CBSE Important Questions
Class-12 Economics

Higher Order Thinking Skills
1. What is the main function of money in an economy?
Ans. The main function of money in an economic system is to facilitate the exchange of
Goods and services.
2. 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.
3. 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.
4. 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.
5. 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.
6. The central bank acts as lender of last resort. How?
Ans. The central bank also acts as lender of last resort for the other banks of the country.
It means that if a commercial bank fails to get financial accommodation from anywhere,
it approaches the central bank as a last resort. Central bank advances loan to such a bank
against approved securities. As a lender of the last resort, central bank exercises
control over the entire banking system of the country.
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7. 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.
8. 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
authorised 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.
9. What is margin requirement of loans.
Ans. Marginal requirement of loan means the difference in percentage between the
amount of the loan and market value of the security offered by the borrower against the
loan.
LONG ANSWER TYPE QUESTIONS (6 MARKS)
1. What do you mean by credit/money creation? Explain the process of Money creation
by the commercial banks with the help of a numerical example.
Ans. Money creation is a process in which a commercial bank creates total deposits many
times the initial deposits.
The capacity of commercial bank to create depends on two factors:
1. Amount of initial fresh deposit
2. Legal reserve ratio LRR

Long Answer Type Questions(6 Marks)
1. Explain the role of the following in correcting deficient demand in an Economy.
1. Open market operation
2. Bank rate
Ans:
1. Open market operation refer to the sale and purchase of securities by the Central
Bank incase of deficient demand when AD falling short of AS at full employment, the
Central Bank buys securities in the open market and makes payment to the sellers.
The money flows out of the central bank and reaches the commercial bank as
deposits. This raises the lending capacity of the banks, people can borrow more. This
will raise AD.
2. Incase of deficient demand central bank decrease the bank rate which the central
bank charges on the loan given to commercial bank. This forces the commercial
banks to reduce lending rate. Since borrowing become cheaper and people borrow
more. Arises.
2. Explain the role of the following in correcting ’Excess demand in an Economy’
1. Bank Rate
2. Open market
Ans.
1. To Correct excess demand central bank can rise the bank rate. This forces commercial
bank to increase lending rates. This reduces demand for borrowing by the public for
investment and consumption. Aggregate demand falls.
2. When there is excess demand Central Bank sells securities. This leads to flow of
money out of the commercial banks to the central bank when people make payment
by cheques. This reduces deposits with the banks leading to decline in their lending
capacity. Borrowing decline. AD declines.
3. Explain the role of following in correcting the deflationary gap in an economy.
1) Govt. Expenditure
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2) Legal Reserve Ratio
Ans.
1. In a situation of deflationary gap or deficient demand. The Govt. should raise its
expenditure i.e. there will be more economic activities in the economy like, building
of roads, bridges, canal etc. This will raise the level of employment. It will in turn
increase the income and the purchasing power. Thus aggregate demand will rise.
2. During deficient demand, central bank reduces the CRR. The result of reducing CRR
will be seen in the surplus cash reserves with the banks which can be offered for
credit. The bank’s credit bank reduces SLR, this will have expansionary effect on the
credit position of the banks leading to increase in their leading capacity borrowing
increases & AD increases.
4. Explain the role of margin requirements for correcting the deflationary gap.
Ans. Deflationary gap refers to a situation when at full employment level of income AD
falls short of AS. It is called deficient demand.
Margin requirements refers to the margin on the security provided by the borrower.
When margin is lower, the borrowing capacity of the barrow is higher. When central
bank lowers the margin the borrowing capacity of the borrowers increase. This raise AD.
5. In an economy 75% of the increase in income is spent on consumption. Investment
increased by Rs.1000 Crore. Calculate
1 Total increase in income
2 Total increase in consumption expd.
Ans. : MPC = 75% = 75/100 =3/4
MPS = 1-3/4 = 1/4 K=4
1. DY = DI x K
= 1000 x 4 = 4000 Crore
2. DY = DC + DI
DC = DY - DI
= 4000-1000 = Rs. 3000 Crore
6. In an economy the equilibrium level of income is Rs.1200 Crore. MPC:MPS = 3:1 DI =?
Ans. New equilibrium income = Rs. 20000 Crore
=20000-12000=8000 Crore
K= 1/MPS = 1/0.25 = 4
DI = DY/K = 8000/4 = Rs.2000 Crore.