Sample paper 14-15 & 15-16 & 16-17
(Q1) Which of the following agency is responsible for issuing Rs. 1 currency note in India
(i) Reserve Bank of India.
(ii) Ministry of finance
(iii) Ministry of Commerce
(iv) Niti Aayog
Ans: (ii) Ministry of finance
(Q2) Discuss how the central bank plays the role of ‘controller of credit‘ in an economy ?
Ans:This is the most crucial function played by any central bank in the modern times. Central Banks are supposed to regulate and control the volume and direction of the credit by using the:
(i) Quantitative techniques – are those techniques which influence the quantum of credit in the economy like open market operations, bank rate policy, repo and reverse repo rate policy etc.
(ii) Qualitative techniques - or selective credit control techniques are the ones which influence the direction of credit in the economy like margin requirements and moral suasion.( brief explanation of each)
(Q3) Using a numerical example elaborate the credit creation process as handled by the commercial banks. (6M)
Ans: Creation of credit is one of the crucial functions performed by a commercial bank in modern times. The commercial bank is responsible for putting money (produced/created by central bank) in circulation through the process of credit creation or the lending process.
Numerical Illustration, may be based on the following assumptions:
(a). There is only one bank in the economy.
(b) Initial deposits are say 10,000 crores and the legal reserve (3M)
Requirement proposed by the central bank is 10%.
Credit Creation = Initial deposits x 1 / LRR = 10,000 / 0.1 = 1,00,000 crores.
(Students may provide a schedule for deriving the same) (3M)
CBSE paper 2014
(Q1) What are time deposits ?
Ans: Time deposits are deposits which have fixed period of maturity or which can be withdrawn only after a specified period of time.
(Q2) What are demand deposits ?
Ans: The deposits which can be withdrawn from the banks on demand, through cheques
(Q3) What is Central Bank ? (1 mark)
Ans: The central bank is the apex bank engaged in regulating commercial banks.
(Q4) What is bank Money ?
Ans: Bank money refers to demand deposits created by the commercial banks
(Q5) Explain ‘lender of last resort resort ’ function of the central bank.
Ans: Lending of money by the Central Bank to commercial banks in times of emergent need is referred to as the ‘lender of last resort’ function of the central bank. When commercial banks are in need of funds in emergency they approach the central bank for giving them loans. Such a lending facility to the commercial banks by the central bank is referred to as the lender of last resort function of central bank.
(Q6) Giving a numerical example, explain the process of money creation by the commercial banks. (4M)
Ans: Deposit creation by banks is determined by (1) Initial deposits & (2) LRR (1M)
Suppose fresh deposit is Rs. 10000 and LRR is 20%. Initially banks keep Rs. 2000 as cash and lend Rs. 8000. Those who borrow spend this Rs. 8000. It is assumed that this Rs. 8000 comes into banks as an initial deposit. Banks again keep 20% of it as cash reserve and lend the rest. In this way deposit creation goes on. (2M)
Deposit creation = initial deposit × 1 / LRR . Total money creation is Rs. 50000.(1M)
CBSE 2015 & 2016
(Q1) Explain the “Bankers’ Bank function” of the central bank.
Ans: As the banker to the banks, the Central Bank holds a part of the cash reserves of commercial banks. From these reserves it lends to commercial banks when they are in need of funds. Central bank also provides cheque clearing and remittance facilities to the commercial banks.
(Q2) Explain the “Bank of Issue function” of the central bank. (4 M)
Ans: The central bank is the sole authority for the issue of currency in the country. It promotes efficiency in the financial system. It leads to uniformity in the issue of currency, and it gives Central Bank control over money supply.
(Q3) Currency is issued by the central bank, yet we say that commercial banks creation by commercial banks likely to affect the national income ? Explain. (4 M)
Ans: Money supply has two components: Currency and demand deposits with commercial banks. Currency is issued by the central bank while deposits are created by commercial banks by lending money to the people. In this way commercial banks also create money. Commercial banks lend money mainly to investors. The rise in investment in the economy leads to rise in national income through the multiplier effect. (2M)
(Q4) GOI has recently launched ‘Jan-Dhan’aimed at every household in the country to have at least one bank account . Explain how deposit made under the plan are going to affect NY of the country
Ans: More accounts leads to more deposits which means more lending capacity / credit creation which further means more investment . Hence more NY
(Q5) Describe any two main functions of a central bank. (6)
(a) Banker to the Government
(b) Bankers’ bank
(c) Controller of credit
(d) Bank of issue (any two) 1x2 (Explanation) 2x2
(Q6) How do changes in Bank Rate affect the money supply in an economy ? Explain.
Ans: Bank rate is the rate of interest at which central bank lends to commercial banks. When this rate is raised, borrowing by the commercial banks becomes costly. Banks are forced to raise their lending rates. This reduces demand for loans by the borrowers leading to fall in money supply.
(Q1) Demand deposit include (Choose the correct alternative) (1M)
(a) Saving account deposits and fixed deposits
(b) Saving account deposits and current account deposits
(c) Current account deposits and fixed deposits
(d) All types of deposits
(Q2) Explain the “bankers’ bank” function of the central bank. (4M)
Ans: Commercial Banks keep a part of their deposits with central bank. This is called cash reserve ratio. This ratio is decided by the central bank and can be changed from time to time. In times of need, central bank gives loans to commercial banks (4M)
(Q3) If the legal reserve ratio is 20 percent and new deposits rs 1000, explain the process of credit creation by commercial banks
(Q4) If legal reserve ratio is 10 percent and fresh deposits rs 10,000, explain the process of deposit creation by the commercial banks
(Q5) If Legal Reserve Ratio is 0.2 and new deposits are rs 1,000, explain the process of money creation by the commercial banks.
Ans: The credit creation by commercial banks is determined by amount of initial deposit and the legal reserve ratio.Suppose customer deposits 1000 in bank. Bank has to pay interest on this amount for Which bank should lend this money to someone. A part of the amount is to be retained with bank to meet its customer’s obligations. Say, if LRR is 20%, the banks will keep 20% of deposits as reserves and will lend remaining 80% i.e. 800. Those who borrow will spend this money and same 800 will come back to banks in form of deposits. This raises the total deposits to 1,800 now. Banks again keep 20% of 800 as reserve and lend 640 to those who needs. This will further raise the deposits with banks. In this way deposits will go on increasing @ 80% of the last deposit. The number of times the total deposit will become, is determined by money multiplier i.e. 1/LRR = 1/0.2 = 5 times. Total deposits will be Initial Deposits X Money Multiplier = 1000 X 5 = 5,000
(Q6) If Legal Reserve Ratio is 0.2 and new deposits are Rs 5,000, explain the process of money creation by commercial banks.
(Q7) Explain ‘banker to the government’ function of the central bank.
Ans: Central bank provides the same banking service to the government as commercial banks provide to people.It accepts deposits of government departments and gives them loans in times of need.
(Q1) Credit creation by commercial banks is determined by (Choose the correct alternative)
(a) Cash Reserve Ratio (CRR)
(b) Statutory Liquidity Ratio (SLR)
(c) Initial Deposits
(d) All the above
(Q2) Explain the role of the Reserve Bank Of India as the “ lender of last resort ”. (4M)
Previous C.B.S.E & N.C.E.R.T QUESTION ’S
(Q1) Explain briefly “ banker to Govt function “ of Central bank ?
(Q2) Explain four main function of Central Bank ?
(Q3) Explain briefly “ Currency authority function “ of Central bank ?
(Q4) How does a central bank perform the function of controller of credit ?
(Q5) What is a commercial bank?
(Q6) State the role of central bank as a banker to the government.
(Q7) Do you consider Commercial bank creator of money in the Economy ?
(Q8) How does a commerical bank creat money ?
Explain the process of money creation by commercial banks.
(Q9) What is legal reserve ratio ? Explain its components ?
(Q10) How does RBI stabilize money supply against exogenous shocks ?