Unit 13: Monetary Policy - Practice Quiz

1 Monetary policy refers to the policy that primarily controls the:

2 In India, monetary policy is formulated and implemented by the:

3 A monetary policy that increases the money supply to encourage economic activity is called:

4 A tight or contractionary monetary policy is generally used to:

5 Which of the following is a common objective of monetary policy?

6 Ensuring adequate flow of credit to productive sectors is an objective aimed at achieving:

7 "Full employment" as an objective of monetary policy means:

8 Which objective of monetary policy focuses on maintaining a stable external value of the currency?

9 The rate at which the central bank lends short-term funds to commercial banks is the:

10 The Cash Reserve Ratio (CRR) refers to the portion of deposits that banks must:

11 Buying and selling of government securities by the central bank is known as:

12 The Statutory Liquidity Ratio (SLR) requires banks to maintain a minimum percentage of their deposits in the form of:

13 Which of the following is a quantitative (general) tool of monetary policy?

14 Moral suasion, as a monetary tool, mainly involves the central bank:

15 If the central bank raises the repo rate, borrowing generally becomes:

16 Inflation refers to a sustained rise in the:

17 To control high inflation, the central bank is most likely to:

18 The framework in which the central bank aims to keep inflation near a specified target is called:

19 After the economic reforms of 1991, Indian monetary policy moved towards greater reliance on:

20 A key feature of monetary policy after economic reforms in India has been:

21 Monetary policy is best described as the process by which a central bank manages the supply of money and credit to achieve macroeconomic goals. Which authority is primarily responsible for conducting monetary policy in an economy?

22 A student claims that monetary policy and fiscal policy are the same because both influence the economy. What is the most accurate correction?

23 A central bank raises interest rates specifically to keep the general rise in prices under control. Which objective of monetary policy is it pursuing?

24 Which pair of objectives can sometimes conflict, forcing the central bank to make a trade-off?

25 The objective of monetary policy that focuses on maintaining a steady value of the domestic currency against foreign currencies is called:

26 If the central bank wants to reduce liquidity in the banking system, which action regarding the Cash Reserve Ratio (CRR) should it take?

27 During a recession, the central bank wants to encourage borrowing and boost demand. Which open market operation is appropriate?

28 The repo rate is the rate at which the central bank lends to commercial banks. If the repo rate is increased, what is the most likely immediate effect?

29 Which of the following is a qualitative (selective) credit control tool rather than a quantitative one?

30 The Statutory Liquidity Ratio (SLR) requires banks to maintain a minimum percentage of their net demand and time liabilities in the form of:

31 The reverse repo rate is the rate at which the central bank borrows from banks. Raising the reverse repo rate primarily encourages banks to:

32 Suppose the CRR is and banks receive fresh deposits of crore. Assuming no leakages, the maximum credit the banking system can create is approximately:

33 To combat high demand-pull inflation, the central bank should adopt a policy stance that is:

34 Under an inflation targeting framework, the central bank commits to keeping inflation:

35 Monetary policy is generally considered less effective against which type of inflation?

36 If the nominal interest rate is and the inflation rate is , the approximate real interest rate is:

37 After the economic reforms of the early 1990s in India, monetary policy shifted increasingly toward reliance on:

38 A notable institutional change in Indian monetary policy after reforms was the establishment of the Monetary Policy Committee (MPC), whose main task is to:

39 One key aim of monetary policy in the post-reform period was to promote financial deepening. This refers to:

40 Why did the effectiveness of the monetary transmission mechanism become an important concern after reforms?

41 A central bank announces it will keep policy rates unchanged but shifts its communication from 'accommodative' to 'neutral' without any change in reserve requirements or open market operations. This action is best characterized as which aspect of monetary policy?

42 Monetary policy is often described as operating through 'transmission channels'. If a policy rate cut fails to reduce bank lending rates because banks are recapitalizing and hoarding liquidity, which channel is said to be impaired?

43 In a liquidity trap, expansionary monetary policy loses effectiveness primarily because:

44 A central bank faces rising inflation alongside stagnating output (stagflation). Pursuing price stability strictly would require tightening, but this worsens unemployment. This dilemma illustrates:

45 Under a flexible inflation targeting framework, a central bank with a target (band ) observes a supply shock pushing inflation to . Which response is most consistent with 'flexible' rather than 'strict' targeting?

46 The objective of 'exchange rate stability' can conflict with an independent domestic monetary policy under free capital mobility. This tension is formally captured by:

47 If the Cash Reserve Ratio is and there are no leakages, an injection of crore of primary deposits can theoretically expand total deposits to a maximum of:

48 During open market operations, when the central bank buys government securities from commercial banks, the immediate effect on the banking system is:

49 Consider the corridor system: the repo rate is , the reverse repo (SDF) is , and the MSF rate is . The overnight interbank call rate would normally be expected to trade:

50 A central bank raises the Statutory Liquidity Ratio while simultaneously conducting open market purchases. The net effect on commercial banks' free lendable resources is:

51 Which combination best distinguishes 'quantitative' from 'qualitative' credit control tools?

52 Sterilized intervention refers to a situation where the central bank:

53 A major shift in Indian monetary policy after the 1991 reforms was the move away from direct instruments. Which change best reflects this transition?

54 The 1994 and 1997 agreements between the RBI and the Government of India to phase out ad hoc treasury bills primarily aimed to:

55 The adoption of the flexible inflation targeting framework in India (formalized in 2016) shifted the nominal anchor toward:

56 The introduction of the Multiple Indicator Approach in 1998 was a response to which problem observed after reforms?

57 Suppose the real interest rate target is and expected inflation is . Under a Taylor-type rule requiring the nominal rate to rise more than one-for-one with inflation, if inflation rises to the nominal policy rate should be set:

58 Monetary policy is generally considered a weaker instrument against cost-push inflation than demand-pull inflation because:

59 The concept of 'time inconsistency' in monetary policy explains why a discretionary central bank may deliver:

60 Using the quantity equation , if the money supply grows at , velocity is stable, and real output grows at , the implied rate of inflation is approximately: