Money, Banking & RBI MCQs for UPSC Prelims

117 practice questions on Money, Banking & RBI from the Economy section of the UPSC Prelims syllabus. 117 come with a written explanation and 56 are actual previous year questions. Try the sample set below - the answer stays hidden until you ask for it.

29 Easy 58 Medium 30 Hard 56 from past papers

Sample questions

Q1
Previous year question easy

The lowering of Bank Rate by the Reserve Bank of India leads to

  1. A More liquidity in the market
  2. B Less liquidity in the market
  3. C No change in the liquidity in the market
  4. D Mobilization of more deposits by commercial banks
Show answer and explanation

Correct answer: A - More liquidity in the market

Correct answer (a) More liquidity in the market. The Bank Rate is the rate at which the RBI lends to banks; lowering it makes central bank funds cheaper, encouraging banks to borrow and lend more, which increases liquidity in the system. (b) is the opposite effect, produced by raising the rate. (c) is wrong because a rate change does affect liquidity, and (d) is wrong because a lower Bank Rate eases credit rather than directly mobilising more deposits.

Q2
Previous year question medium

With reference to 'Financial Stability and Development Council', consider the following statements: 1. It is an organ of NITI Aayog. 2. It is headed by the Union Finance Minister. 3. It monitors macroprudential supervision of the economy. Which of the statements given above is/are correct?

  1. A 1 and 2 only
  2. B 3 only
  3. C 2 and 3 only
  4. D 1, 2 and 3
Show answer and explanation

Correct answer: C - 2 and 3 only

The Financial Stability and Development Council (FSDC) was set up by the Government in 2010 as an apex body under the Ministry of Finance and is not an organ of NITI Aayog, so statement 1 is incorrect. It is chaired by the Union Finance Minister, making statement 2 correct, and one of its core mandates is macro-prudential supervision and monitoring of the financial system, so statement 3 is correct. With statements 2 and 3 valid, the answer is (c). Options (a), (b) and (d) either include the false NITI Aayog claim or drop a correct statement.

Q3
Previous year question medium

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 Select the correct answer using the codes given below:

  1. A 1 only
  2. B 2 and 4 only
  3. C 1 and 3
  4. D 2, 3 and 4
Show answer and explanation

Correct answer: C - 1 and 3

When the central bank buys government securities from the public it injects money into the economy, and government borrowing from the central bank creates new money, so statements 1 and 3 increase money supply. Merely depositing existing currency in banks shifts the form of money without raising the total, and the central bank selling securities to the public absorbs money, so statements 2 and 4 do not increase supply. The answer is 1 and 3.

Q4
Previous year question hard

With reference to the rule/rules imposed by the Reserve Bank of India while treating foreign banks, consider the following statements: 1. There is no minimum capital requirement for wholly owned banking subsidiaries in India. 2. For wholly owned banking subsidiaries in India, at least 50% of the board members should be Indian nationals. Which of the statements given above is/are correct?

  1. A 1 only
  2. B 2 only
  3. C Both 1 and 2
  4. D Neither 1 nor 2
Show answer and explanation

Correct answer: B - 2 only

RBI norms require a wholly owned subsidiary of a foreign bank to have at least half of its board comprising Indian nationals, so statement 2 is correct. Statement 1 is wrong because there is a prescribed minimum initial capital requirement for such subsidiaries; capital adequacy is a core condition for licensing, not something that is waived. Hence only statement 2 is correct, making option (b) the answer.

Q5
Previous year question easy

Priority Sector Lending by banks in India constitutes the lending to

  1. A agriculture
  2. B micro and small enterprises
  3. C weaker sections
  4. D All of the above
Show answer and explanation

Correct answer: D - All of the above

Priority Sector Lending under RBI norms covers sectors deemed important for inclusive growth that may not otherwise get timely and adequate credit. The recognised categories include agriculture, micro and small enterprises, and weaker sections, along with others such as education, housing and export credit. Since all three listed options are individually part of the priority sector, the correct answer is 'All of the above'.

Q6
Previous year question medium

With reference to the 'Banks Board Bureau (BBB)', which of the following statements are correct? 1. The Governor of RBI is the Chairman of BBB. 2. BBB recommends for the selection of heads for Public Sector Banks. 3. BBB helps the Public Sector Banks in developing strategies and capital raising plans. Select the correct answer using the code given below:

  1. A 1 and 2 only
  2. B 2 and 3 only
  3. C 1 and 3 only
  4. D 1, 2 and 3
Show answer and explanation

Correct answer: B - 2 and 3 only

The Banks Board Bureau was headed by its own chairman, not the RBI Governor, so statement 1 is wrong. The BBB's mandate included recommending the selection of whole-time directors and heads of public sector banks, making statement 2 correct. It also advised these banks on strategy, governance and capital-raising plans, so statement 3 is correct. Hence only 2 and 3 are correct.

Q7
Previous year question hard

The money multiplier in an economy increases with which one of the following?

  1. A Increase in the cash reserve ratio
  2. B Increase in the banking habit of the population
  3. C Increase in the statutory liquidity ratio
  4. D Increase in the population of the country
Show answer and explanation

Correct answer: B - Increase in the banking habit of the population

The money multiplier rises when a larger share of money is deposited in and circulates through the banking system rather than being held as cash, so an increase in the banking habit of the population raises the multiplier. A higher cash reserve ratio or statutory liquidity ratio locks up more of banks' resources and reduces their capacity to create credit, lowering the multiplier. A mere rise in population does not by itself change the multiplier unless it alters deposit behaviour. Hence the increase in banking habit is correct.

Q8
Previous year question easy

Which one of the following statements correctly describes the meaning of legal tender money?

  1. A The money which is tendered in courts of law to defray the fee of legal cases
  2. B The money which a creditor is under compulsion to accept in settlement of his claims
  3. C The bank money in the form of cheques, drafts, bills of exchange, etc.
  4. D The metallic money in circulation in a country
Show answer and explanation

Correct answer: B - The money which a creditor is under compulsion to accept in settlement of his claims

Legal tender money is money that a creditor is legally obliged to accept in the discharge of a debt, which is the essence of option (b). Option (a) plays on the word 'tender' but legal tender has nothing to do with paying court fees. Option (c) describes credit instruments or near-money like cheques and bills of exchange, which are not legal tender because a creditor can refuse them. Option (d) is too narrow, as legal tender includes paper currency notes and is not limited to metallic coins. Hence option (b) is correct.

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More Economy topics

External Sector & Trade 106 Agricultural Economy 86 Balance of Payments & Forex 85 Fiscal Policy & Budget 85 Monetary Policy 82 Financial Markets & Institutions 81 Taxation & GST 73 Inflation & Prices 73 National Income & Growth 73 Poverty, Employment & Inclusive Growth 71 Capital Markets & Investment 70 International Economic Organisations 65 Banking Reforms & NPAs 62 Government Schemes & Policies 62 Industry & Infrastructure 55 Planning & NITI Aayog 38