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The Concept of Money Supply MCQs with Answers

Use this page to revise measures of money supply, reserve money, credit creation, CRR, and money multiplier logic. 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: money measures, multiplier logic, and RBI control tools.

Measures of money supply M1 is narrow money and most liquid. M3 is broad money and the most used aggregate in India. M4 is broader and less liquid.
Money multiplier logic Multiplier = 1 / CRR. If CRR rises, multiplier falls. If CRR falls, banks can expand credit more.
RBI control tools CRR, open market operations, and repo policy affect liquidity and money supply in the economy.

Common traps students confuse

Demand deposits vs time deposits Demand deposits are withdrawable on demand. Time deposits are kept for a fixed period.
Narrow money vs broad money Narrow money is more liquid. Broad money includes wider deposit forms and is less liquid.
Primary vs secondary deposits Primary deposits are original deposits. Secondary deposits are created through lending and credit creation.
Core concepts and money measures
Question 01
Money supply refers to:
Money supply means the total stock of money available in the economy at a point of time.
Question 02
Money supply is a:
Money supply is measured as a stock because it is the quantity of money existing at a particular time.
Question 03
M1 includes:
M1 includes currency with the public and demand deposits with the banking system.
Question 04
Currency includes:
Currency here includes both notes and coins held by the public.
Question 05
Demand deposits are:
Demand deposits can be withdrawn on demand, which is why they are highly liquid.
Question 06
Time deposits are:
Time deposits remain locked for a fixed period and are less liquid than demand deposits.
Question 07
M1 is called:
M1 is called narrow money because it contains the most liquid forms of money.
Question 08
M3 is called:
M3 is broad money because it includes a wider range of deposits along with currency.
Question 09
Which is included in M3?
M3 includes currency with the public, demand deposits and time deposits with banks.
Question 10
RBI controls:
The RBI uses monetary tools to regulate liquidity and money supply.
Question 11
High-powered money is:
High-powered money or reserve money is generally denoted by M0.
Question 12
Reserve money includes:
Reserve money consists mainly of currency in circulation plus bank reserves with the RBI.
Question 13
Bank reserves are:
Bank reserves refer to cash balances that banks keep with the RBI.
Question 14
Money multiplier shows:
The money multiplier shows how an initial reserve base can generate multiple deposits through credit creation.
Question 15
Credit creation is done by:
Commercial banks create credit when they lend against deposits while keeping required reserves.
Question 16
Higher reserves lead to:
When more funds are locked as reserves, banks have less capacity to create credit and expand money supply.
Question 17
Lower reserve ratio leads to:
A lower reserve ratio leaves banks with more lendable funds, which raises credit creation and money supply.
Application and banking logic
Question 18
M2 includes:
M2 extends M1 by adding savings deposits of post office savings banks in the standard classification.
Question 19
M4 includes:
M4 is a broader aggregate that includes M3 plus all deposits with post office savings organizations, excluding certain national savings instruments.
Question 20
Which is most liquid?
M1 is the most liquid because it contains currency and demand deposits.
Question 21
Which is least liquid?
M4 is the broadest aggregate here and is therefore the least liquid among the listed measures.
Question 22
Money supply depends on:
Money supply is influenced by reserve requirements, bank credit creation and RBI monetary policy actions.
Question 23
Money multiplier =
In simple textbook form, the multiplier is the reciprocal of the cash reserve ratio.
Question 24
Higher CRR leads to:
A higher CRR reduces banks' lending capacity, so the multiplier falls.
Question 25
Credit creation depends on:
Credit creation depends jointly on deposits, available reserves and the required reserve ratio.
Question 26
Primary deposits are:
Primary deposits are the original deposits placed by customers into banks.
Question 27
Secondary deposits are:
Secondary deposits arise when banks create credit through the lending process.
Question 28
RBI increases money supply by:
When the RBI decreases CRR, banks can lend more and money supply expands.
Question 29
RBI decreases money supply by:
Raising CRR absorbs lendable resources from banks and contracts money supply.
Question 30
Which is not part of money supply?
Shares are financial assets, but they are not counted as money supply.
Question 31
Cash reserve ratio is:
CRR is the proportion of deposits that commercial banks must keep with the RBI as reserves.
Question 32
Excess reserves increase:
Higher excess reserves support greater lending capacity and therefore more credit creation.
Question 33
Which expands money supply fastest?
A low CRR gives banks maximum space to expand credit and deposits.
Question 34
Money supply curve is:
In basic macro treatment, money supply is taken as policy-determined and shown by a vertical curve.
Advanced concepts and multiplier effects
Question 35
Money supply is exogenous in:
The classical approach treats money supply as externally determined by the monetary authority.
Question 36
Money supply is endogenous in:
The Keynesian view allows money supply outcomes to interact with banking behaviour and credit conditions.
Question 37
Increase in CRR causes:
A higher CRR reduces banks' lendable funds, causing credit contraction.
Question 38
Money multiplier depends on:
In a more complete view, the multiplier depends on reserve requirements and the public's currency-deposit behaviour.
Question 39
High currency leakage leads to:
When people hold more cash instead of redepositing it, the deposit expansion chain weakens and the multiplier falls.
Question 40
Credit creation is limited by:
Credit creation is limited by reserve availability, the reserve ratio, and the actual demand for loans.
Question 41
Which reduces money supply?
An increase in CRR directly reduces banks' credit creation ability and lowers money supply.
Question 42
Which increases money supply?
Open market purchase injects liquidity into the banking system and increases money supply.
Question 43
High-powered money multiplier effect is:
Reserve money acts as the base from which multiple credit expansion can directly proceed through the banking system.
Question 44
Reserve money is base for:
Reserve money is the foundation on which banks build multiple deposit and credit expansion.
Question 45
Money supply expansion leads to:
When money supply expands, liquidity in the economy rises.
Question 46
Which is not controlled by RBI directly?
The RBI can influence credit conditions, but it does not directly control private demand for loans.
Question 47
If CRR = 10%, multiplier =:
Using the simple formula multiplier = 1 / CRR, 1 / 0.10 gives 10.
Question 48
If CRR increases, multiplier:
The multiplier moves inversely with the cash reserve ratio.
Question 49
Maximum credit creation occurs when:
A low CRR allows banks to lend a larger part of deposits, producing maximum credit creation.
Question 50
Money supply ultimately depends on:
Money supply is shaped by the RBI, commercial banks, and the public's behaviour regarding currency and deposits.

Test Result

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Why this MCQ page matters

Money supply MCQs with answers for focused CA Foundation revision.

This page is useful after theory revision because it helps students separate money aggregates, reserve concepts, and multiplier 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 measures first, then attempt the MCQs, then revisit only weak areas.

Students usually improve faster when they first lock M1, M3, reserve money, and multiplier logic, then attempt the paper, and finally recheck only the mistakes instead of revising the full unit again.

Focus areas for re-revision

  • Money aggregates from M1 to M4
  • CRR and money multiplier relationship
  • Credit creation by commercial banks