Money and banking notes and MCQs for UGC NET 1 Money and banking Notes and MCQs Syllabus for UGC NET 1. Components of Money Supply 2. Central Bank 3. Commercial Banking 4. Instruments and Working of Monetary Policy 5. Non-banking Financial Institutions 6. Capital Market and its Regulation 1- Components of money supply Functions of money are- Store of value, Medium of exchange, instrument of deferred payments etc. Supply of money Supply of money is a stock concept. It refers to total stock of money by the people of a country at a point of time. M1= C+DD+OD. (Currency+ Demand Deposits+ Other deposits M2= M1+ Deposits with post office savings bank account M3= M1+ Net time deposits with the commercial banks. M4= M3+ Total deposits with post offices. (Other than in the form of NSC) Narrow money- M1 or M2 Broad money- M3 or M4 M3 is aggregate monetary resources of the country India is governed by Minimum reserve system. The entire currency issued has the backing of minimum gold reserves. Near money refers to assets that can be quickly converted into cash. How Banks Create money? Suppose Mr. A deposits Rs. 1000 in a PQR bank, The bank will keep certain percentage of it as reserves and it will lent the remaining amount. If the percentage of required reserves is 10 then the bank will keep 100 Rs. and it will lend 900 Rs.
Transcript
Money and banking notes and MCQs for UGC NET
1
Money and banking Notes and MCQs
Syllabus for UGC NET
1. Components of Money Supply
2. Central Bank 3. Commercial Banking 4. Instruments and Working
of Monetary Policy 5. Non-banking Financial
Institutions 6. Capital Market and its
Regulation
1- Components of money supply
Functions of money are- Store of value, Medium of exchange, instrument of deferred payments etc.
Supply of money
Supply of money is a stock concept. It refers to total
stock of money by the people of a country at a point of time.
M1= C+DD+OD. (Currency+ Demand Deposits+ Other deposits
M2= M1+ Deposits with post office savings bank account
M3= M1+ Net time deposits with the commercial banks.
M4= M3+ Total deposits with post offices. (Other than in the form of NSC)
Narrow money- M1 or M2
Broad money- M3 or M4
M3 is aggregate monetary resources of the country
India is governed by Minimum reserve system. The entire currency issued has the backing of minimum gold reserves.
Near money refers to assets that can be quickly converted into cash.
How Banks Create money?
Suppose Mr. A deposits Rs.
1000 in a PQR bank, The
bank will keep certain
percentage of it as reserves
and it will lent the remaining
amount.
If the percentage of required
reserves is 10 then the bank
will keep 100 Rs. and it will
lend 900 Rs.
Money and banking notes and MCQs for UGC NET
2
So the 900 Rs. which is lent
will be deposited in another
bank say XYZ, out of 900 Rs.
81 Rs. will be kept as reserve
and 819 Rs. will be lent. This
process will be repeated over
and over again.
Money created out of 1000
Rs. will be calculated by
Money multiplier.
Money multiplier= 1/Reserve
Ratio = 1/0.1= 10
Money created out of 1000
Rs. = 900*10= 9000
Theories of demand for money 1. Quantity theory of money MV=PT (Fisher’s equation)
M- Represents money supply.
V- Represents Velocity of money. (The number of time money changes hands)
P- Represents average price level.
T- Represents the volume of transactions in the economy.
Quantity theory of money assumes that increases in the quantity of money leads to inflation.
Classical quantity theory of money- P= f(M)
Cambridge equation- Md =kPY
Y is the physical level of aggregate or national output.
P is average price
K is the proportion of national output/Income that people want to hold.
Assumption MS’ is determined by the monetary authority.
2. Keynesian theory of demand for money
Keynes said that
money was
demanded due to
three main
motives:
(1) The transactions
motive,
(2) The precautionary
motive
(3) The speculative
motive.
Md=L(Y,r) Md is
money demand, Y is
income and r is rate of
interest.
Md has positive
relation with Y and r
has inverse
relationship with Md.
3. Friedman’s theory of
demand for money
M/P = f (y, w; Rm, Rb, Re, gp,
u ) Where M is the total
Money and banking notes and MCQs for UGC NET
3
stock of money demanded; P
is the price level; у is the real
income; w is the fraction of
wealth in non-human form:
Rm is the expected nominal
rate of return on money;
Rb is the expected rate of
return on bonds; Re is the
expected nominal rate of
return on equities; gp=(1/P)
(dP/dt) is the expected rate
of change of prices of goods
and hence the expected
nominal rate of return on
physical assets; and u stands
for variables other than
income that may affect the
utility linked to money.
According to Friedman
Demand for money is stable
due to Permanent income
expectations of the citizens.
Supply of money is unstable
due to actions of monetary
authorities.
Friedman’s theory is theory
of demand for money.
2- Central Bank
India’s central bank is RBI, it was
established in 1935. Its HQ is in
Mumbai, and Current RBI governor is
Shashikant Das.
Inflation Target is 4% from 2016-2020
Current Policy rates as on 1 Feb
2018
Policy Repo Rate: 6.25% (reduced from 6.50% to 6.25% in feb)
Reverse Repo Rate: 6.25%
Bank Rate: 6.75%
Marginal Standing Facility Rate: 6.75%
CRR: 4%
SLR: 19.5%
Functions of RBI
1. Bank of issuing notes. 2. Banker to the Government. When the government expenditure exceeds government revenue and the deficit is managed by borrowing from the RBI, it is called deficit financing. 3. Bankers’ bank, As a Bankers‟ bank, it has almost the same relation with other banks in the country as a commercial bank has with its customers. It accepts deposits from the commercial banks and offers them loans. 4. Lender of the last resort: RBI offers commercial banks loans in case of emergency.
Money and banking notes and MCQs for UGC NET
4
5. Custodian of foreign exchange: Central bank is the custodian of nation’s foreign exchange reserves. 6. Clearing house function: cheques of bank S and bank P are cleared through their accounts in RBI. 7. Control of credit. Central bank increases or decreases the supply of money in the economy by regulating the creation of credit by the commercial banks.
Monetary policy tools used by
RBI
Monetary policy monetary policy
committee has 6 members including
RBI Governor; this committee decides
monetary policy rates.
Quantitative monetary policy tools
CRR- It refers to the
percentage of total demand
deposits of the commercial
banks which they must keep as
cash reserves with the RBI.
SLR- It refers to liquid assets
that the commercial banks
must hold with themselves
daily, as a percentage of their
total deposits.
Bank rate- It relates to the
loans offered by the RBI to the
commercial banks without any
collateral.
Repo rate- It relates to the
loans offered by the RBI to the
commercial banks with
security.
Reverse repo rate- The rate at
which commercial banks are
permitted to keep their surplus
funds with the RBI is called
„Reverse Repo Rate‟.
Open market operations-
(OMO): Open market
operations refer to the sale
and purchase of securities in
the open market by the central
bank. By selling the securities
the central bank absorbs
liquidity from the economy.
And by buying the securities,
the central bank releases
liquidity.
Qualitative monetary policy tools
Margin requirement: The
margin requirement refers to
the difference between the
current value of the security
offered for loan (called
collateral) and the value of
loan granted.
Money and banking notes and MCQs for UGC NET
5
Rationing of credit: It refers to
fixation of credit quotas for
different business activities.
Moral suasion: The central
bank makes the member banks
agree through persuasion (or
pressure) to follow its
directives. The banks are
advised to restrict loans during
inflation, and be liberal in
lending during deflation.
4- Commercial
Banking
According to Indian Banking
Companies Act, “Banking
company is one which transacts
the business of banking which
means the accepting (for the
purpose of lending or investment)
of deposits of money from the
public repayable on demand or
otherwise and withdrawal by
cheque, draft, order or
otherwise.”
Number of Banks in India
PSBs: 22 (21 Nationalised
banks, as SBI is not a
nationalised bank)
Total Private Sector Banks:
24
RRB‟s: 56 (To be reduced
after few mergers)
Foreign Banks: 46
Cooperative Banks: 42
Nationalization of banks
On July 19, 1969 fourteen
commercial banks with
deposits worth Rs. 50 Crore or
more were nationalized.
On April 15 1980, six more
privately owned banks were
nationalized.
Why nationalization?
Concentration of wealth in the
hands of few, Refusal to give
agriculture loans, No interest
by commercial banks in
establishing offices in semi-
urban and rural areas.
Objectives of nationalization?
Removal of control by a few,
provision of adequate credit
for agriculture and small
industry, giving professional
bent to management, provision
Money and banking notes and MCQs for UGC NET
6
of adequate training as well as
terms of service for bank staff.
Banking structure in India
State bank of India and other
public commercial banks
dominate the banking in India.
On the recommendation of M
Narsimhan RRBs were set up in
1976.
NABARD- Est. 1982-Shivaraman
committee
EXIM Bank- Est. 1982
Lead bank scheme 1969
recommendation of Narsimhan
committee. Under this scheme
each bank was allocated a
district. Impact of lead bank
scheme increase in no. of
branches and increase in
deposits and lending.
5- NBFCs
NBFCs are registered under
companies’ act 1956, these
are involved in the business
of Loans and advances,
buying and selling securities.
NBFCs are not those
companies whose principle
business is agriculture
activity, Industrial activity,
purchase and sale of goods
and services.
NBFCs can broadly be
classified in two categories as
under:
A. NBFCs accepting public
deposits
B. NBFCs not accepting public
deposits
Difference between NBFCs and Banks as per the RBI
i. NBFC cannot accept demand deposits.
ii. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself.
iii. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.
B. Minimum Ratio of Common Equity to RWAs--4.50% to 7.00%
C. Tier I capital to RWAs--6.00% Core Tier I capital to RWAs-- 5.00%
D. Leverage Ratio--3.00%
Previous year questions from Money and banking
1. According to monetarists, demand for money function is A. Stable and interest
inelastic B. Constant and interest
elastic C. Stable and interest elastic D. Unstable and interest
inelastic (Jan 2017)
2. ‘Near money’ is correctly defined as an (1) Asset which has 100% liquidity.
(2) Asset which has no store of value function. (3) asset which is a medium of exchange. (4) Asset which fulfils the store of value function and can be converted into a medium of exchange at a short notice.
(July 2016) 3. Which of the following is
generally called as Aggregate monetary measure of money supply? (1) M4 (2) M1 (3) M2 (4) M3
(July 2016)
4. Who among the following economists considered the rate of interest to influence the transaction demand for money? (1) P. Samuelson (2) W. J. Baumol (3) Keynes (4) I. Fisher
5. Assertion (A): Monetarists
disagreed with the Phillips curve analysis. Reason (R): There is no unique correspondence of % inflation rate with % unemployment rate.
Money and banking notes and MCQs for UGC NET
10
Answer from the codes below: Codes: (1) Both (A) and (R) are true and (R) is the correct explanation of (A). (2) Both (A) and (R) are true and (R) is not the correct explanation of (A). (3) (A) is true and (R) is false. (4) (A) is false and (R) is true.
6. The traders reduce the risk of
loss in currency fluctuations through which of the following? (1) Speculations (2) Arbitrage (3) Hedging (4) None of the above
7. Which among the following are the recommendations of the Urjit Patel Committee report of on monetary policy? I. Curtailment of the fiscal deficit. II. Inflation anchor at four percent. III. Providing adequate liquidity in the money and capital market. IV. Pegging the exchange value of Indian Currency. Select the answer from the code below: Codes: (1) I, II and III (2) II and IV
(3) III and IV (4) I, II and IV
8. Consider the following statements about rising NPAs of banks in India : I. Rising NPAs are due to
slow down in the world economy.
II. Private Sector banks have lower NPAs in comparison Public Sector Banks.
III. Rising NPAs are due to droughts in India. Which of the statements given above is/are correct?
IV. Codes : (1) Only I (2) I and III (3) I and II (4) I, II and II
9. The banks which are
implementing the Micro Finance Programme linked with Self Help Groups (SHGs) are (1) Commercial Banks and Co-operative Banks, only. (2) Regional Rural Banks and Commercial Banks, only. (3) Co-operative Banks and Regional Rural Banks, only.
Money and banking notes and MCQs for UGC NET
11
(4) Commercial Banks, Regional Rural Banks and Co-operative Banks.
10. For the demand function D= D
(p) and supply function S= S(p), the excess demand brings about market equilibrium in which of the following situations?
A. dE(p)
dp> 0
B. 𝐝𝐄 𝐩
𝐝𝐩< 𝟎
C. dE p
dp= 0
D. dE(p)
dp= ∞
11. Retail banking is to provide
banking services: A. Only to individual customers
in an integrated manner B. Entirely to agriculture sector
only C. Only to self help group for their
survival D. None of the above
12. The rate at which banks lend
to RBI is known as: A. Bank rate B. Repo rate C. Reverse repo rate D. Interest rate
13. Who among the following
believed the velocity of money to be constant?
A. Classicals B. Keynesians C. Monetarists D. Both A and C
14. An interest rate risk means:
A. When borrowers fail to fulfill the terms of the loan contract
B. A rise in interest rate will mean a fall in the value of security in the secondary market
C. A rise in interest rate will raise the value of financial security in the secondary market
D. When unintended inflation arises
15. In the famous equation M= PKY, K stands for; A. Fraction of real output held
for transaction B. Fraction of money supply
held by persons C. Fraction of money value of
output (transactions) held by public.
D. None of the above
16. Which of the following new financing agency provide finance to micro and small business? A. SIDBI
Money and banking notes and MCQs for UGC NET
12
B. MUDRA C. NABARD D. KCC
17. According to monetary
approach, a revaluation of a nation’s currency A. Increases the nation’s
demand for money B. Increases the nation’s
supply of money C. Reduces the nation’s
demand for money D. Reduces the nation’s supply
of money
18. A crossed cheque can be encashed by; A. Through SBI B. Through post office C. Through any bank D. None of the above
19. Which of these is not a
monetary policy rate? A. CRR B. SLR C. Repo rate D. MDR
20. A scheduled bank is a bank
which is: A. Included in 2nd schedule of
RBI B. Not included in 2nd schedule
of RBI C. All the commercial banks
D. All the PSBs
21. NABARD was established in 1982 on the recommendation of- A. R H khan committee B. Y deoshthali committee C. Shivaraman committee D. None of these
22. What is shenzan?
A. Stock exchange of china B. Stock exchange of south korea C. Stock exchange of japan. D. None of these
23. SEBI is ---- and it’s chairman is? A. Statuary body and Ajay
Tyagi B. Advisory body and UK sinha C. Regulator of money market,
Ajay Tyagi D. Constitutional body, R.H.
Khan
24. Capital market is? A. Market for short term
securities B. Market for Long term
securities C. Market for Bonds D. None of these
25. NBFCs are of two types these
are:
Money and banking notes and MCQs for UGC NET
13
A. Deposit accepting and non-deposit accepting
B. Loan giving and non- loan giving
C. Registered with RBI, not registered with RBI.
D. None of these
26. Headquarter of World Bank is in? A. New York B. Washington D.C. C. Chicago D. London
27. Which institution regulates
RRBs? A. SEBI B. SIDBI C. NABARD D. None of these
28. If bank wants to increase
credit creation: A. They should reduce the
interest rate B. They should increase
lending C. They should decrease
lending D. They should increase
interest rates
29. Monetary base consists of; A. Money with debtors of
banks
B. Money with RBI C. Money with Government D. Reserves of banking
system and currency with public
30. Repo rate refers to:
A. Rate at which RBI lends to banks
B. Rate at which banks lend to RBI
C. Rate at which banks lend to government
D. None of these
31. Open market operations refers to: A. Sale and purchase of
government securities by RBI
B. Sale and purchase of government securities by commercial banks
C. Sale of securities by the NBFCs
D. None of these
32. NSDL refers to: A. National securities
depositories limited B. Net sale and discount
liabilities C. National social depositaries
Limited D. None of these
Money and banking notes and MCQs for UGC NET
14
33. For improving corporate governance which of the following committee has been formed? A. Nachiket mor committee B. Uday kotak committee C. R.H. Khan committee D. None of these
