Reason Based & Extra Questions - Money | Crash Course of Macro Economics -Class 12 - Commerce PDF Download

Reason Based Question’s

(Q1) Giving reasons state whether the following statements are true or false.

(a) Money supply is a flow concept.

(b) M, includes net demand deposits of banks.

(c) High powered money means demand deposits at banks

Ans: F , T , F

(Q2) All the coins in India are minted by Government of India.

 Ans: True .    

(Q3) Like money, goods also perform the function of store of value with same merits.

 Ans: False

(Q4)  High powered money includes only the cash reserves of commercial banks .

 Ans: False ::   In addition to cash reserves of commercial banks, high powered money also includes currency held by public.

(Q5)  M, is also known as transaction money.

 Ans: True  As M, can be directly used for making transactions.

(Q6) Money as a store of value helps to shift purchasing power from present to future.

 Ans: True.  Money has general acceptability and its value remains stable.  So, it can be stored to transact with in future.

(Q7) 

(a) Commodity value of a ten rupee coin in India is more than its money value

(b) Money value of a Thousand rupee note is what is written on it.

(c) The commercial banks generate their profits by way of ‘spread’.

(d) Money is a liquid store of wealth

 Ans: F , T ,T ,T

(Q8) If reverse repo rate is 4%, then repo rate will be 3%.

 Ans: False .  If reverse repo rate is 4%, then repo rate will be 5% (4% + 1%).  Because, the standard practice is to keep ‘reverse repo rate’ lower than the ‘repo rate’ by 1%.

(Q9) Double coincidence of wants is an essential requirement of exchange.

 Ans: False , Though it is an essential requirement for the barter economy, in a money economy, exchange can take place without double coincidence of wants.

(Q10) Never money is also known as plastic money.

 Ans: False.

(Q11) The currency notes do not carry as much value as denominated on it    

 Ans: True

EXTRA QUESTION’s

(Q1) Can a situation arises when money plays no role whatsover ?

 Ans: where there is no exchange . Example a person or family on an island without any exchange

(Q2) Do you agree with the view that the excess of money supply hinders the process of     economic growth ? Give reasons 

Ans: Yes , leads to inflation )

(Q3) A soap manufacturing company wishes to pay compensation to its employees in the form of soaps. However, employees want compensation in the form of money. Why compensation is more convenient in terms of money than in soaps ?

Ans: Soaps lack general acceptability, while money  enjoys merit of general acceptability.   Employees can purchase any goods and services with the help of money at any point of time and there is no problem of lack of double coincidence of wants.

(Q4) Explain how introduction of money has led to the expansion of markets.

 Ans: (i) By removing the problem of double coincidence of wants and seperating the act of sale and purchase and thus giving multi - lateral trade option 

(ii) It has led to the emergence of money market and capital market

(iii) It has led to creation of Financial intermediates like Banks , PFI which ensure avilability of funds both for consumption and investment

(iv) Expansion of global market by way of foreign investment , Export and Import

(Q5) Money is a good servant but a bad master.

 Ans: True .  Money represents purchasing power over good and services.  That is, all transactions involve the use of money.  Money is, therefore, useful only when more goods and services are produced.  Without the additional supply of goods and services, the purchasing power of money falls, i.e., inflation sets in.

Therefore, money can simply serve as a servant; it cannot be an end in itself.

(Q6) Is money ever used as a commodity ?

Ans: Money is used as a commodity when intrinsic value of money (value of the metal the coins are made of) exceeds its face value. People will then sell coins as a metal , rather than using them at their face value.’Example :: Silver coins in circulation during the British rule in India are now used as a commodity rather than money.

(Q7) There is no equivalent cash to the amount of demand deposits with the banks.  Why should then demand deposits be taken as a part of money supply ? 

Ans: This is because all demand deposits are chequable deposits and can be used as money by way of issuing the cheques.

(Q8) Do you agree with the view that the excess of money supply hinders the process of     economic growth ? Give reasons.

Ans: Yes, it is correct 

(a) Excess of money supply puts pressure of demand on the available supply of goods and services. This leads to a rise in the general price level.

(b) If the situation of rising price level continues then there would be situation  of ‘ price spiral ’

(c) High cost of investment leads to a cut in the volume of investment.

(d) When investment declines, the GDP growth also declines. 

(Q9) If higher level of expenditure leads to higher level of AD and higher level of AD leads to higher level of output (GDP), why can’t India increase its AD (expenditure) by printing more notes and thereby, achieve higher level of GDP.

Ans: same as Q8

(Q10)  A curb on high powered money will lead to a curb on the creation of credit by the     commercial banks in the economy. Do you agree ?

 Ans: Yes, the given statement is correct . This is because high powered money includes currency with the public as well as cash reserves of the commercial banks with the RBI. 

 It serves as a monetary base for the creation of credit in the economy. A curb on high powerd money will definitely lead to a curb on the creation of credit by the commercial banks.

(Q11) Why people hold notes and coins when it is clear that the intrinsic value (commodity value) of notes and coins is almost negligible ? 

 Ans: these are legal tender or fiat money 

(Q12) Double coincidence of wants is an essential requirement of exchange . Comment 

 Ans: No 

(Q13) Money becomes a commodity when intrinsic value of money exceeds its face value . Defend or refute.
 Ans: Yes 

(Q14) Under barter system animals cannot be divided into smaller units for exchange. This highlights which problem under the barter system ?

(Q15) The Union Government may print truck-loads of money. It may distribute it on common streets for everyone and each one to pick up any amount to their satisfaction. In one shut, poverty will be eliminated. True or False ?

(Q16) Rohan brought a house . While valuing his house , his grandmother valued it in terms of buffalo and carts . What is the problem that is being faced in the valuation process ?

(Q17) When the barter system was in use, a merchant had to incurred costs which were all in the absence of money. Name and define such costs with their components.

(Q18) “ Money supply does not include cash and currency alone rather many more factors are included in it. Comment.

(Q19) What is meant by cashless economy ? Why Government is encouraging Digital           payments instead of cash payment ?

(Q20)  What type of losses a depositor has to bear if he withdraws his fixed deposit before the due date of maturity ?

(Q21) Why people accept cheques to settle transactions even when these are not a legal       tender ?

(Q22)  Why people accept cheques when these are not legal tender ?

(Q23) Why is only a small percentage of total deposits kept by banks as reserves ?

(Q24) What is high powered money ? Which component of it is not included  in money supply and why ?

(Q25) “ Like money, goods also perform the function of store of value with same merits. ” Defend or refute.