Impact of Financial Market Policies (CP2)
Medium-difficulty multiple-choice quiz covering RBI credit policy, instruments, channels, and Fed basics from the provided chapter.
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Quiz Questions & Answers
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Question 1: What is the primary purpose of the Reserve Bank of India's credit policy as defined in the chapter?
To directly set fiscal budget deficits for the government
To fix prices of all consumer goods in the economy
To determine tax rates for imports and exports
To control and regulate money supply and the flow of credit to achieve macroeconomic goals
Question 2: Which mechanism describes how higher interest rates reduce firms' investment by raising borrowing costs?
Exchange Rate Channel
Asset Price Channel
Market Stabilization Channel
Interest Rate Channel
Question 3: Which RBI instrument requires banks to hold a certain percentage of deposits as an interest-free deposit with the central bank?
Cash Reserve Ratio (CRR)
Statutory Liquidity Ratio (SLR)
Open Market Operations
Repo Rate
Question 4: How does the exchange rate channel affect domestic output when the domestic currency appreciates, according to the chapter?
Inflation immediately spikes due to higher export earnings
Net exports fall and domestic output may decline because imports become cheaper and exports less competitive
Banks must raise CRR to counter capital flows
Domestic output rises because cheaper imports always increase industrial production
Question 5: Which facility allows commercial banks to borrow overnight from RBI by selling securities with an agreement to repurchase them later?
Reverse Repo
Marginal Standing Facility
Repo under Liquidity Adjustment Facility
Open Market Operation
Question 6: What is the role of the Market Stabilization Scheme (MSS) described in the chapter?
Provide credit directly to small businesses at subsidized rates
Absorb excess liquidity by issuing government securities to sterilize capital inflows
Fix the policy repo rate quarterly
Set the statutory liquidity ratio for all banks
Question 7: According to the material, why might RBI alter the classification of a sector as 'priority' or grant it 'infrastructure' status?
To require firms in that sector to maintain higher CRR balances
To encourage banks to increase lending and ease access to institutional credit for that sector
To automatically reduce the sector's taxes
To mandate immediate subsidy payments to companies
Question 8: Which statement best matches the chapter's brief description of the Federal Reserve System?
An international organization that manages all central banks
A government ministry responsible for fiscal policy
The Federal Reserve System is the central bank of the United States
A private commercial bank that sets global interest rates