Monetary Policy & RBI Tools — Set 10
Economy Advanced · मौद्रिक नीति और RBI साधन · Questions 91–100 of 200
Which of the following is the floor rate in the LAF corridor?
Correct Answer: D. Reverse Repo Rate / SDF Rate
The floor of the LAF (Liquidity Adjustment Facility) corridor is the Reverse Repo Rate (or the SDF rate, which replaced it as the effective floor from April 2022). The ceiling is the MSF rate, and the policy repo rate is in the middle. This corridor framework ensures that short-term market interest rates remain within a predictable band.
What are the three external members of the MPC appointed by?
Correct Answer: C. Search Committee under Government of India notification
The three external members of the MPC are appointed by the Government of India based on the recommendations of a Search Committee. The committee is chaired by the Cabinet Secretary and includes the RBI Governor, the Chief Economic Adviser, and a nominee of the Central Government. External members serve a term of four years and are not eligible for re-appointment.
Which concept best explains why reducing interest rates may stimulate investment?
Correct Answer: B. Lower rates reduce the opportunity cost of investment and cost of borrowing
When interest rates fall, the cost of borrowing for businesses decreases, making investment in projects more financially viable. Additionally, the opportunity cost of deploying capital (the return foregone by not investing in risk-free deposits) also falls. Both effects encourage businesses to invest more, stimulating economic activity. This is the core transmission channel of expansionary monetary policy.
What is 'helicopter money' in the context of monetary economics?
Correct Answer: B. Central bank directly giving money to citizens to boost spending
Helicopter money, coined by economist Milton Friedman, refers to the concept of a central bank directly distributing money to the public (or crediting accounts) to stimulate spending without the requirement of repayment. Unlike quantitative easing, it bypasses the banking system. While theoretical, it was debated during COVID-19 as an unconventional monetary tool.
What is 'currency swap' in the context of RBI operations?
Correct Answer: B. Agreement between RBI and foreign central banks to exchange currencies
A currency swap is an agreement between the RBI and foreign central banks to exchange currencies at agreed rates for a specified period, often to ensure dollar liquidity or bilateral trade settlement. India has currency swap agreements with Japan (USD 75 billion), SAARC nations, and others. These provide a safety net during forex crises.
What triggers an 'inflation failure' report by MPC to government under the IT framework?
Correct Answer: B. Inflation above 6% or below 2% for 3 consecutive quarters
Under the flexible inflation targeting framework, if CPI inflation remains above the upper tolerance limit (6%) or below the lower tolerance limit (2%) for three consecutive quarters, the RBI/MPC must submit a report to the Central Government. The report must explain the reasons for failure, remedial actions, and estimated time for returning to target.
The term 'credit multiplier' or 'money multiplier' is related to:
Correct Answer: B. How an initial deposit multiplies into larger credit through fractional reserve banking
The money multiplier (credit multiplier) refers to the process by which an initial deposit in the banking system leads to a larger expansion in total money supply through fractional reserve banking. The multiplier = 1/CRR. For example, with CRR of 4%, the multiplier is 25, meaning a ₹100 deposit can theoretically create ₹2,500 in credit.
RBI's open market operations are conducted primarily in:
Correct Answer: C. Government securities market
RBI's Open Market Operations (OMOs) are conducted exclusively in the government securities (G-Sec) market. RBI buys or sells dated government securities and treasury bills in the secondary market to inject or absorb liquidity. Government securities are preferred because they are risk-free and have high liquidity in the Indian financial market.
What is the relationship between inflation and the purchasing power of money?
Correct Answer: B. Higher inflation decreases purchasing power of money
Inflation erodes the purchasing power of money — as prices rise, the same amount of money buys fewer goods and services. For example, if inflation is 6%, ₹100 today will only have the purchasing power of ₹94 next year. This is why RBI focuses on containing inflation, to protect the real value of money, savings, and fixed incomes.
What does 'policy normalization' mean in the context of central banking?
Correct Answer: B. Returning to conventional interest rate levels after an extraordinary easing period
Policy normalization refers to the process by which a central bank gradually withdraws the extraordinary monetary stimulus (like near-zero rates or quantitative easing) adopted during a crisis and returns policy rates to more neutral or normal levels. Post-COVID, major central banks including RBI undertook policy normalization by raising rates from pandemic-era lows.