The various methods or instruments of credit control used by the central bank can be broadly classified into two categories: The methods used by the central bank to influence the total volume of credit in the banking system, without any regard for the use to which it is put, are called quantitative or general methods of credit control. Hawtrey and Keynes have developed different lines of thought regarding the effect of bank rate policy. III Sem MULTIPLE CHOICE QUESTIONS AND ANSWERS 1. Copyright. But, after the World War I, there has been a marked decline in the use of bills of exchange as an instrument of financing trade mainly due to the contraction of international trade and the increasing use of treasury bills or other short-term government securities. In a narrow market even a small sale of government securities will lead to a significant fall in their prices. VII. It will reduce the market rates of interest, make the bank credit cheaper, encourage the businessmen to borrow, and invest, push up the level of economic activity and the price level. This is mainly because of the fact that interest cost forms a very low proportion of total cost of investment in these countries. Various effects of bank rate policy are discussed below: i. UCC Book Of Modules 2017 2018 Accounting. Suppose the commercial banks keep 10% of their cash reserves with central bank. The Cash Reserve Ratio is an effective instrument of credit control. The credit control methods adopted by RBi includes: a) Quantitative control b) Qualitative control c) Fixed control d) a &b 20. Lack of Well-Developed Security Market: The success of the policy of open market operations requires the existence of a well-organised and well-developed securities market in the country. MCQ Questions for Class 12 Business Studies with Answers were prepared based on the latest exam pattern. While Hawtrey emphasised the effectiveness of short-term interest rates in influencing the level of economic activity, Keynes emphasised the effects of change in the long- term interest rates on the level of economic activity. Effect on the Level of Economic Activity: The bank rate policy affects the level and structure of interest rates and thereby the level of economic activity in an economy. To check inflation, the central bank raises the cash reserve ratio from 10% to 12%. MCQs on Inflation, which are covered in this chapter, relate to the topic, Inflation. control systems multiple choice questions with answers bing. hrm mcq sem i human resource management scribd com. But, it is not easy for the commercial banks to distinguish between productive and unproductive activities. (iii) Most of the commercial banks in the underdeveloped countries are in the habit of keeping excess cash reserves over and above the minimum requirements. Similarly if the central bank wants to use the open market operations policy to change the money supply in the desired directions, it must surrender its control over the interest rate and must allow it to go where it will go. Hence, open market operations can also affect interest rates. They may have some ideas about new systems or technologies on the rise that could benefit your company. (c) 14. The open market operations policy is superior to the policy of bank rate in two way: (i) Open market operations policy is a direct way of controlling credit, whereas the bank rate policy is an indirect way; in the case of the former, the initiative lies in the hands of the monetary authority, while in case of the latter, the initiative lies with the commercial banks. (There are two aspects to consider your company’s exposure to bad debts and you credit control) 9) Conduct regular credit … Changing Methods of Business Financing: Recent changes in the methods of business financing have also reduced the importance of interest rates and hence of the bank rate in investment decisions. For example, the selling of securities by the central bank will contract the volume of credit and generate a deflationary situation, thus reducing the domestic price level. Unemployment of workers will reduce general demand for goods and services, and, thereby their prices. (v) In the underdeveloped countries, the open market operations are a very useful method of credit control. The quantitative credit control methods- the bank rate, the open market operations and the variable reserve ratio-operate primarily by affecting the cost, volume and availability of bank reserves, and thereby, tend to regulate the total supply of credit. Poor households in urban areas take loans from______ sources. Similarly, an aggressive sale of securities will lower their prices and raises their yields. an increase in sales. iii. The method of direct action is most extensively used by the central bank to enforce both quantitative as well as qualitative credit controls. (b) The central bank may charge a penal rate of interest, over and above the bank rate, on the money demanded by the bank beyond the prescribed limit. MCQs 1 To 10 . Multiple Choice Questions and Answers (MCQ) on Monetary Policy for Civil Services Question 1 : Bank rate is the rate at which the Reserve Bank of India provides loans to a) Public sector undertakings b) … (iv) The selective credit controls are particularly useful in the developing countries where quantitative methods are not so much effective because of underdeveloped money market. The main purpose of preparing a bank reconciliation statement is? 17. Thus, given the demand for money function, the central bank cannot simultaneously choose an interest rate and the money supply. If the banks keep the cash reserves in excess of the fixed ratio, the policy of open market operations will become ineffective because then these banks will purchase the securities being sold by the central bank with their excessive reserves. IV. Since money acts as an intermediate in the exchange process, it is called: 3. Who issues currency notes on behalf of the Central government in India? ucc book of modules 2017 2018 accounting So, you can entre mcq in infection control mahesy easily from some 84 credit controller ~1~null~1~ interview questions. (i) Crowther (ii) Robertson. Process of Credit Creation • The process of multiple credit-expansion can be illustrated by assuming – The existence of a number of banks, A, B, C etc., each with different sets of depositors. (c) 5. Share Your PPT File, Fisher’s Quantity Theory of Money: Equation, Example, Assumptions and Criticisms. A comparative picture of the distinctive features of the three quantitative credit control methods, i.e., bank rate policy, open market operations and variable cash reserve ratio, is presented below: All the three methods have two common features: (i) They are objective and indiscriminatory in nature; they aim at controlling the total volume of credit in the economy without any regard for the uses for which the credit is put. (ii) In the underdeveloped countries, most of the commercial banks enjoy an excess liquidity. easy a. Control Valves Multiple Choice Questions Question 1 When a valve is installed in a process with where the differential pressure (drop) across the … The Volume of credit will decrease, the level of economic activity will decline and the price level will fall. The balance is financed through the bank credit which is repayable by the consumer in installments. The success of the open market operations is also limited by the willingness of the central bank to incur losses. This may offset the anti-inflationary effects of the bank rate policy. Oi is the rate of interest. Open market operations can also affect the economy by changing expectations about the future interest rates. Answers to MCQs on Inflation are available at the end of the last question. An account will be classified as substandard if it remains NPA for a. period not exceeding----months. An assessee who has opted for the Composite Scheme, is he eligible to take input tax credit… (iv) In the underdeveloped countries, the central banks do not have enough experience in using the technique of open market operations. 40. Correct! This will affect the economic activity in the economy. (b) 4. Opposite effects will be obtained when the central bank sells securities. According to Chandler, “In many countries with only a handful of commercial banks, the central bank relies heavily on moral suasion to accomplish its objectives.” Moral suasion means advising, requesting and persuading the commercial banks to cooperate with the central bank in implementing its general monetary policy. Since money acts as an intermediate in the exchange process, it is called: (a) value for money (b) exchange value Moreover, the demand for domestic currency will rise, raising its value and making the exchange rate more favourable. (vi) Through selective measures, the central bank can give preferential treatment to the backward and priority sectors, such as agricultural sector, small scale sector, export sector, of the developing economies by providing special credit facilities to these sectors. They assist customers in setting up a credit control system that allows for periodic … (vi) The, economies of the underdeveloped countries are far from elastic in the sense that wages, costs and prices do not respond readily to changes in the volume of credit. The bank rate policy is the traditional method of credit control used by a central bank. (iii) It is suitable when marginal adjustments are needed in the cash reserves of the commercial banks. (d) Direct action, which involves refusal of rediscount facilities to the commercial banks, is in conflict with the function of the central bank as the lender of the last resort according to which the central bank cannot refuse such facilities. The success of the open market operations depends on the assumption that the commercial banks will expand credit whenever they get additional cash and contract credit whenever their cash reserves diminish as a result of central bank’s open market operations. (a) inability to repay credit amount (b) ability to pay credit amount (c) overspending till no money is left (d) none of these. This will, in turn, affect the level of economic activity and the price level. (a) Money market ... Control inflation. Thus, an increase in the marginal requirements will reduce the amount that can be borrowed for the purchase of a security. The term ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ refers financial investment in a highly risky and growth oriented venture with the … 1. However, for effective and successful monetary management, both the quantitative and qualitative credit control methods are to be combined judiciously. Watch Queue Queue If the stock of securities is limited, the central bank will not be able to sell them at a large scale when it wants to reduce the cash reserves of the commercial banks and to that extent the effectiveness of open market operations is reduced. In view of falling orders, the industrialists will reduce production and employment. Risk analysis and management - MCQs 1. (vii) The selective credit controls are helpful in ensuring balanced economic growth. Multiple Choice Questions and Answers on Money and Credit. The central banks regularly publish the statement of their assets and liabilities; reviews of credit and business conditions; reports on their own activities, money market and banking conditions; etc. Purchase or sale of securities affects their prices as well as their yields. During boom period, when the businessmen are over- optimistic and the marginal efficiency of capital is high, the demand for bank credit cannot be easy checked by increasing the bank rate. HRM MCQ Sem I Human Resource Management Scribd Com. This method was first adopted by the Federal Reserve System of the U.S.A. in 1935 in order to prevent injurious credit expansion or contraction. Its importance as a useful weapon of credit control, particularly in fighting inflationary pressures in the economy cannot be underestimated. (c) The central bank may refuse to grant more credit to the banks whose borrowings are found to be in excess of their capital and reserves. (vii) This method affects only the commercial banking system of the country. As these assumptions are not fully achieved in reality, the bank rate policy suffers from a number of limitations: The Radcliffe Committee in Great Britain and the American Committee on Money and Credit have pointed out that the entrepreneurs are not very sensitive to changes in the interest rates while making their investment decisions. In the underdeveloped countries, however, this method has little significance where such a system is yet to develop. Financial Management MCQ is important for exams like CA, CS, CMA, CPA, CFA, UPSC, NET, Banking and other accounts department exam. Qualitative Control to regulates the flow of credit Here is a brief description of the quantitative and qualitative measures of credit control … 7. Automatic control system. EC Credit Control is a leader in debt collection across Sydney and wider NSW. 5. Limitations of Variable Cash Reserve Ratio: The following are the limitations of the method of variable cash reserve ratio: (i) This method is not effective when the commercial banks keep very large excessive cash reserves. Financial Management MCQ Questions and answers with easy and logical explanations. (c) 2. There is a direct relationship between the bank rate and the market interest rates. S Bharadwaj Reddy November 3, 2017 December 12, 2019. They will curtail their existing stocks of finished goods and also reduce their orders with the industrialists. – Every bank has to keep 10% of cash reserves, according to law, and, – A new deposit of Rs. higher profits. Auditors. Keynes, on the other hand, was of the view that the economic activity in the economy is influenced by the effect of the bank rate on the long-term interest rates. Money and Credit Answers for Multiple Choice Questions, 1. The marginal requirement is the difference between the market value of the security and its maximum loan value. All these factors may neutralise the effect of the sale of securities by the central bank. It can be applicable to a narrower sector of the banking system and therefore cannot be changed easily and quickly. Open Market Operations in Underdeveloped Countries: The scope of open market operations is considerably restricted in underdeveloped countries due to the following reasons: (i) In the underdeveloped countries, the money and capital markets are in their infancy and are not fully developed. (d) 12. In this way, the ability of these banks to create credit will not be adversely affected and the purpose of the open market operations will be defeated. 4. (iii) This method is appropriate only when big changes in the reserves of the commercial banks are required. For example, if the bank rate is raised to control speculative activities, it will also adversely affect the genuine productive activities. (iv) It is not flexible. To use the words of De Kock, “The discount rate of central bank has nevertheless a useful function to perform in certain circumstances and in conjunction with other measures of control.”. Share Your Word File Credit analysts facilitate credit risk management by measuring the creditworthiness of the individual or a firm. In modem times, the selective credit controls have become very popular, particularly in the developing countries. This website includes study notes, research papers, essays, articles and other allied information submitted by visitors like YOU. Despite these limitations, the selective credit controls are an important tool with the central bank and are extensively used as a method of credit control. Large proportion of total volume of credit: bank rate and the credit of... 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