Please refer to Money and Banking Class 12 Economics notes and questions with solutions below. These revision notes and important examination questions have been prepared based on the latest Economics books for Class 12. You can go through the questions and solutions below which will help you to get better marks in your examinations.
Class 12 Economics Money and Banking Notes and Questions
Multiple Choice Question
Q1. Supply of money refers to quantity of money –
(a) As on 31st March
(b) During any specified period of time
(c) As on any point of time
(d) During a fiscal year
Ans1. – (c)
Q2. Money supply includes _
(a) All deposits in bank
(b) Only demand deposits in banks
(c) Only time deposits in banks
(d) Currency with the banks
Ans2. – (b)
Q3. Who regulates money supply in India?
(a) Government of India
(b) Reserve Bank of India
(c) Planning Commission
(d) NITI Aayog
Ans3. – (b)
Q4. _ is the main source of money supply in an economy.
(a) Central Bank
(b) Commercial Banks
(d) Both a and b
Ans4. – (d)
Q5. is the primary function of money.
(a) transfer of value
(b) medium of exchange
(c) standard of deferred payment
(d) store of value
Ans5. – (b)
Q6. The creation of is called credit creation.
(a) time deposits
(b) primary deposits
(c) secondary deposits
(d) none of these
Ans6. – (c)
Q7. Limitation of barter system of exchange
(a) lack of unit of value
(b) lack of store of value
(c) lack of standard of deferred payments
(d) all of these
Ans7. – (d)
Q8. High powered money includes –
(a) currency and demand deposits
(b) demand deposits and saving deposits
(c) currency held by public and cash reserves with banks
(d) none of these
Ans8. – (c)
Q9. Money supply is a concept.
(d) All of these
Ans9. – (b)
Q10. _ are called legal tenders.
(a) demand deposits
(b) time deposits
(c) inter-bank deposits
(d) currency notes and coins
Ans10. – (d)
Very Short Answer Questions
Q1. Name the System of Note-issue in India.
Ans. In India, the system of note issue is the Minimum Reserve System. The RBI is required to keep minimum reserves of Rs 200 crores.
Q2. Define open Market operation.
Ans Open Market operations refer to the purchase or sale of government securities in the open market by the central bank of the country.
Q3. Name the additional facility which the businessman gets in the current deposit account of the bank.
Ans. The businessman gets the facility of overdraft (OD) in the current account of the bank.
Q4. What is margin requirement of loans?
Ans. Marginal requirement of loan means the difference in percentage between the
HOTS and Value Based Questions
Q1. A curb on high powered money will lead to a curb on the creation of credit by the commercial banks in the economy. Do you agree?
Ans. Yes, the given statement is correct. This is because high powered money includes currency with the public as well as cash reserves of the commercial banks with the RBI. It serves as a monetary base for the creation of credit in the economy. A curb on high powered money will definitely lead to a curb on the creation of credit by the commercial banks.
Q2. Do you agree with the view that the excess of money supply hinders the process of economic growth? Give reasons.
Ans. Yes, it is correct to say that the excess of money supply hinders the process of economic growth. The following reasons explain this point of view:
(i) Excess of money supply is a situation when purchasing power (also called liquidity) with the people is more than the existing market value of the goods and services available in the economy. Consequently, pressure of demand mounts up on the available supply of goods and services. This leads to a rise in the general price level.
(ii) If excess supply of money continues to persist, the situation of rising price level also continues to persist. This is called a situation of inflation-a situation of ‘price spiral’.
(iii) Persistent inflation leads to a rise in the rate of interest. Implying that the cost of investment tends to rise.
(iv) High cost of investment leads to a cut in the volume of investment.
(v) When investment declines, the GDP growth also declines.
Thus, excess supply of money tends to hinder the process of economic growth. It lowers the growth rate of rea l GDP.
Q3. Commercial banks do not have the note issuing authority, but they do contribute to money supply in the economy. Comment.
Ans. Yes, the given statement is correct. The central bank is the sole authority of issuing notes in the country. However, by advancing loans through credit creation, commercial banks contribute to money supply in the economy.
Q4. Analyses the impact of demonetization (of 500 and 1,000 rupee notes) on credit creation by the commercial banks in the Indian economy.
Ans. Demonetization has led to huge deposits of cash i n the commercial banks. Primary deposits of the banks have risen significantly. This enables them to keep higher CRR-deposits with the RBI .Accordingly, credit creation capacity of the commercial banks is expected to rise.
Q5. If the commercial banks buy government securities, their capacity to create credit is reduced. Do you agree?
Ans. Yes, the given statement is correct. By allowing or inducing the commercial banks to buy government securities, the central bank soaks cash balances of the commercial banks that they could use to create credit. Accordingly, the credit creation capacity of the commercial banks is reduced.
Q6. If CRR is lowered, investment demand must rise. Defend or refute. Ans. Yes, the above statement is correct. If CRR is lowered, cred it creation capacity of the commercial banks is enhanced . Higher availability of credit and at lower interest rate must lead to a rise in investment demand.
Q7. Why do all the compensations in form of money than toys more convenient to an employee working in a toy manufacturing factory?
Ans: There is lack of general acceptability in case of toys, while in the case of money there is general acceptability; so, he can purchase any goods and services with the help of money at any point of time and he does not have to face any problem of lack of double coincidence of wants.
Q11. Money acts as a yardstick of standard measure of value to which all other things can be compared. Discuss it.
Ans. Money serves as a measure of value in terms of unit of account. Measurement of value Was the main difficulty of the barter system. Introduction of money has removed this difficulty. It acts as a yardstick of standard measure of value to which all other things can be compared.” Money measures the value of everything or the prices of all goods and services can be expressed in terms of money. This function of money also enables the trading firms to ascertain their costs, revenues, profits and losses.
Short Answer Type Questions
Q1. What is the high powered money?
Ans. High powered money is a sum of currency held by the public and cash reserve of the banks.
Q2. Explain the working of money multiplier with the help of a numerical example.
Ans. Money multiplier refers to the process of creation of credit by the commercial banks, with the help of initial deposits made by the public and legal reserve ratio (LRR).
Credit Creation = 1000 X 10 = Rs.10000 Crore.
Q3. Explain how introduction of money has led to the expansion of markets.
Ans. Following observations may be noted in this regard : (i) Introduction of money has led to the expansion of markets through the expansion of exchange. Because, barter system of exchange requires ‘double coincidence of wants’ while the monetary system does not.
(ii) Money has led to the emergence of financial market and financial intermediaries (banks and other financial institutions). Availability of funds, both for purpose of consumption and investment, has substantially increased. Consequently, markets have expanded.
Q4. Explain the ‘Bank of issuing currency’ function of central bank.
Ans. Central Bank is the sole authority to issue currency in the country. Since no other authority is allowed, this ensures uniformity in issue of currency with public is a part of money supply, it gives the Central Bank some control over money supply in the economy.
Q5. Explain how repo rate can be helpful in controlling credit creation.
Ans. Repo rate is the rate of interest at which Central Bank lends money to commercial banks for short period. Raising repo rate makes borrowing by commercial banks costlier. So these banks are forced to raise their lending rates. Since borrowing becomes costly for people, they borrow less. Banks, therefore, create less credit.
Q6. Discuss how the central bank plays the role of controller of credit in an economy.
Ans. This is the most crucial function played by any central bank in the modern times. Central banks are supposed to regulate and control the volume and direction of the credit by using –
Quantitative techniques are those techniques which influence the quantum of credit in the economy like open market operations, bank rate policy, repo rate and reverse repo rate etc.
Qualitative techniques are the ones which influence the direction of credit in the economy like margin requirement and moral suasion.
Q7.Calculate the value of money multiplier and total deposit created if the initial amount is Rs.700 crores and LRR is 10%.
Thus total deposit = Initial deposit X money multiplier
= 700 X 10 = Rs. 7000 Crore
Q8. What is Barter system? What are its drawbacks?
Ans: Barter system of exchange is a system in which goods are exchanged for goods. It’s Drawbacks are:
Lack of double coincidence of wants.
Lack of divisibility.
Difficulty in storing wealth.
Absence of common measure of value.
Lack of standard of deferred payment.
Q9. Central bank performs the function of a clearing house. How?
Ans. Every bank keeps cash reserves with the central bank. The claims of banks against one another can be easily and conveniently settled by simple transfers from and to their account. Supposing, Bank A receives a cheque of Rs 10,000 drawn on Bank B and Bank B receives a cheque of Rs. 15000 drawn on Bank A. The most convenient method of settling or clearing their mutual claims is that Bank A should issue a cheque amounting to Rs 5000 in favour of Bank B, drawn on central Bank. As a result of this transference, a sum of Rs 5000 will be debited to the account of Bank A and credited to the account of B. There is not need of cash transactions between the banks concerned. It facilitates cash transaction across the entire banking system, it also reduces requirement of cash reserves of the commercial banks.
Q10. All the currency issued by the central bank is its monetary liability. How?
Ans. The Central Bank is obliged to back the currency with assets of equal value. These assets usually consist of gold coin, gold bullion, foreign securities and the domestic government’s local currency securities. The country’s Central government is usually authorized to borrow money from the central bank. Government does this, by selling local currency securities to the central bank. When the central bank acquires these securities, it issues currency. Putting and withdrawing currency into and from circulation is also the job of the central bank.
Long Question Answer (6 Marks)
Q1. What are the alternative definitions of money supply in India?
Ans: The alternative definitions of money supply in India can be the four measures of money supply. They are explained as under: Measures of M1 include:
Currency notes and coins with the public (excluding cash in hand of all commercial banks) [C]
Demand deposits of all commercial and co-operative banks excluding inter-bank deposits. (DD), Where demand deposits are those deposits which can be withdrawn by the depositor at any time by means of cheque. No interest is paid on such deposits.
Other deposits with RBI [O.D] M1 = C + DD + OD Where, Other deposits are the deposits held by the RBI of all economic units except the government and banks. OD includes demand deposits of semi-government public financial institutions (like IDBI, IFCI, etc.), foreign central banks and governments, the International Monetary Fund, the World Bank, etc.
Measures of M2
M1[C + DD + OD]
Post office saving deposits
Measures of M3
Time deposits of all commercial and co-operative banks. Where, Time deposits are the deposits that cannot be withdrawn before the expiry of the stipulated time for which deposits are made. Fixed deposit is an example of time deposit.
Measures of M4
Total deposits with the post office saving organization (excluding national savings certificates).
Q2. What are the instruments of monetary policy of RBI? How does RBI stabilize money supply against exogenous shocks?
Ans. (a) Quantitative Instruments,
(i) Bank Rate
(ii) Repo rate
(iii) Reverse Repo rate
(iv) Open Market Operations (OMO)
(i) Margin requirement
(ii) Moral Suasion
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