Question 1

Consider the following statements regarding different types of money:
1. Fiduciary money is a type of legal tender whose value is determined by government decree rather than any intrinsic value.
2. A cheque is an example of Limited Legal Tender Money because a creditor can refuse to accept it beyond a certain limit.
3. Token money is a form of money where its value as a commodity is less than its designated face value.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. It incorrectly combines the definitions of Fiduciary and Fiat money. Fiduciary money is accepted based on trust between the payer and payee, not government decree. Fiat money is what derives its value from government decree.
Statement 2 is incorrect. A cheque is classified as Optional Money, not Legal Tender Money. There is no legal obligation for a creditor to accept it for payment, regardless of the amount. Limited Legal Tender Money refers to currency that can be used to pay a debt only up to a certain limit.
Statement 3 is correct. The definition provided for Token Money is that it has a lesser intrinsic value (value as a commodity) compared to its face value.

Question 2

With reference to the issuance of currency in India, consider the following statements:
1. The Paper Currency Act of 1861 granted the Reserve Bank of India the exclusive right to issue paper currency, ending the practice by private banks.
2. The entire surplus earned by the Reserve Bank of India from seigniorage is mandatorily transferred to the Government of India.
3. The promissory clause 'I promise to pay the bearer...' on a banknote signifies the obligation of the Government of India towards the holder.

How many of the above statements are correct?

Accepted Answer

None. Statement 1 is incorrect. The Paper Currency Act of 1861 granted the monopoly of note issue to the Government of India. The Reserve Bank of India was established much later, in 1935, and subsequently took over this function.
Statement 2 is incorrect. The Reserve Bank of India retains a portion of its surplus earnings, which include seigniorage, to maintain its contingency funds and other reserves. Only the remaining surplus is transferred to the Government of India. The use of the word 'entire' makes the statement false.
Statement 3 is incorrect. The promissory clause on a banknote, as per Section 26 of the RBI Act, 1934, signifies the obligation of the Reserve Bank of India, as the issuer, to pay the bearer the value of the note. This liability is on the RBI, not directly on the Government of India.

Question 3

Consider the following two statements:

Statement-I: In modern economies, most circulating coins and paper currency are examples of token money.

Statement-II: The profit earned by the currency-issuing authority, known as seigniorage, arises because the face value of the currency is greater than its actual production cost.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I.. Statement-I is correct. Token money is defined as money that has a lesser intrinsic value compared to its face value. Modern coins and paper notes cost much less to produce than their face value, fitting this definition.
Statement-II is correct. The text defines seigniorage as the difference between the face value of money and its actual production cost, which represents a profit for the issuing authority (RBI).
Statement-II provides the correct explanation for Statement-I. The economic incentive for an authority to issue token money (as described in Statement-I) is precisely to generate seigniorage (as described in Statement-II). The existence of a gap between face value and intrinsic/production cost is the defining characteristic of token money and is also the source of seigniorage.

Question 4

With reference to the concept of Money Supply, consider the following statements:
1. Money supply is a stock concept representing the total money in circulation among the public at a specific point in time.
2. The stock of money held by the Government is included in the calculation of money supply as it is a primary supplier of money.
3. The stock of money held by the country's banking system is considered an integral part of the money supply held by the public.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is correct. Money supply is fundamentally a stock concept, as it measures the total volume of money held by the public at a particular point in time. Statement 2 is incorrect. The definition of money supply explicitly excludes cash balances held by the central and state governments. This is because the government is a supplier of money, not part of the public that holds it. Statement 3 is incorrect. The stock of money held by the country's banking system (as cash reserves) is also excluded from the money supply. Banks are considered producers or suppliers of money, and their reserves are not in circulation among the public. Therefore, only the first statement is correct.

Question 5

Consider the following statements:

Statement-I: The Reserve Bank of India holds the exclusive mandate for the issuance of all paper currency in India.
Statement-II: The ₹1 note is issued by the Government of India, while all other banknotes are issued by the Reserve Bank of India and guaranteed by the Central Government.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Statement-I is incorrect but Statement-II is correct.. Statement-I is incorrect. The Reserve Bank of India does not have an 'exclusive' mandate for all paper currency. The text explicitly mentions that the ₹1 note is issued by the Government of India, not the RBI. Statement-II is correct. It accurately describes the division of responsibility for currency issuance, noting that the Government of India issues the ₹1 note, while the RBI issues all other banknotes (like ₹2, ₹5, etc.), which are guaranteed by the Central Government. Therefore, Statement-II correctly identifies the exception that makes Statement-I false.

Question 6

Consider the following determinants of Money Supply:
1. During a period of economic recession, the money supply in an economy tends to increase.
2. Commercial banks' lending practices, such as increasing loans to firms and people, directly contribute to the expansion of the money supply.
3. The public's preference for retaining currency rather than depositing it in interest-bearing accounts has no significant impact on the money supply.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 2 is the only correct statement. 
- Statement 1 is incorrect. During an economic recession, business activity slows down, reducing the demand for credit. Banks also tend to become more cautious and reduce lending. This leads to a contraction or slower growth of the money supply, not an increase.
- Statement 2 is correct. This describes the process of credit creation. When commercial banks grant loans, they create new deposits in the borrowers' accounts. Since deposits are a major component of the money supply (like M1 and M3), this lending activity directly expands the total money supply in the economy.
- Statement 3 is incorrect. The public's preference for holding currency versus deposits is a crucial determinant of the money supply. If people hold more currency, banks have fewer reserves to lend out. This reduces the size of the money multiplier, thereby constraining the overall creation of money in the banking system.

Question 7

Consider the following statements regarding the measurement of money supply in India:

1. The monetary aggregate M1, also known as Narrow Money, is calculated by adding Net time deposits with the banking system to the currency with the public.
2. The monetary aggregate M2 is derived by adding savings deposits with Post Office Savings Banks to M3 (Broad Money).
3. As one moves from M1 to M4, the function of money increasingly shifts from a 'store of value' to a 'medium of exchange'.

How many of the above statements are correct?

Accepted Answer

None. Statement 1 is incorrect. M1 (Narrow Money) is defined as Currency with the Public + Net demand deposits held by Commercial Banks. It is M3 (Broad Money) that includes Net time deposits, not M1.

Statement 2 is incorrect. M2 is calculated by adding Savings deposits with Post Office Savings Banks to M1, not to M3. The formula is M2 = M1 + Savings deposits with Post Office Savings Banks.

Statement 3 is incorrect. The text states that the decreasing order of liquidity is M1 > M2 > M3 > M4. This decline in liquidity indicates a shift in money's feature from a ‘medium of exchange’ to a ‘store of value’. Therefore, moving from M1 to M4 represents a shift towards the 'store of value' function, not away from it.

Question 8

Consider the following statements:

Statement-I: The monetary aggregate M3 is considered less liquid than the monetary aggregate M1.

Statement-II: M3 includes net time deposits with the banking system, which primarily serve as a store of value and are not as readily available for transactions as the demand deposits included in M1.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I.. Statement-I is correct. The established order of decreasing liquidity for monetary aggregates is M1 > M2 > M3 > M4, which means M3 is indeed less liquid than M1. Statement-II is also correct. M3 is defined as M1 + Net time deposits with the banking system. Time deposits are locked in for a specific period and cannot be withdrawn on demand, making them less liquid and more of a 'store of value'. In contrast, M1 consists of currency and demand deposits, which are the most liquid assets and serve as a direct 'medium of exchange'. Therefore, the inclusion of less liquid time deposits in M3 is the precise reason for its lower liquidity compared to M1, making Statement-II the correct explanation for Statement-I.

Question 9

With reference to the publication of data on monetary and liquidity aggregates by the RBI, consider the following statements:

1. Data on Reserve Money (M0) is published on a weekly basis.
2. Data for both Narrow Money (NM1) and Broad Money (NM3) are published on a fortnightly basis.
3. Data on the liquidity aggregate L3 is published on a monthly basis.

How many of the above statements are correct?

Accepted Answer

Only two. Statement 1 is correct. The RBI publishes data on M0 (Reserve Money) on a weekly basis. Statement 2 is correct. The text specifies that data for M1 and M3 are published on a fortnightly basis. Since NM1 and NM3 are the new terminologies for Narrow and Broad money, this applies to them as well. Statement 3 is incorrect. Data on the liquidity aggregate L3 is published on a quarterly basis, not monthly. Data for L1 and L2 are published monthly. Therefore, only two statements are correct.

Question 10

Consider the following statements regarding the velocity of money:
1. Minimal financial inclusion is associated with a higher velocity of money as people prefer to preserve more in real assets.
2. As a nation develops, the velocity of money tends to decrease because individuals save more due to faith in government social security.
3. During an economic boom, the velocity of money circulation generally increases.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. Minimal financial inclusion indicates a lower, not higher, velocity of money. This is because with minimal bank intervention, people tend to hold onto assets rather than circulating money frequently. Statement 2 is incorrect. As a nation develops, the velocity of money increases, not decreases. This is driven by individuals saving less and spending more, partly due to confidence in government social security. Statement 3 is correct. During periods of economic boom, spending and transactions accelerate, leading to an increase in the velocity of money.

Question 11

Consider the following two statements:

Statement-I: The money multiplier in India has shown a declining trend in the period 2019-2023.

Statement-II: An increase in deposits by commercial banks with the RBI under the reverse repo facility can lead to a decline in the money multiplier.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I.. Statement-I is correct as the money multiplier recorded a slight decline in the years 2019-20, 2020-21, 2021-22, and 2022-23. Statement-II is also correct. The money multiplier is the ratio of Broad Money (M3) to Reserve Money (M0). When banks park large funds with the RBI under reverse repo, it reduces the amount of money available for lending and credit creation in the economy, which can dampen the growth of M3 relative to M0, thus causing the multiplier to decline. The text explicitly links the decline in the money multiplier to large deposits by banks with the RBI under reverse repo, making Statement-II the correct explanation for Statement-I.

Question 12

Consider the following statements:
1. The ratio of a country's GDP to its Total Money Supply is defined as the Money Multiplier.
2. An increase in the banking habit of people, achieved through better financial inclusion, directly improves the velocity of money.
3. The money multiplier is calculated as the ratio of Reserve Money (M0) to Broad Money (M3).

How many of the above statements are correct?

Accepted Answer

None. All three statements provided are incorrect.

*   **Statement 1 is incorrect.** The ratio of a country's nominal GDP to its Total Money Supply (e.g., M3) defines the **Velocity of Money**, not the Money Multiplier. The Money Multiplier is the ratio of Broad Money (M3) to Reserve Money (M0).
*   **Statement 2 is incorrect.** An increase in the banking habit of people leads to a larger portion of money being held as deposits in banks. This enhances the banking system's ability to create credit, thus increasing the **Money Multiplier**. It does not directly improve the velocity of money.
*   **Statement 3 is incorrect.** The statement presents an inverted formula. The correct formula for the money multiplier is the ratio of Broad Money (M3) to Reserve Money (M0), expressed as M3/M0.

Since all three statements are incorrect, the correct option is 'd', indicating that none of the statements are correct.

Question 13

Consider the following statements regarding the evolution of Indian banknotes since Independence:

1. The first banknotes issued by independent India in 1949 featured the portrait of Mahatma Gandhi in the watermark window.
2. The Mahatma Gandhi (MG) Series of 1996 completely replaced the symbol of the Lion Capital of Ashoka Pillar on the banknote.
3. The Mahatma Gandhi (New) Series, introduced in 2016, was the first instance of indigenously developed designs for banknotes based on national themes.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. The first banknote issued by independent India in 1949 featured the symbol of the Lion Capital of Ashokan Pillar at Sarnath in the watermark window, replacing the portrait of King George. Statement 2 is incorrect. In the MG Series 1996, the symbol of the Lion Capital of Ashoka Pillar was not completely replaced; it was retained and shifted to the left side next to the watermark window. Statement 3 is correct. The text explicitly states that for the Mahatma Gandhi (New) Series, 'For the first time, designs for banknotes have been indigenously developed on themes reflecting the diverse history, culture and ethos of the country'.

Question 14

With reference to the features and legal backing of Indian banknotes, consider the following statements:

1. As per Section 33 of the RBI Act, 1934, all banknotes issued by the RBI must be backed exclusively by gold reserves.
2. It is impossible for two or more banknotes to have the same serial number under any circumstances.
3. The 'Star series' banknotes were introduced with non-sequential numbering to improve operational efficiency and cost-effectiveness.

How many of the above statements are correct?

Accepted Answer

None. Statement 1 is incorrect. The RBI Act, 1934, mandates that banknotes are backed by a portfolio of assets which includes gold, Government Securities, and Foreign Currency Assets. The use of the word 'exclusively' makes the statement false. Statement 2 is incorrect. It is possible for two or more banknotes to have the same serial number, provided they have a different Inset Letter, year of printing, or the signature of a different RBI Governor. Statement 3 is incorrect. This statement inaccurately combines two separate concepts. 'Star series' banknotes are issued as replacements for defectively printed notes and are identified by a star symbol. Non-sequential numbering is a different measure introduced to improve operational efficiency. As all three statements are incorrect, the correct answer is 'None'.

Question 15

Consider the following statements regarding digital assets:
1. Stablecoins are cryptocurrencies designed to exhibit extreme price volatility, making them ideal for speculation.
2. Non-Fungible Tokens (NFTs) are mutually interchangeable and can be broken down into smaller values, facilitating their use as a medium for commercial transactions.
3. Cryptocurrencies are based on a decentralised ledger technology, which contrasts with the centralised nature of government-issued currency.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. Stablecoins are designed to have a consistent value, as they are tied to stable assets like the US dollar. It is other cryptocurrencies, not stablecoins, that are known for extreme price volatility which makes them suitable for speculation. Statement 2 is incorrect. Non-Fungible Tokens (NFTs) are unique and irreplaceable by definition. They are not mutually interchangeable and cannot be broken into smaller values, which is why they cannot be used as a medium for commercial transactions. Statement 3 is correct. Cryptocurrencies utilize decentralised ledger-based blockchain technology, which operates without a central authority, unlike government-issued currencies which are managed by a central bank.

Question 16

Consider the following statements:
Statement-I: In India, there is currently no specific Act enacted to regulate cryptocurrencies, though a bill has been proposed.
Statement-II: The Supreme Court of India, in its 2020 judgment, mandated the Reserve Bank of India to create a comprehensive regulatory framework for cryptocurrencies.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Statement-I is correct but Statement-II is incorrect. Statement-I is correct. As of 2021, the Indian government had not enacted a specific law to regulate cryptocurrencies, although 'The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021' was under consideration. Statement-II is incorrect. The Supreme Court's 2020 judgment did not mandate the RBI to create a regulatory framework. The Court's decision was limited to lifting the ban on cryptocurrency trading that the RBI had imposed in 2018, ruling that a complete ban was excessive. It did not issue a directive to formulate regulations.

Money and Money Supply

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