Fill in the blank: The Cash Reserve Ratio (CRR) is a percentage of deposits that banks must keep as ___ with the central bank.

Reserves

True or False: The demand for money decreases when interest rates rise, because people prefer to hold cash instead of earning interest.

False. The demand for money decreases when interest rates rise because people prefer to invest in interest-earning accounts rather than hold cash.

How does demonetization impact the circulation of black money in an economy?

Demonetization reduces black money circulation.

• Encourages depositing old notes.

• Brings wealth into banking system.

• Enhances tax compliance rates.

Fill in the blank: The Reserve Bank of India was established in ___ and plays a key role in issuing currency.

1935

What is the effect of an increase in the Cash Reserve Ratio (CRR) on banks' lending capacity?

An increase in the CRR reduces the amount of money banks can lend, thereby decreasing the overall money supply in the economy.

Define 'liquidity preference' in the context of money demand.

Liquidity preference affects money demand.

• Desire to hold cash.

• Safeguard against uncertainties.

• Balances liquidity and earnings.

True or False: Time deposits are considered part of M1 money supply.

False. Time deposits are included in M3, not in M1, which consists only of currency and demand deposits.

Explain how banks create money through the lending process.

Banks create money by lending.

• Lending expands money supply.

• Deposits generate new funds.

• Maintains reserve for withdrawals.

What are the two main types of monetary policy tools used by the Reserve Bank of India?

Monetary policy tools include quantitative and qualitative.

• Quantitative tools adjust CRR.

• Open market operations impact liquidity.

• Qualitative tools influence credit availability.

What are the primary functions of money in an economy?

Money has three main functions.

• Medium of exchange for transactions.

• Unit of account for value measurement.

• Store of value for wealth preservation.