UPSC CSE Prelims
Monetary Policy Previous Year Questions (PYQs)
Practice solved questions for Monetary Policy with detailed step-by-step solutions, key insights, and trend analysis for UPSC CSE PRELIMS.
Solved Previous Year Questions
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Supply of money remaining the same when there is an increase in demand for money, there will be:
Detailed Explanation:
When money supply is constant and demand for money increases, there is greater competition for the available money in the economy.
According to the Liquidity Preference Theory, banks and lenders respond by raising the interest rate to equilibrate the money market—higher rates reduce money demand and attract more deposits, restoring balance between supply and demand.
Which of the following measures would result in an increase in the money supply in the economy?
- Purchase of government securities from the public by the Central Bank
- Deposit of currency in commercial banks by the public
- Borrowing by the government from the Central Bank
- Sale of government securities to the public by the Central Bank
Select the correct answer using the codes given below:
Detailed Explanation:
✅ Statement 1 – Correct: When the Central Bank purchases government securities from the public, it pays with newly created money, directly injecting liquidity and increasing money supply.
❌ Statement 2 – Incorrect: When the public deposits currency in commercial banks, no new money is created; it merely shifts from cash in hand to bank deposits, keeping total money supply unchanged.
✅ Statement 3 – Correct: When the government borrows from the Central Bank, the Central Bank creates new money (monetization of deficit), directly expanding money supply in the economy.
❌ Statement 4 – Incorrect: When the Central Bank sells government securities to the public, it absorbs money from circulation in exchange for securities, thereby reducing money supply.
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Related Topics in Indian Economy
Banking Structure in India
Digital Banking and Payment Systems
Reserve Bank of India
Financial Inclusion
Banking Reforms
Evolution and Functions of Money
NPA Management
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