Quantitative Instruments of Monetary Policy

Description: This quiz covers the concept of quantitative instruments of monetary policy used by central banks to influence the money supply and achieve economic objectives.
Number of Questions: 15
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The primary objective of quantitative instruments of monetary policy is to:

  1. Control inflation

  2. Stabilize exchange rates

  3. Promote economic growth

  4. Manage government debt


Correct Option: A
Explanation:

Quantitative instruments are primarily used to control inflation by influencing the money supply and interest rates.

Which of the following is a quantitative instrument of monetary policy?

  1. Open market operations

  2. Bank rate

  3. Cash reserve ratio

  4. Statutory liquidity ratio


Correct Option:
Explanation:

Open market operations, bank rate, cash reserve ratio, and statutory liquidity ratio are all quantitative instruments of monetary policy.

Open market operations involve:

  1. Buying and selling of government securities

  2. Changing the bank rate

  3. Adjusting the cash reserve ratio

  4. Imposing credit ceilings


Correct Option: A
Explanation:

Open market operations involve buying and selling of government securities to influence the money supply.

An increase in the bank rate leads to:

  1. Higher interest rates

  2. Lower interest rates

  3. Stable interest rates

  4. Negative interest rates


Correct Option: A
Explanation:

An increase in the bank rate leads to higher interest rates in the economy.

The cash reserve ratio (CRR) is the percentage of:

  1. Total deposits that banks must hold as reserves

  2. Total loans that banks must hold as reserves

  3. Total assets that banks must hold as reserves

  4. Total equity that banks must hold as reserves


Correct Option: A
Explanation:

The cash reserve ratio is the percentage of total deposits that banks must hold as reserves with the central bank.

An increase in the statutory liquidity ratio (SLR) leads to:

  1. Higher liquidity in the banking system

  2. Lower liquidity in the banking system

  3. No change in liquidity

  4. Negative liquidity


Correct Option: B
Explanation:

An increase in the SLR leads to lower liquidity in the banking system as banks are required to hold more of their assets in government securities.

Quantitative instruments of monetary policy are effective in:

  1. Short-term economic management

  2. Long-term economic management

  3. Both short-term and long-term economic management

  4. Neither short-term nor long-term economic management


Correct Option: C
Explanation:

Quantitative instruments can be used for both short-term economic management (e.g., controlling inflation) and long-term economic management (e.g., promoting economic growth).

The effectiveness of quantitative instruments of monetary policy depends on:

  1. The state of the economy

  2. The credibility of the central bank

  3. The level of public confidence

  4. All of the above


Correct Option: D
Explanation:

The effectiveness of quantitative instruments depends on various factors, including the state of the economy, the credibility of the central bank, and the level of public confidence.

Quantitative instruments of monetary policy can have unintended consequences, such as:

  1. Crowding out of private investment

  2. Asset price bubbles

  3. Financial instability

  4. All of the above


Correct Option: D
Explanation:

Quantitative instruments can have unintended consequences such as crowding out of private investment, asset price bubbles, and financial instability.

Which of the following is NOT a quantitative instrument of monetary policy?

  1. Moral suasion

  2. Open market operations

  3. Bank rate

  4. Cash reserve ratio


Correct Option: A
Explanation:

Moral suasion is a qualitative instrument of monetary policy, while open market operations, bank rate, and cash reserve ratio are quantitative instruments.

Quantitative instruments of monetary policy are typically implemented by:

  1. The central bank

  2. The government

  3. The private sector

  4. All of the above


Correct Option: A
Explanation:

Quantitative instruments of monetary policy are typically implemented by the central bank.

The quantitative instrument of monetary policy that directly affects the cost and availability of credit is:

  1. Open market operations

  2. Bank rate

  3. Cash reserve ratio

  4. Statutory liquidity ratio


Correct Option: B
Explanation:

The bank rate directly affects the cost and availability of credit by influencing the interest rates charged by banks.

Which of the following is NOT a purpose of quantitative instruments of monetary policy?

  1. Controlling inflation

  2. Promoting economic growth

  3. Stabilizing exchange rates

  4. Managing government debt


Correct Option: D
Explanation:

Managing government debt is not a purpose of quantitative instruments of monetary policy.

Quantitative instruments of monetary policy can be used to:

  1. Increase the money supply

  2. Decrease the money supply

  3. Both increase and decrease the money supply

  4. None of the above


Correct Option: C
Explanation:

Quantitative instruments can be used to both increase and decrease the money supply, depending on the specific instrument and the economic conditions.

The quantitative instrument of monetary policy that directly affects the liquidity of banks is:

  1. Open market operations

  2. Bank rate

  3. Cash reserve ratio

  4. Statutory liquidity ratio


Correct Option: C
Explanation:

The cash reserve ratio directly affects the liquidity of banks by determining the amount of reserves they are required to hold.

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