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Q.1 Calculate the value money multiplier and the total deposit created if initial deposit is of Rs. 500 crores and LRR is 10%.
Ans: Money multiplier = 1/LRR which is equal to 1/0.1=10
Initial deposit Rs. 500 crores
Total deposit = Initial deposit x money multiplier
= 500 x 10 = 5000 crores.
Q.2 If total deposits created by commercial banks are Rs.12000, LRR is 25% calculate initial deposit.
Ans: Money multiplier = 1/LRR = 1/.25 = 4
Initial deposit = Total deposit / money multiplier = 12000/4 = 3000
Q.3 Calculate LRR, if initial deposit of Rs. 200 cores lead to creation of total deposits of Rs. 1600 cores.
Ans: Money multiplier = Total deposits/Initial deposits = 1600/200=8
Money multiplier = 1/LRR = 8=1/LRR.
LRR = 1.25 or 12.5
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FAQs on High Order Thinking Skills Questions - Money and Banking - Economics Class 12 - Commerce
| 1. What is the role of commercial banks in the economy? |  |
Ans. Commercial banks play a crucial role in the economy by providing various financial services. They accept deposits from individuals and businesses, which they then use to provide loans and credit to borrowers. Commercial banks also facilitate the payment system, offer investment services, and contribute to economic growth by providing funds for businesses and individuals to invest in projects and purchases.
| 2. What is the difference between savings and checking accounts? | |
Ans. Savings and checking accounts are both types of bank accounts, but they have distinct characteristics. A savings account is primarily used for storing money and earning interest, while a checking account is designed for regular transactions and day-to-day expenses. Savings accounts generally have higher interest rates and limited withdrawal options, while checking accounts provide easier access to funds through checks, debit cards, and online transfers.
| 3. How do central banks control the money supply? | |
Ans. Central banks control the money supply through various monetary policy tools. One of the primary methods is open market operations, where the central bank buys or sells government securities to inject or withdraw money from the economy. Additionally, central banks can adjust interest rates, reserve requirements for commercial banks, and provide loans to financial institutions. These measures influence the availability of credit, interest rates, and overall money supply in the economy.
| 4. What is the purpose of the Federal Reserve System in the United States? | |
Ans. The Federal Reserve System, often referred to as the Fed, serves as the central bank of the United States. Its primary purpose is to promote a stable and healthy financial system, control inflation, and support economic growth. The Fed achieves these goals through various functions, including conducting monetary policy, supervising and regulating banks, providing financial services to banks, and maintaining the stability of the payment system.
| 5. How do banks create money? | |
Ans. Banks create money through a process called fractional reserve banking. When a bank receives a deposit, it is only required to keep a fraction of that deposit as reserves and can lend out the rest. This creates new money in the form of loans. As the loaned money is spent and deposited in other banks, the process repeats, leading to further creation of money. This system allows banks to expand the money supply through lending and contributes to economic activity.
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