IBPS Reading Comprehension 3 — Questions and Answers
Question 1: Passage: 'Priority sector lending mandates require commercial banks to allocate a specified portion of their advances to agriculture, micro enterprises, and weaker sections. Failure to meet these targets results in mandatory contributions to government funds.' What is the consequence of not meeting PSL targets?
- Banks face license cancellation
- Banks must contribute to government funds (Correct answer)
- Banks receive tax exemptions
- Banks are exempted from future targets
Correct answer: Banks must contribute to government funds
The passage states that failure to meet PSL targets results in mandatory contributions to government funds.
Question 2: Read: 'The term 'moral hazard' in banking refers to the risk that institutions, knowing they will be bailed out, take on excessive risks. This behavior can destabilize the financial system, making effective regulation essential.' Which of the following best defines 'moral hazard' as used in the passage?
- Banks refusing to lend to risky borrowers
- Excessive risk-taking due to expectation of bailout (Correct answer)
- Ethical misconduct by bank employees
- Loss of depositor confidence
Correct answer: Excessive risk-taking due to expectation of bailout
The passage defines moral hazard as institutions taking excessive risks because they expect to be bailed out.
Question 3: Passage: 'Inflation targeting, adopted by the RBI in 2016, commits the central bank to maintaining CPI inflation within a specified band. This framework enhances monetary policy credibility and anchors inflation expectations.' The word 'anchors' in this context most likely means:
- Eliminates
- Stabilizes or keeps steady (Correct answer)
- Increases rapidly
- Makes unpredictable
Correct answer: Stabilizes or keeps steady
In monetary policy context, 'anchors' means stabilizes or keeps inflation expectations steady around the target.
Question 4: A passage reads: 'Financial contagion occurs when economic distress in one institution or country spreads rapidly to others through interconnected financial networks. The 2008 global financial crisis exemplified how localized mortgage defaults cascaded into a worldwide recession.' What does the passage identify as the mechanism of financial contagion?
- Currency devaluation
- Interconnected financial networks (Correct answer)
- Government policy failures
- Trade imbalances
Correct answer: Interconnected financial networks
The passage explicitly states that contagion spreads through interconnected financial networks.
Question 5: Read: 'Corporate bonds offer higher yields than government securities to compensate investors for greater credit risk. Investors seeking safety prefer government bonds, while those chasing returns often gravitate toward corporate debt.' Which group would most likely prefer corporate bonds?
- Risk-averse investors seeking safety
- Investors chasing higher returns (Correct answer)
- Investors with no risk tolerance
- Government institutions
Correct answer: Investors chasing higher returns
The passage states that investors chasing returns gravitate toward corporate debt due to higher yields.
Question 6: Passage: 'The cash reserve ratio is the fraction of a bank's total deposits that must be held as reserves with the central bank. A higher CRR reduces the funds available for lending, effectively tightening credit in the economy.' Based on the passage, what is the effect of raising the CRR?
- More funds become available for lending
- Credit in the economy expands
- Banks have fewer funds to lend, tightening credit (Correct answer)
- Depositor returns increase
Correct answer: Banks have fewer funds to lend, tightening credit
The passage directly states that a higher CRR reduces funds available for lending and tightens credit.
Question 7: Passage excerpt: 'Behavioural economics challenges the classical assumption of rational decision-making, demonstrating that individuals often make financial choices based on cognitive biases and emotional responses rather than pure logic.' The passage suggests that classical economics assumed people make decisions based on:
- Emotions and biases
- Pure logic and rationality (Correct answer)
- Social pressure
- Government guidance
Correct answer: Pure logic and rationality
The passage contrasts behavioural economics with 'classical assumption of rational decision-making,' implying classical economics assumed pure rationality.
IBPS Reading Comprehension 3
Passage: 'Priority sector lending mandates require commercial banks to allocate a specified portion of their advances to agriculture, micro enterprises, and weaker sections.
Failure to meet these targets results in mandatory contributions to government funds.' What is the consequence of not meeting PSL targets?