UPSC CSE Prelims
Money, Banking & Financial System Previous Year Questions (PYQs)
Showing solved Previous Year Questions for Chapter: Money, Banking & Financial System
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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.
Priority Sector Lending by banks in India constitutes the lending to:
Detailed Explanation:
Priority Sector Lending (PSL) mandates banks to allocate 40% of Adjusted Net Bank Credit (ANBC) to designated sectors including agriculture and allied activities, micro and small enterprises, weaker sections (low-income groups, students for education, housing), export credit, renewable energy, and social infrastructure.
All three options – agriculture, micro and small enterprises, and weaker sections – are explicitly covered under the RBI's PSL guidelines, making option 4 the correct answer.
The Reserve Bank of India (RBI) acts as a bankers’ bank. This would imply which of the following?
- Other banks retain their deposits with the RBI.
- The RBI lends funds to the commercial banks in times of need.
- The RBI advises the commercial banks on monetary matters.
Select the correct answer using the codes given below :
Detailed Explanation:
✅ Statement 1 – Correct: Commercial banks maintain their deposits with the RBI in the form of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements, making RBI the custodian of banking system reserves.
✅ Statement 2 – Correct: RBI acts as the Lender of Last Resort, providing emergency liquidity to commercial banks through mechanisms like repo operations and marginal standing facility during financial crunch.
✅ Statement 3 – Correct: RBI exercises supervisory and regulatory functions over commercial banks, advising them on monetary policy implementation, credit management, and prudential norms to maintain banking system stability.
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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.
The basic aim of the Lead Bank Scheme is that:
Detailed Explanation:
The Lead Bank Scheme was introduced by the Reserve Bank of India (RBI) in December 1969 to ensure coordinated banking and credit facilities in rural areas.
Under this scheme, a lead bank is assigned to each district to take the lead role in promoting intensive banking development, coordinating credit flow, and ensuring branch expansion in underbanked areas.
The primary objective is district-level concentrated development, not competition among banks or merely opening offices.