Test: Money And Banking - 1 - UPSC MCQ

Apex is the top or highest part of something, especially one forming a point.  An apex institution is a second-tier or wholesale organization that channels funding (grants, loans, guarantees) to multiple microfinance institutions (MFIs) in a single country or region. Funding may be provided with or without supporting technical services.

The Central Bank is the Apex Bank in India because of the following functions:

• Monetary authority, issue of currency. Banker and debt manager to government, banker to banks, regulation of banking system, manager of foreign exchange, regulator and supervisor of the payment and the settlement systems and maintaining financial stability

Money is often defined in terms of the three functions or services that it provides. Money serves as a medium of exchange, as a store of value, and as a unit of account.

Well in an easy way to understand this, we can say that  the primary function of money as a store of value is that it can be used to transfer purchasing power from present to future.The main reason behind this is that it is most economical and convenient way to store money as its storage does not require much space. Basically, money as a store of value provides security to individuals.

Cash is a highly liquid asset followed by the banking accounts, checkable account, short-term promissory notes, treasury bills and other government bonds.

There are several standard measures of the money supply, including the monetary base, M1, and M2. The monetary base is defined as the sum of currency in circulation and reserve balances (deposits held by banks and other depository institutions in their accounts at the Federal Reserve).

The process of money creation, commercial banks are able to create credit, which is in far excess of the initial deposits.

Money to be used as a medium of exchange must be universally acceptable. All people must accept a thing as money. Or the government should give it legal sanction. And for performing the other two functions—that is, to be used as a store of value and standard of deferred payment—money should have stability of value. In other words, the value of money should not change often.

The system of exchange where goods or services are directly exchanged for other goods or services without saying a medium of exchange, such as money is known as the Barter system

The functioning of the barter system requires a double coincidence of wants on the part of those who want to exchange goods or services. It is necessary for a person who wishes to trade his good or service to find some other person who is not only willing to buy his good or service, but also possesses that good which the former wants.

The most important function of a commercial bank is the creation of credit.
Therefore, money supplied by commercial banks is called credit money. Commercial banks create credit by advancing loans and purchasing securities. They lend money to individuals and businesses out of deposits accepted from the public.