35 Essential Banking & Monetary Economics MCQs for NRB Officer and Other Competitive Exams (with Answer Key)

Prepare for the Nepal Rastra Bank (NRB) Officer and other competitive banking exams with this comprehensive set of 35 MCQs on Banking System and Monetary Economics. This guide covers core concepts including Keynesian theory, Fisher’s equation, Basel III framework, and NRB Unified Directives. Each question is meticulously cross-checked with the latest regulatory standards, featuring detailed answer keys and brief descriptions for better conceptual clarity. Master topics like Capital Adequacy Ratio (CAR), Non-Performing Loans (NPL), and Monetary Policy transmission channels to boost your exam readiness. This is an essential resource for aspiring bankers aiming for success in the Nepalese financial sector.

1. According to the Quantity Theory of Money (Fisher’s Equation), an increase in money supply leads to inflation, assuming:

A. Velocity of money increases

B. Velocity of money and output remain constant

C. Output increases proportionately

D. Interest rate falls

 

2. In Keynesian liquidity preference theory, the speculative demand for money is inversely related to:

A. Income level

B. Price level

C. Interest rate

D. Money supply

 

3. Which of the following is considered the strongest transmission channel of monetary policy in developing economies like Nepal?

A. Interest rate channel

B. Asset price channel

C. Credit (bank lending) channel

D. Exchange rate channel

4. If the central bank increases the Cash Reserve Ratio (CRR), the immediate effect will be:

A. Increase in money supply

B. Decrease in bank lending capacity

C. Increase in inflation

D. Fall in government borrowing

 

5. The money multiplier is inversely related to:

A. Currency-deposit ratio

B. Interest rate

C. Inflation rate

D. GDP growth rate

 

6. Which of the following best explains the concept of “neutrality of money”?

A. Money affects only interest rates

B. Money affects output in the long run

C. Money affects prices but not real variables in the long run

D. Money affects employment permanently

 

7. According to Friedman’s Modern Quantity Theory of Money, demand for money is primarily a function of:

A. Interest rate alone

B. Income alone

C. Wealth and expected returns on assets

D. Price level only

 

8. In an inflationary gap situation, which monetary policy is most appropriate?

A. Expansionary policy

B. Neutral policy

C. Contractionary policy

D. Selective policy

 

9. Which of the following represents “high-powered money” (monetary base)?

A. Currency with public only

B. Demand deposits only

C. Currency in circulation plus bank reserves

D. Time deposits plus savings deposits

 

10. Time inconsistency of monetary policy mainly arises due to:

A. Poor forecasting ability

B. Political pressure and short-term objectives

C. Lack of monetary instruments

D. Inefficient banking system

 

11. Which of the following is the quantitative tool of monetary policy used by NRB?

A. Moral suasion

B. Selective credit control

C. Open Market Operations

D. Credit rationing

 

 12. Statutory Liquidity Ratio (SLR) in Nepal refers to maintaining liquid assets in the form of:

A. Cash only

B. Cash and gold

C. Government securities and NRB-approved instruments

D. Foreign currency reserves only

 

13. Under NRB directives, banks must classify loans as Non-Performing when interest or principal is overdue for more than:

A. 60 days

B. 90 days

C. 120 days

D. 180 days

 

14. Which Basel framework is currently implemented by Nepalese commercial banks?

A. Basel I only

B. Basel II only

C. Basel II with selected Basel III provisions

D. Full Basel III

 

15. Capital Adequacy Ratio (CAR) is the ratio of:

A. Total capital to total deposits

B. Tier-I capital to total assets

C. Regulatory capital to risk-weighted assets

D. Equity capital to total loans

 

16. Which of the following is included in Tier-I capital as per NRB directives?

A. Revaluation reserves

B. Subordinated debt

C. Paid-up equity capital

D. General loan loss provision

 

 

17. The main objective of Open Market Operations in Nepal is to:

A. Increase foreign exchange reserves

B. Control liquidity in the banking system

C. Provide long-term loans

D. Regulate interest rates directly

 

 

18. Which risk arises due to a mismatch between assets and liabilities in banks?

A. Credit risk

B. Liquidity risk

C. Market risk

D. Operational risk

 

 

19. In Nepal, the lender of last resort function is performed by:

A. Ministry of Finance

B. Commercial banks

C. Nepal Rastra Bank

D. Development banks

 

 

20. Which of the following loans carries the highest risk weight under NRB guidelines?

A. Government securities

B. Residential housing loan

C. Personal overdraft loan

D. Cash collateralized loan

 

 

21. The CAMELS framework is primarily used to assess:

A. Profitability of banks

B. Liquidity position only

C. Overall financial health of banks

D. Customer satisfaction

 

22. Which component of CAMELS evaluates management quality?

A. Capital adequacy

B. Asset quality

C. Management efficiency

D. Sensitivity to market risk

 

23. Credit concentration risk arises when:

A. Loans are diversified

B. Excess lending is done to a single sector or borrower

C. Interest rates fluctuate

D. Banks hold excess liquidity

 

24. Base Rate system in Nepal was introduced mainly to:

A. Increase bank profitability

B. Control inflation

C. Enhance transparency in lending rates

D. Encourage foreign investment

 

 

25. Which committee of NRB deals with problem banks and financial institutions?

A. Monetary Policy Committee

B. Financial Stability Committee

C. Bank Supervision Department

D. Crisis Management Committee

 

 

26. Which of the following is a non-interest income for commercial banks?

A. Interest on loans

B. Discount on bills

C. Service charges and fees

D. Interest on overdraft

 

 

27. Spread rate in Nepal refers to the difference between:

A. Deposit rate and inflation rate

B. Base rate and lending rate

C. Weighted average lending rate and deposit rate

D. Call money rate and repo rate

 

 

28. Repo rate is the rate at which:

A. Banks lend to customers

B. NRB borrows from commercial banks

C. NRB lends to commercial banks

D. Banks lend to each other

 

 

29. Which account is MOST sensitive to interest rate risk?

A. Current account

B. Fixed deposit

C. Saving account

D. Call deposit

 

 

30. The prime responsibility for maintaining financial stability in Nepal lies with:

A. Ministry of Finance

B. Nepal Rastra Bank

C. Commercial banks

D. National Planning Commission

 

 

31. Which ratio measures a bank’s ability to meet short-term obligations?

A. Capital adequacy ratio

B. Liquidity ratio

C. Debt-equity ratio

D. Credit-deposit ratio

 

32. In Nepal, foreign exchange risk is mainly faced by banks due to:

A. Domestic lending

B. Priority sector lending

C. Fluctuation in exchange rates

D. Cash reserve requirement

 

33. Which NRB directive governs credit risk management?

A. Unified Directive

B. Corporate Governance Directive

C. Risk Management Guideline

D. Monetary Policy Framework

 

 

34. Which of the following best describes “moral hazard” in banking?

A. Risk due to interest rate changes

B. Risk arising from borrower’s unethical behavior after loan approval

C. Risk due to poor liquidity

D. Risk due to economic downturn

 

 

35. Which indicator best reflects asset quality of a bank?

A. Return on Assets (ROA)

B. Non-Performing Loan (NPL) ratio

C. Capital Adequacy Ratio

D. Net Interest Margin

 Answer Key:

Q.N.	Ans	Verified Brief Description
1	B	In MV=PY, V and Y are assumed constant/at full employment for M to cause inflation.
2	C	Higher interest rates increase the opportunity cost of holding cash (speculative demand).
3	C	Banks are the primary financial intermediaries in Nepal; hence the credit channel is strongest.
4	B	CRR (Cash Reserve Ratio) locks up bank funds, directly cutting their ability to issue new loans.
5	A	$Multiplier = \frac{1 + c}{c + r}$. As currency-to-deposit ($c$) rises, the multiplier effect shrinks.
6	C	Neutrality means money doesn't change "real" things (like output) in the long run—only prices.
7	C	Friedman treats money as one of many assets; demand is based on total wealth and returns.
8	C	Contractionary policy (tightening) is used to close an "inflationary gap" and cool the economy.
9	C	$M_0 = \text{Currency in circulation} + \text{Bank reserves}$. It is the "base" for money creation.
10	B	Occurs when political or short-term needs override long-term stability goals.
11	C	OMOs (Repo/Reverse Repo) are quantitative because they change the total volume of money.
12	C	SLR includes cash, gold, and "unencumbered" government securities/approved papers.
13	B	Over 90 days = Non-Performing (NPL). Substandard (90-180), Doubtful (180-360), Bad (>360).
14	C	Nepal follows "Basel II" with elements like the Conservation Buffer from Basel III.
15	C	CAR ensures a bank has enough capital to cover its Risk-Weighted Assets (RWA).
16	C	Paid-up capital is the "purest" form of Tier-I capital (Core Capital).
17	B	OMOs are the primary tool for fine-tuning "liquidity" (managing excess or shortage).
18	B	Liquidity risk is the inability to meet deposit withdrawals due to long-term asset lock-ins.
19	C	NRB is the "Lender of Last Resort," providing emergency liquidity to distressed banks.
20	C	Personal/Unsecured loans (like overdrafts) carry much higher risk weights (up to 150%).
21	C	CAMELS is a holistic 1–5 rating system for the overall safety and soundness of a bank.
22	C	In the CAMELS acronym, 'M' stands for Management Quality/Efficiency.
23	B	Verified: Per NRB Directive 2, this risk occurs via Single Obligor or Sectoral lending.
24	C	The Base Rate ensures customers know the "minimum" cost of funds and how their rate is set.
25	B	The Financial Stability Committee at NRB monitors systemic risks and problem institutions.
26	C	Commissions, locker fees, and exchange gains are "Non-Interest" (Fee) incomes.
27	C	The spread is the difference between what banks charge on loans vs. what they pay on deposits.
28	C	A "Repo" is when NRB lends cash to banks (banks "sell" securities with an agreement to buy back).
29	B	Fixed deposits are "time-sensitive"; if market rates change, these have the most fixed lock-in.
30	B	NRB is the primary regulator and guardian of the entire financial system's stability.
31	B	The Liquidity Ratio (or CD ratio) checks if a bank can pay its short-term deposit obligations.
32	C	FX risk is the danger that a moving exchange rate will devalue assets held in foreign currencies.
33	A	Unified Directive No. 2 specifically covers Loan Classification and Credit Risk Management.
34	B	Moral hazard: A borrower takes high risks because the "cost" of failure falls on the bank/society.
35	B	The NPL ratio is the most critical indicator of how "good" or "bad" a bank's loan book is.