started on 1 April 1935; it was nationalised in 1949.

AnswerA · keeping prices stable while supporting growth

1. The RBI Act gives monetary policy the aim of price stability, keeping growth in mind.

AnswerD · A-II, B-IV, C-I, D-III

1. Each title names one role of the central bank.

AnswerA · lender of last resort

1. As lender of last resort, the central bank supplies cash to a sound bank in trouble, which protects depositors and the system.

AnswerC · keeps its accounts and manages its borrowing

1. The RBI acts as the government's bank and debt manager; taxes and the budget are the government's own work.

AnswerA · Both A and R are true, and R is the correct explanation of A.

1. The RBI does for banks what banks do for the public. R explains A.

AnswerB · Only II

1. The RBI deals with the government and banks, not with the public's accounts. I is false.

2. Its aims are price stability, sound banking and growth, not profit. II is true.

AnswerB · Controlling money supply

1. The central bank controls credit for the whole economy; commercial banks deal with the public.

AnswerC · the Monetary Policy Committee of the RBI

1. Since 2016, a six-member Monetary Policy Committee (three from the RBI, three appointed by the government) decides the policy rate.

AnswerD · Opening savings accounts for the public

1. The RBI does not run accounts for the general public; commercial banks do.

AnswerB · licenses, inspects and regulates banks

1. Supervision keeps banks sound so that depositors' money is safe.

AnswerB · holds the country's foreign currency and gold reserves and can use them to steady the rupee

1. The RBI manages the reserves and may buy or sell dollars to calm sharp swings in the exchange rate.

AnswerD · the RBI lends short-term funds to commercial banks against government securities

1. In a repo, a bank sells securities to the RBI with an agreement to buy them back; the cost is the repo rate.

AnswerC · the RBI borrows from commercial banks

1. Banks park surplus funds with the RBI and earn the reverse repo rate.

AnswerA · raise the repo rate

1. A higher repo rate makes borrowing from the RBI costlier, so banks raise their lending rates.

2. Less borrowing and spending lowers demand and inflation.

AnswerB · make loans cheaper and raise borrowing and spending

1. Banks get funds more cheaply and pass this on as lower lending rates.

AnswerD · the RBI lends to banks for longer periods

1. Unlike the repo, which is very short-term against securities, the bank rate applies to the central bank's other lending to banks.

AnswerA · Both A and R are true, and R is the correct explanation of A.

1. Parking with the RBI becomes more attractive than lending. R explains A.

AnswerA · Only I

1. The RBI lends at a higher rate than it pays when it borrows. I is true.

2. Banks lending to the RBI is the reverse repo; the repo is the RBI lending to banks. II is false.

AnswerA · A-III, B-I, C-IV, D-II

1. The first three are policy rates set by the central bank; the last is set by each bank.

AnswerC · raise the reverse repo rate

1. A higher reverse repo pays banks more for funds kept with the RBI.

AnswerC · Liquidity Adjustment Facility

1. Through the Liquidity Adjustment Facility, the RBI lends to banks (repo) or absorbs their surplus funds (reverse repo) day to day.

AnswerD · Banks' cost of funds rises → lending rates rise → borrowing and spending fall → demand and prices ease

1. A repo rise works through banks' borrowing costs and then through loan rates.

2. Taxes are fiscal policy, not a result of the repo rate.

AnswerB · in liquid assets with itself

1. SLR assets are held by the bank itself; CRR balances are held with the RBI.

AnswerC · reduces the funds banks can lend and lowers the money multiplier

1. More of each deposit is locked with the RBI, so less is lent and less is redeposited.

AnswerB · ₹50 crore

1. Extra reserves = 0.5% of 10,000 = ₹50 crore.

AnswerA · Only I

1. CRR = cash with the RBI. I is true.

2. SLR assets (cash, gold, government securities) stay with the bank. II is false.

AnswerA · Both A and R are true, and R is the correct explanation of A.

1. Funds freed from SLR assets become available for lending. R explains A.

AnswerC · cut the CRR

1. A lower CRR frees funds for lending and raises the money multiplier, which supports spending.

AnswerB · Loans given to customers

1. SLR assets must be liquid: cash, gold and approved securities. Loans are not liquid.

AnswerA · Both A and R are true, and R is the correct explanation of A.

1. The multiplier is 1 ÷ reserve ratio, so a lower ratio raises it. R explains A.

AnswerB · ₹1,500 crore

1. CRR = 5% of 2,000 = 100; SLR = 20% of 2,000 = 400.

2. Lendable = 2,000 − 100 − 400 = ₹1,500 crore.

AnswerB · the central bank's buying and selling of government securities

1. By buying or selling securities, the RBI adds money to or takes money out of the banking system.

AnswerD · rises, because the RBI pays for them and bank reserves increase

1. The RBI pays sellers with new reserves, so banks have more to lend.

AnswerA · sell government securities in the open market

1. Buyers of the securities pay the RBI, which takes reserves out of banks.

AnswerD · offsetting forex inflows' effect on money supply

1. When the RBI buys dollars it pays in rupees, raising money supply.

2. Selling securities takes those rupees back, so money supply stays stable.

AnswerC · Both I and II

1. OMOs change the total volume of credit, so they are quantitative. I is true.

2. Purchases add reserves and sales remove them. II is true.

AnswerD · ₹500 crore

1. Banks' reserves rise by 50; the multiplier is 1 ÷ 0.1 = 10.

2. Deposits can rise by 50 × 10 = ₹500 crore.

AnswerA · Both A and R are true, and R is the correct explanation of A.

1. The money multiplier also works in reverse. R explains A.

AnswerD · ₹1,000 crore

1. Banks pay ₹200 crore to the RBI from their reserves.

2. Money supply can shrink by 5 × 200 = ₹1,000 crore.

AnswerA · the part of a security's value that a bank does not lend against it

1. If the margin is 30% on gold worth ₹1 lakh, the bank lends only ₹70,000.

AnswerB · persuading banks to follow its policy

1. Moral suasion uses persuasion, not legal force.

AnswerB · ₹6 lakh

1. Loan = value × (1 − margin) = 10 × 0.6 = ₹6 lakh.

AnswerC · discourage hoarding of grain with borrowed money

1. A higher margin means less can be borrowed against each sack, so hoarding becomes harder.

2. This is a selective (qualitative) tool aimed at one use of credit.

AnswerB · A-IV, B-III, C-II, D-I

1. Quantitative tools change the total volume or cost of credit; qualitative tools direct credit to or away from particular uses.

AnswerC · Both I and II

1. Both statements give the standard distinction. Both are true.

AnswerA · Both A and R are true, and R is the correct explanation of A.

1. Borrowers need less of their own money, so more of them can buy. R explains A.

AnswerA · ₹6 lakh to ₹4 lakh

1. At 25%: 8 × 0.75 = 6. At 50%: 8 × 0.5 = 4.

AnswerC · direct action

1. Direct action is the RBI's power to act against a particular bank; moral suasion only persuades.

AnswerD · A cut in the SLR

1. A lower SLR frees funds that banks can lend.

2. The other three restrict credit.

AnswerA · Raise the repo rate, raise the CRR and sell government securities

1. All three make credit costlier or scarcer, which reduces spending.

AnswerD · cut the repo rate and buy government securities

1. Cheaper and more plentiful credit encourages firms to invest and households to spend.

AnswerB · Both A and R are true, but R is not the correct explanation of A.

1. Both statements are true.

2. R describes what each policy uses; it does not explain why different bodies decide them. So R is not the explanation of A.

AnswerA · Both A and R are true, and R is the correct explanation of A.

1. Higher loan rates make firms and households borrow less. R explains A.

AnswerA · inflation is high because of excess demand

1. A higher CRR cuts lending and money supply, which suits a time of too much demand.

AnswerC · A-II, B-I, C-IV, D-III

1. Purchases and repo cuts expand; a higher CRR contracts; higher margins restrict credit to particular uses.

AnswerA · Only I

1. A purchase adds reserves and a lower CRR frees them: both expand. I is true.

2. A higher reverse repo draws funds into the RBI and a sale removes reserves: both contract. II is false.