Money and Banking — Practice Quiz

Medium of exchange, Unit of account, Store of value

Money serves three main functions: (1) Medium of exchange - facilitates trade, (2) Unit of account - provides a common measure of value for goods and services, and (3) Store of value - allows wealth to be saved for future use. Source of income and measure of intelligence are not functions of money.

Reserve Bank of India

The Reserve Bank of India (RBI) is known as the 'lender of last resort' because it provides funds to commercial banks when they face liquidity problems and cannot get funds from other sources. This ensures stability in the banking system.

Cash Reserve Ratio (CRR), Bank Rate, Open Market Operations

RBI uses quantitative tools like CRR (cash reserve ratio), Bank Rate (rate at which RBI lends to banks), and Open Market Operations (buying/selling government securities) to control money supply. Income tax rates and import duties are fiscal policy tools, not monetary policy tools.

Money supply decreases

When RBI increases CRR, banks have to keep more money as reserves with RBI, leaving less money available for lending. This reduces the money multiplier effect and decreases the overall money supply in the economy.