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Introductory Macroeconomics: Money & Banking Video Lecture | NCERT Video Summary: Class 6 to Class 12 (English) - UPSC
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FAQs on Introductory Macroeconomics: Money & Banking Video Lecture - NCERT Video Summary: Class 6 to Class 12 (English) - UPSC
| 1. What is the role of money in the economy? |  |
Ans. Money plays a crucial role in the economy as a medium of exchange, unit of account, and store of value. It facilitates trade by eliminating the need for barter and provides a common measure of value for goods and services. Additionally, money serves as a store of value, allowing individuals to save their wealth and make future purchases. It also acts as a medium for deferred payment, enabling borrowers and lenders to engage in credit transactions.
| 2. How is money created in the banking system? | |
Ans. Money is primarily created in the banking system through a process called fractional reserve banking. When a bank receives a deposit, it is required to hold only a fraction of that deposit as reserves and can lend out the rest. This loaned amount becomes a new deposit in another bank, and the process continues. This creation of new loans and deposits by banks is known as the money multiplier effect, where each initial deposit results in multiple times the initial amount being created in the form of loans.
| 3. What are the functions of central banks in the economy? | |
Ans. Central banks, such as the Reserve Bank of India (RBI) in the case of India, have several important functions in the economy. They serve as the regulatory authority for the banking system, ensuring its stability and smooth functioning. Central banks also conduct monetary policy to regulate inflation and promote economic growth. They control the money supply, set interest rates, and manage the exchange rate. Additionally, central banks act as a lender of last resort, providing liquidity to banks and financial institutions during times of crisis.
| 4. What is the significance of the repo rate in monetary policy? | |
Ans. The repo rate is a key tool used by the central bank to implement monetary policy. It is the rate at which commercial banks borrow funds from the central bank for a short period, typically overnight. By adjusting the repo rate, the central bank can influence interest rates in the economy. When the repo rate is reduced, borrowing costs for banks decrease, encouraging them to lend more to businesses and individuals. Conversely, an increase in the repo rate makes borrowing more expensive, thus reducing the money supply and curbing inflationary pressures.
| 5. How does the banking system contribute to economic growth? | |
Ans. The banking system plays a vital role in promoting economic growth. It channels savings from individuals and businesses into productive investments, facilitating capital accumulation. Banks provide loans and credit to businesses, enabling them to invest in new projects, expand operations, and create employment opportunities. Moreover, banks offer a range of financial services, such as payment systems and foreign exchange facilities, which support domestic and international trade. The stability and efficiency of the banking system are crucial for fostering economic growth and development.
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Nov 16, 2024 Last updated |
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