Important Questions: Money & Banking | Economics Class 12 - Commerce PDF Download

Very Short Answer Type Question

Q1: 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.

Q2: Define bank money.
Ans: Bank money mainly means cheques and bank drafts.

Q3: Write the secondary function of money.
Ans: Secondary functions of money include:

• Store of value
• Standard of deferred payments

Q4: Define 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.

Q5: State the components of money supply.
Ans: The constituents of money supply in narrow sense are coins, currency notes and demand deposits.

Q6: What are the functions of commercial banks?
Ans: The main functions of commercial banks are accepting deposits and advancing loans.

Q7: What are time deposits?
Ans: Time deposits are those deposits of the public in banks that are deposited for a fixed period.

Q8: Define ‘money multiplier’.
Ans: The money multiplier measures the amount of money that the banks are able to create in form of deposits with every initial deposit.

Short Answer Type Questions

Q9: 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.

Q10: 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.

Q11: 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 j 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.

Q12: Explain the concept of money supply.
Ans: Money supply is a stock variable. It is the total stock of different types of money (currency in circulation and deposits) available in an economy, at a specific point of time. In India, M₁, M₂, M₃, and M₄ are the four alternative measures of money supply. They are defined as follows:
M₁ = CU + DD
M₂ = M₁ + Savings deposits with post office saving banks
M₃ = M₁ + Time deposits of commercial banks
M₄ = M₃ +Total deposits with post office savings organisations (excluding National Savings Certificates)
where, CU = Currency (notes and coins held by public)
DD = Net demand deposits held by the commercial banks

Q13: State any two components of Ml measure of money supply.
Ans: The two components of Ml measure of money supply:

• Currency: Currency is the main component of money supply. Currency consists of coins and
• 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.

Long Answer Type Questions

Q14: What is meant by the supply of money? Discuss the factors which determine the supply of money.
Ans: Money supply refers to the amount of money, which is in circulation in an economy at any given point of time.
The following factors determine the money supply:

• Monetary Standard: Money supply is affected by the monetary standard. If gold standard is adopted, there will be less supply of money. On the other hand, if paper currency system is adopted, money supply can be increased on the basis of demand.
• Production Volume: Volume of production also determines the money supply. If the level of production is high, the money supply will be more.
• Monetary Policy: Monetary policy of the government also affects the money supply. If the Central Bank increases the Cash Reserve Ratio there will be contraction in money supply.
• Fiscal Policy: Fiscal policy of the government determines the money supply. If government prepares deficit budget, money supply will increase.
• Other Factors: Banking habits, velocity of money, liquidity preference and the volume of money multiplier also determine the supply of money.

Q15: Explain any two methods of credit control used by Central Bank.
Ans: Methods of credit control used by central bank are as follows:

• Bank Rate: 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. The central bank increases the bank rate to correct the situation of inflationary gap or excess demand in the economy, Higher bank rate reduces the lending capacity of the commercial banks as they get funds at a higher interest rate from the central bank. Consequently, money supply contracts in the economy as the public borrows less at high rate of interest. Similarly, the central bank decreases the bank rate to correct the situation of deflationary gap or deficient demand in the economy, Lower bank rate increases the lending capacity of the commercial banks as they get funds at a lower interest rate from the central bank Consequently, money supply expands in the economy as public borrows more at low rate of interest.
• Open Market Operations: Open market operation is the policy of the central monetary authority to sell and buy the government securities in the market. The central bank sells government securities to commercial -banks and general public in a bid to correct the situation of inflationary gap or excess demand.

This decreases the stock of high powered money in the economy. Similarly, the central bank- purchases government securities from commercial banks and general public in a bid to correct the situation of deflationary gap or deficient demand. This increased the stock of high powered money in the ecbnoitiy.

Q16: Explain any two methods of credit control used by Central Bank.
Ans: Methods of credit control used by central bank are as follows:

• Bank Rate: 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. The central bank increases the bank rate to correct the situation of inflationary gap or excess demand in the economy, Higher bank rate reduces the lending capacity of the commercial banks as they get funds at a higher interest rate from the central bank.
  Consequently, money supply contracts in the economy as the public borrows less at high rate of interest. Similarly, the central bank decreases the bank rate to correct the situation of deflationary gap or deficient demand in the economy, Lower bank rate increases the lending capacity of the commercial banks as they get funds at a lower interest rate from the central bank Consequently, money supply expands in the economy as public borrows more at low rate of interest.
• Open Market Operations: Open market operation is the policy of the central monetary authority to sell and buy the government securities in the market. The central bank sells government securities to commercial -banks and general public in a bid to correct the situation of inflationary gap or excess demand. This decreases the stock of high powered money in the economy. Similarly, the central bank- purchases government securities from commercial banks and general public in a bid to correct the situation of deflationary gap or deficient demand. This increased the stock of high powered money in the economy.

Q17: Define money. Explain its main functions.
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.
The following are the important functions of money:

• 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.
• Unit of Value: Money acts as a convenient unit of account. The value of all the goods and 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.
• 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.
• Standard of Deferred Payments: 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.