Monetary Policy in India: Objectives and Instruments

Description: This quiz is designed to assess your understanding of the objectives and instruments of monetary policy in India.
Number of Questions: 15
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Tags: economics monetary policy india
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What is the primary objective of monetary policy in India?

  1. To maintain price stability

  2. To promote economic growth

  3. To ensure financial stability

  4. To control inflation


Correct Option: A
Explanation:

The primary objective of monetary policy in India is to maintain price stability, which is essential for sustained economic growth and development.

Which of the following is not an instrument of monetary policy in India?

  1. Open market operations

  2. Bank rate

  3. Reserve ratio

  4. Fiscal policy


Correct Option: D
Explanation:

Fiscal policy is not an instrument of monetary policy, as it is concerned with the government's spending and taxation policies.

What is the impact of an increase in the bank rate on the economy?

  1. It increases the cost of borrowing

  2. It decreases the cost of borrowing

  3. It has no impact on the cost of borrowing

  4. It increases the money supply


Correct Option: A
Explanation:

An increase in the bank rate increases the cost of borrowing for banks and other financial institutions, which in turn leads to an increase in the cost of borrowing for businesses and consumers.

What is the impact of an increase in the reserve ratio on the economy?

  1. It increases the money supply

  2. It decreases the money supply

  3. It has no impact on the money supply

  4. It increases the cost of borrowing


Correct Option: B
Explanation:

An increase in the reserve ratio decreases the amount of money that banks can lend out, which in turn leads to a decrease in the money supply.

What is the impact of open market operations on the economy?

  1. It increases the money supply

  2. It decreases the money supply

  3. It has no impact on the money supply

  4. It increases the cost of borrowing


Correct Option: A
Explanation:

Open market operations involve the central bank buying or selling government securities in the open market. When the central bank buys government securities, it injects money into the economy, which leads to an increase in the money supply.

Which of the following is not a type of open market operation?

  1. Repurchase agreements

  2. Reverse repurchase agreements

  3. Quantitative easing

  4. Fiscal policy


Correct Option: D
Explanation:

Fiscal policy is not a type of open market operation, as it is concerned with the government's spending and taxation policies.

What is the impact of quantitative easing on the economy?

  1. It increases the money supply

  2. It decreases the money supply

  3. It has no impact on the money supply

  4. It increases the cost of borrowing


Correct Option: A
Explanation:

Quantitative easing is a type of open market operation in which the central bank purchases large quantities of government securities and other assets from banks and other financial institutions. This injects money into the economy, which leads to an increase in the money supply.

What is the impact of a decrease in the bank rate on the economy?

  1. It increases the cost of borrowing

  2. It decreases the cost of borrowing

  3. It has no impact on the cost of borrowing

  4. It decreases the money supply


Correct Option: B
Explanation:

A decrease in the bank rate decreases the cost of borrowing for banks and other financial institutions, which in turn leads to a decrease in the cost of borrowing for businesses and consumers.

What is the impact of a decrease in the reserve ratio on the economy?

  1. It increases the money supply

  2. It decreases the money supply

  3. It has no impact on the money supply

  4. It increases the cost of borrowing


Correct Option: A
Explanation:

A decrease in the reserve ratio increases the amount of money that banks can lend out, which in turn leads to an increase in the money supply.

Which of the following is not an objective of monetary policy in India?

  1. To maintain price stability

  2. To promote economic growth

  3. To ensure financial stability

  4. To reduce unemployment


Correct Option: D
Explanation:

Reducing unemployment is not an objective of monetary policy in India, as it is primarily concerned with maintaining price stability and ensuring financial stability.

What is the impact of an increase in the money supply on the economy?

  1. It increases inflation

  2. It decreases inflation

  3. It has no impact on inflation

  4. It increases the cost of borrowing


Correct Option: A
Explanation:

An increase in the money supply leads to an increase in the overall level of prices in the economy, which is known as inflation.

What is the impact of a decrease in the money supply on the economy?

  1. It increases inflation

  2. It decreases inflation

  3. It has no impact on inflation

  4. It decreases the cost of borrowing


Correct Option: B
Explanation:

A decrease in the money supply leads to a decrease in the overall level of prices in the economy, which is known as deflation.

Which of the following is not a type of monetary policy instrument?

  1. Open market operations

  2. Bank rate

  3. Reserve ratio

  4. Fiscal policy


Correct Option: D
Explanation:

Fiscal policy is not a type of monetary policy instrument, as it is concerned with the government's spending and taxation policies.

What is the impact of an increase in the cost of borrowing on the economy?

  1. It increases investment

  2. It decreases investment

  3. It has no impact on investment

  4. It increases the money supply


Correct Option: B
Explanation:

An increase in the cost of borrowing makes it more expensive for businesses and consumers to borrow money, which leads to a decrease in investment and spending.

What is the impact of a decrease in the cost of borrowing on the economy?

  1. It increases investment

  2. It decreases investment

  3. It has no impact on investment

  4. It decreases the money supply


Correct Option: A
Explanation:

A decrease in the cost of borrowing makes it less expensive for businesses and consumers to borrow money, which leads to an increase in investment and spending.

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