Important MCQs of Money and Banking chapter class 12 Economics

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Are you looking for the Multiple Choice Questions (MCQs) of the Money and Banking chapter with answer and Explanation of Macro-economics class 12 as per the syllabus of the CBSE Board?

I have made the collection of around 100 MCQs of Money and Banking units of economics class 12.

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Must do Multiple Choice Questions of Money and Banking units of Macroeconomics Class 12

Following are the MCQs

1. Which of the following makes a financial institution a bank?

a) Accepting borrowings
b) Lending
c) Accepting demand deposits
d) Accepting time deposits

Ans:- c)
It is only the bank which accepts the demand deposits. The Depositor is free to withdraw money out of it on demand through checque, ATM and online banking. The savings and current account are the examples of demand deposits.

2. Creation of money by commercial banks refers to:

a) Creation of bank deposits
b) Issuing currency
c) Both a) and b)
d) Neither a) nor b)

Ans – a)
The commercial bank provides loan out of the bank deposits it receive from depositors. When bank releases a loan it does not give cash. A demand deposit account is opened with the name of borrower and the loan amount is deposited into it. The borrower is free to make payment from this demand deposits through cheque, ATM, and online Banking.

3. How much money are banks able to create is determined by:-

a) Initial deposits
b) SLR
c) CRR
d) All of these

Ans – d)
How much money banks are able to create depends upon initial deposits and LRR. LRR consists of SLR and CRR.

4. The Value of Money Multiplier equal:-

a) 1/SLR
b) 1/CRR
c) 1/(SLR + CRR)
d) None of these

Ans – c)
The Value of Money Multiplier equal to 1/LRR. LRR consists of SLR + CRR.

5. Given CRR = 4% and SLR = 16%, the value of money multiplier is:-

a) 25
b) 6.25
c) 5
d) 8.33

Ans – C)
Money Multiplier equals to 1/LRR. LRR equalt to SLR + CRR. Hence Money Multiplier equals to 1/20%. After solving it comes to 5.

Read Here:- Important MCQs of Government Budget and the Economy Class 12

6. When the central bank sells securities in the market, the credit creation capacity of the commercial banks is likely to:-

a) Rise
b) Fall
c) May rise or may fall
d) No effect

Ans – b)
When central bank sells securities in the market. The general public purchase such securities because of trustworthy investment. They make payment through cheque from their bank account in commercial bank. The Amount in bank deposits fall. It further reduces the credit creation capacity of the commercial bank.

7. Lowering of CRR by the central bank has the following impact on the credit creation capacity of the commercial banks:-

a) Negative
b) Positive
c) Can be negative or can be positive
d) No effect

Lowering CRR increases the amount of deposits for lending purposes. It increases the lending capacity of the commercial bank. >

8. Raising Reverse Repo Rate by the central bank is likely to have the following impact on demand for goods and services in the economy.

a) Rise
b) Fall
c) May rise or may fall
d) No effect

Ans – b)
Raising Reverse Repo Rate incourage the commercial bank to park their funds with central bank for higher returns. The Money in deposits become less. It further reduces the lending capacity of the commercial bank

9. With lowering margin requirements by the Central bank, the borrowing capacity of the borrowers:-

a) Rises
b) Falls
c) May rise or may fall
d) No effect

Ans:- a)

Margin Requirements is the difference between the Collaterol security and loan amount senction. The lower the margin requirements larger is the loan amount senctioned.>

10. What items are not included in the Money supply measure?

a) Currency and coins with the public
b) inter-bank deposits
c) Other deposits with RBI
d) Net demand deposits with banks

Ans – b)
Money supply includes Currency and coints with the public + Net Demand deposits with banks + other deposits with RBI

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11. High powered Money consists of:-

a) Currency and coins held by the public
b) Currency, cash reserves with banks, and demand deposits
c) Currency held by the public and cash reserves with banks
d) Currency and demand deposits

Ans – c)
high powered money is the total money issued by RBI. It is always in the hands of public in the form of currency and coins and bank deposits + cash reserves with banks

12. Money Supply refers to:

a) Total volume of money held by the public at a particular point in time
b) Total volume of money held by the public over a period of time
c) Total volume of money held by the government
d) Both a) and b)

Ans – a)
Money supply is a stock concept and it is the money help bu public in the form of coins and currency and public deposits in the bank at a point of time.

Read Here:- Important MCQs of Foreign Exchange Rate with Answer and Explanation

13. Money Supply is a__________concept:-

a) Stock
b) Flow
c) Both a) and b
d) Neither a) nor b)

Ans – a)
Money supply is measured at a point of time

14. Which one of these is a limitation of the barter exchange?

a) lack of double coincidence of wants
b) lack of store of value
c) lack of a common measure of value
d) All of these

Ans – d)

15. Who regulates the money supply in India?

a) Government of India
b) Reserve Bank of India
c) Commercial Banks
d) Planning Commission

Ans – b)
The Reserve bank of India is the Central bank of India. The cental bank of country regulates the money supply

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16. Which of the following is not a problem of barter system of exchange?

a) Store of value
b) Double Coincidence of wants
c) Unit of Account
d) Unemployment

Ans – d)

17. Money supply includes:-

a) All deposits in Banks
b) Only Demand deposits in Banks
c) Only Time Deposits in Banks
d) Currency with the Banks

Ans – b)
MOney supply includes coins and currency with public + Demand deposits with banks

18. Supply of money refers to the quantity of money:-

a) As on 31st March
b) During any specified period of time
c) As on any point of time
d) During a fiscal year

Ans – c)
supply of money is a stock concept and measured at a point of time

19. ____________is the main source of money supply in an economy.

a) Central Bank
b) Commercial Banks
c) Both a) and b)
d) Government

Ans – c)

20. Name the institution which performs the functions of accepting deposits, granting loans, and making investments, with the aim of earning profits:

a) Commercial Banks
b) Central Bank
c) Neither a) nor b)
d) Both a) and b)

Ans – a)

Read Here:- Important MCQs of Balance of Paymnets with Answers and Explanation

21. This function of the Central Bank involves buying and selling of government securities from or to the public.

a) Selective Credit Controls
b) Legal Reserve Requirements
c) Open Market Operations
d) None of these

Ans – c)

22. Name the credit-control method which refers to the difference between the amount of loan and market value of the security offered by the borrower against the loan.

a) Selective Credit Controls
b) Moral Suasion
c) Margin Requirements
d) Legal Reserve Requirements

Ans – c

23. This bank operates in the public interest without any profit motive.

a) Reserve bank of India
b) State bank of India
c) Canara Bank
d) Allahabad Bank

Ans – a)

24. Through the process of______________commercial banks are able to create credit, which is in far excess of the initial deposits.

a) Advancing loans
b) Money creation
c) Accepting Deposits
d) None of these

Ans – b)

25. What will be the effect of an increase in the ‘Repo Rate on the Money Supply?

a) Money supply will increase
b) Money supply will decrease
c) Money supply will remain same
d) Money supply will initially increase and then it will decrease

Ans – b)
Increase in the Repo Rate force the commercial bank to increase the interest rate on advancing loans. It discourages the borrower to avail loan from bank. Thus money supply will decrease.

26. The ratio of total deposits that a commercial bank has to keep with the Reserve Bank of India is Called:-

a) Statutory liquidity ratio
b) Deposit ratio
c) Cash reserve ratio
d) Legal reserve ratio

Ans – c)
Cash reserve ratio is a fraction of bank deposits that a commerical bank has to keep at central bank

27. Banks create credit:-

a) Out of nothing
b) on the basis of their securities
c) on the basis of their total assets
d) on the basis of deposits

Ans – d)
Credit creation by commercial bank depends on bank deposits and rate of LRR.

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28. If the total deposits created by banks is ₹ 10,000 crores and legal reserve requirements is 40%, then amount of initial deposits will be____________

a) ₹ 2000 crore
b) ₹ 3000 crore
c) ₹ 4000 crore
d) ₹ 14000 crore

Ans – c)
Money multiplier is 2.5. After dividing 10,000 by 2.5 we get initial deposits ₹ 4000 crore.

29. Which of the following will increase the money supply?

a) Fall in repo rate
b) Purchase of securities in the open market
c) Decrease in, the cash reserve ratio
d) All of these

Ans:- d)

Ans – d)

30. What is the other name of the money multiplier?

a) Credit Multiplier
b) Deposit Multiplier
c) Cash Reserve Ratio
d) a and b both

Ans – d)

31. In order to reduce credit in the country, RBI may:-

a) Buy securities in the open market
b) Sell securities in the open market
c) Reduce cash reserve ratio
d) Reduce Repo Rate

Ans – b)
Selling securities in the open market reduces the deposits of commercial bank. It further reduces the lending capacity.

32. The one rupee note and coins are issued by:-

a) RBI (Central Bank)
b) Commercial Bank
c) Ministry of finance
d) Central Government

Ans – c)
The Reserve bank of India is not authorised to issue coins. Since independence govt is issuing it.

33. Which of these is not the function of central bank?

a) Accepting deposits of general public
b) Custodian of foreign exchange reserve
c) Banker’s Bank
d) Currency Authority

Ans – a)
Central bank does not deal with the general public

34. Other name of legal reserve requirement is:-

a) Cash reserve ratio
b) Statutory liquidity ratio
c) required reserve ratio
d) Bank rate

Ans – c)

35. Which of the following is not the function of the central Bank:

a) Banking facilities to government
b) Banking facilities to the public
c) Lending to the government
d) Lending to commercial banks

Ans – b)
The central bank does not provide banking facility to general public. It offers banking facility to government and commercial banks.

36. Which of the following instrument can not be used by central bank to control money supply?

a) Open Market operations
b) Bank rate
c) Repo Rate
d) Government spending

Ans – d)
government spending is the instrument of fiscal policy.

37. Which bank controls the banking and monetary structure of India?

a) Reserve bank of India
b) State Bank of India
c) World Bank
d) Axis Bank

Ans – a)
Central bank has authority to regulate banking and monetary structure. In India central bank name is Reserve Bank of India

38. What is the value of money multiplier when initial deposits are ₹500 crores and LRR is 10%.

a) 0.1
b) 0.2
c) 10
d) 20

Ans – c)
Money Multiplier is 1/LRR. 1/10% comes to 10 times

39. What happens where there is an increase in the margin requirements.

a) It reduces the borrowing capacity and money supply
b) Encourages people to borrow more and money supply rise
c) No change in money supply
d) None of these

Ans – a)
Margin requirement is difference between mortgage security and loan amount. Higher is the margin requirement less would be the loan amount. Less loan amount discourages the borrower to avail loan from the bank

40. Which institution performs the activity of credit creation:-

a) Commercial Banks
b) Central bank
c) Both a) and b)
d) Neither a) nor b)

Ans – a)

41. Which of these conditions is needed for a financial institution to become a bank?

a) Accepting deposits
b) Advancing loans
c) Both a) and b)
d) Neither a) nor b)

Ans – c)
bank performs both functions. It accepts all types of deposits and advance loan to general public.

42. _______refers to that portion of total deposits of a commercial bank which it has to keep with itself in the form of liquid assets.

a) Cash Reserve Ratio
b) Statutory Liquidity Ratio
c) Bank Rate
d) Repo Rate

Ans – b)
SLR is the fraction of total deposits a commercial bank has to keep with itself.

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43. Which of the following agency is responsible for issuing ₹ 1 currency note in India?

a) Reserve Bank of India
b) Ministry of Commerce
c) Ministry of Finance
d) Niti Aayog

Ans – c)
RBI is not authorised to issue ₹ 1 currency. Ministry of Finance issues it.

44. Reverse Repo Rate is the rate at which Central Bank:-

a) Lends Money to Commercial Banks for short term
b) Lends Money to Commercial Banks for long term
c) Accepts deposits from the commercial Banks
d) None of these

Ans – c)

45. Demand Deposits include:-

a) Saving Account deposits and fixed deposits
b) Saving Account deposits and current account deposits
c) Current account deposits and fixed deposits
d) All types of deposits

Ans – b)
current and saving account deposits are called demand deposits as depositors can any time withdrew money out of it through cheque, ATM and online banking.

46. Repo rate is the rate at which:-

a) Commercial Banks purchase government securities from the central bank
b) Commercial banks can take loans from the central bank
c) Commercial banks can keep their deposits with the central bank
d) Short term loans are given by commercial banks

Ans – b)
Repo Rate is the rate at which central bank can take loan from central bank for short term needs.

47. Which of the following is not a quantitative Method of Credit Control?

a) Open Market Operatoin
b) Margin Requirements
c) Variable Reserve Ratio
d) Bank Rate Policy

Ans – b)

48. Credit Creation by commercial banks is determined by:-

a) Cash Reserve Ratio (CRR)
b) Statutory Liquidity Ratio (SLR)
c) Initial deposits
d) All of the above

Ans – d)
Credit creation by commercial bank depends upon the initial deposits and LRR. LRR consists of SLR and CRR.

49. The central bank can increase availability of credit by:-

a) Raising repo rate
b) Raising reverse repo rate
c) Buying government securities
d) Selling government securities

Ans – c)
When govt by securities. It pay to seller in cash. Seller of securities deposited their money in commercial bank. It raises the deposits thus increasing credit creation capacity of the commercial bank.

50. Which of the following is a must for anything to be called money?

a) Measure of deferred payment
b) Medium of exchange
c) Store of value
d) Measure of value

Ans – b)
Medium of exchange is the prime feature of Money.

51. Supply of money refers to the quantity of money:-

a) During the year only
b) During any period of time
c) As on 31st March only
d) As on any point of time

Ans – d)
supply is a stock concept and can be measured at a point of time.

52. Money supply refers to:

a) Currency outside banks and all bank deposits
b) Currency inside banks and all bank deposits
c) Currency outside banks and demand deposits in banks
d) Currency both inside and outside banks and demand deposits in banks

Ans – c)
Money supply includes coins and currency with public at home and demand deposits with commercial bank

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53. What items are not included in the measure of Money Supply

a) Currency and coins with the public
b) Time deposits with banks
c) Net Demand deposits with banks
d) None of the above

Ans – b)
Time deposits are not the part of Money supply

54. Name the institution which performs the functions of accepting deposits, granting loans, and making investments, with the aim of earning profits.

a) commercial Bank
b) Central Bank
c) Neither a) nor b)
d) Both a) and b)

Ans – a)
Commercial bank performs the function of accepting all types of depsoits, advancing loans and investing deposits money into various investment plans to ear profit.

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