Unit 14: Money Supply And Inflation (JAIIB - MODULE B)

1. Which of the following is NOT considered a function of money?

  • A. Medium of exchange
  • B. Store of value
  • C. Increase in production
  • D. Unit of account
Money facilitates exchange, stores value, and acts as a unit of account. Production is influenced by other factors like capital and labor, not money itself.

2. Commodity money refers to:

  • A. Money that has intrinsic value, like gold or silver
  • B. Paper currency issued by RBI
  • C. Bank deposits transferable by cheque
  • D. Digital payments using UPI
Commodity money has its own intrinsic value (like gold coins, silver, or cattle) and can be directly used as money.

3. Which of the following best defines "Fiat Money"?

  • A. Money backed by gold reserves
  • B. Commodity-based currency
  • C. Cryptocurrency
  • D. Money declared legal tender by the government without intrinsic value
Fiat money is currency that has no intrinsic value but is accepted as legal tender because the government declares it so (e.g., Indian Rupee).

4. A customer deposits ₹10,000 in a bank account. The money now serves as:

  • A. Commodity money
  • B. Store of value
  • C. Fiat money
  • D. Barter exchange
By depositing money, the customer is storing value for future use. The deposit maintains purchasing power over time.

5. Which characteristic makes money different from barter system?

  • A. It is based on mutual exchange
  • B. It depends on double coincidence of wants
  • C. It serves as a universally accepted medium of exchange
  • D. It is always backed by gold
Unlike barter, money is universally accepted and removes the need for double coincidence of wants.

6. Which of the following is considered the narrowest measure of money supply in India?

  • A. M1
  • B. M2
  • C. M3
  • D. M4
M1 is the narrow money supply, which includes currency with the public + demand deposits with banks + other deposits with RBI.

7. In India, which measure of money supply is most commonly used by RBI for policy formulation?

  • A. M1
  • B. M2
  • C. M4
  • D. M3
M3 (Broad money) is the most widely used measure of money supply in India and is used by RBI for monetary policy.

8. Which of the following is NOT included in M1 (Narrow Money)?

  • A. Currency with the public
  • B. Demand deposits with commercial banks
  • C. Fixed deposits with banks
  • D. Other deposits with RBI
Fixed deposits are included in M2/M3 but not in M1, as M1 includes only liquid money components.

9. Which situation best represents cost-push inflation?

  • A. Increase in consumer demand leading to higher prices
  • B. Rise in wages and raw material costs leading to higher production costs
  • C. Increase in money supply by RBI
  • D. Growth in foreign direct investment
Cost-push inflation occurs when production costs (wages, raw materials) increase, forcing producers to raise prices.

10. If RBI wants to reduce inflation, which of the following actions is MOST appropriate?

  • A. Decrease in CRR
  • B. Decrease in Repo Rate
  • C. Increase in Repo Rate
  • D. Purchase of government securities
Increasing the repo rate makes borrowing costlier, reducing money supply and controlling inflation.

11. Which of the following is the MOST common cause of demand-pull inflation?

  • A. Excessive increase in money supply
  • B. Sudden increase in oil prices
  • C. Increase in wages and raw materials
  • D. Supply chain disruptions
Demand-pull inflation is caused by excess demand in the economy, often due to excessive money supply or credit growth.

12. A sharp rise in international crude oil prices is MOST likely to cause which type of inflation in India?

  • A. Demand-pull inflation
  • B. Creeping inflation
  • C. Imported deflation
  • D. Cost-push inflation
An increase in crude oil prices raises transportation and production costs, leading to cost-push inflation in India.

13. Which of the following government actions may lead to inflation?

  • A. Reduction in indirect taxes
  • B. Large fiscal deficit financed by printing currency
  • C. Reduction in customs duty
  • D. Subsidy on essential commodities
Financing fiscal deficit by printing new money increases money supply, creating demand-pull inflationary pressure.

14. Which of the following scenarios is an example of “structural inflation”?

  • A. RBI increases repo rate
  • B. Excess demand for luxury cars
  • C. Persistent shortage of food grains due to low agricultural productivity
  • D. Sharp increase in wages due to trade union pressure
Structural inflation arises from long-term supply bottlenecks such as low agricultural productivity and poor infrastructure.

15. Which of the following combinations is CORRECT regarding causes of inflation?

  • A. Demand-pull: Excessive money supply; Cost-push: Rise in input costs
  • B. Demand-pull: Increase in oil prices; Cost-push: Rise in exports
  • C. Demand-pull: Supply chain disruption; Cost-push: Credit expansion
  • D. Demand-pull: Wage rise; Cost-push: Luxury demand growth
Demand-pull inflation results from excessive demand or money supply, while cost-push inflation comes from higher input costs like wages or raw materials.

16. Which of the following indices is MOST commonly used in India to measure wholesale inflation?

  • A. Consumer Price Index (CPI)
  • B. GDP Deflator
  • C. Wholesale Price Index (WPI)
  • D. Producer Price Index (PPI)
India measures wholesale inflation primarily through the Wholesale Price Index (WPI), published by the Office of Economic Adviser.

17. Which organization publishes the Consumer Price Index (CPI) in India?

  • A. Central Statistics Office (CSO) / NSO
  • B. Reserve Bank of India (RBI)
  • C. Ministry of Finance
  • D. NITI Aayog
The Consumer Price Index (CPI) is compiled and published by the National Statistical Office (earlier CSO).

18. If the CPI in 2024 is 180 and in 2023 it was 150, what is the inflation rate?

  • A. 15%
  • B. 18%
  • C. 25%
  • D. 20%
Inflation rate = ((180 - 150) / 150) × 100 = 20%.

19. Which of the following is TRUE about GDP Deflator?

  • A. It is based on a fixed basket of goods and services
  • B. It covers all goods and services produced domestically
  • C. It excludes services and focuses only on goods
  • D. It is the same as CPI
The GDP deflator is a broad measure of inflation as it includes all goods and services produced domestically, unlike CPI or WPI which are based on fixed baskets.

20. Which of the following is the headline inflation measure used by RBI for monetary policy decisions in India?

  • A. Consumer Price Index (CPI) Combined
  • B. Wholesale Price Index (WPI)
  • C. GDP Deflator
  • D. Core Inflation Index
RBI currently uses CPI (Combined) as the measure of headline inflation for its monetary policy framework.

21. Inflation that increases at a very slow pace (around 1–3% annually) is called:

  • A. Galloping inflation
  • B. Hyperinflation
  • C. Stagflation
  • D. Creeping inflation
Creeping inflation refers to a mild rise in prices (1–3% per year) and is often considered manageable or even healthy for the economy.

22. When inflation rises rapidly at double or triple digit rates, it is called:

  • A. Galloping inflation
  • B. Creeping inflation
  • C. Structural inflation
  • D. Core inflation
Galloping inflation refers to very high inflation (double or triple digits), which disrupts savings and investment decisions.

23. Which type of inflation is seen in situations like Germany in the 1920s or Zimbabwe in the 2000s, where prices rise uncontrollably?

  • A. Galloping inflation
  • B. Creeping inflation
  • C. Hyperinflation
  • D. Structural inflation
Hyperinflation occurs when prices increase uncontrollably, often exceeding 50% per month, usually due to collapse in confidence in the currency.

24. A situation where inflation coexists with high unemployment and stagnant growth is known as:

  • A. Hyperinflation
  • B. Stagflation
  • C. Cost-push inflation
  • D. Core inflation
Stagflation is a rare condition where inflation remains high despite low growth and high unemployment, making it hard to tackle with conventional policies.

25. Headline inflation differs from core inflation in which way?

  • A. Headline inflation includes all items including food and fuel, while core inflation excludes food and fuel.
  • B. Core inflation includes food and fuel, while headline excludes them.
  • C. Both headline and core inflation exclude food and fuel.
  • D. Both headline and core inflation include only wholesale prices.
Headline inflation reflects the overall inflation rate including food and fuel, while core inflation excludes these volatile items to show underlying trends.

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