Daily Current Affairs Quiz: December 20, 2025

Answer: C [Raising the reserve requirement ratio.]
Explanation:

In a fractional reserve banking system, the money multiplier is inversely related to the reserve requirement ratio, as banks can lend only the portion of deposits that is not kept as reserves. When the central bank raises the reserve requirement ratio, banks are forced to hold a larger share of deposits as mandatory reserves, leaving less money available for lending and deposit creation. This directly reduces the capacity of banks to create credit and therefore lowers the money multiplier. The other measures – lowering the discount rate, conducting open market purchases, or reducing the statutory liquidity ratio – all increase liquidity or lendable resources and hence tend to increase, not decrease, the money multiplier.

Answer: B [1, 3, and 4 only]
Explanation:

Statement 1 is correct: The money multiplier explains how an initial increase in the monetary base supplied by the central bank results in a proportionately larger expansion of the total money supply through successive rounds of bank lending.

Statement 2 is incorrect: The money multiplier is not solely determined by the central bank. It also depends on banks’ lending behaviour, reserve requirements, and the public’s preference for holding currency versus deposits.

Statement 3 is correct: The money multiplier operates because banks lend out a part of their deposits while retaining only a fraction as reserves, leading to repeated deposit creation across the banking system.

Statement 4 is correct: The reserve ratio directly influences the money multiplier, as a higher reserve requirement reduces banks’ lending capacity and lowers the multiplier, while a lower reserve ratio increases credit creation.

Answer: D [CBDCs are issued and regulated by a central authority.]
Explanation:

The defining feature that distinguishes CBDCs from cryptocurrencies like Bitcoin is that CBDCs are sovereign digital currencies issued and regulated by a country’s central bank. They represent a direct liability of the central bank and operate within the existing monetary and legal framework. In contrast, cryptocurrencies such as Bitcoin are decentralized, lack sovereign backing, and are not controlled by any central authority. While CBDCs may or may not use blockchain technology and generally do not offer full anonymity, their core distinction lies in centralized issuance, regulation, and legal tender status.

Answer: A [Both Statement 1 and Statement 2 are correct and Statement 2 is the correct explanation for Statement 1 ]
Explanation:

Statement 1 is correct: Hyperinflation refers to an extremely high and rapidly accelerating rate of inflation that severely erodes the purchasing power of the domestic currency, leading to a sharp and generalized rise in prices of goods and services.

Statement 2 is correct and is the correct explanation of Statement 1: Hyperinflation typically occurs when there is a massive expansion of the money supply without a corresponding increase in the production of goods and services. This excess money chases limited output, causing prices to rise uncontrollably and explaining the phenomenon described in Statement 1.

Answer: D [Interest rates are so low that everyone prefers to hold money]
Explanation:

In a liquidity trap, interest rates are extremely low, making bonds unattractive because people expect interest rates to rise in the future and bond prices to fall. As a result, the speculative demand for money becomes highly elastic, and people prefer to hold money rather than bonds, rendering monetary policy largely ineffective.