A. Multiple Choice Questions 1. Credit creation means creation of (a) primary deposits (b) secondary deposits (c) time deposits (d) none of these 2. Central Bank ............... credit, (a) creates (®) controls (c) restricts (d) none of the above 3. A commercial bank is a bank that (a) makes investment of funds (b) creates credit (c) gives short-term loans (d) all of these 4, The bank that operates without any profit motive in public interest is (2) Reserve Bank of India (b) Nationalised commercial bank (©) Canara Bank (d) Allahabad Bank 5. Which one is a qualitative measure of credit control? (a) Bank rate (b) Open market operations (OCRR (@) Margin requirement 6. Which of the following is not helpful in controlling money supply? (a) Free market policy (b) Bank rate (c) CRR, (d) Change in margin requirements 7. Which of the following functions is not performed by Central Bank? (2) Accepting deposit from the general public (b) Custodian of foreign exchange reserves (c) Banker’s bank (@ Currency authority When RBI acts as a banker to the government, what does it do? (a) It carries out government transactions. (b) It advises on monetary and financial matters. (c) It keeps account of the government. (d) All the above 9. Which one is not the instrument of monetary policy? e (@) Qpen market operation (b) Bank rate (c) Selective credit-control (d) Government spending 10, Which bank controls the banking and monetary structure of India? (a) Reserve Bank of India (b) State Bank of India (o) World Bank (@) Axis Bank 11. Which one of the following will increase the supply of money? (a) Fall in bank rate (b) Purchase of securities in open market (c) Decrease in CRR (d) All of these 12. The one rupee note and coins are issued by (a) Central Bank (RBI) (6) Commercial Bank (©) Ministry of Finance (d) None of the above 13. Credit control means (@ contraction of credit only. (b) extension of credit only. (c) extension and contraction of money supply. (d) none of these14. The value of credit multiplier will be high when (a) cash reserve ratio is high (8) cash reserve ratio is small (c) cash reserve ratio is zero (d) cash reserve ratio is infinity 15. When cash reserve ratio is 20% then credit multiplier will be (a) 20% () 80% (5 @a4 16. Which of the following is not concerned with banking organisation? (2) Bank rate (®) Fiscal deficit (c) Credit creation (d) Cash reserve ratio 17. Central bank is an apex bank of the country that: (e) controls the entire banking system of the country (b) issues currency (c) acts as a banker to the government (d) all of these 18. The minimum percentage of a bank's total deposits which is required to be kept with the RBI is called (2) CRR (b) repo rate (SLR (a) reverse repo rate 19. The difference between the amount of loan and market value of security offered by borrower against the loan is called: (@) Bank rate (8) Cash reserve ratio (©) Margin requirement (@) Reverse repo tate 20. Buying and selling of government securities by the central bank from the public and banks is known as: (a) Repo rate (b) Credit rationing (c) Open market operations (d) Reverse repo rate 21. Money multiplier is denoted by: (a) LRR (®) 1/LRR (©) CRR (@) 1/CRR Answers 16) 2) 3. (d) 4, (a) 5. (d) 6. (a) 7. (a) 8. (a) 9. (d) 10. (a) Idd) 12. &) BO Wh 6) 16%) 7%@ 18 (@ 19. (Cc) 20. (c) 24. (B) B. True or False 1. Decrease in cash reserve ratio adversely affects the capacity of commercial banks to create credit. 2, Commercial banks contribute to quantum of money supply in the economy as they do not have not issuing authority. 3. All financial institutions can also be termed as banking institutions. 4. Purchase of securities in the open market by the commercial banks reduces their credit creating power, 5. Cash reserve ratio and statutory liquidity ratio are not fixed by the commercial banks themselves. 6. Size of money multiplier is given by the inverse of LRR 7. Loans offered by commercial banks are not equal to deposits received by them. 8. RBI acts as the banker to the central government and commercial bank act as banker to the general public 9. To increase the money supply in the economy, central bank reduces the margin requirements,Solution to True or False 1. False 2. True 3. False 4. True 5. True 6. True 7. True 8. True 9. True C. Very Short Answer Questions 1. What is a commercial bank? 2. What is meant by credit creation? 3. What is the name of central bank of India? 4. Give one point of difference between a central bank and a commercial bank. 5. Name any one function of a central bank. 6. Who controls the credit in an economy? 7. Who has the power to issue currency notes in an economy? 8, What is meant by cash reserve ratio? 9, What is meant by statutory liquidity ratio? 10. What will be the effect of a rise in bank rate on money supply? 11. What is meant by credit multiplier? 12. When does a central bank increase bank rate? 13. What is meant by credit rationing? 14. When does central bank lower the cash reserve ratio (CRR)? 45. What is meant by margin requirement of loans? 16. Define bank rate/repo rate. [Delhi 2013] Answers to Very Short Questions 1. Acommercial bank is an institution which performs the functions of accepting deposits from the public and giving loans and making investments with the object of securing profits. 2. Credit creation means the creation of bank deposits. 3. Reserve Bank of India. 4. A commercial bank is operated for profits but the central bank is set up basically in public interest. 5. Bank of Issue. 6. Central bank. 7. Central bank. 8. Every commercial bank is required to keep a minimum percentage of its total deposits with the central bank, this is termed as cash reserve ratio. 9. Statutory liquidity ratio is the ratio of total demand and time deposits of commercial bank which is to be kept in the form of specified liquid assets. 10. Money supply will be reduced. 11. Credit multiplier indicates that the total credit creation is some multiple of the primary : ee TTotal credit creation _ 1 apoaite. Credit multiplier == ott credit ceatios at y rect mullipllet = ‘primary cash deposits LRR 12. When general price level rises due to increase in flow of money in circulation, in that situation central bank raises bank rate. As a result of increase in bank rate, there is contraction in credit creation and excess demand. 43. Credit rationing is an arrangement in which central bank prescribes the maximum limit of credit creation by commercial banks.44. When general price level and the level of income and employment in an economy start to decline, in this situation central bank lowers the CRR to encourage credit creation. 15. The difference between the value of the security and the amount of loans is known as margin requirements of loans. 16. The rate at which Central bank advances loans to the commercial banks is known as bank rate. D. Short Answer Questions 1, Define commercial bank. 2. Briefly explain the credit creation function of commercial banks in an economy. 3. What is a Central Bank? 4. How does a Central Bank differ from a Commercial Bank? Give any three points of difference. Or Distinguish between commercial bank and central bank. 5. Why is Central Bank called ‘banker’s bank? 6. Write a short-note on ‘Control of Credit’ function of a Central Bank. Or How does a central bank perform the function of controller of credit? Or Explain any two methods of credit control used by Central Bank. [Outside 2013) 7. What do you understand by bank rate? By changing it, how does central bank affect credit creation? Or How do changes in bank rate affect money creation by Commercial Banks? Explain. 8. Describe main functions of a central bank, Or Describe any two functions of a central bank. Or Give any four major functions of a central bank 9. Briefly describe the policy of open market operations as a credit control measure. Or Explain the open market operations method of credit control used by a central bank. [Outside 2013] 10. Explain the ‘issue of currency function’ of a central bank. [Outside 2016} M1. Explain any one of the following functions of a central bank: (j) currency authority, and (ii) lender of the last resort. 12. Describe any two quantitative measures of credit control. 13, State the role of central bank as a banker to the government. [Delhi 2017] Or Explain ‘banker to the government’ function of central bank. [Dethi 2013; Outside 2014) 14. Explain “bankers’ bank and supervisor” function of central bank. (Delhi (Comptt.) 2013; Outside (Comptt.) 2013; Outside 2014] 15. Explain the meaning of cash resrve ratio and statutory liquidity ratio.ng Answer Questions 41. Do you consider a commercial bank as a ‘creator of money’ in the economy? Explain. > What is a Central Bank? Explain the functions of the Central Bank in an economy. 5 Define a Central Bank, Explain the difference between a central bank and a commercial bank. 4, What are the instruments of monetary policy of RBI? How does RBI stabilize money supply against exogenous shocks? 5. Explain the following functions of the Central bank: () Bank of issue (ii) Banker's bank 6, Given that LRR is 15% and initial deposits is € 25000, explain the process of credit creation by commercial banks. rain Teasers (HOTS) 1, Explain money creation by commercial banks with the help of an example. 2. Calculate money multiplier and total deposit created if initial deposit is of % 500 crores and ERR is 10%. 3. If the total deposits created by commercial bank is % 10,000 crores and LRR is 25% then calculate initial deposit. 4, Calculate LRR if initial deposit of % 100 crores leads to creation of total deposits of & 1,600 crores. 5, Distinguish between cash reserve ratio and statutory liquidity ratio. 6. Whether the following changes by the reserve bank will increase the money supply or decrease the money supply? (i) RBI reduces the cash reserve ratio. (ii) Purchase of securities in the open market. (ii) RBI increases the margin from 20% to 30%. (ia) Rise in repo rate. 7. What should be done in order to reduce the availability of credit for the general public? 8. Government of India has recently launched ‘Jan-Dhan Yojna’ aimed at every household in the country to have at least one bank account. How will it affect the national income. 9, Currency is issued by the central bank, yet we say that ¢ommercial banks create money Explain Hints to Brain Teasers (HOTS) 1 It is determined by- (a) Initial deposit () LRR 5 Take initial deposit as % 1000 and LRR as 0.20, _} The number of times, the total deposit will become, is determined by the deposit money multiplier: eon Money multiplier = TR ~ 92 Total deposit = 1000 x 5 = % 5000 sate 2 MN a iTeR Oe od ‘Total deposit = % 5000 crores3, Initial deposit = —Tetal deposit_ _ 10,000 _ 2500 crores Money multiplier 4 4. Total deposit = 1,600 crores Initial deposit = 7 1,00,000 ___ Total deposit nieprer 2 Soetsepete Monty ato IBUES Tela deoall =f ig 700 1 146=- — TRR LRR = 6.25% 5. CRR is minimum percentage of net demand and time liabilities to be kept by commercial banks with the central bank. On the other hand, SLR refers to minimum percentage of net demand and time liabilities in the form of designated liquid assets which commercial banks are required to maintain with themselves. 6. Increase in money supply: (ii), (. Decrease in money supply: (iv), (if) 7. RBI should increase the repo rate 8. There will be increase in the national income of the country due to more investment and money creation. 9, Commercial bank multiply money though currency is issued by the central bank