Q.1. What is meant by money?
Ans. Money can be defined as a generally acceptable medium that can be exchanged for goods and services, and can be used as a measure and store of value.
Q.2. What is barter?
Ans. Barter is a system of exchange in which goods and services are directly traded for other goods and services without the mediation of money.
Q.3 What is fiat money?
Ans. Fiat money refers to the currency notes and coins made legal tender by the order of the government. They do not have intrinsic value like gold or silver coin.
Q.4. Define bank money.
Ans. Bank money mainly means cheques and bank drafts.
Q.5. What do you mean by legal tender money?
Ans. Legal tender money is the money that, by law, must be accepted as a medium of exchange and payment for debt by the citizens of a country. It cannot be refused by any person against the payment for any transactions. Everyone is bound to accept it because its non-acceptance is an offence.
Q.6. Give two demerits of money.
Ans. Demerits of money are:
(i) Increase in corruption
(ii) Inequality of income
Q.7. Write secondary function of money.
Ans. Secondary functions of money include:
(i) Store of value
(ii) Standard of deferred payments
Q.8. State the three motives of holding money.
Ans. The three motives of holding money are:
(i) Transaction Motive
(ii) Speculative Motive
(iii) Precautionary Motive
Q.9. Define liquidity trap.
Ans. Liquidity trap is a situation in which the expansionary monetary policy has no impact on interest rates and income. Interest rate remains low and saving rate is high as people save whatever amount of money is supplied to them at prevailing interest rates.
Q.10. What is velocity of circulation of money?
Ans. The number of times a unit of money changes hands during the unit period is called the velocity of circulation of money.
Q.11. What will be the effect of a rise in bank rate on money supply?
Ans. A rise in bank rate will reduce the money supply.
Q.12. What is money supply?
Ans. Money supply is the total stock of money of different types of money (currency in circulation and deposits) in an economy at any specific point of time.
Q.13. What are the various money stock measures?
Ans. Mr M2, M3 and M4 are the various money stock measures.
Q.14. What are the constituents of money supply in narrow sense?
Or
State the components of money supply.
Ans. The constituents of money supply in narrow sense are coins, currency notes and demand deposits.
Q.15. What is a commercial bank?
Ans. Commercial bank is a financial institution that accepts deposits from the public and advances loans to other people in order to earn profits.
Q.16. What are the functions of commercial banks?
Ans. The main functions of commercial banks are accepting deposits and advancing loans.
Q.17. What are demand deposits?
Ans. Demand deposits are those deposits in the banks, which can be withdrawn by drawing cheques on demand.
Q.18. What are time deposits?
Ans. Time deposits are those deposits of the public in banks which are deposited for a fixed period.
Q.19. What is bank rate?
Ans. Bank rate is that minimum rate at which the central bank discounts the first class bills and provides credit to the commercial banks.
Q.20. State the four functions of money. Describe any one.
Ans. The four functions of money are:
(i) Money as a Unit of Value
(ii) Money as a Medium of Exchange
(iii) Money as a Standard of Deferred Payment
(iv) Money as a Store of Value
Money as a Unit of Value: Money acts as a convenient unit of account. The value of all goods or services can be expressed in monetary units. Money as a unit of value helps in measuring the value of exchange for various goods and services. For example, if the price of a pen is ' 10 then a pen can be exchanged for ten monetary units. Therefore, money is a useful measuring rod of value provided the value of money or purchasing power remains constant.
Q.21. Briefly explain any two functions of money.
Ans. Two functions of money are given below:
(i) Money as a Unit of Value: Money acts as a convenient unit of account. The value of all goods or services can be expressed in monetary units. Money as a unit of value helps in measuring the value of exchange for various goods and services. For example, if the price of a pen is ' 10 then a pen can be exchanged for ten monetary units. Therefore, money is a useful measuring rod of value provided the value of money or purchasing power remains constant.
(ii) Money as a Medium of Exchange: Money acts as an intermediary in the exchange transactions of goods and services. Money solves the problem of double coincidence of wants by acting as a medium of exchange for all goods and services. For example, if a vegetable grocer wants a cart but the cart manufacturer wants clothes, and not vegetables, then the grocer can use money to buy a cart. Similarly, the cart manufacturer can then use the money to buy clothes. Thus, everyone's wants can be satisfied as money acts as a medium of exchange. Money is also called a bearer of options or generalised purchasing power. This indicates the freedom of choice that the use of money offers. This function can only be performed properly if the value of money remains constant.
Q.22. Give meaning of money. Explain its medium of exchange function.
Ans. Money can be defined as a generally acceptable medium that can be exchanged for goods and : services, and can be used as a measure and store of value.
Money as a Medium of Exchange: Money acts as an intermediary in the exchange transactions of goods and services. Money solves the problem of double coincidence of wants by acting as a medium of exchange for all goods and services. For example, if a vegetable grocer wants a cart but the cart manufacturer wants clothes, and not vegetables, then the grocer can use money to buy a cart. Similarly, the cart manufacturer can then use the money to buy clothes. Thus, everyone's wants can be satisfied as money acts as a medium of exchange. Money is also called a bearer of ; options or generalised purchasing power. This indicates the freedom of choice that the use of money offers. This function can only be performed properly if the value of money remains constant.
Q.23. Give meaning of money. Explain the ‘store of value’ function of money.
Ans. Money can be defined as a generally acceptable medium that can be exchanged for goods and services, and can be used as a measure and store of value.
Money as a Store of Value: Money is not a perishable item and its storage costs are also considerably low. Moreover, it is acceptable to anyone at any point of time. Thus, money acts as a store of value for individuals. Under barter system, wealth in the form of goods like wheat, rice, cattle etc. deteriorate with the passage of time or involve heavy storage cost. However, wealth can easily be stored in the form of money for future use. '
Q.24. What is ‘Barter’? Explain ‘standard of deferred payment’ function of money.
Ans. Barter is a system of exchange in which goods and services are directly traded for other goods and services without the mediation of money.
Money as a Standard of Deferred Payment: Deferred payments refer to those payments, which : are made at some specific time in future. Money acts as standard in terms of which future or deferred payments are stated because money maintains a constant value over a period of time. Under barter system, goods could not be used for future contracts due to the risk associated with type, quality and value of the goods. Money exchange has no such problem.
Q.25. Explain the evolution of money.
Ans. Money is a generally acceptable medium that can be exchanged for goods and services, and can be used as a measure and store of value.
Money has undergone a process of historical evolution spread over a long period of time. During this process of historical evolution, a variety of things had been used as money. Commodities such as hides and skins of animals, domestic animals such as cattle, goats and agricultural products such as rice, wheat had been used as money in different stages of economic evolution. In more recent times, metallic coins and paper notes have been used as a medium of exchange.
Q.26. Explain the significance of the unit of account function of money.
Ans. Money is to be a unit of value or a unit of account. The monetary unit is the unit in terms of which the value of all goods and services is measured and expressed. The value of each good or service is expressed as a price, which is the number of monetary units for which the good or service can be exchanged. If the price of a pen is ' 10 then a pen can be had in exchange for ten monetary units. Therefore, money is a useful measuring rod of value only if the value of money itself remains constant.
Q.27. Explain the problem of double coincidence of wants faced under barter system. How has money solved it?
Ans. Double coincidence of wants requires that a person who is willing to exchange his or her goods should find another person who is not only willing to buy the goods offered by the first person, : but should also possess what the first person wants in exchange. Double coincidence of wants is hard to find. Money solves the problem of double coincidence of wants by acting as a medium of exchange for all goods and services. For example, if a vegetable grocer wants a cart but the cart manufacturer wants clothes, and not vegetables, then the grocer can use money to buy a cart. The cart manufacturer can then use the money to buy clothes. Thus, everyone’s wants can be satisfied as money acts as a medium of exchange.
Q.28. What is ideal supply of money?
Ans. The ideal supply of money is that quantity in which the production capacity of the country can be fully utilised. In other words, that quantity of money which helps in achieving the full employment level and maximum output is called ideal supply of money.
Q.29. What are the components of money supply?
Ans. The following are the main components of money supply:
(i) Currency: Currency is the main component of money supply. Currency consists of coins and notes.
(ii) Demand Deposits: Demand deposits are also an important component of money supply.
These are payable by the banks on demand from the account holder. For example: Current and Savings Account Deposits
(iii) Time Deposits: These deposits have a fixed period to maturity. For example : Fixed Deposits.
Q.30. Explain the effect of an increase in bank rate on credit creation by commercial banks.
Ans. The bank rate is the minimum rate at which the central bank discounts the first class bills of exchange and provides credit to the commercial banks.
Increase in the bank rate makes the borrowings from the central bank costlier than before. This reduces the lending or credit creation capacity of the commercial banks as they get funds at a higher interest rate from the central bank. Increase in bank rate also increases the rate at which commercial banks lends to the general public. Consequently, credit contracts in the economy.
Q.31. Describe two main functions of commercial bank.
Ans. The following are the main or primary functions of a commercial bank:
(i) Accepting Deposits: Commercial banks accept deposits from the public and lend this money to companies and other people for investment projects. The banks offer interests on deposits to the deposit holders. Deposits can be broadly into:
a) Demand Deposits: These are, payable by the banks on demand from the account holder. For example: Current and Savings Account Deposits.
b) Time Deposits: These deposits have a fixed period to maturity. For example: Fixed Deposits.
(ii) Advancing Loans: Extending loans is another important primary function of the commercial banks. After keeping a certain portion of the deposits as reserves, the bank gives the balance to the borrowers in the form of loans and advances. The rate at which banks lend out their reserve to investors is called the lending rate. Lending by commercial banks consists mainly of cash credit, demand and short-term loans to the private investors and banks. The credit worthiness of a person is judged by his current assets or the collateral (a security pledged for the repayment of a loan).
Q.32. Give four agency functions of commercial banks.
Ans. The agency functions of a commercial bank are as follows:
(i) To transfer funds from one place to another.
(ii) To collect funds on behalf of the customers.
(iii) To purchase and sell shares and debentures on behalf of the customers.
(iv) To provide income-tax consultancy.
(v) To pay bills and insurance premium as per customer's direction.
(vi) To provide facility of travellers' cheque and letter of credit.
Q.33. Explain the lending function of commercial banks.
Ans. Extending loans is one of the two primary function of the commercial banks. After keeping a certain portion of the deposits as reserves, the bank gives the balance to borrowers in the form of loans and advances. The different types of loans and advances made by banks are as follows:
(i) Cash Credit: Cash credit is given to the borrowers against their current assets. The required amount of money is sanctioned on a consolidated basis to save time and effort. The amount is transferred into the borrower's account that he can use according to his or her needs. The bank charges interest only on the amount withdrawn from the account.
(ii) Demand Loans: Demand loans are secured loans as they are made against security. The loan can be repaid in instalments.
(iii) Term Loans: Terms loans are long term loans, the maturity period for which is usually more than 3 years. The entire loan amount is credited into the account of the borrower. The bank charges interest on the entire loan amount.
(iv) Overdrafts: The banks provide overdraft facility, which allows their customers to withdraw more than the available amount in their current accounts up to an agreed limit. The banks charges interest on overdrawn amount.
(v) Discounting of Bills of Exchange: The banks provide instant loans by discounting the bills of exchange written during trade transactions. The banks deduct commission or interest and pay the value of bill to the holder.
Q.34. Name any three types of deposit accounts of commercial banks and also state one of their distinguishing features.
Ans. Following are the three types of deposit accounts of commercial banks:
(i) Current Account Deposits: Deposits in current accounts are payable on demand. They can be drawn upon by cheque without any restriction. These accounts are usually maintained by businessmen and are used for making routine business payments. The bank does not pay interest on these deposits.
(ii) Saving Account Deposits: Saving deposits combine the feature of current account deposits and fixed deposits. These are payable on demand and are also with drawable by cheque, but with certain restrictions on the number of cheques issued in a period of time. Interest is paid on these deposits.
(iii) Fixed or Term Deposits: Fixed deposits are for a fixed period of time (fixed term) varying from a few days to a few years. These are not payable on demand and depositors do not enjoy cheque facilities. Interest paid on these deposits is greater than the interest paid on saving account.
Q.35. Describe any one method of quantitative credit control.
Ans. Bank rate is the minimum rate at which the central bank discounts the first class bills of exchange and provides credit to the commercial banks. Higher bank rate reduces the lending capacity of the commercial banks as they get funds at a higher interest rate from RBI. Consequently, credit contracts in the economy as public borrows less at high rate of interest. Similarly, lower bank rate increases the lending capacity of the commercial banks as they get funds at a lower interest rate from RBI. Consequently, credit expands in the economy as public borrows more at low rate of interest.
