Money and Banking (Economic Development) Part-I

Total Questions: 150

11. Which of the following is a most likely consequence of implementing the 'Unified Payments Interface (UP) ? [U.P.S.C (Pre) 2017]

Correct Answer: (a) Mobile wallets will not be necessary for online payments.
Solution:Unified Payments Interface (UPI) is an instant real-time payment system developed by National Payments Corporation of India (NPCI) for facilitating inter-bank transactions through mobile phone. UPI allows sending or requesting money between any two bank account through inter-bank payment system.

The most likely consequence of implementing the UPI is that mobile wallets will not be necessary for online payments, because customer's mobile number is directly linked with the bank account using bank's 'customized app' which is built on the UPI platform.

12. With reference to Central Bank digital currencies, consider the following statements : [U.P.S.C (Pre) 2023]

1. It is possible to make payments in a digital currency without using US dollar or SWIFT system.
2. A digital currency can be distributed with a condition programmed into is such as a time-frame for spending it.

Which of the statements given above is/are correct?

Correct Answer: (C) 1 only
Solution:A Central Bank digital currency (CBDC) is a form of digital currency issued by country's Central Bank. it is a similar to cryptocurrencies, except that its value is fixed by the Central Bank and its equivalent to the country's fiat currency Governments and Central banks worldwide are exploring the possibility of using government- back digital currencies.

Alternative to SWIFT( Society for Worldwide interbank Financial Telecommunication) systems and the U.S dollar are coming from two directions : cryptocurrencies and Central Bank digital currencies. It is possible to make payments in a digital currency without using US dollar or SWIFT system . Countries will be able to directly exchange digital currencies in a bilateral way and without going through SWIFT or similar settlement systems.

A digital currency can be distributed with a condition programmed into is such as a time-frame for spending it. China's digital currency is programmable to have an expiry date, which gives its Central Bank power to effectively control and boost consumption demand or impose negative rate. China is exploring expiration dates with its upcoming digital yuan, or /DCEP, which means the currency will expire if not used in a certain time-frame.
Hence, both given statements are correct.

13. With reference to 'Bitcoins', sometimes seen in the news which of the following statements is/are/correct ? [U.P.S.C (Pre) 2016]

1. Bitcoins are tracked by the central banks of the countries.
2. Anyone with a Bitcoin address can send and receive Bitcoins from anyone else with a Bitcoin address.
3. Online payments can be sent without either side knowing the identity of the other.

Select the correct answer using the code given below :

Correct Answer: (b) 2 and 3 only
Solution:Bitcoin is a digital currency, that was created in January, 2009 by the mysterious and pseudonymous Satoshi Nakamoto. Bitcoin is a type of cryptocurrency. Bitcoins are not issued or booked by any banks or governments. Bitcoin is one of the first digital currencies to use peer to peer technology to facililate instant payments, in which anyone else with a Bitcoin address. Under this system, online payments can be sent without either side knowing the identity of the other . Hence, option (b) is the correct answer.

14. With reference to Non-fungible Token (NFTs), consider the following statements : [U.P.S.C (Pre) 2022]

1.They enable the digital representation of physical assets.
2.They are unique cryptographic tokens that exit on a blockchain.
3. They can be traded or exchanged at equivalency and therefore can be used as a medium of commercial transactions.

Which of the statements given above are correct?

Correct Answer: (a) 1 and 2 only
Solution:Non-Fungible Tokens (NFTs) are assets that have been tokenized via a blockchain. They are unique cryptographic tokens that exist on a blockchain and cannot be replicated. NFTs represent an ownership interest in any tangible or intangible asset. NFTs can represent digital or real-world items like artwork and real estate. They enable the digital representation of physical assets. Hence, statements 1 and 2 are correct.

NFTs and cryptocurrencies are very different from each other. Cryptocurrencies are usually fungible from a financial perspective, meaning that they can be traded or ex- changed, one for another.

NFTs shift the crypto paradigm by making each token unique and irreplaceable, making it impossible for one non-fungible token to be 'equal' to an- other. Thus, unlike cryptocurrencies, they cannot be traded or exchanged at equivalency and therefore cannot be used as a medium of commercial transactions. Hence, statement 3 is incorrect.

15. Consider the following : [U.P.S.C (pre) 2002 , U.P.P.C.S (Mains) 2008]

1.Currency with the public.
2.Demand deposits with banks.
3.Time deposits with banks.

Which of these are included in Broad Money (M3) in India?

Correct Answer: (d) 1, 2 and 3
Solution:RBI publishes figures for four alternative measures of money supply, viz. M₀, M₁ M₂ and M₃ . M₃ is known as Broad Money. M₃ includes:

M₃= Currency with the public + Demand deposits with banks + Other deposits with RBI + Time deposits with banks

or M₃ = M₁+ Time deposits with banks

16. The sum of which of the following constitutes Broad Money in India? [U.P.S.C (Pre) 1997]

1.Currency with the public.
2.Demand deposits with banks
3.Time deposits with bank.
4.Other deposits with RBI.

Choose the correct answer using the codes given below:

Correct Answer: (C) 1, 2 3 and 4
Solution:RBI publishes figures for four alternative measures of money supply, viz. M₀, M₁ M₂ and M₃ . M₃ is known as Broad Money. M₃ includes:

M₃= Currency with the public + Demand deposits with banks + Other deposits with RBI + Time deposits with banks

or M₃ = M₁+ Time deposits with banks

17. If you withdraw Rs. 1,00,000 in cash from your Demand Deposit Account at your bank, the immediate effect on aggregate money supply in the economy will be: [U.P.S.C (Pre) 2020]

Correct Answer: (d) to leave it unchanged
Solution:M3 = M₁ (Currency with the public + Demand deposits with banks + Other deposits with RBI) + Time deposits with banks, M3 is the most commonly used measure of money supply. It is also known as aggregate money supply (Broad money). Now, if we withdraw Rs.1,00,000, Demand deposits component will fall by Rs. 1,00,000 and CU (Currency held by Public) will increase by Rs. 1,00,000. It means, it leaves the money supply unchanged. Hence, option (d) is the correct answer.

18. Consider the following liquid assets: [U.P.S.C (Pre) 2013]

1.Demand deposits with the banks
2.Time deposits with the banks
3.Saving deposits with the banks
4.Currency

The correct sequence of these assets in the decreasing order of liquidity is-

Correct Answer: (d) 4-1-3-2
Solution:Currency is the most liquid asset because it is easiest for transactions. Time deposit is least liquid because it is fixed for a definite period of time and it cannot be used before its maturity. Demand deposits are more liquid than saving deposits because they can be demanded by the holder from the bank at any time. Hence, option (d) is the correct answer.

19. The money multiplier in an economy increase with which one of the following? [U.P.S.C (Pre) 2021 , U.P.S.C (Pre) 2019]

Correct Answer: (C) Increase in the banking habit of the people
Solution:The money multiplier describes how an initial deposit leads to a greater final increase in the total money supply. It identifies the ratio of decrease and/or increase in the money supply in relation to the commensurate decrease and/or increase in deposits.

Increase in banking habit of the population will lead to more deposits in the banking system and hence, banks have more money to lend out, which leads to the increase in money multiplier.

On the other hand, increase in reserve ratios like Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) decreases the money multiplier, while the increase in the population does not necessarily leads to the increase in banking deposits/money multiplier.

20. Money multiplier in India is defined as: [U.P.P.C.S (Mains) 2009 , U.P.P.C.S.(Spl.) (Mains) 2008]

Correct Answer: (b) Broad Money/Reserve Money
Solution:In India, we define money multiplier as the ratio of the stock of money or Broad Money (M3) to the stock of high powered money or Reserve Money (Mo or Rm). So if money multiplier is K, then K = M3/Mo or M3/Rm.

The money multiplier refers to the ratio of the total amount of money that can be created in the economy to the amount of new reserves injected into the banking system. It represents the potential increase in the money supply resulting from an initial injection of funds into the system.

The money multiplier is based on the fractional reserve banking system, in which banks are required to hold only a fraction of their deposits as reserves and can lend out the remaining amount. As loans are repaid, new deposits are created, and the process continues, leading to an expansion of the money supply. The money multiplier is an important concept for understanding the relationship between the monetary base and the money supply in an economy.

When banks receive deposits, they are required to hold a certain percentage of those deposits as reserves (known as the reserve ratio). The remaining amount can be lent out to borrowers in the form of loans, which increases the money supply in the economy.

The amount by which the money supply increases for every unit increase in the monetary base is known as the money multiplier. It is determined by the reserve ratio, as well as other factors such as the willingness of banks to lend and the demand for credit from borrowers.