Macro Economics Issues & Policies (MEIP) – February 2016 MCQs with Solutions & Explanations

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MACRO ECONOMICS ISSUES & POLICIES

(MEIP)

MCQS - February 2016

1) Traditionally money includes which of the followings

A) Currency with public 

B) Reserves with IMF

C) Foreign exchange reserves 

D) None of the above

Remember:

Traditional Money = Currency with Public (Cash)
Modern/Broad Money = Currency + Bank Deposits

Do not confuse:

Foreign Exchange Reserves → External assets of the RBI
IMF Reserves → International reserve assets
Currency with Public → Part of the money supply

Final Answer: A) Currency with public

2) Value of money and price are

A) Inversely related 

B) Directly related 

C) Not related 

D) All of the above

Remember this simple rule:

 
Price ↑ → Value of Money ↓
Price ↓ → Value of Money ↑

Shortcut:

High Prices = Low Value of Money
Low Prices = High Value of Money

 
Final Answer: A) Inversely related

3) Time deposit as a medium of exchange was recognized by

A) Friedman 

B) Gurley 

C) Crowther 

D) Shaw

Explanation:

Milton Friedman of the Chicago School argued that the definition of money should be broader than just currency and demand deposits. He recognized that time deposits (fixed deposits) can function as a near-money asset and should be included in the broader measure of money because they can be converted into cash and influence spending and economic activity.

• Friedman → Broad definition of money, including time deposits.
• Gurley and Shaw → Developed the Gurley–Shaw approach, emphasizing financial intermediaries and near-money assets.
• Crowther → Known for defining the functions of money.
• Shaw → Worked with Gurley on financial intermediation.

4) Which of the following is not included in all the RBI’s measure of money

A) Reserves with IMF 

B) Time Deposit 

C) Demand deposit 

D) Postal Savings

Explanation:

The Reserve Bank of India (RBI) defines monetary aggregates as M1, M2, M3, and M4.

These measures include:

• Demand Deposits (included in M1, M2, M3, and M4)
• Time Deposits (included in M3 and M4)
• Postal Savings Deposits (included in M2 and M4)

However, Reserves with the International Monetary Fund (IMF) are not part of any RBI monetary aggregate. They are foreign reserve assets and not components of the domestic money supply.

5) Open market sales of bond by RBI will have the tendency to

A) Decrease liquidity 

B) Increase liquidity 

C) Reduce interest rates 

D) Increase money supply

Explanation:

Open Market Operations (OMO) are conducted by the Reserve Bank of India (RBI) to regulate the money supply.

When the RBI sells government bonds/securities:

• Banks and the public pay money to the RBI.
• Money flows out of the banking system.
• Liquidity decreases.
• Banks have less money to lend.
• The money supply contracts, helping to control inflation.

Therefore, selling bonds reduces liquidity in the economy.

6) During inflation, the right policy of the central bank will be to

A) Increase SLR 

B) Buy Government securities

C) Decrease CRR 

D) All of the Above

Explanation:

Inflation → Contractionary Monetary Policy

Remember the following actions by the RBI:

• Increase CRR
• Increase SLR
• Increase Bank Rate/Repo Rate
• Sell Government Securities (Open Market Operations)

Shortcut:

Inflation = "Increase & Sell"
Increase CRR/SLR/Repo Rate
Sell Government Securities

 
Final Answer: A) Increase SLR

7) The basic difference between M3 and M4 is that

A) M4 includes all post office deposit and but not in M3

B) M3 is greater than M4

C) M1 is part of M3 but not part of M4

D) M3 is included in M1 but M4 is not included in M1

Explanation:

The monetary aggregates in India are:

• M1 (Narrow Money) = Currency with the public + Demand deposits with banks + Other deposits with RBI.
• M3 (Broad Money) = M1 + Time deposits with commercial banks.
• M4 = M3 + All deposits with Post Office Savings Banks (excluding National Savings Certificates).

Thus, M4 is broader than M3 because it includes post office savings deposits, which are not included in M3.

8) Which of the following is not a modern weapon of credit control

A) Legal requirements 

B) Moral suasion

C) Rationing of credit 

D) Margin requirement

Explanation:

The Central Bank (RBI) uses various credit control measures to regulate the money supply and credit in the economy.

Modern (Qualitative/Selective) weapons of credit control include:

• Moral Suasion – Persuading banks to follow RBI guidelines.
• Rationing of Credit – Limiting the amount of credit for certain sectors.
• Margin Requirement – Changing the margin on loans against securities to control borrowing.

Legal requirements (such as statutory provisions) are not classified as a modern weapon of credit control. They are part of the regulatory framework rather than a selective monetary policy tool.

9) In the measures of money, currency with public denotes which of the following

A) Notes, coins and demand deposit 

B) Notes and coins only

C) Reserves with central bank 

D) All of the above

Explanation:

Currency with the public refers only to the notes and coins held by the public (households, firms, and other non-bank entities).

It does not include:

• Demand deposits (these are bank deposits, not currency)
• Reserves with the Central Bank (these are held by commercial banks)

Therefore, the correct option is Notes and coins only.

10) Time deposits with banks are included __________ measure of money stock

A) M3 

B) M1 

C) M2 

D) All of the above

Explanation:

Time Deposits are fixed deposits (FDs) or term deposits that cannot be withdrawn on demand. In India, according to the monetary aggregates defined by the Reserve Bank of India (RBI):

• M1 (Narrow Money) = Currency with the public + Demand deposits + Other deposits with RBI
• M2 = M1 + Savings deposits with Post Office Savings Banks
• M3 (Broad Money) = M1 + Time deposits with commercial banks
• M4 = M3 + All deposits with Post Office Savings Banks (excluding National Savings Certificates)

Since time deposits with banks are added to M1 to form M3, the correct answer is M3.

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