Question

The Banking Principle allows note issue against:

• A. Only gold reserves
• B. Gold, foreign exchange, and government securities
• C. Only government securities
• D. Only government securitiesd) Only foreign exchange

Answer 1

Answer:

B. Gold, foreign exchange, and government securities

Under the Banking Principle, a central bank can issue currency notes backed not just by government securities but also by gold and foreign exchange reserves. This provides greater flexibility compared to the Currency Principle, allowing the central bank to meet the economy’s liquidity needs more effectively.