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No.
Because its a definition based question. If you dont know the definition of OMO you might
tick a wrong answer and fail. Most of the sincere players fail in prelims because of this reason.
They push their luck in negative marking to overcome an imaginary cutoff and thus dig up their
own grave. (especially during last 10-15 minutes of the exam.)
Moral of the story: never put fact/definition type MCQs in Mark-n-Review.
Lets solve a bit more complicated MCQ from 2012s CSAT paper.
Q.Which of the following measures would result in an increase in the money supply in economy?
5.
6.
7.
8.
Answer choice
9.
10.
11.
12.
Only 1
2 and 4
1 and 3
2, 3 and 4
Whenever you face such multiple statement type MCQs, always use elimination method. First find a
statement that is definitely right or definitely wrong and eliminate choices accordingly.
13.
14.
15.
16.
Focus on first statement Purchase of government securities from public by central bank: will it
increase money supply in the system?
Imagine Rajan puts an ad in newspaper: bring your Sabzi (vegetables), Ill buy it. Junta gives him
their own veggies, Rajan gives them money. (a classic buy and sell).
Ultimate result: money supply increased in the system- because junta got the money. Meaning
#1 definitely correct.
If you think it on technical terms. Central bank purchases government securities=OMO (Open
market operation), where money shifts hands from RBI to people.
Hence money supply increased. (In reality, money doesnt go to aam admi directly, but those
bankers and non-banking institutions who participate in OMO). Anyways, #1 is right, Eliminate
choices that do not have #1
Only 1
2 and 4
1 and 3
2, 3 and 4
Statement #3 says Borrowing by government from the central bank. (So, will it increase
money supply?)
How does Government borrow from Central bank? Does Mohan just callup Rajan and demand 1
lakh crores? No. Mohan will have to give Rajan that much government securities (vegetables)
and Rajan will give him cash.
Is money supply increased? Yes Mohan sold veggies to Rajan and got Money. Whenever Rajan
buys veggies and pays the money supply is increased. (this is similar to Open Market operation)
Besides, Mohan can then use money to pay salaries of government staff, pay for rail-roadbridges and other infrastructure projects, pay for MNREGA and so on. Therefore Answer C: 1
and 3 correct.
Counter- argument?
What if Rajan subsequently sells those (Mohans) securities to bankers. Then bankers money
reduced. Hence #3 is wrong. Therefore final answer A only 1.
Viewpoint 1: yes. Because bank can used it to expand loanable credit. (as explained in Money
creation topic in Class 12 NCERT Macroeconomics page 39 onwards).
Viewpoint 2: no. (Because Bank will have to put some money aside as CRR- so that much money
is less in the system.)
Either way it doesnt change the answer. Because We know that statement 1 is definitely correct. And
there is no option where (1,2) are given simultaneously.
Q. RBI Acts as bankers bank. This would imply which of the following?
1. Other banks retain their deposits with RBI
2. RBI lends funds to commercial banks in the times of need.
3. RBI advises commercial banks on monetary matters.
Correct Statement
4.
5.
6.
7.
Only 2 and 3
Only 1 and 2
Only 1 and 3
1, 2 and 3
Approach:
Whenever you face such 3 statement MCQ or 4 statement MCQ, Always use elimination method. First
you find out a statement that is definitely right or definitely wrong. In above case, we can see #2 is
definitely right. RBI lends funds to banks in the times of need (Repo, MSF)
So lets eliminate choices that dont involve statement #2
8.
9.
10.
11.
Only 2 and 3
Only 1 and 2
Only 1 and 3
1, 2 and 3
This did not help much. We still have three choices left. Observe statement #1: Other banks
retain their deposits with RBI. That is correct with respect to cash reserve ratio. CRR is one type
of deposit that banks make to RBI. (RBI doesnt pay interest on it- thats a different story).
Meaning #1 is also correct eliminate choices that donot have #1
a. Only 2 and 3
b. Only 1 and 2
c. Only 1 and 3
d. 1, 2 and 3
Only two choices left and the ultimate solution = is statement #3 is correct or not?
Viewpoint #1
The statement says RBI advises commercial
banks on monetary matters.The word
advises makes this statement incorrect.
Because RBI doesnt Advice they just order the
banks- be it SLR, CRR, PSL. RBI doesnt advice,
RBI gives orders and direction. Therefore
statement #3 is wrong.
Even if we accept that RBI advices, still the
questions asks what is implied by RBI as
Viewpoint #2
RBI does advice those banks. We saw it under
Moral Suasion. Therefore, Statement #3 is
right.
Bankers bank. So, RBI advices moral suasion Advice function under Bankers bank topic.
that is a monetary policy tool. RBIs not doing it
as a Banker to those banks. Therefore,
Statement #3 is definitely wrong.
Answer (B)
Answer (D)
So, is it B or is it D? Final judge is UPSC.
They had uploaded CSAt-2012 official answer key on their site.
This question is Test Series A, Question #75 and its official answer is D = meaning all three
statements are correct.
If you face such MCQ in exam, what should be your approach?
Skip
Attempt
Mark n Review