Money and Banking (Assignment – 1)

Read the following statements – Assertion (A) and Reason (R), Choose one of the correct alternatives given
below:-
Alternatives
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A)
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A)
c) Assertion (A) is true but Reason(R) is false.
d) Assertion (A) is false but Reason(R) is true.

Q1 Assertion : (A)- By selling government securities the central bank soaks liquidity from the economy.
Reason : (R) – Those who buy make payments buy cheques to the central bank. This reduces the reserves
of commercial banks and adversely affects bank’s ability to create credit and thus, reduces the money
supply in the hands of general public.

Q2 Assertion : (A)- Credit creation is inversely related to the legal reserve ratio (LRR).
Reason : (R) – Credit creation = Initial Deposits X 1/ LRR . Any increase in LRR will decrease the credit
creation power of commercial banks (banking system) and vice versa.

Q3 Assertion : (A)- Demand deposits are not legal tenders.

Reason : (R) – Demand deposits are the deposits which can be easily withdraw able on demand, by cheque
or otherwise, by the depositor from his/her bank account.

Q4 Assertion : (A)- Money supply is a stock variable.

Reason : (R) – Money supply is the total stock of money in circulation among the public at a given point of
time.

Q5 (CBSE – 2021-22 , Term 1 058/3/4)

Assertion : (A)- Notes and coins are the only source of money supply in the economy.
Reason : (R) – Demand deposits with commercial bank is also a component of money supply.

Q6 (CBSE -2021-22 term 1 058/1/4)

Assertion : (A)- Central Bank provides loans to the commercial banks in the situation of financial distress.
Reason : (R) – Central bank can order the government to help the bank facing the financial crisis.

Q7 (CBSE-2021-22 Term 1 058/2/4)

Assertion : (A)- Reserve Ratio and credit creation power of commercial bank are directly related.
Reason : (R) – Credit creation is the product of the reciprocal of Reserve ratio (RR) and

a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A)
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A)
c) Assertion (A) is true but Reason(R) is false.
d) Assertion (A) is false but Reason(R) is true.

Q8 Assertion : (A)-Lower cash reserve ratio implies higher capacity of the commercial banks to create
credit.
Reason : (R) – Credit multiplier is the reciprocal of cash reserve ratio.

BY PULKIT GARG (KV 1 FARIDABAD) Page 1

 Money and Banking (Assignment – 1)
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A)
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A)
c) Assertion (A) is true but Reason(R) is false.
d) Assertion (A) is false but Reason(R) is true.

Q9 (CBSE 2021 (58/1/4), Term 1 )

Assertion : (A)- Central bank provides loans to the commercial banks in the situation of financial distress.
Reason : (R) – Central bank can order the government to help the bank facing the financial crisis.

a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A)
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A)
c) Assertion (A) is true but Reason(R) is false.
d) Assertion (A) is false but Reason(R) is true.

Q10 Assertion : (A)- Rationing of credit is introduced when the supply of credit is to be controlled.
Reason : (R) – When the supply of money is to be increased , CRR is lowered.

a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A)
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A)
c) Assertion (A) is true but Reason(R) is false.
d) Assertion (A) is false but Reason(R) is true.

Q11 Assertion : (A)-Money Supply includes money held by all the financial institutions.
Reason : (R) – Money held by the government does not come into circulation.

a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A)
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A)
c) Assertion (A) is true but Reason(R) is false.
d) Assertion (A) is false but Reason(R) is true.

Case study based questions

Q1“ At the time of writing, a new wave in the form of the omicron variant was sweeping across the world
, inflation had jumped up in most countries, and the cycle of liquidity withdrawal was being initiated by
major central banks . This is why it is especially important to look at India’s macro-economic stability
indicators and their ability to provide a buffer against the above stresses”
Identify the situation described above and also discuss any one quantitative instrument of credit control
to curb that situation.
Q2 Read the following news report and answer the following question
RBI Monetary Policy 2020
Indicator Current Rate
CRR 3%
SLR 18.50%
Repo Rate 4.00%
Reverse Repo Rate 3.35%
Bank Rate 4.65%

BY PULKIT GARG (KV 1 FARIDABAD) Page 2

 Money and Banking (Assignment – 1)
On 9th October ,2020 , RBI has kept the repo rate unchanged at 4.00% and reduce reverse repo rate to
3.35%. In addition to that , the bank rate stand at 4.65%. This has been done to limit the damage to the
economy caused by the covid -19 and subsequent lockdowns.
1) What does RBI Monetary policy mean?
a) It is the policy formulated by the RBI in 2020 related to expenditure and taxation of the government
b) It is the policy formulated by the RBI in 2020 related to money matters of the country.
c) It is the policy formulated by the RBI in 2020 related to the government budget.
d) It is the policy formulated by the RBI in 2020 related to the distribution of credit among the users as
well as the rate of interest on borrowing and lending.
2) What does ‘Bank rate’ mean?
a) Rate at which bank borrow from the RBI for short- term.
b) Rate at which banks borrow from RBI for long term.
c) Rate at which banks deposit excess funds with the RBI.
d) Rate at which banks lend funds to the public.
3) Which of the following is a quantitative credit control technique of RBI?
a) CRR b) SLR c) Repo Rate d) All of these
4) Cut in Reverse Repo rate is likely to _________ the demand for goods and services in the economy
during covid-19 lockdowns.
a) Increase b) Decrease c) Double d) Not affect

Q3 (CBSE 2021 (58/1/4) Term 1 )

Money Play a crucial role in the smooth functioning of the economy. Money supply is considered as a very
important tool to control other macroeconomic variables. Central bank and commercial banks are the two
main sources of money supply. Measurement of money supply is an important task to perform by the
central bank. RBI in its press release on 22 September, 2021 has released data on money supply for the
fortnight ended 10 September, 2021 as follows:-
S.no Items Outstanding as on 10 September , 2021 (in Rs crores)
1 Currency with public 28,43,296
2 Demand Deposits with banks 18,88,130
3 Time deposits with banks 1,46,21,448
4 Other deposits with world bank 46,722

1) The value of money supply in the economy is _________ crores

a) Rs 1,30,78,148 b) Rs 1,93,99,596 c) Rs 47,78 , 178 d) Rs 47, 31,426

2) Money Supply is a ________ variable , measured at a point of time.

a) Stock b) Flow c) Both stock and flow d) Neither stock , nor flow
3) Demand deposits are _____________
a) Chequeable deposits b) Non – chequable deposits c) Fixed deposits d) Recurring deposits
4) Suppose primary deposits are Rs 2,000 crores and reserve deposit ratio is 10%. The money created by
commercial banks would be Rs _________ crores in the country.

Q4 RBI lower repo rate from 4.40% to 4.00%

Analyze the economic value of this statement from this view point of i) the households ii) investors and
iii) the economy.

BY PULKIT GARG (KV 1 FARIDABAD) Page 3

 Money and Banking (Assignment – 1)
Statement Based question
In the following questions, read the following statement and choose the correct alternative among those
given below:-
Alternative
a) Both the statements are true b) Both the statements are false
c) Statement 1 is true and statement 2 is false d) Statement 2 is true and statement 1 is
false
Q1 Statement 1:- Cryptocurrency is that form of legal tender money, which can be paid in discharge of a
debt of any amount.
Statement 2:- Cryptocurrency is any form of currency that exists digitally.

Q2 Statement 1 :- M1 includes only demand deposits and not time deposits.

Statement 2:- M1 is the most liquid measure of money supply.

Q3 Statement 1 :- Commercial Banks are able to lend money which is number of times more than their
cash reserves.
Statement 2:- Demand deposits and primary deposits are one and the same thing.

Q4 Statement 1 :- All the coins are issued by finance Ministry of India.

Statement 2:- All the currency notes are issued by Reserve bank of India.

Q5 Statement 1 :-Money multiplier is directly related to legal reserve ratio.

Statement 2:- Through money multiplier, commercial banks create credit, Based upon the reserve ratio
and initial deposits.

Q6 Statement 1 :- Reserve bank of India keeps a certain percentage of deposits of commercial banks as
reserve to avoid ‘too much lending to public’.
Statement 2:- The reserve deposit ratio acts as deterrence to the amount of credit created by the
commercial bank.

Q7Statement 1 :-SLR is determined by the Reserve bank of India.

Statement 2:- The central bank offers loans to the government.

Q 8Statement 1 :- All financial institutions are banking institutions

Statement 2:- Higher cash deposit ratio implies higher credit creation capacity of the commercial
banks.

Q9 Statement 1 :-“Term deposits” are always for a specific period of time.

Statement 2:- Against term deposits, no interest is paid to the depositors.

Q10 Statement 1 :- Money supply includes money held by all the financial institutions.
Statement 2:- Money held by the government does not come into circulation.

BY PULKIT GARG (KV 1 FARIDABAD) Page 4