UPSC Prelims 2020 · Question 87 of 100
UPSC Prelims 2020 question on Expansionary Monetary Policy Tools
- ExamUPSC CSE
- Year2020
- PaperGeneral Studies Paper I
- SubjectIndian Economy
- TopicBanking
- DifficultyEasy
- TypeStatement
If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do?
1. Cut and optimise the Statutory Liquidity Ratio
2. Increase the Marginal Standing Facility Rate
3. Cut the Bank Rate and Repo Rate
Select the correct answer using the code given below:
Show answer
Answer: B. 2 only
Analysis
Expansionist/expansionary monetary policy is when the central bank of a country increases money supply to stimulate the economy.
The tools used by the RBI to control money supply in the economy can be quantitative or qualitative. Quantitative tools control the extent of money supply by changing the Cash Reserve Ratio (CRR), or Statutory Liquidity Ratio (SLR), or bank rate or Liquidity Adjustment Facility (LAF) that includes Marginal Standing Facility (MSF).
In expansionary monetary policy:
- SLR is REDUCED (cut), not optimised/increased — Statement 1 (cut SLR) would be done in expansionary policy. However, the phrasing 'cut and optimise' may be considered as not a standard tool.
- Bank Rate and Repo Rate are CUT to reduce cost of borrowing and increase money supply — Statement 3 (cut bank rate and repo rate) WOULD be done.
- Marginal Standing Facility Rate being INCREASED would TIGHTEN monetary policy (makes borrowing more expensive), NOT expand it.
Therefore, in an expansionist monetary policy, the RBI would NOT increase the Marginal Standing Facility Rate.
Hence option (b) — 2 only — is the correct answer.
Statement by statement
Statement 2 — Increase the Marginal Standing Facility Rate — would NOT be done in expansionary monetary policy.