The smaller the Cash Reserve Ratio, the scope for lending by banks is:
(a) greater
(b) smaller
(c) weaker
(d) lesser
Solution: (a)
Cash Reserve Ratio is a regulation set by Central bank (RBI in India) which dictates the minimum amount (reserves) that a commercial bank must be held to customer notes and deposits. A decrease in CRR will make it mandatory for the banks to hold a lesser proportion of their deposits in the form of deposits with the RBI. This will increase the amount of Bank deposits and they will lend more as they have more amount as their reserve.
Funds that flow into a country to take advantage of favorable rates of interest in that country are called
(a) Cold Money
(b) Black Money
(c) Hot Money
(d) White Money
Solution: (c)
Hot money is a term that is most commonly used in financial markets to refer to the flow of funds (or capital) from one country to another in order to earn a short-term profit on interest rate differences and/ or anticipated exchange rate shifts. These speculative capital flows are called “hot money” because they can move very quickly in and out of markets, potentially leading to market instability..
Commercial banks create credit
(a) on the basis of their securities
(b) on the basis of their assets
(c) on the basis of their reserve fund
(d) on the basis of their deposits
Solution: (d)
Commercial banks create credit on the basis of their deposits. Credit creation is the multiple expansions of banks demand deposits. Whenever, customer deposits sum of money, a part of that money is kept by the commercial banks with the credit bank of the country which is obligatory by the law. The amount of credit that can be created by the bank will depend on the primary deposits and also on the amounts of minimum legal resource requirement.
A speculator who sells stocks, in order to buy back when the price falls, for gain is a
(a) Bull
(b) Bear
(c) Boar
(d) Bison
Solution: (b)
A bear is a speculator who is wary of fall in prices and hence sells securities so that he may buy them at cheap price in future. He does not have securities at present but sells them at higher prices in anticipation that he will supply them business purchasing at lower prices in the future. If the prices move down as per the expectations of the bear he will earn profits out of these transactions.
“Bad money will drive out good money from circulation.” This is known as :
(a) Engle’s Law
(b) Gresham’s Law
(c) Say’ Law
(d) Wagner’s Law
Solution: (b)
Gresham’s law is an economic principle that states: “When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation.” It is commonly stated as: “Bad money drives out good.”
