banking and monetary policy — BSSC Economics

50 Questions • 30 Minutes • Economics Mock Test in Hindi and English

Sample Questions from this Test

Question 1:

Which of the following commissions recommended the establishment of the Reserve Bank of India (RBI)?
A.Narasimham Committee
B.Hilton Young Commission
C.Malegam Committee
D.Kelkar Committee

• Key Fact
The Hilton Young Commission (Royal Commission on Indian Currency and Finance) in 1926 recommended setting up a Central Bank in India.

• Supporting Detail
Based on this, the Reserve Bank of India Act was passed in 1934, and RBI started functioning on 1st April 1935.

• Related Concept
The purpose was to separate currency control from the government and regulate credit.

• Why wrong options are wrong
Narasimham Committee relates to banking reforms, and Malegam Committee studied microfinance issues.

• Exam Trick
Remember "Hilton Young" as the "young" foundation step for India's central banking system.

• Additional Info
RBI was nationalised on 1st January 1949.

Question 2:

Consider the following statements regarding the Chronology of Banking Evolution in India:
1. Bank of Hindustan was the first bank in India, established in 1770.
2. Awadh Commercial Bank was the first bank managed by Indians.
3. Punjab National Bank (PNB) was established by Lala Lajpat Rai.
Which of the above statements is/are correct?
A.1 and 2 only
B.2 and 3 only
C.1 and 3 only
D.All of the above

• Key Fact
Bank of Hindustan (1770, Calcutta) was the first bank but failed in 1832.

• Supporting Detail
Awadh (Oudh) Commercial Bank, established in 1881, was the first Indian-managed bank.

• Related Concept
PNB was established in 1894 in Lahore by Lala Lajpat Rai and was the first bank fully managed by Indians with Indian capital.

• Why wrong options are wrong
All statements provided are factually correct based on banking history.

• Exam Trick
PNB is often asked as the first fully Indian-capitalized bank.

• Additional Info
The Imperial Bank of India was formed in 1921 by merging the three Presidency Banks.

Question 3:

Assertion (A): The one rupee note bears the signature of the Governor of the Reserve Bank of India.
Reason (R): The Ministry of Finance issues coins and the one rupee note in India.
A.Both A and R are true, and R is the correct explanation of A
B.Both A and R are true, but R is NOT the correct explanation of A
C.A is true but R is false
D.A is false but R is true

• Key Fact
The one rupee note bears the signature of the Finance Secretary of India, not the RBI Governor.

• Supporting Detail
The Ministry of Finance issues all coins (under the Coinage Act 2011) and the one-rupee note.

• Related Concept
All other currency notes (from ₹2 onwards) are issued by the Reserve Bank of India.

• Why wrong options are wrong
Assertion (A) is completely false, while Reason (R) is a true statement.

• Exam Trick
Always associate "One Rupee" and "Coins" strictly with the Finance Ministry/Secretary.

• Additional Info
The Coinage Act, 2011 allows the issue of coins up to the denomination of ₹1000.

Question 4:

Which of the following is NOT a component of the M1 measure of money supply?
A.Currency with the public
B.Demand deposits of the public
C.Post office savings deposits
D.Coins and currency notes

• Key Fact
M1 includes Currency with the public (coins and currency notes) + demand deposits of the public.

• Supporting Detail
Post office savings deposits are added to M1 to calculate M2 (M2 = M1 + post office savings deposits).

• Related Concept
M1 is known as narrow money and is the most liquid measure of money supply.

• Why wrong options are wrong
Options A, B, and D are integral parts of M1.

• Exam Trick
M1 is purely what is instantly spendable: Cash in hand + Bank Demand Deposits.

• Additional Info
M3 (Broad Money) is M1 plus net time deposits of commercial banks.

Question 5:

Match the following Banking Committees with their Key Focus Areas:
List I (Committee)
1. Narasimham Committee I (1991)
2. Nachiket Mor Committee (2013)
3. P.J. Nayak Committee (2014)
4. Damodaran Committee (2010)

List II (Focus)
a. Governance of PSBs
b. Customer service in banks
c. Financial inclusion (Payments Banks)
d. Banking sector liberalization
A.1-d, 2-c, 3-a, 4-b
B.1-c, 2-d, 3-b, 4-a
C.1-d, 2-b, 3-a, 4-c
D.1-a, 2-c, 3-d, 4-b

• Key Fact
Narasimham I focused on Banking sector liberalization (Control SLR/CRR).

• Supporting Detail
Nachiket Mor focused on Financial inclusion, recommending Payments Banks.

• Related Concept
P.J. Nayak focused on Governance of PSBs (reduce govt stake <50%). Damodaran focused on Customer service.

• Why wrong options are wrong
Any other matching order contradicts the established historical committee mandates.

• Exam Trick
'Nayak' = Governance/Leader of PSBs; 'Damodaran' = D for Dealing with Customers.

• Additional Info
Narasimham Committee II (1998) focused on strengthening banking structure through mergers and setting up ARCs.

Question 6:

The concept of 'Money Illusion', where people ignore the effects of inflation and believe money has a fixed value, was first coined by:
A.John Maynard Keynes
B.Irving Fisher
C.Adam Smith
D.Dennis Robertson

• Key Fact
The term ‘Money Illusion’ was first coined by American economist Irving Fisher in his book “Stabilising the Dollar”.

• Supporting Detail
It refers to the belief that money has a fixed value, completely ignoring the effects of inflation on purchasing power.

• Related Concept
Although coined by Fisher, the concept was popularized by John Maynard Keynes.

• Why wrong options are wrong
Keynes popularized it but didn't coin it. Adam Smith is the father of economics (Wealth of Nations).

• Exam Trick
Fisher "fished" the idea out first, Keynes made it famous.

• Additional Info
Irving Fisher also gave the equation of exchange: MV = PT (Money Supply × Velocity = Price Level × Transactions).

Question 7:

What is the primary aim of the Insolvency and Bankruptcy Code (IBC), 2016?
A.To regulate stock market investments
B.To provide a time-bound mechanism for resolving insolvency
C.To bail out banks from financial distress
D.To provide collateral-free loans to startups

• Key Fact
The IBC, 2016 was enacted to provide a time-bound and efficient mechanism for resolving insolvency and bankruptcy.

• Supporting Detail
It applies to cases of companies, partnership firms, and individuals who cannot repay debt.

• Related Concept
The standard time-bound resolution process is 180 days, extendable to 330 days.

• Why wrong options are wrong
It does not regulate the stock market or bail out banks directly.

• Exam Trick
IBC is strictly related to "time-bound recovery" to improve the ease of doing business.

• Additional Info
The Insolvency and Bankruptcy Board of India (IBBI) is the regulator, and NCLT adjudicates corporate insolvency.

Question 8:

Which of the following describes the difference between a bank's 'Repo Rate' and 'Bank Rate'?
A.Repo Rate is for long-term borrowing; Bank Rate is for short-term borrowing.
B.Repo Rate does not require collateral; Bank Rate requires collateral.
C.Repo Rate is for short-term borrowing with collateral; Bank Rate is for long-term borrowing without collateral.
D.Both are exactly the same and used interchangeably.

• Key Fact
Repo Rate is the rate at which RBI lends money to commercial banks against government securities (collateral) for short-term needs.

• Supporting Detail
Bank Rate is the rate at which RBI lends long-term funds to commercial banks without requiring any security or collateral.

• Related Concept
Both are Quantitative tools used by the RBI to implement monetary policy.

• Why wrong options are wrong
Option A and B reverse the definitions. Option D is factually incorrect.

• Exam Trick
"Repo" includes "Repurchase agreement" which implies securities are involved (collateral).

• Additional Info
Increasing the bank rate makes borrowing costlier, which discourages lending and reduces credit flow in the economy.

Question 9:

Assertion (A): When the Reserve Bank of India (RBI) sells government bonds in the open market, the money supply in the economy increases.
Reason (R): Selling bonds absorbs liquidity from the banking system.
A.Both A and R are true, and R is the correct explanation of A
B.Both A and R are true, but R is NOT the correct explanation of A
C.A is true but R is false
D.A is false but R is true

• Key Fact
Selling of bonds by the RBI under Open Market Operations (OMO) decreases the money supply, it does not increase it.

• Supporting Detail
When RBI sells securities, it sucks funds (liquidity) from the banking system (banks use cash to buy the bonds).

• Related Concept
Conversely, if RBI wants to inject liquidity, it buys government securities from the market.

• Why wrong options are wrong
Assertion (A) incorrectly claims money supply increases upon selling bonds.

• Exam Trick
Sell = Suck liquidity (Money supply falls). Buy = Boost liquidity (Money supply rises).

• Additional Info
OMOs are conducted by the RBI on behalf of the government to control interest rates and money supply.

Question 10:

Which institution in India acts as a Self-Regulatory Organization (SRO) for Non-Banking Financial Company-Micro Finance Institutions (NBFC-MFIs)?
A.NABARD
B.SEBI
C.Microfinance Institutions Network (MFIN)
D.SIDBI

• Key Fact
Microfinance Institutions Network (MFIN) is an industry association and SRO for the microfinance sector.

• Supporting Detail
It was established in 2009.

• Related Concept
In 2014, the RBI recognized MFIN as a Self-Regulatory Organization (SRO) for NBFC-MFIs.

• Why wrong options are wrong
NABARD regulates rural banks, SEBI regulates capital markets, SIDBI refinances MSMEs.

• Exam Trick
MFIN was the very first industry association to be accorded recognition as an SRO by the RBI.

• Additional Info
Another designated SRO for microfinance institutions in India is Sa-Dhan.

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