Commercial bank functions, credit creation numericals, Central Bank functions and credit control tools. Q25–Q30 are CUET-level.
1
A Commercial Bank is best defined as a financial institution that:
AOnly issues currency notes for the government
BAccepts deposits from the public and lends money to individuals and businesses, with the primary aim of EARNING PROFIT through the interest spread between loans and deposits
COnly regulates other banks without dealing with the public directly
DOnly provides foreign exchange services to the government
Answer: B — Accepts deposits, lends money, earns profit. Commercial Banks (SBI, HDFC, ICICI, PNB, Axis Bank) are the banks ordinary people and businesses use daily. They accept deposits (paying LOWER interest to depositors) and lend those funds as loans (charging HIGHER interest to borrowers) — the difference (interest spread) is their main source of PROFIT. This profit motive distinguishes them fundamentally from the Central Bank.
2
📋 CASE: A businessman needs an account with UNLIMITED withdrawals and deposits for his daily business transactions, but he does not need interest on the balance. Which type of deposit account should he open?
ACurrent Account — designed specifically for businesses, with NO withdrawal limits and typically NO or minimal interest, allowing frequent, unrestricted transactions
BSavings Account, since it offers higher interest rates
CFixed Deposit, since it locks funds for a set period
DRecurring Deposit, since it requires monthly deposits
Answer: A — Current Account. Current Accounts are specifically designed for BUSINESSES that need to make FREQUENT, UNRESTRICTED transactions (unlimited withdrawals and deposits) throughout the day. Unlike Savings Accounts, they typically offer LITTLE to NO interest, since their purpose is TRANSACTIONAL convenience, not earning returns. Fixed and Recurring Deposits are savings-oriented products with withdrawal RESTRICTIONS, which would be unsuitable for a business needing daily flexible access to funds.
3
📋 CASE: Rekha deposits Rs 2,000 every month for 3 years in a bank scheme designed to help her save systematically for a future goal, earning moderate interest. Which deposit type is this?
ACurrent Account
BFixed Deposit, since it involves a lump sum
CRecurring Deposit — a FIXED amount is deposited EVERY MONTH for a fixed period, specifically designed to encourage disciplined, systematic saving, earning moderate interest
DSavings Account, since it earns interest
Answer: C — Recurring Deposit. A Recurring Deposit (RD) is SPECIFICALLY designed for depositing a FIXED amount EVERY MONTH over a set period (like 3 years) — this systematic, disciplined savings approach helps individuals accumulate funds toward a future goal. This differs from a Fixed Deposit, which involves depositing a LUMP SUM ONCE for a fixed period, not monthly instalments.
4
📋 CASE: A shopkeeper current account has a sanctioned overdraft facility of Rs 50,000. His account balance is Rs 0, but he withdraws Rs 30,000 to pay an urgent supplier bill. How is this possible?
AOverdraft facility — allows current account holders to withdraw MORE than their actual account balance, up to a pre-sanctioned limit; the shopkeeper is essentially borrowing Rs 30,000 within his Rs 50,000 approved overdraft limit
BThis is illegal and should not be permitted by any bank
CTerm Loan, since it is a fixed-period loan
DDiscounting of Bills of Exchange
Answer: A — Overdraft facility. An OVERDRAFT is a specific type of credit facility linked to a CURRENT ACCOUNT, allowing the account holder to withdraw funds EXCEEDING their actual balance, up to a PRE-APPROVED limit (here, Rs 50,000). This is extremely useful for businesses managing short-term cash flow gaps — the shopkeeper can meet his urgent Rs 30,000 payment obligation even with zero balance, as long as he stays within his sanctioned overdraft limit.
5
A bank collects cheques, pays insurance premiums and transfers funds on behalf of its customers. These activities fall under which function category?
APrimary function — Accepting Deposits
BPrimary function — Advancing Loans
CSecondary function — Agency Functions, where the bank acts as an AGENT performing specific tasks (collecting payments, transferring funds) on behalf of and as INSTRUCTED by its customers
DSecondary function — General Utility Functions
Answer: C — Agency Functions. When a bank collects cheques, pays bills/premiums, or transfers funds ON BEHALF of a specific customer (acting on their EXPLICIT instructions), it is performing AGENCY FUNCTIONS — the bank acts as the customer AGENT. This is different from General Utility Functions (like providing lockers or issuing traveller cheques), which are services offered to the general banking public, not tied to specific agent-like instructions from an individual customer.
6
Providing locker facilities, issuing traveller cheques, and underwriting shares for companies are examples of which function of a Commercial Bank?
APrimary function — Advancing Loans
BAgency Functions
CGeneral Utility Functions — additional services provided to the general public, not necessarily tied to a specific individual customer instruction, but offered as a standard service package by the bank
DPrimary function — Accepting Deposits
Answer: C — General Utility Functions. Lockers, traveller cheques and underwriting are services made AVAILABLE to bank customers generally, as part of the bank broader service offering — they are not “agency” tasks performed on specific customer instructions (like paying a particular bill), but rather STANDING FACILITIES the bank provides. This distinguishes General Utility Functions from Agency Functions within the Secondary Functions category.
7
What is the formula for the Money/Credit Multiplier used in Credit Creation?
AMoney Multiplier = LRR × Initial Deposit
BMoney Multiplier = 1 ÷ LRR, where LRR is the Legal Reserve Ratio expressed as a decimal
CMoney Multiplier = LRR ÷ 1
DMoney Multiplier = Initial Deposit − LRR
Answer: B — Money Multiplier = 1 ÷ LRR. The Money Multiplier formula shows the INVERSE relationship between the Legal Reserve Ratio and the extent of credit creation. A SMALLER LRR (fraction kept as reserve) means banks can lend out a LARGER portion of every deposit, resulting in a BIGGER multiplier and MORE total money created. Total Credit Created = Initial Deposit × Money Multiplier = Initial Deposit × (1 ÷ LRR).
8
📋 CASE: If the Legal Reserve Ratio (LRR) is 25% and an initial deposit of Rs 20,000 is made into the banking system, what is the TOTAL money that can be created?
ARs 25,000 (adding 25% to the deposit)
BRs 80,000 — Money Multiplier = 1 ÷ 0.25 = 4; Total Credit Created = Rs 20,000 × 4 = Rs 80,000
CRs 5,000 (25% of the deposit)
DRs 20,000 (no multiplication occurs)
Answer: B — Total money created = Rs 80,000. Money Multiplier = 1 ÷ LRR = 1 ÷ 0.25 = 4. Total Credit Created = Initial Deposit × Multiplier = Rs 20,000 × 4 = Rs 80,000. This means the ORIGINAL Rs 20,000 deposit, through the chain of lending and re-depositing across multiple banks, ultimately expands into Rs 80,000 of total money circulating in the banking system.
9
📋 CASE: If the LRR is 10% (lower than before) and the same initial deposit is Rs 20,000, how would the total money created COMPARE to a scenario with LRR = 25%?
AIt would be LOWER, since 10% is a smaller number than 25%
BIt would be HIGHER: with LRR = 10%, Multiplier = 1 ÷ 0.10 = 10, so Total Credit Created = Rs 20,000 × 10 = Rs 2,00,000, which is MUCH greater than the Rs 80,000 created with LRR = 25%, since a LOWER reserve ratio allows banks to lend out MORE of each deposit
CIt would remain exactly the same at Rs 80,000
DIt cannot be determined without additional information
Answer: B — Higher total money created (Rs 2,00,000) with a LOWER LRR. This tests the INVERSE relationship at the heart of Credit Creation. With LRR = 10%: Multiplier = 1 ÷ 0.10 = 10, Total Credit = Rs 20,000 × 10 = Rs 2,00,000. A LOWER LRR means banks keep LESS as reserve and LEND OUT more of every deposit, allowing the multiplier chain to continue for MORE rounds, creating dramatically MORE total money. This is exactly why RBI LOWERS the CRR/SLR when it wants to EXPAND the money supply (encourage more lending) and RAISES them to CONTRACT the money supply.
10
Which of the following is NOT a standard assumption underlying the Credit Creation process?
AAll banks in the system maintain a uniform Legal Reserve Ratio (LRR)
BBorrowers deposit their ENTIRE loan amount back into the banking system (no cash leakage)
CThere is sufficient demand for credit/loans in the economy
DDifferent banks can set DIFFERENT reserve ratios based on their individual risk assessment — this is NOT an assumption of the standard credit creation model, which assumes a UNIFORM ratio across all banks
Answer: D is NOT a valid assumption. The standard Credit Creation model assumes ALL banks maintain the SAME (uniform) LRR — this is essential for the mathematical simplicity of the multiplier formula (1 ÷ LRR). If different banks used different ratios, the calculation would become far more complex and could not be captured by a single simple multiplier. Options A, B and C ARE genuine assumptions of the standard model: uniform LRR, no cash leakage (all loan money gets re-deposited) and sufficient credit demand (borrowers are always available to take loans).
11
In India, the Central Bank is known as:
AState Bank of India (SBI)
BReserve Bank of India (RBI), established in 1935, the apex financial institution responsible for regulating the entire monetary and banking system of the country
CNational Bank for Agriculture and Rural Development (NABARD)
DIndustrial Development Bank of India (IDBI)
Answer: B — Reserve Bank of India (RBI). The RBI, established in 1935, is India’s Central Bank — the apex (topmost) institution overseeing the entire banking and monetary system. SBI is a commercial bank (though government-owned), NABARD focuses specifically on agricultural/rural development finance, and IDBI is an industrial development finance institution — none of these are the Central Bank of India, which is exclusively the RBI.
12
Which of the following is the MOST fundamental difference between a Central Bank and a Commercial Bank?
ACentral Banks are always larger buildings than Commercial Banks
BThe Central Bank does NOT deal directly with the general public and operates WITHOUT a profit motive (for national economic welfare), while Commercial Banks deal directly with the public and operate WITH a profit motive
CCentral Banks only operate in rural areas
DCommercial Banks have the sole right to issue currency
Answer: B — No direct public dealing + no profit motive (Central Bank) vs Direct public dealing + profit motive (Commercial Bank). This captures the TWO most defining distinctions: (1) The Central Bank deals with the GOVERNMENT and OTHER BANKS, not ordinary individuals — you cannot open a personal savings account at the RBI. (2) The Central Bank exists to serve NATIONAL ECONOMIC INTERESTS (price stability, growth, financial stability), not to earn profit, unlike commercial banks which are fundamentally profit-seeking businesses.
13
The “Bank of Issue” function of the Central Bank refers to:
AThe Central Bank sole, exclusive right to issue currency notes in the country (except Re 1 notes/coins, issued by the Government); no commercial bank can print its own currency
BThe Central Bank ability to issue loans to individual citizens
CThe Central Bank power to issue new commercial bank licences
DThe Central Bank ability to issue shares to private investors
Answer: A — Sole right to issue currency notes. “Bank of Issue” specifically refers to the Central Bank MONOPOLY on printing/issuing currency notes (all denominations except the Re 1 note/coin, which technically comes from the Government of India, though RBI manages its circulation). This monopoly ensures UNIFORMITY in the currency system and maintains public TRUST — if multiple banks could print their own money, it would create chaos and undermine confidence in the currency.
14
When the RBI holds government accounts, manages government borrowing and advises on economic policy, it is performing which function?
ABank of Issue
BBanker to the Government — the Central Bank acts as banker, agent and financial advisor to the government, handling its accounts, borrowing and policy advice
CLender of Last Resort
DCustodian of Foreign Exchange Reserves
Answer: B — Banker to the Government. This function positions the Central Bank as the GOVERNMENT own banker — holding its accounts (like an individual holds an account with a commercial bank), managing the issuance and repayment of government bonds/securities (borrowing), and providing expert ADVICE on monetary and economic policy matters. This is a DIFFERENT role from being a “Bankers’ Bank” (which involves relationships with COMMERCIAL banks, not the government).
15
📋 CASE: A commercial bank is required to keep a mandatory cash deposit with the RBI, and can also borrow emergency funds from RBI when facing a liquidity crunch. Which TWO functions of the Central Bank does this illustrate?
ABank of Issue and Banker to Government
BBankers’ Bank (holding mandatory reserves of commercial banks, acting as a clearing house) and Lender of Last Resort (providing emergency funds during a liquidity crisis to prevent bank failure)
CCustodian of Foreign Exchange Reserves and Controller of Credit
DBanker to Government only
Answer: B — Bankers’ Bank + Lender of Last Resort. Two DISTINCT functions are being demonstrated: (1) BANKERS’ BANK — the RBI holds mandatory reserve deposits (like CRR) FROM commercial banks, acting as “a bank for banks.” (2) LENDER OF LAST RESORT — when a commercial bank faces a severe liquidity crisis and cannot obtain funds elsewhere, the RBI provides emergency loans to prevent that bank collapse, protecting the STABILITY of the overall banking system.
16
The Cash Reserve Ratio (CRR) refers to:
AThe percentage of a bank profit that must be given to the RBI
BThe MINIMUM percentage of a bank total deposits that it MUST keep as cash RESERVE WITH THE RBI, which cannot be lent out or invested at all
CThe interest rate charged on personal loans by commercial banks
DThe percentage of foreign exchange reserves held by RBI
Answer: B — Minimum % of deposits kept as cash reserve WITH THE RBI. CRR is a MANDATORY requirement — commercial banks MUST deposit a fixed percentage of their TOTAL deposits with the RBI as cash reserves. This money CANNOT be used for lending or investment by the bank. When the RBI RAISES the CRR, banks have LESS money available to lend, CONTRACTING the money supply/credit in the economy — this is a key TOOL the RBI uses to control inflation and the LRR-based multiplier effect.
17
How does the Statutory Liquidity Ratio (SLR) DIFFER from the Cash Reserve Ratio (CRR)?
ASLR and CRR are identical concepts with different names
BCRR requires banks to keep a percentage of deposits as cash WITH THE RBI; SLR requires banks to maintain a percentage of deposits in LIQUID ASSETS (cash, gold, approved government securities) WITH THEMSELVES (not with RBI)
CSLR applies only to foreign banks operating in India
DCRR is set by commercial banks themselves; SLR is set by the RBI
Answer: B — CRR = cash WITH RBI; SLR = liquid assets WITH the bank itself. The KEY distinguishing factor is WHERE the reserve is held: CRR funds are deposited AWAY from the bank, WITH the RBI. SLR assets (cash, gold, approved government bonds) are held BY the bank ITSELF (in its own vaults/portfolio), not transferred to the RBI. Both reduce the funds available for lending (contracting credit when raised), but they differ in custody/location of the reserved assets.
18
Repo Rate is best described as:
AThe rate at which the RBI BORROWS funds from commercial banks
BThe rate at which the RBI LENDS SHORT-TERM funds to commercial banks AGAINST government securities as collateral; this is the RBI most frequently used policy tool today
CThe interest rate charged by commercial banks on home loans to individuals
DThe rate at which foreign currency is exchanged for Rupees
Answer: B — RBI lends short-term funds to banks against government securities. Repo Rate (“Repurchase” agreement rate) is the interest rate at which commercial banks BORROW SHORT-TERM funds FROM the RBI, pledging government securities as COLLATERAL (which they agree to repurchase later, hence “repo”). This is RBI MOST ACTIVELY used and FREQUENTLY adjusted monetary policy tool in modern times, directly influencing short-term interest rates throughout the economy.
19
How does Reverse Repo Rate DIFFER from Repo Rate?
ARepo Rate is the rate at which RBI LENDS to commercial banks; Reverse Repo Rate is the rate at which RBI BORROWS from commercial banks (the OPPOSITE direction of fund flow)
BThey are identical rates with no difference
CReverse Repo Rate applies only to international transactions
DRepo Rate is set by commercial banks; Reverse Repo Rate is set by the government
Answer: A — Repo = RBI lends; Reverse Repo = RBI borrows (opposite direction). These two rates work in OPPOSITE directions: under REPO, banks borrow FROM the RBI (RBI is the lender). Under REVERSE REPO, the RBI borrows FROM commercial banks (banks are the lenders, parking surplus funds WITH the RBI to earn interest). When the RBI RAISES the Reverse Repo Rate, it becomes MORE attractive for banks to park money with RBI rather than lend to the public, CONTRACTING money supply in the broader economy.
20
📋 CASE: The RBI decides to SELL government securities worth Rs 5,000 crore in the open market to commercial banks and the public. What is the LIKELY effect on money supply?
AMoney supply will CONTRACT — when RBI SELLS securities, buyers pay money TO the RBI, ABSORBING/removing that money from circulation in the banking system, reducing the funds available for lending
BMoney supply will EXPAND, since securities represent new money creation
CMoney supply will remain completely unchanged
DThis transaction has no connection to money supply at all
Answer: A — Money supply will CONTRACT. This is an OPEN MARKET OPERATION (OMO). When the RBI SELLS government securities, buyers (banks/public) PAY MONEY to the RBI in exchange — this money flows OUT of the banking system and INTO the RBI, effectively REMOVING/ABSORBING that money from active circulation. With LESS money available, banks have LESS to lend, CONTRACTING the overall money supply. The OPPOSITE (RBI BUYING securities) would INJECT money into the system, EXPANDING money supply.
21
Which of the following is a QUALITATIVE (not quantitative) tool of credit control used by the Central Bank?
ABank Rate
BCash Reserve Ratio (CRR)
CMoral Suasion — where RBI persuades commercial banks to follow certain lending policies VOLUNTARILY through informal advice and meetings, WITHOUT any formal legal compulsion, unlike quantitative tools which uniformly affect the overall money supply volume
DOpen Market Operations
Answer: C — Moral Suasion is a Qualitative tool. QUANTITATIVE tools (Bank Rate, CRR, SLR, Repo, Reverse Repo, OMO) affect the TOTAL VOLUME of money/credit in the economy UNIFORMLY, across all sectors. QUALITATIVE tools (Margin Requirement, Moral Suasion, Direct Action, Rationing of Credit) are used SELECTIVELY to influence the DIRECTION or COMPOSITION of credit toward/away from SPECIFIC sectors, WITHOUT necessarily changing the total volume of credit. Moral Suasion specifically relies on PERSUASION rather than formal, binding rules.
22
📋 CASE: The RBI is concerned about excessive speculative lending for real estate purchases and wants to SELECTIVELY discourage this WITHOUT affecting overall credit availability for other sectors like manufacturing. Which tool is BEST suited?
ABank Rate, since it affects the entire economy uniformly
BMargin Requirement — RBI can RAISE the margin requirement SPECIFICALLY for real estate-related lending, making banks lend a smaller percentage of the property collateral value, selectively discouraging speculative real estate lending without impacting other sectors
CCRR, since it applies to all deposits equally
DOpen Market Operations, since they affect overall liquidity
Answer: B — Margin Requirement. Margin Requirement is a QUALITATIVE tool that allows the RBI to be SELECTIVE — it can raise the margin requirement SPECIFICALLY for loans against real estate collateral (forcing banks to lend a SMALLER percentage of the property value, requiring the borrower to contribute more of their own funds), WITHOUT affecting lending conditions for other sectors like manufacturing or agriculture. Quantitative tools like Bank Rate, CRR and OMO affect the ENTIRE economy UNIFORMLY, making them unsuitable for this SECTOR-SPECIFIC objective.
23
Which statement about the “Lender of Last Resort” function is CORRECT?
AIt means the Central Bank is the FIRST place any individual should go for a personal loan
BWhen commercial banks face a SEVERE liquidity crisis and cannot obtain funds from any other source, the Central Bank steps in to provide EMERGENCY loans, preventing bank collapse and protecting overall banking system stability
CIt refers to the Central Bank refusal to lend to any commercial bank under any circumstances
DIt means commercial banks must always borrow from the Central Bank before approaching any other source
Answer: B — Emergency support during severe liquidity crisis to prevent bank collapse. The “LAST resort” terminology is key — this function activates ONLY when a bank has EXHAUSTED all other options for obtaining funds and faces a genuine liquidity crisis. The Central Bank steps in as the FINAL safety net, providing emergency support to prevent that bank from failing/collapsing, which could otherwise trigger a broader banking system crisis (bank runs, loss of public confidence). This function is critical to maintaining overall FINANCIAL STABILITY.
24
Which of the following correctly distinguishes the “Controller of Credit” function from ALL other functions of the Central Bank?
AIt specifically involves using QUANTITATIVE tools (Bank Rate, CRR, SLR, Repo, Reverse Repo, OMO) AND QUALITATIVE tools (Margin Requirement, Moral Suasion, Direct Action, Rationing of Credit) to regulate the TOTAL volume and DIRECTION of money/credit in the economy for macroeconomic stability
BIt only involves printing new currency notes
CIt only involves holding government accounts
DIt only involves providing locker facilities to bank customers
Answer: A — Controlling credit volume/direction using quantitative AND qualitative tools. The “Controller of Credit” is widely considered the MOST IMPORTANT function of a modern Central Bank — it is the PRIMARY mechanism through which monetary policy is IMPLEMENTED to manage inflation, promote growth and maintain financial stability. This function is UNIQUE in that it deploys a whole TOOLKIT of instruments (both broad/quantitative and selective/qualitative) specifically to influence the ECONOMY-WIDE availability and cost of credit — distinct from the other, more specific functions like currency issue or acting as banker to government.
25
[CUET Level] Assertion (A): An increase in the CRR will lead to an INCREASE in the total money supply in the economy.
Reason (R): A higher CRR means commercial banks must keep MORE of their deposits as reserves with RBI, leaving LESS available for lending.
ABoth A and R are true, and R correctly explains A
CA is FALSE (an increase in CRR leads to a DECREASE/contraction in money supply, not an increase); R is TRUE (correctly explains the mechanism — higher CRR means less funds available for lending) — R actually explains why A is WRONG, not why A is right
BBoth A and R are true, but R does not correctly explain A
DA is true but R is false
Answer: C — A is false; R is true (and explains why A is wrong). A is FALSE: raising the CRR DECREASES (contracts) money supply, NOT increases it. R is TRUE: it correctly explains the MECHANISM — higher CRR forces banks to keep MORE money as reserves (unavailable for lending), which REDUCES the funds available for credit creation, hence CONTRACTING (not expanding) the money supply. Since R accurately describes a mechanism that leads to the OPPOSITE of what A claims, R effectively disproves A rather than supporting it.
26
[CUET Level] Assertion (A): A commercial bank can legally print and issue its own currency notes if it has sufficient gold reserves.
Reason (R): Only the Central Bank has the exclusive, sole legal right to issue currency notes in a country.
ABoth A and R are true, and R correctly explains A
BBoth A and R are true, but R does not correctly explain A
CA is FALSE (commercial banks CANNOT legally issue their own currency notes under any circumstances, including having gold reserves); R is TRUE (correctly states the Central Bank sole currency issue monopoly) — and R directly explains WHY A is false
DA is true but R is false
Answer: C — A is false; R is true and explains why. A is FALSE: NO commercial bank, regardless of its gold reserves or financial strength, has the legal authority to print/issue currency notes — this would undermine the entire monetary system and create chaos. R is TRUE: the Central Bank (RBI in India) holds the EXCLUSIVE, sole legal right (monopoly) to issue currency — this is precisely the “Bank of Issue” function. R correctly EXPLAINS why A must be false: since the Central Bank has SOLE authority, no other institution (including commercial banks) can legally perform this function.
27
[CUET Level — Incorrect Pair] Which of the following function-description pairs is INCORRECTLY matched?
ABank of Issue — Sole right to print/issue currency notes
BBankers’ Bank — Holds reserves of commercial banks, acts as clearing house
CCustodian of Foreign Exchange Reserves — Provides personal savings accounts to individual foreign tourists — INCORRECT: this function refers to managing the NATION foreign currency and gold reserves at the institutional/macro level, NOT providing individual banking services to tourists (which is a commercial bank retail function)
DLender of Last Resort — Provides emergency funds to banks facing liquidity crisis
Answer: C is incorrectly matched. “Custodian of Foreign Exchange Reserves” refers to the Central Bank role in HOLDING and MANAGING the NATION overall foreign currency and gold reserves, and INTERVENING in the forex market to stabilise the exchange rate — this is a MACRO-level, institutional function. It does NOT involve providing RETAIL banking services (like personal savings accounts) to individual tourists, which is a COMMERCIAL BANK function, not a Central Bank one (recall: the Central Bank does not deal directly with the public). Options A, B and D are all correctly matched.
28
[CUET Level — Case] 📋 The LRR in an economy is 12.5%. A new deposit of Rs 40,000 is made into the banking system. Calculate the Money Multiplier and the Total Credit Created:
AMultiplier = 8; Total Credit = Rs 3,20,000
BMultiplier = 1 ÷ 0.125 = 8; Total Credit Created = Rs 40,000 × 8 = Rs 3,20,000
CMultiplier = 12.5; Total Credit = Rs 5,00,000
DMultiplier = 0.125; Total Credit = Rs 5,000
Answer: A/B — Multiplier = 8; Total Credit Created = Rs 3,20,000. Step 1: Convert LRR to decimal: 12.5% = 0.125. Step 2: Money Multiplier = 1 ÷ 0.125 = 8. Step 3: Total Credit Created = Initial Deposit × Multiplier = Rs 40,000 × 8 = Rs 3,20,000. This shows that with a relatively LOW LRR of 12.5%, the banking system can expand the original Rs 40,000 deposit into a much larger Rs 3,20,000 of total credit/money in circulation.
29
[CUET Level — Case] 📋 The RBI wants to CONTRACT the overall money supply to control rising inflation. Which combination of policy actions would be CONSISTENT with this goal?
AINCREASE the Repo Rate, INCREASE the CRR, and SELL government securities through Open Market Operations — all three actions REDUCE the funds available for banks to lend, contracting money supply and helping control inflation
BDECREASE the Repo Rate, DECREASE the CRR, and BUY government securities
CINCREASE the Repo Rate but DECREASE the CRR simultaneously, as these actions cancel out
DOnly adjusting the Bank Rate has any effect on money supply; other tools are irrelevant
Answer: A — Increase Repo Rate + Increase CRR + Sell securities (OMO) — all contract money supply. To CONTRACT money supply (fight inflation), the RBI would consistently use tools in the CONTRACTIONARY direction: RAISING Repo Rate (makes borrowing costlier for banks), RAISING CRR (banks keep more reserves, lend less), and SELLING securities via OMO (absorbs money from the banking system). All three actions work TOGETHER in the same direction to REDUCE the total money/credit available in the economy. Option B describes the OPPOSITE (expansionary) actions; C incorrectly suggests contradictory tools cancel out; D incorrectly claims only one tool matters.
30
[CUET Level — Comprehensive] 📋 Four statements about Banking. Identify ALL correct ones: (I) Commercial banks operate for profit; the Central Bank does not. (II) The Money Multiplier is directly proportional to the LRR (higher LRR means higher multiplier). (III) SLR requires banks to keep reserves with the RBI, the same as CRR. (IV) Moral Suasion is a qualitative tool that relies on persuasion rather than legal compulsion.
AAll four are correct
B(I) and (IV) are correct; (II) is incorrect (the Money Multiplier is INVERSELY proportional to LRR — a HIGHER LRR means a LOWER multiplier, not higher); (III) is incorrect (SLR requires banks to keep liquid assets WITH THEMSELVES, not with the RBI — that is CRR)
COnly (II) and (III) are correct
DOnly (I) is correct; the rest are incorrect
Answer: B — (I) and (IV) are correct; (II) and (III) are incorrect. (I) CORRECT: Commercial banks are profit-driven; the Central Bank operates for national economic welfare, not profit. (II) INCORRECT: Money Multiplier = 1 ÷ LRR, meaning it is INVERSELY (not directly) proportional to LRR — a HIGHER LRR results in a LOWER multiplier (less credit creation), and a LOWER LRR results in a HIGHER multiplier (more credit creation). (III) INCORRECT: SLR requires banks to hold liquid assets WITH THEMSELVES (in their own vaults/portfolio), NOT with the RBI — that describes CRR instead. (IV) CORRECT: Moral Suasion is indeed a qualitative tool based on persuasion, not formal legal compulsion.
