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Monetary Policy MCQs with Answers

Use this page to revise RBI monetary policy, repo and reverse repo rates, CRR, SLR, open market operations, inflation control, credit regulation, and policy action during recession or inflation. The explanations open after submission so students can check both accuracy and concept clarity in one attempt.

Quick revision before you attempt the test

This unit is usually scored well when students lock three things clearly: policy objective, tool-direction mapping, and quantitative versus qualitative controls.

Policy objective Monetary policy mainly aims at price stability, controlled inflation, better credit flow, and balanced growth in the economy.
Tool-direction mapping Repo up means costlier borrowing and lower credit. CRR or SLR up means lower lendable funds. OMO purchase means higher liquidity.
Policy logic During inflation, RBI follows tight or contractionary policy. During recession, it follows easy or expansionary policy.

Common traps students confuse

Repo vs reverse repo Repo is the rate at which RBI lends to banks. Reverse repo is the rate at which RBI borrows from banks.
Quantitative vs qualitative tools Quantitative tools affect the whole economy. Qualitative tools target selected sectors or credit uses.
Expansionary vs contractionary policy Expansionary policy raises liquidity and credit. Contractionary policy reduces liquidity to control inflation.
Basic concepts and RBI tools
Question 01
Monetary policy refers to:
Monetary policy means the policy by which the RBI regulates money supply, credit, and interest rates in the economy.
Question 02
Monetary policy is controlled by:
In India, the Reserve Bank of India is the authority that frames and implements monetary policy.
Question 03
Main objective of monetary policy:
The core objective of monetary policy is price stability, along with supporting growth and orderly credit conditions.
Question 04
Expansionary monetary policy means:
Expansionary policy raises liquidity and credit availability to support output, demand, and recovery.
Question 05
Contractionary monetary policy means:
Contractionary policy reduces liquidity and credit in order to control inflationary pressure in the economy.
Question 06
Repo rate is:
Repo rate is the rate at which the RBI lends short-term funds to commercial banks against securities.
Question 07
Reverse repo rate is:
Reverse repo is the rate at which the RBI borrows funds from commercial banks, usually to absorb liquidity.
Question 08
CRR means:
CRR is the share of deposits that banks must keep as cash reserves with the RBI.
Question 09
SLR means:
SLR is the ratio of deposits that banks must maintain in liquid assets such as cash, gold, or approved securities.
Question 10
Open Market Operations involve:
Under open market operations, the RBI buys or sells government securities to inject or absorb liquidity.
Question 11
Bank rate is:
Bank rate is the rate at which the RBI lends to commercial banks for the longer term without repurchase agreement.
Question 12
Monetary policy affects:
Monetary policy works through liquidity, interest rates, and credit availability across the economy.
Question 13
RBI reduces inflation by:
To control inflation, the RBI generally follows tight policy and reduces excess liquidity and credit growth.
Question 14
RBI increases growth by:
To support growth, the RBI may increase liquidity and reduce the cost of funds so credit expands.
Question 15
Credit control is:
Credit control is a central part of monetary policy because the RBI influences the volume and direction of bank credit.
Question 16
Quantitative tools affect:
Quantitative tools change overall credit and liquidity conditions and therefore influence the whole economy.
Question 17
Qualitative tools affect:
Qualitative tools are selective in nature and aim to regulate credit use in particular sectors or activities.
Application and policy direction
Question 18
Increase in repo rate leads to:
When repo rate rises, borrowing from the RBI becomes costlier, so banks reduce borrowing and credit expansion slows down.
Question 19
Decrease in repo rate leads to:
A lower repo rate makes funds cheaper for banks, so borrowing and lending activity usually increase.
Question 20
Increase in CRR leads to:
A higher CRR locks more deposits with the RBI, leaving banks with fewer funds to lend.
Question 21
Decrease in CRR leads to:
A lower CRR frees bank resources and increases credit creation, which raises money supply.
Question 22
Open market purchase leads to:
When the RBI purchases securities, it injects funds into the banking system and increases liquidity.
Question 23
Open market sale leads to:
When the RBI sells securities, money moves from banks to the RBI and liquidity contracts.
Question 24
Selective credit control includes:
Margin requirement is a selective credit control tool because it targets borrowing against specific securities or assets.
Question 25
Margin requirement means:
Margin requirement refers to the share of the value of an asset that cannot be financed by bank credit.
Question 26
Credit rationing means:
Credit rationing means placing limits on the amount of credit available to borrowers or sectors.
Question 27
Moral suasion is:
Moral suasion means the RBI uses advice, requests, or persuasion instead of a formal legal order.
Question 28
Monetary policy during inflation:
During inflation, the RBI usually adopts contractionary policy to reduce excess demand and credit growth.
Question 29
Monetary policy during recession:
During recession, expansionary monetary policy is used to encourage borrowing, investment, and production.
Question 30
Increase in SLR leads to:
A higher SLR requires banks to hold more liquid assets, so their lending capacity falls.
Question 31
Decrease in SLR leads to:
A lower SLR leaves more funds with banks for lending, so credit can expand.
Question 32
Which tool is fastest?
Repo rate changes often transmit quickly through short-term money market conditions and bank funding costs.
Question 33
Which tool directly affects liquidity?
Repo policy directly changes the cost and flow of short-term funds in the banking system, so it affects liquidity.
Question 34
Which reduces inflation quickly?
A repo increase tightens monetary conditions and can help reduce inflationary pressure by slowing borrowing and demand.
Advanced concepts and exam logic
Question 35
Monetary policy transmission works through:
Monetary policy transmission works through changes in liquidity, interest rates, and bank credit conditions.
Question 36
Liquidity trap makes monetary policy:
In a liquidity trap, even very low interest rates may fail to stimulate borrowing and investment, so monetary policy becomes weak.
Question 37
High interest rate leads to:
Higher interest rates raise borrowing cost, so consumers and firms borrow less.
Question 38
Low interest rate leads to:
Lower interest rates make loans cheaper and generally increase borrowing, investment, and spending.
Question 39
Monetary policy lag includes:
Policy lag includes recognising the problem, taking the decision, and waiting for the final effect on the economy.
Question 40
Repo rate increase reduces:
A higher repo rate raises borrowing cost for banks and generally reduces credit expansion in the economy.
Question 41
Which is NOT quantitative tool?
Margin requirement is a qualitative or selective credit control tool, unlike CRR, SLR, and repo policy.
Question 42
Which is NOT qualitative tool?
CRR is a quantitative control tool because it affects overall liquidity and lending capacity of banks.
Question 43
Tight monetary policy means:
Tight monetary policy means contractionary policy with lower liquidity and controlled credit growth.
Question 44
Easy monetary policy means:
Easy monetary policy means expansionary policy designed to raise liquidity and stimulate borrowing.
Question 45
RBI controls inflation by:
Reducing liquidity and credit is a standard anti-inflationary action under monetary policy.
Question 46
Which increases money supply most?
A repo decrease lowers borrowing cost for banks and supports a larger expansion of liquidity and credit.
Question 47
Which reduces liquidity most?
OMO sale withdraws money from the banking system by selling securities and absorbing liquidity.
Question 48
Monetary policy objective includes:
Monetary policy supports stability, growth, and employment through controlled credit and liquidity management.
Question 49
RBI independence ensures:
A credible and relatively independent central bank improves consistency and stability in monetary management.
Question 50
Most effective tool in short run:
In the short run, monetary policy is often treated as a quicker stabilisation tool because the RBI can act directly on liquidity and rates.

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Why this MCQ page matters

Monetary policy MCQs with answers for focused CA Foundation revision.

This page is useful after theory revision because it helps students separate RBI tools, policy direction, and inflation-recession logic without mixing them up in objective questions.

  • Chapter-wise practice for Money Market concepts
  • Instant checking with explanations after submission
  • Useful for revision, class tests, and self-practice
  • Best used after reading the notes for this unit
Better practice flow

Revise tools first, then attempt the MCQs, then revisit only weak areas.

Students usually improve faster when they first lock repo, reverse repo, CRR, SLR, and OMO logic, then attempt the paper, and finally recheck only the mistakes instead of revising the full unit again.

Focus areas for re-revision

  • Quantitative and qualitative instruments
  • Inflation versus recession policy direction
  • RBI tool-effect mapping for exam traps