Free Questions › CA › Business Economics
Free CA Business Economics Practice Questions & Answers
501 exam-style Business Economics questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 301
The repo rate differs from the bank rate in that the repo rate applies to:
Select an option first.
Correct answer: A — SHORT-TERM lending by the central bank against the sale and repurchase of securities
Explanation: Repo transactions are collateralised and typically overnight, which is why the repo rate has become the operative policy rate for day-to-day liquidity, while the bank rate now functions largely as a penal rate linked to the marginal standing facility.
Question 302
Commercial banks act as financial intermediaries because they:
Select an option first.
Correct answer: D — Channel funds from savers to borrowers, transforming small short-term deposits into larger longer-term loans
Explanation: Banks perform maturity transformation, size transformation and risk assessment that individual savers could not undertake themselves. This is also why they are vulnerable to a run: their liabilities are payable on demand while their assets are locked into loans.
Question 303
M3, or broad money, consists of M1 plus:
Select an option first.
Correct answer: D — TIME deposits with the banking system
Explanation: M1 covers money available immediately for transactions; M3 adds time deposits, which are less liquid but still command purchasing power. M3 is the aggregate most watched for monetary policy in India. Verify the current definitions against the ICAI study material for your attempt.
Question 304
Call money refers to funds borrowed and lent:
Select an option first.
Correct answer: B — For very short periods, often overnight, mainly between banks
Explanation: The call money market lets banks adjust their day-to-day liquidity and meet reserve requirements. Because the maturity is a day or so, the rate is highly sensitive to shortages of liquidity and is watched closely as an indicator of money market conditions.
Question 305
The cash reserve ratio is the proportion of deposits that a commercial bank must:
Select an option first.
Correct answer: D — Hold as cash reserves with the central bank
Explanation: Raising the CRR withdraws lendable resources from the banking system and contracts credit; lowering it does the reverse. Distractor B describes the STATUTORY LIQUIDITY RATIO, which is held in approved securities rather than as cash with the RBI - the two are constantly confused.
Get the full CA question bank — free
Drop your email and we'll send you fresh CA practice questions, fully worked solutions and exam-deadline reminders. No spam — unsubscribe in one click.
Want to save your score and take a full mock exam? Create a free account →
Question 306
A certificate of deposit is:
Select an option first.
Correct answer: D — A negotiable instrument evidencing a term deposit with a bank
Explanation: Being negotiable, a CD can be sold before maturity, which gives the holder liquidity while the bank keeps the funds for a fixed term. It is a money market instrument issued at a discount, and it lets banks raise bulk short-term funds at market rates.
Question 307
Commercial paper is:
Select an option first.
Correct answer: B — An unsecured short-term promissory note issued by a creditworthy company
Explanation: Highly rated companies use commercial paper to raise working capital directly from the money market, usually more cheaply than from banks. Being unsecured, it depends entirely on the issuer's credit standing, which is why only well-rated companies can issue it.
Question 308
Commercial banks create credit because they:
Select an option first.
Correct answer: D — Lend a large part of their deposits, which return to the system as fresh deposits
Explanation: A loan is credited to the borrower's account, spent, and redeposited in some bank, which lends most of it again. The process repeats in diminishing rounds, so the banking system as a whole creates deposits several times the original cash - though no single bank can lend more than it holds.
Question 309
In India, currency notes other than the one-rupee note are issued by:
Select an option first.
Correct answer: B — The Reserve Bank of India
Explanation: The Reserve Bank issues currency notes under the minimum reserve system, while one-rupee notes and all coins are issued by the Government of India, though circulated through the RBI. Verify the current arrangement against the ICAI study material for your attempt, as such details are periodically revised.
Question 310
Deflation refers to:
Select an option first.
Correct answer: D — A sustained fall in the general price level
Explanation: Deflation is dangerous because buyers postpone purchases in expectation of lower prices, demand weakens further, and the real burden of debt rises. Distractor A describes DISINFLATION - a slowing of inflation, with prices still rising - which is a quite different condition.
Question 311
The money supply in an economy depends on:
Select an option first.
Correct answer: A — High-powered money and the money multiplier, which reflects the reserve ratio and the public's cash preference
Explanation: The central bank controls the monetary base directly and the multiplier indirectly through reserve requirements, but the public's decision to hold cash and the banks' willingness to lend also matter - which is why money supply cannot be controlled with precision.
Question 312
The principal difficulty of a barter system is:
Select an option first.
Correct answer: A — The need for a double coincidence of wants
Explanation: Exchange requires each party to want precisely what the other offers, which makes transactions rare and costly. Barter also lacks a common measure of value, cannot handle indivisible goods, and offers no satisfactory store of value or basis for deferred payment - and money solves each of these in turn.
Question 313
The chief economic significance of digital payment systems is that they:
Select an option first.
Correct answer: B — Lower transaction costs, widen financial inclusion and improve the traceability of payments
Explanation: Cheap, instant transfers reduce dependence on cash, bring small merchants into the formal economy and make direct benefit transfers feasible. They also reduce the currency-to-deposit ratio, which raises the money multiplier - a monetary consequence worth noting.
Question 314
An increase in the repo rate is likely to:
Select an option first.
Correct answer: C — Reduce the money supply and discourage borrowing
Explanation: The repo rate is the rate at which the central bank lends to commercial banks, so raising it makes their funds dearer and they in turn raise lending rates - contracting credit and the money supply. It is the standard instrument against inflation. Cutting the rate does the reverse and is used to stimulate a slowing economy.
Question 315
The correct sequence in the evolution of money is:
Select an option first.
Correct answer: C — Commodity money, metallic money, paper money, credit money
Explanation: Money began as commonly accepted commodities such as cattle or grain, moved to metals for durability and divisibility, then to paper representing metal and later fiat paper, and finally to bank deposits and electronic credit. Each stage improved portability and reduced the cost of transacting.
Question 316
Fiat money is money that:
Select an option first.
Correct answer: D — Derives its value from GOVERNMENT DECREE and general acceptance rather than intrinsic worth
Explanation: A currency note is intrinsically worth little; it circulates because the state declares it legal tender and because everyone expects everyone else to accept it. Legal tender status means a creditor cannot lawfully refuse it in settlement of a debt.
Question 317
Which of the following is NOT a function of a central bank?
Select an option first.
Correct answer: A — Accepting deposits from the general public
Explanation: A central bank deals with the government and with commercial banks, not with the general public - which is what distinguishes it from a commercial bank. Its functions are note issue, banker to government, bankers' bank, controller of credit, custodian of reserves and lender of last resort.
Question 318
The functions of money include:
Select an option first.
Correct answer: D — Medium of exchange, measure of value, store of value and standard of deferred payment
Explanation: The first two are the PRIMARY functions and the latter two the SECONDARY ones. Money solves the double coincidence of wants that cripples barter, provides a common unit for comparing values, allows purchasing power to be carried forward, and makes contracts for future payment possible. Money does not fix prices; it expresses them.
Question 319
Gresham's law states that:
Select an option first.
Correct answer: A — BAD money drives out good money when both circulate at a fixed legal ratio
Explanation: If two coins have the same face value but different metal content, people spend the debased one and hoard or melt the superior one, so the better money disappears from circulation. The law applies only where the exchange rate between the two is fixed by law rather than by the market.
Question 320
High-powered money, or reserve money, consists of:
Select an option first.
Correct answer: A — Currency held by the public plus bank reserves plus other deposits with the central bank
Explanation: It is the monetary base on which the banking system builds deposits through credit creation - hence high-powered, since each unit supports several units of money supply. The relationship between it and total money supply is the money multiplier, which depends on the reserve ratio and the public's cash preference.
Question 321
According to the quantity theory, a sustained increase in the money supply well beyond the growth of output will:
Select an option first.
Correct answer: A — Raise the general PRICE LEVEL
Explanation: With velocity and transactions stable, more money chasing the same goods raises prices proportionately. The theory is a long-run proposition: in the short run, with unused capacity, additional money may raise output rather than prices.
Question 322
As lender of last resort, the central bank:
Select an option first.
Correct answer: B — Provides funds to commercial banks facing a temporary liquidity crisis
Explanation: By standing ready to lend against good security, the central bank prevents a solvent bank from collapsing merely because depositors have demanded cash at once, and so checks the spread of panic. The support is for illiquidity, not for insolvency.
Question 323
The power of banks to create credit is limited by:
Select an option first.
Correct answer: C — The cash reserve ratio, the public's preference for cash, and the availability of creditworthy borrowers
Explanation: Reserve requirements set the theoretical ceiling, but leakage of cash into circulation lowers the effective multiplier, and in a downturn banks may find no sound borrowers however ample their reserves. This is why easy money alone cannot guarantee an expansion of credit.
Question 324
Liquidity preference means:
Select an option first.
Correct answer: B — The preference for holding wealth in the form of money rather than less liquid assets
Explanation: Keynes made liquidity preference, together with the money supply, the determinant of the rate of interest - which he saw as the reward for parting with liquidity. The speculative demand element is what gives the theory its distinctive shape, since it links money demand to expectations about bond prices.
Question 325
Raising the margin requirement on loans against a commodity will:
Select an option first.
Correct answer: C — REDUCE lending against it, since the borrower must find a larger share himself
Explanation: The margin is the portion of the value of the security that the bank will not lend against. Raising it from, say, 30% to 60% halves the loan obtainable on the same stock, which is the standard tool for curbing speculative hoarding of essential commodities.
Question 326
Money serves as a store of value because it:
Select an option first.
Correct answer: C — Is perfectly liquid and can be held to command goods in the future
Explanation: Money is the most liquid store of value, being usable immediately without conversion. But INFLATION erodes its real purchasing power, which is why it is an imperfect store of value and why people hold other assets alongside it - a qualification distractor A ignores.
Question 327
The money market differs from the capital market in that the money market deals in:
Select an option first.
Correct answer: A — SHORT-term funds and instruments of high liquidity
Explanation: Money market instruments mature within a year - treasury bills, call money, commercial paper, certificates of deposit - and are close substitutes for cash. The capital market handles long-term finance through shares and debentures. The dividing line is the MATURITY of the instrument.
Question 328
Moral suasion as an instrument of monetary policy involves:
Select an option first.
Correct answer: A — PERSUASION and advice by the central bank to commercial banks, without legal compulsion
Explanation: Through letters, meetings and informal guidance, the central bank urges banks to restrain or redirect lending. It works because of the central bank's authority and the banks' dependence on it, and it can act quickly - but it has no legal force behind it.
Question 329
According to Keynes, the three motives for holding money are:
Select an option first.
Correct answer: D — Transaction, precautionary and speculative motives
Explanation: The transaction motive covers day-to-day purchases and the precautionary motive unforeseen contingencies; both depend chiefly on INCOME. The speculative motive - holding cash rather than bonds when interest rates are expected to rise - depends on the INTEREST RATE, and it is what makes the demand for money interest-elastic.
Question 330
M1, or narrow money, consists of:
Select an option first.
Correct answer: A — Currency with the public, demand deposits with banks, and other deposits with the Reserve Bank
Explanation: M1 captures money available for immediate transactions, which is why time deposits - being less liquid - are excluded and appear only in the broader M3. Liquidity falls as one moves from M1 to M4. Verify the current definitions of the monetary aggregates against the ICAI study material for your attempt, as these have been revised in the past.
More free CA topics
Ten questions in
- The ones you miss are saved as a drill you can repeat
- Your place is kept, on this device and any other
- A streak, if that is the thing that gets you back tomorrow
Every question on this page stays free and open either way.