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

Reason Based Question’s 

(Q1) Currency created by the Central Bank (RBI) is called bank money.

Ans: False ,because currency created by RBI is called High Powered Money.

(Q2) CRR and SLR are opposite of each other.

Ans: False ,  both are complementary to each other.  A fall in these ratios cause a fall in LRR.

(Q3) Higher CRR implies higher capacity to create credit.

Ans: False ,  Higher CRR implies lower capacity of the commercial banks to create credit as credit multiplier is the reciprocal of CRR..

(Q4) Money creation is primarily made by Central Bank of the country.
Ans: (F)

(Q5) Main objective of money creation is the motive of raising money supply.
Ans: (F)

(Q6) Govt. of India has monopoly right over the issue of currency.
Ans: (F)

(Q7) If the commercial banks buy securities , their capacity to create credit is reduced .
Ans: (T)
(Q8) Increase in cash reserve ratio adversely affects the capacity of commercial banks to create credit.
Ans: (T)

(Q9) Commercial banks do not contribute to quantum of money supply in the economy as they do not have note-issuing authority.
Ans: (F)

(Q10) Bank rate of the country is also known as market rate of interest.
Ans: (F)

(Q11) Rate of interest brings an equilibrium between saving and investment in the economy.
Ans: (F)

(Q12) Investment demand includes financial investment like purchase of shares from secondary market
Ans: (F)

(Q13) Comercial bank create credit only on the advice of the government
Ans: (F)

EXTRA QUESTION’s

(Q1)  Mr. Umesh has 2,000 US dollars, but these are not recorded with RBI. Is it legal  ?

Ans: No , it is not legal. If he wants to keep 2000 US dollars with himself, he has to apply for permission in the prescribed application form prescribed by RBI for this purpose.

(Q2)  Why are the banks required to keep only a fraction of deposits as legal reserves  ?

Ans: (1) According to banking experience not all depositors approach the banks for  withdrawal of money at the same time, and also normally they withdraw only a fraction of deposits. 

(2) There is a constant flow of new deposits in to the banks. 

Therefore to meet the daily demand for withdrawal of cash, it is sufficient for banks to keep only a fraction of deposits as cash reserve.

(Q3) Suppose Mr. Jagdish is a Manager of ICICI Bank. The bank’s position is very critical, it may go into liquidation. What are the options available before Mr Jagdish.

Ans: Mr Jagdish has the option to save his bank from liquidation. There is no doubt that only RBI can save ICICI Bank from liquidation .His options are :

(i) He can rediscount bank’s securities with RBI.

(ii) He can take loan on bank securities by mortgaging them with RBI.

(Q4) How, in your opinion, credit creation by the commercial banks accelerates the pace of economic growth ? Write two observations.

Ans: (i) by expanding the availability of credit for purpose of investment.

(ii) by expanding size of the market (or aggregate demand) as the availability of credit for the purchase of consumer durables increases

(Q5) What is the difference between the ‘borrowing rate’ and ‘the lending rate’?

Ans:  The rate of interest offered by the banks to their depositors is called borrowing rate. 

And the rate of interest at which banks lend out their money is called the lending rate.

(Q6)  Commercial banks serve as conduit in the economy.

Ans: True.  Commercial banks act as an intermediary between those persons who have surplus funds and those who need funds to meet their needs.  Thus, the banks serve as an instrument to promote economic activity, employment and income.

(Q7) If CRR is scrapped as a legal requirement, do you think the banks can create unlimited amount of money supply ?

Ans: No. Even if CRR is scrapped as a legal requirement, the commercial banks must continue to hold some cash reserves as a percentage of their demand deposits.  Because, in the absence of these reserves, the banks may sink into ‘crises of confidence’.

(Q8) Analyse the impact of demonetisation (of 500 and 1,000 rupee notes) on credit creation by the commercial banks in the Indian economy.

Ans: Demonetisation has led to huge deposits of cash in the commercial banks. Primary deposits of the banks have risen significantly. This enables them to keep higher CRR-deposits with the RBI. Accordingly, credit creation capacity of the commercial banks is expected to rise. 

(Q9) How does the central bank (Reserve Bank of India) looks after the interest of the common man, even it, it is not a common man’s bank ?

Ans: Reserve Bank of India, being the apex bank of the country plays pivotal role in ensuring financial security to the common man indirectly , through its credit instruments used like open market operation, CRR, SLR, Repo Rate (RR), Reserve Repo Rate, Bank Rate etc.  Through the proper steps taken by the RBI, the government tries to ensure economic stability in the economy.  This is mainly in the interest of social or public welfare via the commercial banks.  They act as agents between the central bank and the common masses

(Q10) “ Banks need to channelise household savings into financial system.” [India Infoline News Service]. What is the economic value of this statement in the context of the Indian economy ?

Ans: India lacks financial inclusion. Most of households stay away from the financial system (briefly, the banking system). They do not have their bank accounts. 

 Accordingly, their savings remain as idle cash balance at home. The banks are advised to open zero balance accounts involving minimum possible formalities. This will encourage the small account holders to park their savings in the banks. 

 The banks can convert these savings into investment by way of loans to the                         investors. Thus, unproductive household savings may be converted into productive investment. This will make a significant contribution to the process of growth and development

(Q11) Suppose all the customers of a commercial bank demand for their deposit at a time then how does central bank help commercial bank in this situation.

Ans: When all the customers of a commercial bank demand for their deposits at the same time, then there will be problem of ‘shortage of liquidity’. In this situation central bank acts as a lender of lost resort and provides adequate funds to commercial banks to pay off all the customers.

(Q12) ‘Bank rate is always greater than market rate’. Comment.

Ans: FAlSE , Bank rate is that discount rate which is charged by Central Bank for discounting first class and approved securities of commercial banks. Market rate is the leading rate charged by commercial banks from its customers. Bank rate is determined by Central Bank of the country which is always less than market rate. Because commercial banks always charge a higher rate than bank rate so as to raise their interest incomes.

(Q13) Increase in money supply through borrowing in an effective measure to control economic depression but it creates the burden of borrowing on the economy. Explain any two measures by which economic depression can be controlled other than the increase in money supply.

Ans: (i) Decrease bank rate so that people are enabled to borrow on cheaper rates.

(ii) Decrease the statutory liquidity ratio so that commercial bank can lend more advances to the public.

(Q14)  What has been the impact of “demonetization” of domestic currency on net demand deposits of commercial banks?  Why did the Central Bank doubled the “Cash Reserve Ratio” after demonetization?

Ans: The impact of this policy was a huge increase in net demand deposits with commercial banks.

The Central bank doubled the “Cash Reserve ratio” in order to control or limit the credit creation process of commercial banks so that the increase in demand deposits may not lead to increase in money supply and hence add to inflationary pressures in the economy.

(Q15) What is money multiplier ? How will you determine its value ? What ratios play an important role in the determination of the value of the money multiplier ?

(Q16) Commercial banks are called factories of credit ? Explain 

(Q17) Commercial banks are not only purveryors of money but they create money ? How

(Q18)  State two important factors that affect credit creation by the commercial banks.

(Q19) Which of the following is a bank  or not ? Give reason 

(i) Post office saving banks
(ii) LIC
(iii) UTI
(iv) IDBI 

(Q20) Is there any limit to deposit creation by banks ? Explain.

(Q21) There is eventually no difference between State Bank of India and Reserve Bank of India. Do you agree? Give reasons.

(Q22) How improvement in banking habits of the people pushes up credit availability from the commercial banks?

EXTRA QUESTION’S

(Q1) What is money multiplier ? How will you determine its value ? What ratios play an important role in the determination of the value of thWhat is money multiplier ? How will you determine its value ? What ratios play an important role in the determination of the value of thWhat is money multiplier ? How will you determine its value ? What ratios play an important role in the determination of the value of the money multiplier ?

(Q2) How does Central Bank controls the supply of  money in an economy ?

(Q3)  How does RBI stabilize money supply against exogenous shocks ?

(Q4) Commercial banks are called factories of credit ?Explain 

(Q5) Explain how do commercial banks create credit ? What are the limits to the expansion of credit?

(Q6) Commercial banks are not only purveryors of money but they create money ? How

(Q7)  What impacts credit creation capacity of the commercial banks?        Or

State two important factors that affect credit creation by the commercial banks.

(Q8) How does the central bank looks after the interest of the common man , even if it is not a common man’s bank ? 

(Q9) Comercial bank create credit only on the advice of the government . Is it true ? 

(Q10) Commercial banks do not have note issuing authority , but they do contribute to money supply in the economy . Comment ?

(Q11) How will the flow of funds in the money market increase, if CRR is phased out by the central bank ?

(Q12) What is high powered money ? 

(Q13) Which of the following is a bank  or not ? Give reason 

(i) Post office saving banks
(ii) LIC
(iii) UTI
(iv) IDBI 

(Q14) Is there any limit to deposit creation by banks ? Explain.

(Q15) There is eventually no difference between State Bank of India and Reserve Bank of India. Do you agree? Give reasons.

(Q16) How improvement in banking habits of the people pushes up credit availability from the commercial banks?