(CBCIBAICB) Contemporary Issues in Banking AICB only version Practice Exam
Q1. Which of the following best describes the primary function of a bank as a financial intermediary?
A. Providing consumer loans only
B. Converting deposits into loans and investments
C. Issuing government bonds exclusively
D. Managing foreign exchange exclusively
Answer: B
Explanation: Banks take deposits and convert them into loans and investments, thereby channeling
funds from savers to borrowers.
Q2. In the context of national balance sheets, what does the ‘asset’ side primarily represent?
A. The liabilities owed by households
B. The productive resources owned by the nation
C. The domestic recycling of funds
D. The amount of government spending
Answer: B
Explanation: Assets in a national balance sheet reflect the productive resources and wealth held by a
nation.
Q3. What is meant by ‘sectoral surplus’ in a national balance sheet analysis?
A. Excess funds held by government institutions
B. The amount by which a sector’s income exceeds its expenditures
C. The over-allocation of bank deposits
D. The borrowing rate among private firms
Answer: B
Explanation: A sectoral surplus occurs when a sector’s revenues or income exceed its spending.
Q4. Which mechanism best explains domestic recycling of funds within an economy?
A. Direct government spending
B. Conversion of deposits into loans and securities
C. Issuing foreign currency
D. Printing money
Answer: B
Explanation: Domestic recycling involves banks transforming deposits into loans and securities, thereby
reallocating funds within the economy.
Q5. How does the process of deposit creation by banks affect the money supply?
A. It directly reduces the available money in circulation
B. It multiplies the amount of base money via the deposit multiplier effect
C. It has no impact on money supply
D. It converts deposits into physical currency only
Answer: B
Explanation: Banks create deposits by lending a fraction of their deposits, which increases the money
supply through the multiplier effect.
,Q6. Which statement best explains the role of financial intermediaries?
A. They directly control monetary policy
B. They serve as a bridge between savers and borrowers
C. They solely manage government funds
D. They set interest rates for consumer loans only
Answer: B
Explanation: Financial intermediaries connect those with surplus funds (savers) to those in need of funds
(borrowers).
Q7. When analyzing a personal sector balance sheet, which component is most critical?
A. Foreign exchange reserves
B. The household savings ratio
C. The number of bank branches
D. International debt levels
Answer: B
Explanation: The household or personal sector savings ratio is critical in understanding the balance
between income and expenditures at the individual level.
Q8. What is the bank deposit multiplier?
A. A tool to measure bank profits
B. A ratio showing how many times deposits can be multiplied through lending
C. The interest rate charged on loans
D. A calculation of government spending
Answer: B
Explanation: The bank deposit multiplier indicates how an initial deposit can lead to a multiple increase
in the total money supply due to repeated lending.
Q9. Which of the following is NOT a typical function of financial intermediaries?
A. Risk transformation
B. Maturity transformation
C. Direct issuing of corporate bonds
D. Providing liquidity services
Answer: C
Explanation: While financial intermediaries do facilitate risk and maturity transformation, the direct
issuance of corporate bonds is typically done by corporations, not banks.
Q10. What does the national balance sheet illustrate in the context of an economy?
A. Only the liabilities of the government
B. The stock of assets and liabilities for an entire nation
C. Only private sector debts
D. The printing history of the national currency
Answer: B
Explanation: The national balance sheet gives an overall picture of the nation’s assets and liabilities,
reflecting the economy’s financial position.
Q11. Which component best reflects a bank’s role as a deposit creator?
A. Maintaining a high reserve ratio
,B. Holding large quantities of government securities
C. Extending loans based on received deposits
D. Increasing the central bank’s liabilities
Answer: C
Explanation: By extending loans using a portion of deposits, banks effectively create new deposits in the
system.
Q12. How do fluctuations in the personal sector savings ratio affect the economy?
A. They have no measurable impact
B. They indicate changes in consumer confidence and spending
C. They solely affect government budgets
D. They determine the central bank’s interest rate
Answer: B
Explanation: A change in the personal sector savings ratio reflects shifts in consumer behavior,
influencing overall demand and economic growth.
Q13. Which of the following is a direct outcome of the domestic recycling of funds?
A. Decrease in foreign investments
B. Increased availability of credit to borrowers
C. Reduction in the national debt
D. Elimination of inflation
Answer: B
Explanation: Recycling funds domestically helps make credit more available to borrowers, supporting
economic activity.
Q14. What role does the national balance sheet analysis play in economic planning?
A. It only focuses on short-term monetary policy
B. It provides insights into the distribution of wealth and resource allocation
C. It disregards the role of financial intermediaries
D. It exclusively measures government spending
Answer: B
Explanation: National balance sheet analysis helps planners understand resource allocation and wealth
distribution in the economy.
Q15. Which of the following best defines bank deposit creation?
A. Issuing currency notes
B. Generating additional deposits through the process of lending
C. Eliminating bad loans
D. Consolidating bank branches
Answer: B
Explanation: Banks create deposits by lending out a portion of their received funds, effectively
multiplying the money supply.
Q16. How does an increase in bank lending typically affect the money supply?
A. It decreases the money supply through deflation
B. It increases the money supply through new deposit creation
C. It has no effect on the money supply
, D. It only affects foreign exchange rates
Answer: B
Explanation: Increased lending by banks results in the creation of additional deposits, thereby expanding
the money supply.
Q17. Which of the following best captures the concept of the domestic recycling of funds?
A. Using international loans to boost domestic growth
B. Reinvesting savings within the local economy
C. Printing additional money to cover government deficits
D. Reducing the overall savings rate
Answer: B
Explanation: Domestic recycling refers to the reallocation of funds within the national economy, thereby
supporting domestic investment and growth.
Q18. What is the significance of sectoral deficits in national balance sheet analysis?
A. They represent surplus funds in the economy
B. They indicate sectors where expenditures exceed income
C. They lead directly to an increase in savings
D. They are irrelevant for economic policy
Answer: B
Explanation: Sectoral deficits occur when a sector’s spending is greater than its income, highlighting
potential areas of economic imbalance.
Q19. Which element is NOT typically included in the analysis of a personal sector balance sheet?
A. Household assets
B. Private liabilities
C. Corporate earnings reports
D. Net worth calculations
Answer: C
Explanation: Corporate earnings reports are relevant to firms rather than individual household balance
sheets.
Q20. How does the bank deposit multiplier influence the overall economy?
A. By directly setting tax rates
B. Through its effect on the level of credit and spending in the economy
C. By determining the value of imported goods
D. Through government spending controls
Answer: B
Explanation: The deposit multiplier affects the amount of credit available, which in turn influences
overall spending and economic activity.
Q21. Which of the following best explains why banks maintain a reserve ratio?
A. To maximize profit from every deposit
B. To ensure liquidity and meet withdrawal demands
C. To increase the money multiplier indefinitely
D. To control the interest rate on loans
Answer: B
Q1. Which of the following best describes the primary function of a bank as a financial intermediary?
A. Providing consumer loans only
B. Converting deposits into loans and investments
C. Issuing government bonds exclusively
D. Managing foreign exchange exclusively
Answer: B
Explanation: Banks take deposits and convert them into loans and investments, thereby channeling
funds from savers to borrowers.
Q2. In the context of national balance sheets, what does the ‘asset’ side primarily represent?
A. The liabilities owed by households
B. The productive resources owned by the nation
C. The domestic recycling of funds
D. The amount of government spending
Answer: B
Explanation: Assets in a national balance sheet reflect the productive resources and wealth held by a
nation.
Q3. What is meant by ‘sectoral surplus’ in a national balance sheet analysis?
A. Excess funds held by government institutions
B. The amount by which a sector’s income exceeds its expenditures
C. The over-allocation of bank deposits
D. The borrowing rate among private firms
Answer: B
Explanation: A sectoral surplus occurs when a sector’s revenues or income exceed its spending.
Q4. Which mechanism best explains domestic recycling of funds within an economy?
A. Direct government spending
B. Conversion of deposits into loans and securities
C. Issuing foreign currency
D. Printing money
Answer: B
Explanation: Domestic recycling involves banks transforming deposits into loans and securities, thereby
reallocating funds within the economy.
Q5. How does the process of deposit creation by banks affect the money supply?
A. It directly reduces the available money in circulation
B. It multiplies the amount of base money via the deposit multiplier effect
C. It has no impact on money supply
D. It converts deposits into physical currency only
Answer: B
Explanation: Banks create deposits by lending a fraction of their deposits, which increases the money
supply through the multiplier effect.
,Q6. Which statement best explains the role of financial intermediaries?
A. They directly control monetary policy
B. They serve as a bridge between savers and borrowers
C. They solely manage government funds
D. They set interest rates for consumer loans only
Answer: B
Explanation: Financial intermediaries connect those with surplus funds (savers) to those in need of funds
(borrowers).
Q7. When analyzing a personal sector balance sheet, which component is most critical?
A. Foreign exchange reserves
B. The household savings ratio
C. The number of bank branches
D. International debt levels
Answer: B
Explanation: The household or personal sector savings ratio is critical in understanding the balance
between income and expenditures at the individual level.
Q8. What is the bank deposit multiplier?
A. A tool to measure bank profits
B. A ratio showing how many times deposits can be multiplied through lending
C. The interest rate charged on loans
D. A calculation of government spending
Answer: B
Explanation: The bank deposit multiplier indicates how an initial deposit can lead to a multiple increase
in the total money supply due to repeated lending.
Q9. Which of the following is NOT a typical function of financial intermediaries?
A. Risk transformation
B. Maturity transformation
C. Direct issuing of corporate bonds
D. Providing liquidity services
Answer: C
Explanation: While financial intermediaries do facilitate risk and maturity transformation, the direct
issuance of corporate bonds is typically done by corporations, not banks.
Q10. What does the national balance sheet illustrate in the context of an economy?
A. Only the liabilities of the government
B. The stock of assets and liabilities for an entire nation
C. Only private sector debts
D. The printing history of the national currency
Answer: B
Explanation: The national balance sheet gives an overall picture of the nation’s assets and liabilities,
reflecting the economy’s financial position.
Q11. Which component best reflects a bank’s role as a deposit creator?
A. Maintaining a high reserve ratio
,B. Holding large quantities of government securities
C. Extending loans based on received deposits
D. Increasing the central bank’s liabilities
Answer: C
Explanation: By extending loans using a portion of deposits, banks effectively create new deposits in the
system.
Q12. How do fluctuations in the personal sector savings ratio affect the economy?
A. They have no measurable impact
B. They indicate changes in consumer confidence and spending
C. They solely affect government budgets
D. They determine the central bank’s interest rate
Answer: B
Explanation: A change in the personal sector savings ratio reflects shifts in consumer behavior,
influencing overall demand and economic growth.
Q13. Which of the following is a direct outcome of the domestic recycling of funds?
A. Decrease in foreign investments
B. Increased availability of credit to borrowers
C. Reduction in the national debt
D. Elimination of inflation
Answer: B
Explanation: Recycling funds domestically helps make credit more available to borrowers, supporting
economic activity.
Q14. What role does the national balance sheet analysis play in economic planning?
A. It only focuses on short-term monetary policy
B. It provides insights into the distribution of wealth and resource allocation
C. It disregards the role of financial intermediaries
D. It exclusively measures government spending
Answer: B
Explanation: National balance sheet analysis helps planners understand resource allocation and wealth
distribution in the economy.
Q15. Which of the following best defines bank deposit creation?
A. Issuing currency notes
B. Generating additional deposits through the process of lending
C. Eliminating bad loans
D. Consolidating bank branches
Answer: B
Explanation: Banks create deposits by lending out a portion of their received funds, effectively
multiplying the money supply.
Q16. How does an increase in bank lending typically affect the money supply?
A. It decreases the money supply through deflation
B. It increases the money supply through new deposit creation
C. It has no effect on the money supply
, D. It only affects foreign exchange rates
Answer: B
Explanation: Increased lending by banks results in the creation of additional deposits, thereby expanding
the money supply.
Q17. Which of the following best captures the concept of the domestic recycling of funds?
A. Using international loans to boost domestic growth
B. Reinvesting savings within the local economy
C. Printing additional money to cover government deficits
D. Reducing the overall savings rate
Answer: B
Explanation: Domestic recycling refers to the reallocation of funds within the national economy, thereby
supporting domestic investment and growth.
Q18. What is the significance of sectoral deficits in national balance sheet analysis?
A. They represent surplus funds in the economy
B. They indicate sectors where expenditures exceed income
C. They lead directly to an increase in savings
D. They are irrelevant for economic policy
Answer: B
Explanation: Sectoral deficits occur when a sector’s spending is greater than its income, highlighting
potential areas of economic imbalance.
Q19. Which element is NOT typically included in the analysis of a personal sector balance sheet?
A. Household assets
B. Private liabilities
C. Corporate earnings reports
D. Net worth calculations
Answer: C
Explanation: Corporate earnings reports are relevant to firms rather than individual household balance
sheets.
Q20. How does the bank deposit multiplier influence the overall economy?
A. By directly setting tax rates
B. Through its effect on the level of credit and spending in the economy
C. By determining the value of imported goods
D. Through government spending controls
Answer: B
Explanation: The deposit multiplier affects the amount of credit available, which in turn influences
overall spending and economic activity.
Q21. Which of the following best explains why banks maintain a reserve ratio?
A. To maximize profit from every deposit
B. To ensure liquidity and meet withdrawal demands
C. To increase the money multiplier indefinitely
D. To control the interest rate on loans
Answer: B
