SBI Clerk Money, Banking and Credit — practice questions — page 2

1. In an outright operation the central bank buys or sells securities with no promise to reverse the trade. 2. The money injected or absorbed therefore stays in or out of the system. 3. So the effect is **permanent**, unlike a repo, which specifies a date and price for the reverse leg. 4. Both instruments deal in government securities and both are conducted by the central bank, so the remaining options misstate the mechanics. _Source: syllabus Introductory Macroeconomics, Ch 3 "Money and Banking", section 3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY_

1. A bank holds deposits it has promised to repay on demand. 2. In practice **not every depositor withdraws at once**. 3. So a bank can safely lend out part of those funds, and the loan reappears as a new deposit. 4. That repetition is what creates credit. Depositors are not barred from withdrawing, which is precisely why a reserve is still required. _Source: syllabus Introductory Macroeconomics, Ch 3 "Money and Banking", section 3.3 MONEY CREATION BY BANKING SYSTEM_

1. CU stands for currency held by the public and DD for demand deposits with banks. 2. M1 = **CU + DD**. 3. Adding post office savings deposits gives M2, and adding net time deposits of commercial banks gives M3. 4. Time deposits are therefore excluded from M1, which is what makes the second option wrong. _Source: syllabus Introductory Macroeconomics, Ch 3 "Money and Banking", section 3.2 DEMAND FOR MONEY AND SUPPLY OF MONEY_