Monetary Economics

Question 1

Define Fiat Money

Answer 1

Fiat Money - Fiat (Order) of the Government (or) Legal Tenders

(Eg) Paper Money

Question 2

Define Fiduciary Money

Answer 2

Fiduciary Money - Accepted money on the basis of trust

(Eg) Loans, Cheques, Credit Cards, ….

Question 3

Define Commemorative Coin and which is the 1st Commemorative Coin?

Answer 3

Commemorative Coin: Not used for exchange and given as a honor

1st Commemorative Coin issued (1964) in honor of Jawaharlal Nehru

Question 4

Quantitative Theory of Money
(Fisher’s Theory)

Answer 4

MV = PT

M - Money Supply
V - Velocity of Money (Number of hands a ₹1 changes hand)
P - Price Level
T - Volume of Transaction

Question 5

Cambridge’s Approach (Cash Balances Approach)

Answer 5

M = KPY

M - Money Supply
K - Money Demand
P - Price Level
Y - Production of Gs/Ss

Question 6

Define CDR

Answer 6

Cash to Deposit Ratio = C/D

Question 7

Define RDR

Answer 7

Reserve to Deposit Ratio = R/D

Reserve Money is distributed among SLR and CRR i.e. RDR = SLR + CRR

The remaining amount is used for lending and administrative purposes

Question 8

Define Money Multiplier

Answer 8

m = 1/Reserve Ratio

Question 9

Increase/Decrease in Money Supply

Answer 9

Δ MS = m*H

m - Money Multiplier
H - Money Injected

Question 10

Relation of Money Supply with CRR, SLR, Repo Rate, Reverse Repo Rate, Standing Deposit Facility Rate, Marginal Standing Facility Rate

Answer 10

Money Supply α 1/(Any) Rate

Rational: Basic logic that lower the interest rate higher is the lending i.e. increase in the money supply

Question 11

Quantitative controls used to curb or promote money supply

Answer 11

1. Liquidity Adjustment Facility - Injection/absorption of money
2. LAF Corridor
   - Upper Bound: MSF Rate
   - Lower Bound: SDF Rate
   - Mid Bound: Policy Repo Rate
3. Bank Rate
4. Repo Rate (Deflationary Scenario)
5. Reverse Repo Rate (Inflationary Scenario)
6. CRR and SLR
7. Open Market Operations

Question 12

Qualitative controls used to curb or promote money supply

Answer 12

1. Imposing Margin Requirement -
   Loan = (100-x)(Security given by seeker)
   x = margin rate defined by RBI
2. Rationing of Credit - Partiality towards a sector. Ex: Investing in Agriculture ↑
3. Selective Credit Control - Discriminatory Return on Investment
4. Moral Suasion - Wide spread appeals and announcements that excessive expansionary (or) contraction of Bank credit may lead to evil consequences

Question 13

Monetary Policy Committee consists of?

Answer 13

1. 6 - Members
   (3 - RBI + 3 Govt appointed)
2. 3 - Members of RBI are Governor (Chairman), Deputy Governor, and Other officer of RBI
3. Tenure of Appointed members - Non - Renewable 4 years

Question 14

RBI shifted from Base Rate System to _______ System

Answer 14

MCLR - Marginal Cost of funds based Lending Rate

Minimum interest rate defined by RBI on Banks, below which no bank shall lend loan

Brings transparency in methodology