CAFC – ECONOMICS

Demand, supply & Monetary

Policy  93242 77778

DEMAND, SUPPLY & MONETARY POLICY

1. Money means anything that serves as -

(a) Medium of Exchange (b) Common Measure of Value
(c) Store of Value (d) All of the above
2. Measure of value of all goods and services refers _________ from following function
of money.
(a) Medium of exchange (b) Unit of account
(c) Standard of different payments (d) Store of value
3. Which of the following functions are not performed by Money?
(a) As a medium of exchange (b) As a unit of account
(c) As a store of value (d) As a tissue paper
4. Which is not the static function of money?
(a) As a medium of exchange
(b) As a unit of account
(c) As encouragement to division of labour
(d) As standard of deferred payment
5. Functions of money doesn't include:
(a) Medium of exchange (b) Store of value
(c) Measure of value (d) Employment generation
6. For an Indian Economist, Money represents -
(a) Dollar
(b) Pounds Sterling
(c) Indian Rupee
(d) All of the above merely represent different units of money
7. Which of the following statements about Money is incorrect?
(a) There are many assets which carry the attribute of money.
(b) Money is what money does
(c) Value of money remains constant at all periods of time
(d) None of the above
8. For Modern Economist or Empiricists, the crucial function of Money is -
(a) Store of Values (b) Common Measure of Value
(c) Medium of Exchange (d) All of the above

1
CAFC – ECONOMICS
Demand, supply & Monetary
Policy  93242 77778
9. For a Modern Economist, which of the following instruments serves to store value?
(a) Only Currencies, Demand Deposits of Banks.
(b) Financial Assets like Bonds, Government Securities, Time Deposits with Banks
and Equity Shares
(c) Both (a) and (b)
(d) Neither (a) nor (b)
10. According to the Empiricists, to include Financial Asset under the purview of
Money, which of the following condition should be satisfied?
(a) Stability of demand function
(b) High degree of substitutability
(c) Feasibility of measuring statistical variations in real economic factors.
(d) All of the above
11. According to some economists, Pure Money refers to
(a) Only Currencies, Demand Deposits of Banks
(b) Financial Assets like Bonds, Government Securities, Time Deposits with Banks
and Equity Shares
(c) Both (a) and (b)
(d) Neither (a) nor (b)
12. According to some economists, Near Money refers to
(a) Only Currencies, Demand Deposits of Banks
(b) Financial Assets like Bonds, Government Securities, Time Deposits with Banks
and Equity Shares
(c) Both (a) and (b)
(d) Neither (a) nor (b)
13. In a liberal sense, Money includes-
(a) Currencies and Demand Deposits
(b) Bonds, Government Securities
(c) Equity Shares
(d) All of the above
14. Demand Deposits with Banks are considered as Money because they are-
(a) Generally acceptable as a means of payment
(b) More liquid than Cash
(c) Held by the Government
(d) Managed efficiently by Bank Managers

2
CAFC – ECONOMICS
Demand, supply & Monetary
Policy  93242 77778
15. In Static Sense, Money serves as –
(a) Medium of Exchange
(b) Common Measure of Value
(c) Standard of Deferred Payments
(d) All of the above
16. In Dynamic Sense, Money serves the following purposes
(a) Gives direction to economic trends
(b) Encourages specialization and division of labour
(c) Ensures transformation of Savings into Investments
(d) All of the above
17. When we say that Money serves as a medium of exchange, we are considering the
_______ aspect of Money.
(a) Static (b) Dynamic
(c) Both (a) and (b) (d) Neither (a) nor (b)
18. When we say that Money serves as a common measure of value, we are considering
the _______ aspect of Money.
(a) Static (b) Dynamic
(c) Both (a) and (b) (d) Neither (a) nor (b)
19. When we say that Money serves as a standard for deferred payments, we are
considering the _______ aspect of Money.
(a) Static (b) Dynamic
(c) Both (a) and (b) (d) Neither (a) nor (b)
20. When Money serves as a store of value, we are considering the _______ aspect of
Money.
(a) Static (b) Dynamic
(c) Both (a) and (b) (d) Neither (a) nor (b)
21. When we say that Money provides direction to economic trends, we are considering
the ________ aspect of money.
(a) Static (b) Dynamic
(c) Both (a) and (b) (d) Neither (a) nor (b)
22. When we say that Money promotes occupational specialization and division of
labour, we are considering the _______ aspect of Money.
(a) Static (b) Dynamic
(c) Both (a) and (b) (d) Neither (a) nor (b)

3
CAFC – ECONOMICS
Demand, supply & Monetary
Policy  93242 77778
23. When we say that Money ensures conversion of savings into investment, we are
considering the ________ aspect of Money.
(a) Static (b) Dynamic
(c) Both (a) and (b) (d) Neither (a) nor (b)
24. Money serves as __________ in any economy.
(a) Medium of exchange (b) Means of payment
(c) Both (a) and (b) (d) Neither (a) nor (b)
25. Money serves as a unit of account. This means that –
(a) Money is a common measure of value
(b) Money is a means of calculating relative prices of goods and services
(c) Money is the value in exchange of all goods and services
(d) All of the above
26. Money is a standard of deferred payments. This means that-
(a) Future transactions can be settled in terms of money
(b) Loans given and repayments thereof can be established in terms of money
(c) Both (a) and (b)
(d) Neither (a) nor (b)
27. Money acts as a store of value. This means that
(a) Money can be used to buy goods and services in current and future
(b) Money can be used to buy goods and services in current but not future
(c) Money can be used to buy goods and services in past periods only
(d) None of the above
28. Money Supply is the stock of money held by –
(a) Public
(b) Public and Banking System
(c) Banking System and Government
(d) None of these
29. In order to increase money supply in the country, the RBI may:
(a) Reduce CRR
(b) Increase CRR
(c) Sell securities in the open market
(d) Increase Bank Rate

4
CAFC – ECONOMICS
Demand, supply & Monetary
Policy  93242 77778
30. Which of the following is a determinant(s) of money supply in an economy?
(a) Behaviour of the Public
(b) Behaviour of Commercial Banks
(c) Behaviour of the Central Bank
(d) All of the above
31. The Quantity Theory of Money suggests that the demand for money is primarily
influenced by:
(a) The interest rate (b) The price level
(c) The level of income (d) Government policies
32. According to the Keynesian Theory of Money Demand, the main determinant of the
demand for money is:
(a) The nominal interest rate (b) The rate of inflation
(c) The level of investment (d) The real interest rate
33. The Baumol-Tobin model proposes that individuals hold money for the purpose of:
(a) Transactions motives (b) Speculative motives
(c) Precautionary motives (d) Asset motives
34. The speculative demand for money is based on the expectation of changes in:
(a) Tax rates (b) Interest rates
(c) Income levels (d) Prices of goods and services
35. The Fisher Effect suggests that an increase in the expected rate of inflation will lead
to:
(a) A decrease in the demand for money
(b) An increase in the demand for money
(c) A decrease in the supply of money
(d) An increase in the supply of money
36. The opportunity cost of holding money is often measured by the:
(a) Inflation rate (b) Real interest rate
(c) Exchange rate (d) Fiscal deficit
37. The speculative demand for money is inversely related to changes in the:
(a) Rate of economic growth (b) Level of investment
(c) Interest rate (d) Government expenditure

5
CAFC – ECONOMICS
Demand, supply & Monetary
Policy  93242 77778
38. According to the Liquidity Preference Theory, the demand for money is influenced
by:
(a) The quantity of money in circulation
(b) The level of government spending
(c) People's preference for liquidity
(d) The balance of trade
39. The Tobin's Portfolio Theory of Money Demand suggests that the demand for
money is affected by changes in:
(a) The stock market prices
(b) Consumer confidence
(c) The exchange rate
(d) The relative returns on money and other assets
40. The precautionary demand for money arises from the need to hold money for:
(a) Everyday transactions
(b) Speculative purposes
(c) Emergencies and unforeseen events
(d) Long-term investments
41. What are monetary aggregates?
(a) Measures of the total demand for money in an economy
(b) Measures of the total supply of money in an economy
(c) Measures of the total output of goods and services in an economy
(d) Measures of the total government expenditure in an economy
42. M1 includes which of the following components?
(a) Currency in circulation and time deposits
(b) Currency in circulation, demand deposits, and other deposits with RBI
(c) Currency in circulation, demand deposits, and time deposits
(d) Currency in circulation, demand deposits, time deposits, & savings deposits
43. M2 includes which of the following components?
(a) Currency in circulation, demand deposits, time deposits, & savings deposits
(b) Currency in circulation, demand deposits, and other deposits with RBI
(c) Currency in circulation and time deposits
(d) Currency in circulation, demand deposits, and government bonds

6
CAFC – ECONOMICS
Demand, supply & Monetary
Policy  93242 77778
44. M3 includes which of the following components?
(a) Currency in circulation, demand deposits, and other deposits with RBI
(b) Currency in circulation and time deposits
(c) Currency in circulation, demand deposits, time deposits, savings deposits, and
government securities
(d) Currency in circulation, demand deposits, and time deposits
45. Which monetary aggregate is considered the narrowest measure of money supply?
(a) M1 (b) M2 (c) M3 (d) M4
46. M4 includes which of the following components?
(a) Currency in circulation, demand deposits, and government securities
(b) Currency in circulation, demand deposits, time deposits, and savings deposits
(c) Currency in circulation, demand deposits, time deposits, savings deposits, and
small-denomination time deposits
(d) Currency in circulation and time deposits
47. Which monetary aggregate represents the broadest measure of money supply?
(a) M1 (b) M2 (c) M3 (d) M4
48. The main purpose of creating different monetary aggregates is to:
(a) Simplify accounting procedures for the central bank
(b) Measure the different components of GDP
(c) Monitor the money supply in various forms to understand the overall liquidity in
the economy
(d) Determine the government's fiscal policy
49. Non-Monetary Financial Institutions (NMFIS) are included in which monetary
aggregate?
(a) M1 (b) M2 (c) M3 (d) M4
50. Which of the following is an example of an M3 component?
(a) Demand deposits (b) Time deposits
(c) Treasury bills (d) Currency in circulation
51. What is the money multiplier?
(a) The ratio of the money supply to the gross domestic product (GDP)
(b) The ratio of the money supply to the total population
(c) The ratio of the money supply to the monetary base
(d) The ratio of the money supply to the government budget

7
CAFC – ECONOMICS
Demand, supply & Monetary
Policy  93242 77778
52. The money multiplier approach helps explain the relationship between changes in
the monetary base and changes in the:
(a) Money supply (b) Government spending
(c) Consumer price index (CPI) (d) Trade deficit
53. The money multiplier is influenced by which of the following factors?
(a) The government's fiscal policy (b) The central bank's monetary policy
(c) The foreign exchange rate (d) Consumer preferences
54. An increase in the required reserve ratio will lead to:
(a) A decrease in the money supply and a decrease in the money multiplier
(b) An increase in the money supply and an increase in the money multiplier
(c) A decrease in the money supply and an increase in the money multiplier
(d) An increase in the money supply and a decrease in the money multiplier
55. The formula for calculating the money multiplier is:
(a) Money Multiplier = Currency in Circulation / Reserve Ratio
(b) Money Multiplier = Reserve Ratio / Currency in Circulation
(c) Money Multiplier = 1/ Reserve Ratio
(d) Money Multiplier = Reserve Ratio / 1
56. If the reserve ratio is 0.10 (10%), what is the money multiplier?
(a) 10 (b) 5 (c) 2 (d) 0.10
57. The money multiplier approach assumes that banks will:
(a) Hold excess reserves
(b) Lend out all their deposits
(c) Decrease their lending during economic expansions
(d) Not influence the money supply
58. If the central bank conducts an open market sale of government securities, the
money supply will:
(a) Increase (b) Decrease
(c) Remain unchanged (d) Double
59. In the money multiplier approach, the process of money creation continues until:
(a) The government intervenes and controls the money supply
(b) The central bank runs out of monetary base
(c) The banks hold excess reserves
(d) The money supply equals the monetary base multiplied by the money multiplier

8
CAFC – ECONOMICS
Demand, supply & Monetary
Policy  93242 77778
60. The money multiplier approach assumes that there are no leakages or withdrawals
from the banking system in the form of:
(a) Taxes and government spending
(b) Interest payments
(c) Foreign exchange transactions
(d) Currency held by the public
61. What is monetary policy?
(a) Government policies that regulate international trade
(b) Government policies that control fiscal deficits
(c) Central bank policies that manage the money supply and interest rates
(d) Central bank policies that control inflation
62. The primary goal of monetary policy is to:
(a) Achieve full employment
(b) Control the government's budget deficit
(c) Stabilize the stock market
(d) Maintain price stability and economic growth
63. The central bank can expand the money supply by:
(a) Selling government bonds in the open market
(b) Raising the reserve requirements for banks
(c) Decreasing the discount rate
(d) Lowering interest rates on loans to banks
64. When the central bank buys government securities in the open market,
it is conducting:
(a) Tight monetary policy (b) Expansionary monetary policy
(c) Contractionary monetary policy (d) Fiscal policy
65. Contractionary monetary policy is designed to:
(a) Increase inflation (b) Reduce unemployment
(c) Stimulate economic growth (d) Control inflationary pressures
66. The interest rate at which the central bank lends money to commercial banks is
known as the:
(a) Prime rate (b) Discount rate
(c) Federal funds rate (d) Treasury rate

9
CAFC – ECONOMICS
Demand, supply & Monetary
Policy  93242 77778
67. Open market operations refer to the central bank's buying and selling of:
(a) Government securities in the secondary market
(b) Foreign currencies in the foreign exchange market
(c) Commodities in the stock market
(d) Real estate properties
68. An increase in the reserve requirement by the central bank will lead to:
(a) An increase in money supply and lower interest Rates
(b) A decrease in money supply and lower interest rates
(c) An increase in money supply and higher interest rates
(d) A decrease in money supply and higher interest rates
69. In a situation of economic recession, the central bank is likely to implement:
(a) Expansionary monetary policy
(b) Contractionary monetary policy
(c) Fiscal policy
(d) A fixed exchange rate policy
70. The Taylor rule is a monetary policy guideline that links interest rates to:
(a) Inflation rate and the output gap
(b) Fiscal deficit and money supply growth
(c) Government spending and tax revenues
(d) Exchange rate fluctuations
71. Quantitative easing (QE) is a monetary policy tool used by central banks to:
(a) Reduce the budget deficit
(b) Control inflation
(c) Lower interest rates
(d) Increase the money supply and stimulate economic growth
72. The term "moral suasion" in the context of monetary policy refers to the central
bank's ability to:
(a) Influence consumer behavior through advertising campaigns
(b) Persuade commercial banks to comply with its policy recommendations
(c) Control international trade agreements
(d) Limit speculative trading in financial markets
73. The "liquidity trap" is a situation where:
(a) Interest rates are extremely high, leading to reduced investment
(b) Interest rates are extremely low, leading to ineffective monetary policy
(c) Inflation is very low or negative, causing deflationary pressures
(d) The money supply is unable to keep up with rising demand in the economy

10
CAFC – ECONOMICS
Demand, supply & Monetary
Policy  93242 77778
74. A central bank's target for inflation is often expressed through:
(a) The GDP growth rate
(b) The unemployment rate
(c) The consumer price index (CPI) or the inflation rate
(d) The exchange rate
75. The Phillips Curve illustrates the trade-off between:
(a) Fiscal policy and monetary policy
(b) Inflation and unemployment
(c) Imports and exports
(d) Government spending and tax revenue
76. The term "forward guidance" in monetary policy refers to the central bank's
communication about its future:
(a) Fiscal policy plans (b) Inflation targets
(c) Foreign exchange reserves (d) Interest rate intentions
77. An "inverted yield curve" is a situation where:
(a) Short-term interest rates are higher than long-term interest rates
(b) Long-term interest rates are higher than short-term interest rates
(c) Interest rates remain constant across all maturities
(d) There is no relationship between short-term and long-term interest rates
78. The "dual mandate" of some central banks typically includes objectives related to:
(a) Financial stability and exchange rate stability
(b) Economic growth and unemployment
(c) Fiscal deficit reduction and price stability
(d) Money supply growth and inflation control
79. During periods of economic expansion, a central bank may pursue a policy of:
(a) Tightening money supply and raising interest rates
(b) Expanding money supply and lowering interest rates
(c) Reducing government spending and increasing taxes
(d) Decreasing money supply and increasing government spending
80. "Sterilization" in the context of monetary policy refers to the central bank's actions
to:
(a) Neutralize the impact of fiscal policies
(b) Remove excess liquidity from the banking system
(c) Influence the exchange rate through market interventions
(d) Implement price controls on essential goods and services

11
CAFC – ECONOMICS
Demand, supply & Monetary
Policy  93242 77778

ANSWERS

1. (d) 2. (b) 3. (d) 4. (c) 5. (d) 6. (d)

7. (c) 8. (a) 9. (c) 10. (d) 11. (a) 12. (b)
13. (d) 14. (a) 15. (d) 16. (d) 17. (a) 18. (a)
19. (a) 20. (a) 21. (b) 22. (b) 23. (b) 24. (c)
25. (d) 26. (c) 27. (a) 28. (b) 29. (a) 30. (d)
31. (b) 32. (d) 33. (a) 34. (d) 35. (a) 36. (b)
37. (c) 38. (c) 39. (d) 40. (c) 41. (b) 42. (c)
43. (a) 44. (c) 45. (a) 46. (c) 47. (d) 48. (c)
49. (d) 50. (c) 51. (c) 52. (a) 53. (b) 54. (a)
55. (c) 56. (b) 57. (b) 58. (b) 59. (d) 60. (d)
61. (c) 62. (d) 63. (d) 64. (b) 65. (d) 66. (b)
67. (a) 68. (d) 69. (a) 70. (a) 71. (d) 72. (b)
73. (b) 74. (c) 75. (b) 76. (d) 77. (a) 78. (b)
79. (a) 80. (b)

~~~~~~~~~~~

12