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Supply of money remaining the same when there is an increase in demand for money, there will be

(a)

a fall in the level of prices

(b)

an increase in the rate of interest

(c)

a decrease in the rate of interest

(d)

an increase in the level of income and employment

Correct Answer

(b)

Explanation

Direct application based question. If the demand increase when the supply is same, it will lead to an increase in prices or in this case rate of interest to be charged.

Microtheme: RBIXLiquidity Management —
19 questions asked in Prelims in the past.

  1. [2023] Consider the following statements :
    Statement-I: In the post-pandemic recent past, many Central Banks worldwide had carried out interest rate hikes.
    Statement-II: Central Banks generally assume that they have the ability to counteract the rising consumer prices via monetary policy means.
    Which one of the following is correct in respect of the above statements?

    • (a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I
    • (b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I
    • (c) Statement-I is correct but Statement-II is incorrect
    • (d) Statement-I is incorrect but Statement-II is correct
    Correct Answer: (A) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I
  2. [2022] With reference to the Indian economy, consider the following statements :
    1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.
    2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.
    3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars.
    Which of the statements given above are correct?

    • (a) 1 and 2 only
    • (b) 2 and 3 only
    • (c) 1 and 3 only
    • (d) 1, 2 and 3
    Correct Answer: (B) 2 and 3 only
  3. [2021] The money multiplier in an economy increases with which one of the following?

    • (a) Increase in the Cash Reserve Ratio in the banks.
    • (b) Increase in the Statutory Liquidity Ratio in the banks.
    • (c) Increase in the banking habit of the people.
    • (d) Increase in the population of the country.
    Correct Answer: (C) Increase in the banking habit of the people.
  4. [2020] If you withdraw Rs. 1,00,000 in cash from your Demand Deposit Account at your bank, the immediate effect on aggregate money supply in the economy will be
    (a) to reduce it by Rs. 1,00,000
    (b) to increase it by Rs. 1,00,000
    (c) to increase it by more than Rs. 1,00,000
    (d) to leave it unchanged

    • (a) to reduce it by Rs. 1,00,000
    • (b) to increase it by Rs. 1,00,000
    • (c) to increase it by more than Rs. 1,00,000
    • (d) to leave it unchanged
    Correct Answer: (D) to leave it unchanged
  5. [2020] If the RBI decides to adopt an expansionist monetary policy, which of the following would
    it not do?
    1. Cut and optimize the Statutory Liquidity Ratio
    2. Increase the Marginal Standing Facility Rate
    3. Cut the Bank Rate and Repo Rate
    Select the correct answer using the code given below:

    • (a) 1 and 2 only
    • (b) 2 only
    • (c) 1 and 3 only
    • (d) 1, 2 and 3
    Correct Answer: (C) 1 and 3 only
  6. [2019] Which one of the following is not the most likely measure the Government/RBI takes to stop the slide of Indian rupee?

    • (a) Curbing imports of non-essential goods-and promoting exports
    • (b) Encouraging Indian borrowers to issue rupee denominated Masala Bonds
    • (c) Easing conditions relating to external commercial borrowing
    • (d) Following an expansionary monetary policy
    Correct Answer: (D) Following an expansionary monetary policy
  7. [2016] What is/are the purpose/purposes of the ‘Marginal Cost of Funds based Lending Rate(MCLR)’ announced by RBI?
    1. These guidelines help improve the transparency in the methodology followed by banks for
    determining the interest rates on advances.
    2. These guidelines help ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks.
    Select the correct answer using the code given below.

    • (a) 1 only
    • (b) 2 only
    • (c) Both 1 and 2
    • (d) Neither 1 nor 2
    Correct Answer: (C) Both 1 and 2
  8. [2015] The problem of international liquidity is related to the non-availability of

    • (a) goods and services
    • (b) gold and silver
    • (c) dollars and other hard currencies
    • (d) exportable surplus
    Correct Answer: (C) dollars and other hard currencies
  9. [2015] When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50 basis points, which of the following is likely to happen?

    • (a) India's GDP growth rate increases drastically
    • (b) Foreign institutional Investors may bring more capital into our country
    • (c) Sheduled Commercial Banks may cut their lending rates
    • (d) It may drastically reduce the liquidity to the banking system
    Correct Answer: (C) Sheduled Commercial Banks may cut their lending rates
  10. [2015] With reference to Indian economy, consider the following :
    (1) Bank rate
    (2) Open market operations
    (3) Public debt
    (4) Public revenue
    Which of the above is/are component/components of Monetary Policy?

    • (a) 1 only
    • (b) 2, 3 and 4
    • (c) 1 and 2
    • (d) 1, 3 and 4
    Correct Answer: (C) 1 and 2
  11. [2014] If the interest rate is decreased in an economy, it will

    • (a) decrease the consumption expenditure in the economy.
    • (b) increase the tax collection of the Government.
    • (c) Increase the investment expenditure in the economy.
    • (d) increase the total savings in the economy.
    Correct Answer: (C) Increase the investment expenditure in the economy.
  12. [2014] The terms ‘Marginal Standing Facility Rate’ and ‘Net Demand and Time Liabilities’, sometimes appearing in news, are used in relation to:

    • (a) banking operations
    • (b) communications networking
    • (c) military strategies
    • (d) supply and demand of agricultural product
    Correct Answer: (A) banking operations
  13. [2013] An increase in the Bank Rate generally indicates that the

    • (a) market rate of interest is likely to fall
    • (b) Central bank is no longer making loans to commercial banks
    • (c) Central Bank is following an easy money policy
    • (d) Central Bank is following a tight money policy
    Correct Answer: (D) Central Bank is following a tight money policy
  14. [2013] Supply of money remaining the same when there is an increase in demand for money, there will be

    • (a) a fall in the level of prices
    • (b) an increase in the rate of interest
    • (c) a decrease in the rate of interest
    • (d) an increase in the level of income and employment
    Correct Answer: (B) an increase in the rate of interest
  15. [2013] In the context of Indian economy, ‘Open Market Operations’ refers to

    • (a) borrowing by scheduled banks from the RBI
    • (b) lending by commercial banks to industry and trade
    • (c) purchase and sale of government securities by the RBI
    • (d) None of the above
    Correct Answer: (C) purchase and sale of government securities by the RBI
  16. [2012] Which of the following measures would result in an increase in the money supply in the economy?
    1. Purchase of government securities from the public by the Central Bank
    2. Deposit of currency in commercial banks by the public
    3. Borrowing by the government from the Central Bank
    4. Sale of government securities to the public by the Central Bank

    • (a) 1 only
    • (b) 2 and 4 only
    • (c) 1 and 3 only
    • (d) 2, 3 and 4 only
    Correct Answer: (C) 1 and 3 only
  17. [2011] Consider the following statements:
    1. An increase in the rate of interest may lead to an increase in the rate of inflation.
    2. An increase in the rate of interest may lead to a decrease in the level of investment.
    3. An increase in the rate of interest may lead to an increase in the rate of savings.
    Which of the statements given above is/are correct?

    • (a) 1 only
    • (b) 2 and 3 only
    • (c) 1 and 2 only
    • (d) 2 and 3 only
    Correct Answer: (B) 2 and 3 only
  18. [2010] When the Reserve Bank of India announces an increase of the Cash Reserve Ratio, what does it mean?

    • (a) The commercial banks will have less money to lend
    • (b) The Reserve Bank of India will have less money to lend
    • (c) The Union government will have less money to lend
    • (d) The commercial banks will have more money to lend
    Correct Answer: (A) The commercial banks will have less money to lend
  19. [2010] Which of the following terms indicates a mechanism used by commercial banks for providing credit to the government ?

    • (a) Cash Credit Ratio
    • (b) Debt Service Obligation
    • (c) Liquidity Adjustment Facility
    • (d) Statutory Liquidity Ratio
    Correct Answer: (D) Statutory Liquidity Ratio