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Mind Map: Money & Banking
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FAQs on Mind Map: Money & Banking
| 1. What is money and what are its main functions in an economy? |  |
Ans. Money is any medium of exchange that holds value and facilitates transactions. Its primary functions include serving as a medium of exchange, store of value, unit of account, and standard of deferred payment. Money eliminates the inefficiencies of barter systems by enabling easier trade and economic activity in modern economies.
| 2. How do central banks like the RBI control money supply and inflation? | |
Ans. The Reserve Bank of India controls money supply through monetary policy tools including open market operations, changing repo rates, and adjusting the cash reserve ratio. By increasing or decreasing liquidity in the banking system, the RBI influences inflation levels and economic growth. These mechanisms help stabilise prices and maintain financial stability.
| 3. What's the difference between narrow money and broad money in Indian banking? | |
Ans. Narrow money (M1) includes currency in circulation and demand deposits-the most liquid forms of money. Broad money (M3) encompasses narrow money plus savings deposits and other less liquid assets. The distinction matters for understanding money supply measurements and monetary policy effectiveness in controlling inflation and credit availability.
| 4. Why do banks charge different interest rates, and how is the repo rate connected to it? | |
Ans. Banks set lending rates based on the repo rate, which is the RBI's benchmark interest rate for short-term borrowing. When the repo rate increases, banks raise their lending rates; when it decreases, they lower rates. This transmission mechanism affects home loans, personal loans, and savings accounts across the entire banking system.
| 5. What are the different types of money like fiat money, commodity money, and credit money? | |
Ans. Fiat money has value by government decree without intrinsic worth, like Indian rupees. Commodity money derives value from the material itself, such as gold or silver coins. Credit money represents claims on banks or financial institutions. Understanding these distinctions clarifies how modern economies function using digital and paper currency systems.
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Apr 20, 2026 Last updated
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