Q1. Which of the following best defines Monetary Policy in the Indian context?
Monetary and Fiscal Policy, Union Budget and Resource Mobilisation: RAS Prelims MCQs
86 RAS Prelims MCQs on monetary and fiscal policy, the Union Budget and resource mobilisation test the tools of the RBI, the Monetary Policy Committee and inflation targeting, along with the deficits, taxes and budget terms. Each question asks for the effect of a policy change on liquidity or credit, so the explanations trace the transmission step by step.
Practice questions based on the RPSC RAS Prelims syllabus. They follow the exam pattern but are not past-paper questions.
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Q2. According to the Reserve Bank of India Act, 1934, what is the primary objective of the monetary policy formulated by the RBI?
Explanation
The statutory mandate for monetary policy involves prioritizing the maintenance of price stability while keeping the objective of growth in mind. This dual mandate ensures that inflation remains within a specified range, providing a stable environment for investment. Achieving this balance is essential for long-term economic prosperity and protecting the purchasing power of the domestic currency for all citizens.
Q3. Which of the following statements correctly describes the Repo Rate?
Explanation
The repurchase rate serves as a key liquidity management tool where the central bank provides short-term funds to commercial banks. Banks pledge government securities as collateral under an agreement to buy them back at a future date. Adjusting this rate directly influences the overall interest rate structure and the cost of credit available within the broader financial system and economy.
Q4. If the Reserve Bank of India decides to increase the Cash Reserve Ratio (CRR), what will be the most likely impact on the banking system?
Explanation
Increasing the reserve requirement mandates commercial banks to park a higher proportion of their total deposits with the central bank. Consequently, the volume of funds available for lending to website businesses and individuals is restricted. This reduction in loanable capital serves as a contractionary measure to control liquidity, manage inflationary pressures, and regulate the overall money supply in the economy.
Q5. Identify the odd one out among the following instruments of economic stabilization.
Explanation
Economic stabilization measures are generally divided into monetary and fiscal categories. Tools such as open market operations, statutory liquidity ratios, and standing facilities are managed by the central bank to regulate money supply and interest rates. In contrast, taxation strategies involve government decisions regarding revenue collection, representing a primary instrument of fiscal policy rather than central bank operations or tools.
Q6. What happens when the Reserve Bank of India increases the Reverse Repo Rate?
Explanation
Raising the interest rate on deposits kept with the central bank makes it more attractive for commercial banks to park their surplus cash. This action effectively drains excess liquidity from the financial system by incentivizing banks to lend less to the public. It serves as a contractionary tool to tighten the money supply and control rising inflation levels in markets.
Q7. Given below are two statements, one is labelled as Assertion (A) and the other as Reason (R).
Assertion (A): During periods of high inflation, the Reserve Bank of India generally sells government securities in the open market.
Reason (R): Selling government securities helps the central bank absorb excess liquidity from the banking system.
Assertion (A): During periods of high inflation, the Reserve Bank of India generally sells government securities in the open market.
Reason (R): Selling government securities helps the central bank absorb excess liquidity from the banking system.
Explanation
Selling government securities in the open market is a contractionary measure designed to reduce the money supply. When the central bank sells these bonds, it collects cash from commercial banks, thereby decreasing their capacity to create credit. This reduction in systemic liquidity helps lower aggregate demand, which is crucial for managing price levels and stabilizing the economy during inflation.
Q8. Which of the following statements regarding the Statutory Liquidity Ratio (SLR) is incorrect?
Explanation
Commercial banks are required to maintain a specific percentage of their net demand and time liabilities in liquid assets like gold or securities. This mandatory reserve ensures solvency and controls the flow of credit. However, the central bank does not provide any interest payments on these holdings. Banks typically earn returns from the underlying securities themselves rather than from the RBI.
Q9. Which of the following represents the correct sequence of policy rates generally maintained by the RBI in descending order of their magnitude under normal economic conditions?
Explanation
Under normal economic conditions, the corridor for interest rates is structured with the marginal standing facility at the top to penalize emergency borrowing. The repo rate acts as the primary signal rate in the middle. The reverse repo rate forms the floor, ensuring that the return on parking funds remains lower than the cost of borrowing from the central bank.
Q10. What is the immediate effect of the Reserve Bank of India purchasing government securities from the public under Open Market Operations?
Explanation
When the central bank buys government bonds from the public or financial institutions, it injects liquidity directly into the banking system. This increase in cash reserves enables banks to expand their lending activities to businesses and consumers. Such expansionary measures are typically used to stimulate economic activity, lower interest rates, and ensure adequate credit flow within the national financial system.Answer key for these questions
| Q | Correct answer |
|---|---|
| 1 | (b) Central bank’s macroeconomic policy for money supply and rates |
| 2 | (a) Maintain price stability and support growth |
| 3 | (c) Rate for RBI’s short-term lending to banks against securities |
| 4 | (d) The lendable resources of the commercial banks will decrease |
| 5 | (b) Taxation Policies |
| 6 | (d) Encourages banks to park funds with RBI, reducing liquidity |
| 7 | (a) Both A and R are true and R is the correct explanation of A. |
| 8 | (c) The Reserve Bank of India pays a fixed penalty interest to banks on the SLR maintained |
| 9 | (a) Marginal Standing Facility Rate, Repo Rate, Reverse Repo Rate |
| 10 | (d) Total money supply in the economy increases |
Key facts from Monetary and Fiscal Policy, Union Budget and Resource Mobilisation
- The objective of monetary policy under the RBI Act, 1934 is to maintain price stability while supporting growth.
- If the RBI increases the CRR, the lendable resources of commercial banks decrease.
- A higher reverse repo rate encourages banks to park funds with the RBI, reducing liquidity.
- The statutory framework for the Monetary Policy Committee was introduced by amending the Reserve Bank of India Act, 1934.
- Inflation targeting means keeping retail inflation within a statutory target range.
- When the RBI buys government securities from the market, the total money supply increases.
Frequently asked questions
How many RAS Prelims practice MCQs are there on Monetary and Fiscal Policy, Union Budget and Resource Mobilisation?
This page has 86 practice MCQs on Monetary and Fiscal Policy, Union Budget and Resource Mobilisation (Indian Economy). Each has the correct answer, and most have an explanation.
What happens when the RBI raises the CRR?
Banks must keep a larger share of their deposits with the RBI, so their lendable resources decrease. Credit becomes tighter, and the policy is used to control inflation.
What is inflation targeting?
A monetary policy framework in which the central bank aims to keep inflation within a stated range. In India the RBI works to a statutory target for retail (CPI) inflation, and the Monetary Policy Committee decides the policy rate.
What is the effect of the RBI buying government securities?
It pays the sellers with new money, so the total money supply in the economy increases. This is an open market operation, used to add liquidity, and selling securities does the opposite and absorbs liquidity from the banks.