Dpp

Daily practice Problems

money
Daily Practice Problems
 Difficulty level- EASY

7. What is the main issue with the

1. What is the main function of money in an
economy? barter system that money resolves?
a) Medium of exchange a) Lack of trust
b) Unit of account b) Double coincidence of wants
c) Store of value c) Limited storage options
d) All of the above d) High transaction costs

8. The Reserve Bank of India issues

2. What is fiat money?
a) Money with intrinsic value currency under which system?
b) Money backed by gold reserves a) Full-reserve system
c) Money declared legal tender by the b) Proportional-reserve system
government c) Minimum Reserve System
d) Money used only for international trade d) Fractional-reserve system

3. 9. What is the term for money that is

Which of the following is an example of
commodity money? quickly convertible into cash?
a) Paper currency a) Liquidity
b) Gold coins b) Velocity
c) Cryptocurrency c) Tangibility
d) Demand drafts d) Elasticity

4. 10. The velocity of money refers to:

What does M1 in money supply include?
a) Only currency with the public a) The rate at which money is printed
b) Currency with the public and demand b) The speed at which money circulates in the
deposits with banks economy
c) Total savings and deposits c) The frequency of transactions in the
d) Cash reserves with the central bank government sector
d) The amount of reserves held by banks

5. What is the most liquid measure of money

supply? 11. Which of the following is not a
a) M1 function of the RBI?
b) M2 a) Printing of all coins and Rs. 1 notes
c) M3 b) Issuing currency
d) M4 c) Managing inflation 8.
d) Acting as the lender of last resort

6. Legal tender is defined as money that:

a) Can be refused for payments 12. What is Gresham’s Law?
b) Must be accepted for payment of debts a) Bad money drives good money out of circulation
c) Is issued by private institutions b) Good money drives bad money out of circulation
9.
d) Is only used in digital transactions c) Currency loses its value over time
d) Money supply reduces during inflation

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13. What is "high-powered money"? 18. What is the difference between M3 and M1 in
a) Total currency with the public terms of money supply?
b) Total reserves with the central bank a) Savings deposits in post offices
c) Currency with the public and reserves with b) Time deposits with banks
the central bank c) Currency in circulation
d) Savings deposits with banks d) Demand deposits

14. Which of the following is an example of near 19. Which entity is responsible for printing Rs. 1
money? notes in India?
a) Fixed deposits a) Reserve Bank of India
b) Physical cash b) Ministry of Finance
c) Cryptocurrency c) Comptroller and Auditor General
d) Demand drafts d) State Governments

15. What does the term "money multiplier" refer to? 20. What is the purpose of liquidity adjustment
a) The ratio of broad money to high-powered facilities like repo and reverse repo?
money a) Regulate inflation and stabilize currency
b) The total amount of foreign exchange b) Fund public welfare schemes
reserves c) Provide loans to private companies
c) The speed at which money changes hands d) Ensure credit flow to the rural sector
d) The difference between M1 and M3

16. The central bank uses which of the following 21. Cryptocurrency is an example of:
to control money supply? a) Fiat money
a) Repo rate b) Fiduciary money
b) Taxation policy c) Digital money
c) Foreign trade policy d) Commodity money
d) Infrastructure spending

17. 22. The Consumer Price Index (CPI) measures:

Which type of money has intrinsic value?
a) Fiat money a) Changes in the price of gold
b) Commodity money b) Changes in general price levels for consumer
9.
c) Fiduciary money goods and services 8.
d) Near money c) Production levels of goods in the economy
d) Growth rate of the GDP

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23. In India, which monetary aggregate is 28. The term "broad money" includes:
referred to as "broad money"? a) Only physical cash in circulation
a) M1 b) Currency with public and time deposits
b) M2 with banks
c) M3 c) Government bonds and securities
d) M4 d) Only demand deposits

24. Which type of money is not backed by 29. The Reserve Bank of India’s main tool for
physical reserves like gold? absorbing excess liquidity is:
a) Fiat money a) Repo rate
b) Commodity money b) Reverse repo rate
c) Representative money c) Bank Rate
d) Near money d) Cash Reserve Ratio

25. 30. What is the characteristic feature of plastic

What is the current inflation targeting range in
India? money?
a) 3-7% a) It is issued by the central government
b) 2-6% b) It refers to debit and credit cards
c) 4-8% c) It is directly linked to gold reserves
d) 1-5% d) It is used for foreign trade only

26.. Central Bank Digital Currency (CBDC) is an

example of:
a) Cryptocurrency
b) Fiat money
c) Representative money
d) Near money

27. The Minimum Reserve System requires RBI to

maintain reserves of:
a) Rs. 200 crore in gold and foreign currency
b) Rs. 100 crore in cash
c) Rs. 500 crore in securities
d) Rs. 200 crore in bonds

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Difficulty level- MEDIUM

1. Which of the following are functions of money? 4. Which of the following come under broad
1. Medium of exchange money (M3)?
2. Store of value 1. Currency with the public
3. Instrument for creating inflation 2. Demand deposits with banks
4. Unit of account 3.Time deposits with banks
a) 1 and 2 only 4.Treasury bills
b) 1, 2, and 4 only a) 1 and 2 only
c) 2, 3, and 4 only b) 1, 2, and 3 only
d) 1, 3, and 4 only c) 2, 3, and 4 only
d) 1, 2, 3, and 4

2. Which of the following are components of M1? 5. Which of the following are characteristics of
1. Currency with the public high-powered money?
2. Demand deposits with banks 1. Includes currency in circulation
3. Time deposits with banks 2.Includes reserves with the central bank
4. Other deposits with RBI 3.Excludes time deposits with banks
a) 1 and 2 only 4.Represents the most liquid form of money
b) 1, 2, and 3 only a) 1 and 2 only
c) 1, 2, and 4 only b) 1, 2, and 3 only
d) 1, 3, and 4 only c) 1, 2, 3, and 4
d) 1, 3, and 4 only

3. 1. It is issued by the government or central bank. 6. Which of the following measures are used by
2. It is backed by gold reserves. the RBI to control money supply?
3. It has no intrinsic value. 1.Repo rate
4. It is declared legal tender by law. 2.Cash reserve ratio
3.Statutory liquidity ratio
a) 1 and 3 only 4.Goods and Services Tax (GST)
b) 1, 3, and 4 only
c) 2, 3, and 4 only a) 1 and 2 only
d) 1, 2, 3, and 4 b) 1, 2, and 3 only
c) 2, 3, and 4 only
d) 1, 3, and 4 only

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7. Which of the following statements are correct 10. Which of the following are true about
about legal tender money? cryptocurrencies?
1. It must be accepted for all payments. 1.They are not backed by any central authority.
2.It can include both fiat money and commodity 2. They are a form of digital money.
money. 3.They have intrinsic value like commodity
3. It cannot be refused for settling debts. money.
4. it is universally accepted across all countries. 4.They rely on blockchain technology.
a) 1 and 3 only a) 1 and 2 only
b) 1, 2, and 3 only b) 1, 2, and 4 only
c) 2, 3, and 4 only c) 1, 3, and 4 only
d) 1, 3, and 4 only d) 2, 3, and 4 only

8. Which of the following are advantages of the 11. Which of the following statements are true about
barter system? Gresham’s Law?
1.No need for a central authority to regulate 1. Bad money drives good money out of
trade. circulation.
2.Eliminates the need for a medium of exchange. 2.It applies to situations where both types of
3.Direct trade of goods and services without money are in circulation.
intermediaries. 3.It states that undervalued money is hoarded.
4.Efficient pricing of goods. 4.It applies only in barter economies.
a) 1 and 2 only a) 1 and 3 only
b) 1, 2, and 3 only b) 1, 2, and 3 only
c) 1 and 3 only c) 2, 3, and 4 only
d) 2, 3, and 4 only d) 1, 2, 3, and 4

9. Which of the following are included in near 12. Whichof the following are monetary
money? aggregates measured in India?
1.Fixed deposits 1. M1
2.Savings accounts 2.M2
3.Physical currency 3.M3
4.Treasury bills 4.GDP

a) 1 and 2 only a) 1 and 3 only

b) 1, 2, and 4 only b) 1, 2, and 3 only
c) 2 and 3 only c) 2, 3, and 4 only
d) 1, 3, and 4 only d) 1, 3, and 4 only

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13.Which of the following instruments are used in
the money market?
1. Treasury bills
2.Commercial papers
3.Corporate bonds
4.Certificates of depositOptions:

a) 1 and 2 only
b) 1, 2, and 4 only
c) 2, 3, and 4 only
d) 1, 3, and 4 only

14. Which of the following are objectives of inflation

targeting?
1. Stabilizing the value of money
2.Promoting economic growth
3.Increasing fiscal revenue
4.Controlling price volatility

a) 1 and 4 only
b) 1, 2, and 4 only
c) 2, 3, and 4 only
d) 1, 3, and 4 only

15. Which of the following are tools of quantitative

monetary policy?
1. Open market operations
2.Bank rate policy
3.Credit rationing
4.Reverse repo rate

a) 1 and 2 only
b) 1, 2, and 4 only
c) 2, 3, and 4 only
d) 1, 3, and 4 only

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 Difficulty level-HARD

1. Match monetary policy tools with their functions:

Tool Function

A. Repo Rate 1. Mandates reserves with RBI

B. Reverse Repo Rate 2. Controls short-term borrowing costs
C. CRR (Cash Reserve Ratio) 3. Absorbs excess liquidity
D. Open Market Operations 4. Regulates liquidity via securities

2. Match monetary aggregates with their components:

Monetary
Component
Aggregate

A. M1 1. Currency with the public + demand deposits

B. M2 2. M3 + All post office deposits

C. M3 3. M1 + Time deposits with banks
D. M4 4. M1 + Savings deposits at post offices

3. Match types of money with their characteristics:

Type Characteristic

A. Fiat Money 1. Has intrinsic value

B. Fiduciary Money 2. Declared legal tender by the government

C. Commodity Money 3. Based on trust, not intrinsic value
D. Representative
4. Redeemable for a specific commodity
Money

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4. Assertion (A): M1 is the most liquid form of 7. Which of the following are characteristics of
money. fiat money?
Reason (R): M1 consists of currency with the 1. Declared legal tender by the government
public, demand deposits, and other 2.Backed by gold reserves
deposits with the 3.Lacks intrinsic value
RBI. 4.Used in all modern economies
a) Both A and R are true, and R is the
correct explanation of A. a) 1, 3, and 4 only
b) Both A and R are true, but R is not the b) 1 and 2 only
correct explanation of A. c) 2, 3, and 4 only
c) A is true, but R is false. d) 1, 2, and 4 only
d) A is false, but R is true.

5. Assertion (A): Increasing the CRR reduces the 8. Which of the following are included in M3?
money supply in the economy. 1. Currency with the public
Reason (R): CRR mandates banks to hold a 2.Time deposits with banks
percentage of their deposits with the RBI, 3.Demand deposits with banks
reducing 4.Savings deposits in post offices
lending capacity.
Options: a) 1, 2, and 3 only
a) Both A and R are true, and R is the correct b) 1, 2, 3, and 4
explanation of A. c) 2, 3, and 4 only
b) Both A and R are true, but R is not the d) 1 and 4 only
correct explanation of A.
c) A is true, but R is false.
d) A is false, but R is true.

6. Assertion (A): Hyperinflation occurs when 9. Which of the following actions indicate
governments print excessive money. contractionary monetary policy?
Reason (R): Excess money supply reduces the 1.Increasing the repo rate
value of currency, leading to uncontrolled price 2.Reducing CRR
increases. 3.Selling government securities
Options:
a) Both A and R are true, and R is the correct a) 1 and 2 only
explanation of A. b) 2 and 3 only
b) Both A and R are true, but R is not the c) 1 and 3 only
correct explanation of A. d) 1, 2, and 3
c) A is true, but R is false.
d) A is false, but R is true.

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10. Which of the following are not the primary 13. Which of the following statements are
functions of money? correct about legal tender?
1. Trade in foreign markets 1. It must be accepted for debt repayment.
2.Store of value 2.Coins are unlimited legal tender in India.
3.Instrument for credit creation 3.Banknotes are limited legal tender.
4.Unit of account
a) 1 and 2 only
a) 1, 2, and 4 only b) 1 only
b) 1 and 3 only c) 1 and 3 only
c) 2 and 4 only d) 1, 2, and 3
d) 1, 2, 3, and 4

11. Which of the following are components of 14. Which of the following are characteristics of
high-powered money? near money?
1. Currency in circulation 1.Highly liquid but not a medium of
2.Reserves held by banks with the central exchange
bank 2.Includes fixed deposits and treasury bills
3.Time deposits with banks 3.Can be converted to cash with minimal
loss of value
a) 1 and 2 only 4.Part of M1 monetary aggregate
b) 2 and 3 only
c) 1, 2, and 3 a) 1 and 2 only
d) 1 and 3 only b) 1, 2, and 3 only
c) 1, 3, and 4 only
d) 2, 3, and 4 only

12. Which of the following affect bond yields in 15. Which of the following are true about the
India? barter system?
1. Actions of the RBI 1. It required a double coincidence of wants.
2.Inflation rates 2.It eliminated the need for a medium of
3.Actions of the US Federal Reserve exchange.
3.It was inefficient for large economies.
a) 1 and 2 only 4.It served as the basis for the introduction
b) 2 and 3 only of money.
c) 1, 2, and 3 a) 1, 3, and 4 only
d) 1 and 3 only b) 1 and 2 only
c) 1, 2, and 4 only
d) 1, 2, 3, and 4

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Difficulty level- EASY

1. Ans: d) All of the above 2. Ans: c) Money declared legal tender

by the government
Explaination
Explaination
Money serves as a medium of exchange, store of
value, and unit of account. These Fiat money has no intrinsic value but is declared as
functions allow seamless trade, savings, and price legal tender by the government.
measurement. Examples: Paper currency and coins.

Pro Tip: Always relate these three functions to the MCQ Pointer: Statements claiming fiat money has
definition of money. intrinsic value are incorrect.

3. Ans: b) Gold coins 4. Ans: b) Currency with the public and

demand deposits with banks
Explaination
Commodity money includes items with intrinsic Explaination
value like gold or silver coins. M1 consists of currency with the public and
demand deposits in banks. It is the narrowest
Pro Tip: Commodity money is rare in modern measure of money supply.
economies but was prevalent in earlier
systems.

5. Ans: a) M1 6. Ans: b) Must be accepted for

payment of debts
Explaination
M1 is the most liquid money supply component as it Explaination
can be immediately used for
Legal tender refers to money that creditors are
transactions. Other measures (M2, M3) include less
legally obligated to accept for settling debts.
liquid components.

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 7. Ans: b) Double coincidence of wants 8. Ans: c) Minimum Reserve System

Explaination Explaination
Money eliminates the need for the double Under the Minimum Reserve System, the RBI
coincidence of wants, a key limitation of the maintains Rs. 200 crore in gold and foreign
barter system. currency to back currency issuance.

9. Ans: a) Liquidity 10. Ans: b) The speed at which money

circulates in the economy
Explaination
Explaination
Liquidity refers to the ease with which an asset can
Velocity of money measures how quickly money
be converted into cash without losing
changes hands in an economy over a
value.
period.

11. Ans: a) Printing of all coins and Rs. 1 12. Ans: a) Bad money drives good money
notes out of circulation

Explaination Explaination
Rs. 1 notes and coins are issued by the Ministry of Gresham’s Law states that in circulation, bad
Finance, while all other denominations money (overvalued) drives good money
are issued by the RBI. (undervalued) out of use.

13. Ans: : c) Currency with the public and 14. Ans: a) Fixed deposits
reserves with the central bank
Explaination
Explaination
Near money includes assets like fixed deposits and
High-powered money consists of currency with savings certificates that are not cash but
the public and reserves held by commercial can be converted to cash quickly.
banks with the central bank.

15. Ans: a) The ratio of broad money to 16. Ans: a) Repo rate
high-powered money
Explaination
Explaination
The money multiplier is the ratio of broad money The repo rate is the interest rate at which the RBI
(M3) to high-powered money (H or M0) and lends money to commercial banks.
reflects the money supply created by reserves. Adjusting it controls liquidity.

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 17. Ans: b) Commodity money 18. Ans: b) Time deposits with banks

Explaination Explaination
Commodity money has intrinsic value, such as gold The difference between M3 (broad money) and M1
or silver, used both as money and for (narrow money) is time deposits,
other purposes. which are less liquid.

19. Ans: b) Ministry of Finance 20. Ans: a) Regulate inflation and stabilize
currency
Explaination
Explaination
Rs. 1 notes are printed by the Ministry of Finance,
Liquidity adjustment facilities like repo and
while the RBI prints all other currency
reverse repo are used to control inflation and
notes.
stabilize liquidity.

21. Ans: c) Digital money 22. Ans: b) Changes in general price levels
for consumer goods and services
Explaination
Explaination
Cryptocurrency like Bitcoin is a form of digital The Consumer Price Index (CPI) measures
money, not backed by a central authority. changes in the general price levels for goods
and services consumed by households.

23. Ans: c) M3 24 Ans: a) Fiat money

Explaination Explaination
M3 includes M1 (currency with the public + demand Fiat money is not backed by reserves like gold. Its
deposits) and time deposits, making it value is derived from government decree
"broad money." as legal tender.

25. Ans: b) 2-6% 26. Ans: b) Fiat money

Explaination Explaination
The current inflation targeting range in India, Central Bank Digital Currency (CBDC) is a digital
managed by the Monetary Policy Committee version of fiat money issued by a
(MPC), is 2-6%. central bank.

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27. Ans: a) Rs. 200 crore in gold and 29.. Ans: b) Reverse repo rate
foreign currency
Explaination
Explaination
The reverse repo rate is used by the RBI to absorb
The Minimum Reserve System requires the RBI to excess liquidity from banks, reducing
maintain Rs. 200 crore in gold and money supply.
foreign currency as reserves.

28. Ans: b) Currency with public and 30. Ans: b) It refers to debit and credit
time deposits with banks cards

Explaination Explaination
Broad money (M3) includes currency with the Plastic money refers to debit and credit cards,
public and time deposits with banks, making used as a modern substitute for physical cash.
it less liquid than narrow money.

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Difficulty level- MEDIUM

1. Ans: b) 1, 2, and 4 only 2. Ans: c) 1, 2, and 4 only

Explaination Explaination
Money functions as a medium of exchange for M1 (narrow money) includes:
trade, a store of value for 1.Currency with the public
future use, and a unit of account to measure 2.Demand deposits in banks
value. It does not act as an instrument for 3.Other deposits with the RBI
creating inflation. Time deposits are excluded, as they are part of M3.

MCQ Pointer: Time deposits (e.g., fixed deposits) are

Pro Tip: Focus on the three primary functions of
part of M3, not M1.
money—exchange, store, and account.

3. Ans: b) 1, 3, and 4 only 4. Ans: b) 1, 2, and 3 only

Explaination Explaination
Fiat money is issued by the government or central Broad money (M3) includes:
bank, has no intrinsic 1. Currency with the public
value, and is declared legal tender by law. It is not 2. Demand deposits with banks
backed by gold. 3. Time deposits with banks
Treasury bills are financial instruments, not part of M3.
Pro Tip: Remember, fiat money derives its value
MCQ Pointer: Distinguish between money supply
solely from government decree.
aggregates (M1, M3) and market
instruments like treasury bills.

5. Ans: c) 1, 2, 3 and 4 6. Ans: b) 1, 2, and 3 only

Explaination Explaination
High-powered money includes: The RBI controls money supply using tools like:
1. Currency in circulation 1. Repo rate: Interest rate for lending to banks.
2. Reserves with the central bank 2. CRR (Cash Reserve Ratio): Portion of deposits
3. Excludes time deposits banks must keep as reserves.
4. It is the most liquid money form. 3. SLR (Statutory Liquidity Ratio): Minimum reserves
banks must hold in government securities.
4. GST is a fiscal tool, not a monetary one.
Pro Tip: High-powered money = Central bank’s
MCQ Pointer: Understand monetary policy tools like
direct money creation.
repo rate, CRR, and SLR.

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7. Ans: a) 1 and 3 only 8. Ans: c) 1 and 3 only

Explaination Explaination
Legal tender: Advantages of the barter system:
1. Must be accepted for all payments. 1. No need for a central authority to regulate.
2. Cannot be refused for settling debts. 2. Direct trade of goods and services without
It is specific to a country and does not universally intermediaries.
include commodity money. It lacks efficient pricing or a standard medium of
exchange.
MCQ Pointer: Barter system disadvantages often
Pro Tip: Commodity money is not always legal
include inefficiency and lack of
tender (e.g., gold in modern economies).
standardization.

9. Ans: b) 1, 2, and 4 only 10. Ans: b) 1, 2, and 4 only

Explaination Explaination
Near money includes assets like: Cryptocurrencies:
1. Fixed deposits 1. Are decentralized and not backed by central
2. Savings accounts authorities.
3. Treasury bills 2. Are forms of digital money.
These are not physical cash but can be quickly 3. Rely on blockchain technology.
converted into cash. They lack intrinsic value, unlike commodity money.

Pro Tip: Near money = High liquidity but not used Pro Tip: Cryptocurrency = Digital, decentralized,
blockchain-based.
directly for transactions.

11. Ans: b) 1, 2, and 3 only 12. Ans: b) 1, 2, and 3 only

Explaination Explaination
Gresham’s Law: Monetary aggregates in India include:
1. Bad money drives good money out of circulation. 1. M1: Narrow money
2. Applies when both types are in circulation. 2. M2: Narrow money + Post Office savings
3. Undervalued (good) money is hoarded. 3. M3: Broad money
It does not apply to barter systems.• GDP measures economic output, not money supply.

Pro Tip: Focus on the difference between monetary

MCQ Pointer: Gresham’s Law operates in monetary
aggregates and economic indicators.
economies with dual circulation.

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13. Ans: b) 1, 2, and 4 only 14. Ans: b) 1, 2, and 4 only

Explaination Explaination
Money market instruments include: Inflation targeting aims to:
1. Treasury bills 1. Stabilize the value of money
2. Commercial papers 2. Promote economic growth
3. Certificates of deposit 3. Control price volatility
Corporate bonds belong to the capital market. Increasing fiscal revenue is not its objective.

Pro Tip: Inflation targeting = Stability + Growth + Price

MCQ Pointer: Capital market focuses on long-term
control.
funding, unlike the money market.

15. Ans: b) 1, 2, and 4 only

Explaination
Quantitative monetary policy tools include:
1. Open market operations
2. Bank rate policy
3. Reverse repo rate
Credit rationing is a qualitative tool.

MCQ Pointer: Quantitative tools focus on money

supply, while qualitative tools influence
credit flow.

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Difficulty level- HARD

1. Ans: A-2, B-3, C-1, D-4

Explaination

These tools influence money supply, liquidity, and interest rates to stabilize the
economy.
Repo Rate: Controls borrowing costs by setting the interest rate for short-term loans from
RBI to banks.

Reverse Repo Rate: Absorbs liquidity as banks deposit funds with RBI to earn interest.
CRR: Requires banks to hold a portion of deposits as reserves, reducing their lending
capacity.

Open Market Operations: Regulate liquidity through the buying or selling of government
securities.

2. Ans: A-1, B-4, C-3, D-2

Explaination

M1 through M4 represent increasing liquidity complexity in monetary aggregates.

M1: Currency with the public and demand deposits represent the most liquid money supply.

M2: Adds savings deposits in post offices to M1.

M3: Combines M1 and time deposits with banks, representing broad money.

M4: Includes M3 and all post office deposits, further broadening money supply.

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 3. Ans: A-2, B-3, C-1, D-4

Explaination

Types of money vary in value basis—trust, government decree, or intrinsic worth.

Fiat Money: Declared legal tender by the government and lacks intrinsic value.

Fiduciary Money: Based on trust, such as cheques, with no inherent backing.

Commodity Money: Has intrinsic value, like gold and silver.

Representative Money: Represents a claim to tangible commodities (e.g., gold certificates).

4. Ans: a) Both A and R are true, and R is 5. Ans: a) Both A and R are true, and R is
the correct explanation of A. the correct explanation of A.

Explaination Explaination
Liquidity is highest in M1 as it is immediately CRR directly impacts credit availability, serving as a
accessible for spending. contractionary tool.

M1 is the most liquid form of money: It includes CRR reduces money supply: Banks must keep a
currency, demand deposits, and RBI-held portion of deposits with RBI, restricting
deposits, all readily usable for transactions. funds available for lending.

6. Ans: a) Both A and R are true, and R is 7. Ans: a) 1, 3, and 4 only

the correct explanation of A.
Explaination
Explaination Fiat money relies on trust and government
mandate, unlike commodity-backed
When currency supply outpaces economic output,
currency.
inflation spirals out of control.

Fiat Money Characteristics: Declared legal tender,

Hyperinflation: Excessive money printing causes
lacks intrinsic value, and is used
currency devaluation and uncontrollable
globally. It is not backed by gold.
price rises.

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 8. Ans: a) 1, 2, and 3 only 9. Ans: c) 1 and 3 only
Explaination Explaination
M3 combines M1 (narrow money) with time deposits, Contractionary measures aim to curb inflation by
broadening its scope. tightening liquidity

M3 Components: Includes currency, demand Contractionary Policy: Involves increasing repo

deposits, and time deposits with banks. Post rates (costlier loans) and selling securities
office savings are excluded. (reducing money supply). Lowering CRR is
expansionary.

10. Ans: b) 1 and 3 only 11. Ans: a) 1 and 2 only

Explaination Explaination
Money’s core functions facilitate trade, value High-powered money forms the base for credit
storage, and pricing. creation, directly influenced by RBI.

Primary Functions of Money: High-Powered Money: Comprises currency in

It acts as a medium of exchange, store of value, circulation and bank reserves with RBI.
and unit of account. Credit creation is a banking Time deposits are excluded.
function.

12. Ans: c) 1, 2, and 3 13. Ans: b) 1 only

Explaination Explaination
Domestic and global economic policies jointly Legal tender laws vary by denomination and
shape bond markets. usage, influencing currency acceptance.

Factors Affecting Bond Yields: RBI policies, Legal Tender: Must be accepted for debt
inflation, and global monetary trends (like repayment. Coins are limited legal tender, while
US Federal Reserve actions) significantly influence banknotes are unlimited. People can refuse to
yields. accept coins beyond a certain limit. For eg. 1 crore
rupees in One rupee coins.

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14. Ans: b) 1, 2, and 3 only 15. Ans: a) 1, 3, and 4 only

Explaination Explaination
Near money complements cash by providing Barter’s inefficiency highlighted the necessity of
liquidity for quick conversion. standardized money.

Near Money: Includes assets like fixed deposits Barter System: Required a double coincidence of
and treasury bills, which are liquid but not wants, was inefficient in large economies,
mediums of exchange. They are excluded from M1. and led to money’s introduction. It did not
eliminate the need for a medium of exchange.

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