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Important Questions : Money & Banking Notes - Class 12

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 Page 1


72 XII ?  Economics
AK
UNIT 7
MONEY AND BANKING
POINTS TO REMEMBER
q Money : Money may be defined as anything which is generally acceptable
as a medium of exchange and does the function of ?unit of account? and
measures of value.
q Barter Exchange : It is a system of exchange in which transactions are
made by exchange of goods.
q Difficulties involved in the Barter Exchange
1. Absence of a common unit.
2. The lack of double coincidence of wants
3. Lacks of any satisfactory units to engage in contracts involving future
payments.
4. Does not provide for any method of storing generalised purchasing
power.
5. Lack of divisibility.
q Supply of Money : Total stock of money with the public at a given point
of time.
q Commercial Banks : Commercial Banks is a financial institution who accepts
deposits from the general public and provide loans facilities.
q Central Banks : The central Bank is the apex institution of monetary and
banking system of country.
Page 2


72 XII ?  Economics
AK
UNIT 7
MONEY AND BANKING
POINTS TO REMEMBER
q Money : Money may be defined as anything which is generally acceptable
as a medium of exchange and does the function of ?unit of account? and
measures of value.
q Barter Exchange : It is a system of exchange in which transactions are
made by exchange of goods.
q Difficulties involved in the Barter Exchange
1. Absence of a common unit.
2. The lack of double coincidence of wants
3. Lacks of any satisfactory units to engage in contracts involving future
payments.
4. Does not provide for any method of storing generalised purchasing
power.
5. Lack of divisibility.
q Supply of Money : Total stock of money with the public at a given point
of time.
q Commercial Banks : Commercial Banks is a financial institution who accepts
deposits from the general public and provide loans facilities.
q Central Banks : The central Bank is the apex institution of monetary and
banking system of country.
73 XII ?  Economics
AK
Page 3


72 XII ?  Economics
AK
UNIT 7
MONEY AND BANKING
POINTS TO REMEMBER
q Money : Money may be defined as anything which is generally acceptable
as a medium of exchange and does the function of ?unit of account? and
measures of value.
q Barter Exchange : It is a system of exchange in which transactions are
made by exchange of goods.
q Difficulties involved in the Barter Exchange
1. Absence of a common unit.
2. The lack of double coincidence of wants
3. Lacks of any satisfactory units to engage in contracts involving future
payments.
4. Does not provide for any method of storing generalised purchasing
power.
5. Lack of divisibility.
q Supply of Money : Total stock of money with the public at a given point
of time.
q Commercial Banks : Commercial Banks is a financial institution who accepts
deposits from the general public and provide loans facilities.
q Central Banks : The central Bank is the apex institution of monetary and
banking system of country.
73 XII ?  Economics
AK
74 XII ?  Economics
AK
5. Custodian of foreign exchange.
6. Controller of money supply and credit.
MONEY CREATION CREDIT CREATION BY
COMMERCIAL BANKS
K = 
1

K = Credit Multiplier
R = Cash reserve ratio
VERY SHORT ANSWER TYPE QUESTIONS (1 MARK)
1. Define money.
2. What is meant by M.
3. What is meant by the term money supply?
4. What is bank rate?
5. State two primary functions of money.
6. What is meant by credit creation?
7. What is credit multiplier?
8. Write two functions of central banks.
9. What is cash reserve ratio (CRR)?
10. What is statutory liquidity ratio (SLR)?
11. What is demand deposits by banks?
12. State two monetary measures of credit control by central bank.
13. What are various money stock measures?
H.O.T.S.
14. What is margin requirement of loans.
Page 4


72 XII ?  Economics
AK
UNIT 7
MONEY AND BANKING
POINTS TO REMEMBER
q Money : Money may be defined as anything which is generally acceptable
as a medium of exchange and does the function of ?unit of account? and
measures of value.
q Barter Exchange : It is a system of exchange in which transactions are
made by exchange of goods.
q Difficulties involved in the Barter Exchange
1. Absence of a common unit.
2. The lack of double coincidence of wants
3. Lacks of any satisfactory units to engage in contracts involving future
payments.
4. Does not provide for any method of storing generalised purchasing
power.
5. Lack of divisibility.
q Supply of Money : Total stock of money with the public at a given point
of time.
q Commercial Banks : Commercial Banks is a financial institution who accepts
deposits from the general public and provide loans facilities.
q Central Banks : The central Bank is the apex institution of monetary and
banking system of country.
73 XII ?  Economics
AK
74 XII ?  Economics
AK
5. Custodian of foreign exchange.
6. Controller of money supply and credit.
MONEY CREATION CREDIT CREATION BY
COMMERCIAL BANKS
K = 
1

K = Credit Multiplier
R = Cash reserve ratio
VERY SHORT ANSWER TYPE QUESTIONS (1 MARK)
1. Define money.
2. What is meant by M.
3. What is meant by the term money supply?
4. What is bank rate?
5. State two primary functions of money.
6. What is meant by credit creation?
7. What is credit multiplier?
8. Write two functions of central banks.
9. What is cash reserve ratio (CRR)?
10. What is statutory liquidity ratio (SLR)?
11. What is demand deposits by banks?
12. State two monetary measures of credit control by central bank.
13. What are various money stock measures?
H.O.T.S.
14. What is margin requirement of loans.
75 XII ?  Economics
AK
SHORT ANSWER TYPE QUESTIONS (3-4 MARKS)
1. Explain the function of money as ?Unit of value?.
2. How does money solve the problem of double coincidence of wants?
3. Explain ? Store of value? function of money.
4. What are open market operations? What is their effect on availability of
credit?
5. Explain the ?lender of last resort? function of central bank.
6. Distinguish between SLR and CRR. Explain the Role of SLR and CRR in
credit control.
7. How does changes in Bank rate affect money creation by commercial Bank?
Explain.
8. State the role of central Bank as a banker of the Government.
9. State any four functions of money.
10. Explain the ?Standard of deferred payment?.
11. How central bank is controller of credit?
12. Explain how does followings helps to control the credit creation.
(i) Open market operation
(ii) Margin requirement of loans
H.O.T.S.
13. What is meant by statutory liquidity ratio (SLR). State the effect of rise in
rate of SLR on creation of credit.
14. Explain ?currency authority? and ?controller of credit? functions of central
bank.
15. Explain effect of increase in bank rate on credit creation by commercial
banks.
Page 5


72 XII ?  Economics
AK
UNIT 7
MONEY AND BANKING
POINTS TO REMEMBER
q Money : Money may be defined as anything which is generally acceptable
as a medium of exchange and does the function of ?unit of account? and
measures of value.
q Barter Exchange : It is a system of exchange in which transactions are
made by exchange of goods.
q Difficulties involved in the Barter Exchange
1. Absence of a common unit.
2. The lack of double coincidence of wants
3. Lacks of any satisfactory units to engage in contracts involving future
payments.
4. Does not provide for any method of storing generalised purchasing
power.
5. Lack of divisibility.
q Supply of Money : Total stock of money with the public at a given point
of time.
q Commercial Banks : Commercial Banks is a financial institution who accepts
deposits from the general public and provide loans facilities.
q Central Banks : The central Bank is the apex institution of monetary and
banking system of country.
73 XII ?  Economics
AK
74 XII ?  Economics
AK
5. Custodian of foreign exchange.
6. Controller of money supply and credit.
MONEY CREATION CREDIT CREATION BY
COMMERCIAL BANKS
K = 
1

K = Credit Multiplier
R = Cash reserve ratio
VERY SHORT ANSWER TYPE QUESTIONS (1 MARK)
1. Define money.
2. What is meant by M.
3. What is meant by the term money supply?
4. What is bank rate?
5. State two primary functions of money.
6. What is meant by credit creation?
7. What is credit multiplier?
8. Write two functions of central banks.
9. What is cash reserve ratio (CRR)?
10. What is statutory liquidity ratio (SLR)?
11. What is demand deposits by banks?
12. State two monetary measures of credit control by central bank.
13. What are various money stock measures?
H.O.T.S.
14. What is margin requirement of loans.
75 XII ?  Economics
AK
SHORT ANSWER TYPE QUESTIONS (3-4 MARKS)
1. Explain the function of money as ?Unit of value?.
2. How does money solve the problem of double coincidence of wants?
3. Explain ? Store of value? function of money.
4. What are open market operations? What is their effect on availability of
credit?
5. Explain the ?lender of last resort? function of central bank.
6. Distinguish between SLR and CRR. Explain the Role of SLR and CRR in
credit control.
7. How does changes in Bank rate affect money creation by commercial Bank?
Explain.
8. State the role of central Bank as a banker of the Government.
9. State any four functions of money.
10. Explain the ?Standard of deferred payment?.
11. How central bank is controller of credit?
12. Explain how does followings helps to control the credit creation.
(i) Open market operation
(ii) Margin requirement of loans
H.O.T.S.
13. What is meant by statutory liquidity ratio (SLR). State the effect of rise in
rate of SLR on creation of credit.
14. Explain ?currency authority? and ?controller of credit? functions of central
bank.
15. Explain effect of increase in bank rate on credit creation by commercial
banks.
76 XII ?  Economics
AK
LONG ANSWER TYPE QUESTIONS (6 MARKS)
1. Define Central Bank. What are the functions of Central Bank?
2. Explain any four functions of money.
3. How does a central bank influence credit creation by commercial banks
through ?open market operation? explain.
4. Explain the process of credit creation or money creation by commercial
banks with the help of numerical example.
ANSWERS
1 MARK QUESTIONS
1. Any thing which is generally acceptable by the people as medium of exchange,
measure of value, standard of deferred payment and performs the function
of store of value.
2. M
1
 = currency held with public + demand deposit in banks + other deposit
in RBI.
3. Total stock of money which are held by the public at a particular point of
time in an Economy.
4. Rate at which central bank lends to the commercial bank.
5. 1. Medium of Exchange
2. Measure of value
6. Credit creation means power to expand demand deposits of Commercial
Banks.
7. Credit multiplier measures, number of times deposits are multiplied as credit.
Credit multiplier = 
1
LRR
8. (i) Currency Authority
(ii) Controller of money and credit
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