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.

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Current Macroeconomic and Financial Situation (First 5 Months, FY 2025/26, Ending Mid-December)

This report, "Current Macroeconomic and Financial Situation of Nepal," released by Nepal Rastra Bank (NRB), provides a comprehensive overview of the Nepalese economy for the first five months of the fiscal year 2025/26 (ending mid-December 2025). The data reflect an economy characterized by exceptionally low inflation, a robust external sector with record-high foreign exchange reserves, and a surge in remittance inflows, contrasted with sluggish credit growth in the private sector.

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Monetary Measures to Control Inflation

Monetary policy refers to the actions taken by a central bank to manage the money supply and interest rates in an economy, to achieve goals such as controlling inflation. Inflation occurs when the general price level of goods and services rises over time, often due to increased demand or higher costs. To control inflation, central banks use various measures to reduce the money supply or make borrowing more expensive, which helps slow down economic activity and stabilize prices. Common monetary measures to control inflation include the bank rate, open market operations, and the reserve requirements ratio.

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Money Multiplier: Magic 100 Rupees

The Problem: The Confusion of "New Money":

Most students think that only the Central Bank (NRB/RBI) can create money. They wonder: "If the bank only printed 100 rupees, how can the total deposits in the country be 1,000 rupees?" The answer is Commercial Bank Lending.

The Step-by-Step Multiplier Process:

Imagine the Central Bank sets the Required Reserve Ratio (RRR) at 10%. This means for every deposit, the bank must keep 10% in the vault and can lend the remaining 90%.

Step A: You deposit Rs. 100 in Bank 1.

• Bank 1 keeps Rs. 10 (10%) and lends Rs. 90 to Person X.

Step B: Person X buys a book. The Bookstore owner takes that Rs. 90 and deposits it into Bank 2.

• Bank 2 keeps Rs. 9 (10%) and lends Rs. 81 to Person Y.

Step C: Person Y buys groceries. The Grocer deposits Rs. 81 into Bank 3.

• Bank 3 keeps Rs. 8.1 and lends the rest...

Result: Even though there was only one physical 100-rupee note, the "Total Money Supply" (the sum of all deposits) keeps growing!

The Easy Math:

Instead of adding up thousands of steps, we use the Money Multiplier formula:

                      m = 1/Reserve Ratio

• If Reserve Ratio is 10% (0.10): $1 / 0.10 = 10$. (The money grows 10 times).

• If Reserve Ratio is 20% (0.20): $1 / 0.20 = 5$. (The money grows only 5 times).

Lesson: The higher the reserve ratio, the lower the money multiplier. This is why Central Banks increase the reserve ratio to fight Inflation—it stops banks from creating too much "magic money."

The Money Multiplier in Action (10% Reserve Ratio):

This table shows how an initial deposit of Rs. 1,000 expands across the banking system.

Step	Bank	Deposit Received	Kept as Reserve (10%)	Amount Lent Out (New Money)
1	Bank A	Rs. 1,000	Rs. 100	Rs. 900
2	Bank B	Rs. 900	Rs. 90	Rs. 810
3	Bank C	Rs. 810	Rs. 81	Rs. 729
...	...	...	...	...
Total	All Banks	Rs. 10,000	Rs. 1,000	Rs. 9,000

Why does this matter for your Exams?

In a competitive exam (like Bank Officer or MA Economics), you might get a "Problem" like this:

Question: "If the Central Bank wants to reduce the money supply, should it increase or decrease the CRR (Cash Reserve Ratio)?"

Solution:

1. Increasing CRR means banks have less to lend.

2. Less lending means the Money Multiplier drops.

3. Therefore, the Money Supply decreases.

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