Worksheet Solutions: Money and Banking - 2 | Economics Class 12 - Commerce PDF Download

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Q1: Money is generally accepted as a medium of ________________.
Ans: exchange.
Money is universally recognized as a means for buying and selling goods and services.

Q2: Money helps in measuring the value of goods and services, which is often referred to as ________________.
Ans: price.
Money provides a common unit (price) that allows easy comparison of the value of various products and services.

Q3: Money acts as a store of value because it is ___________________.
Ans: durable and can be saved for future use.
Money retains its value over time and can be saved for future purchases or investments.

Q4: Standard of deferred payments refers to payments to be made in the ___________________.
Ans: future.
Money enables agreements where payments are made at a later date, ensuring the stability of transactions over time.

Q5: Money has overcome the drawbacks of the ___________________ system.
Ans: barter.
Money eliminates the need for a double coincidence of wants, making trade and transactions more efficient than in the barter system.

Q6: Money multiplier can be calculated as ___________________.
Ans: the reciprocal of the reserve requirement.
The money multiplier represents the amount of money that can be created with each unit of reserves held by banks.

Q7: Central Bank is responsible for stabilizing the external value of ________________.
Ans: the domestic currency.
Central Bank manages foreign exchange reserves and policies to maintain the currency's value in international markets.

Q8: The Central Bank increases the bank rate during ___________________.
Ans: inflationary periods.
Increasing the bank rate discourages borrowing, helping to curb inflation by reducing spending and investment.

Q9: Cash Reserve Ratio (CRR) is the minimum percentage of ___________________.
Ans: deposits that banks must hold as reserves.
CRR is the portion of deposits banks are legally required to keep with the Central Bank, ensuring liquidity and stability.

Q10: Qualitative instruments include margin requirements and ___________________.
Ans: credit rationing.
Qualitative instruments are non-monetary methods used by Central Banks to influence lending practices and credit availability in the economy.

Assertion and Reason Based

Q1: Assertion: Money serves as a medium of exchange.
Reason: Money helps in measuring the value of goods and services.
(a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are true, but Reason is not the correct explanation of Assertion.
(c) Assertion is true, but Reason is false.
(d) Both Assertion and Reason are false.
Ans: (a)
Money indeed serves as a medium of exchange because it is universally accepted in transactions for goods and services. The reason provided, that money helps in measuring the value of goods and services, is correct as well. When goods and services are priced in monetary terms, it becomes easier to compare and exchange them. Therefore, the reason explains why money serves as a medium of exchange.

Q2: Assertion: Money acts as a store of value.
Reason: Money is easy and economical to store.
(a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are true, but Reason is not the correct explanation of Assertion.
(c) Assertion is true, but Reason is false.
(d) Both Assertion and Reason are false.
Ans: (a)
Money acts as a store of value because it can be saved and used for future transactions. The reason provided, that money is easy and economical to store, is correct. Compared to other commodities, money is highly portable and doesn't deteriorate over time, making it a convenient store of value. Therefore, the reason explains why money acts as a store of value.

Q3: Assertion: Central Bank is a sole authority to issue currency in the country.
Reason: Central Bank backs the currency with assets of equal value.
(a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are true, but Reason is not the correct explanation of Assertion.
(c) Assertion is true, but Reason is false.
(d) Both Assertion and Reason are false.
Ans: (a)
The Central Bank is indeed the sole authority to issue currency in most countries. The reason provided, that the Central Bank backs the currency with assets of equal value, is correct. This backing ensures that the currency has intrinsic value and maintains stability. Therefore, the reason explains why the Central Bank is the sole authority to issue currency.

Q4: Assertion: Central Bank acts as a banker to other banks in the country.
Reason: It serves as a clearing house for commercial banks.
(a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are true, but Reason is not the correct explanation of Assertion.
(c) Assertion is true, but Reason is false.
(d) Both Assertion and Reason are false.
Ans: (a)
The Central Bank does act as a banker to other banks, providing various services such as maintaining their reserves and facilitating clearinghouse functions. The reason provided, that it serves as a clearing house for commercial banks, is accurate. Clearinghouse functions involve settling payments and facilitating the transfer of funds between different banks. Therefore, the reason explains why the Central Bank acts as a banker to other banks.

Q5: Assertion: Qualitative instruments include margin requirements.
Reason: Margin requirements are increased during inflation.
(a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are true, but Reason is not the correct explanation of Assertion.
(c) Assertion is true, but Reason is false.
(d) Both Assertion and Reason are false.
Ans: (b)
Qualitative instruments indeed include margin requirements, but the reason provided is not entirely accurate. Margin requirements are usually increased during economic booms or periods of excessive speculation to curb excessive borrowing, not necessarily during inflation. Therefore, while both the assertion and reason are true, the reason is not the correct explanation of the assertion.

Very Short Answer Type  Questions

Q1: List the primary functions of money.
Ans: Primary functions of money: Medium of exchange, measure of value, standard of deferred payments, and store of value.

Q2: Explain the secondary function of money as a store of value.
Ans: The secondary function of money as a store of value means that money can be saved and held for future use. It allows individuals to preserve their wealth over time.

Q3: Define the term "Standard of deferred payments."
Ans: The term "Standard of deferred payments" refers to money's ability to be used for settling future debts. Money serves as a medium through which future obligations or debts can be fulfilled.

Q4: What is the purpose of the Money Multiplier?
Ans: Purpose of the Money Multiplier: It determines the potential increase in the money supply based on changes in cash reserves.

Q5: Why is only a fraction of deposits kept as Cash Reserve by commercial banks?
Ans: Commercial banks keep only a fraction of deposits as Cash Reserve to meet withdrawal demands by customers and to ensure stability in the banking system. The remaining portion is utilized for lending and investment purposes.

Q6: What is the primary function of the Central Bank?
Ans: The primary function of the Central Bank is to control and regulate the country's banking and monetary system. It is responsible for formulating and implementing monetary policies to maintain stability and promote economic growth.

Q7: Mention two advantages of the sole authority of note issue by the Central Bank.
Ans: Advantages of sole authority of note issue by Central Bank: Uniformity in note circulation and better control over the money supply.

Q8: Explain the role of Central Bank as a "banker's bank."
Ans: The Central Bank acts as a "banker's bank" by holding the cash reserves of commercial banks and providing them with necessary financial services. It acts as a lender of last resort and a clearinghouse for interbank transactions.

Q9: Name one quantitative instrument used by the Central Bank.
Ans: Cash Reserve Ratio (CRR) is one quantitative instrument used by the Central Bank. It determines the minimum percentage of deposits that commercial banks must keep as reserves.

Q10: Provide an example of a qualitative instrument used by the Central Bank.
Ans: Example of a qualitative instrument used by the Central Bank: Moral suasion to influence lending practices.

Short Answer Type Questions

Q1: Describe the process of credit creation by commercial banks using an example.
Ans: Commercial banks create credit by lending a portion of the deposits they receive. For example, if a bank receives a deposit of $1000 and the reserve requirement is 10%, the bank can lend $900, thus creating new money in the economy.

Q2: Explain the significance of the Central Bank in controlling money supply during economic fluctuations.
Ans: The Central Bank controls money supply by adjusting interest rates and implementing policies such as open market operations, influencing lending and spending patterns to stabilize the economy during fluctuations.

Q3: List and briefly explain three quantitative instruments used by the Central Bank to influence credit and money supply.
Ans:

• Cash Reserve Ratio (CRR): Percentage of deposits banks must keep with the Central Bank. Increasing CRR reduces money supply.
• Statutory Liquidity Ratio (SLR): Percentage of deposits banks must invest in government securities. Raising SLR decreases money supply.
• Open Market Operations (OMO): Central Bank buying/selling government securities to control money supply; buying increases, selling decreases.

Q4: Define Margin Requirements and explain how they are used during inflation and deflation.
Ans: Margin requirements refer to the difference between the loan amount and the market value of the security offered. During inflation, the Central Bank increases margin requirements to curb excessive borrowing, and during deflation, it reduces them to encourage lending.

Q5: What is Moral Suasion, and how does the Central Bank use it to influence other banks?
Ans: Moral suasion is a method where the Central Bank persuades banks to comply with its policies voluntarily. It involves informal communication, urging banks to adopt specific lending practices, helping maintain stability without regulatory measures.

Q6: Briefly discuss the role of the Central Bank as the custodian of foreign exchange reserves.
Ans: The Central Bank manages a nation's foreign exchange reserves, ensuring stability in exchange rates, meeting international obligations, and safeguarding the country's economic interests in global trade.

Q7: Explain the significance of Statutory Liquidity Ratio (SLR) and how it is adjusted during economic fluctuations.
Ans: SLR is the minimum percentage of deposits banks must maintain in the form of liquid assets. During economic fluctuations, SLR adjustments regulate credit flow; increasing SLR reduces money supply, while decreasing SLR stimulates lending and boosts money supply, aiding economic stability.

Long Answer Type Questions

Q1: Discuss the primary and secondary functions of money, highlighting their importance in the modern economy.
Ans: Money serves two primary functions in the modern economy: a medium of exchange and a store of value.

• As a medium of exchange, money facilitates the exchange of goods and services by acting as a common measure of value. Instead of the barter system, where goods are directly exchanged for other goods, money allows for a more efficient and convenient means of trade. It eliminates the need for double coincidence of wants, where two parties must have something the other desires.
• The secondary function of money is serving as a store of value. Money allows individuals to save and accumulate wealth over time. It retains its value over time, unlike perishable goods or certain assets. People can hold onto money with the expectation that it can be used to make future purchases or investments.
• The importance of these functions in the modern economy cannot be overstated. The medium of exchange function of money enables specialization and division of labor, leading to increased productivity and economic growth. It facilitates trade between individuals, businesses, and nations, promoting economic activity and prosperity.

The store of value function of money provides individuals with a means to save, invest, and plan for the future. It allows for the accumulation of wealth, which can be used for future consumption or investment in productive activities. Money also provides a stable unit of account, enabling individuals and businesses to measure and compare the value of goods and services accurately.

Q2: Explain the role of the Central Bank as a currency authority and the advantages of having the sole authority of note issue.
Ans: The Central Bank serves as the currency authority in a country, responsible for issuing and managing the nation's currency. It plays a crucial role in maintaining the stability and integrity of the monetary system.

• Having the sole authority of note issue provides several advantages. Firstly, it allows the Central Bank to have control over the money supply, which is essential for managing inflation and maintaining price stability. By regulating the amount of currency in circulation, the Central Bank can influence interest rates and control the overall level of economic activity.
• Secondly, the sole authority of note issue gives the Central Bank the power to act as a lender of last resort. During financial crises or liquidity shortages, the Central Bank can provide liquidity to banks and other financial institutions, ensuring the stability of the banking system. This helps prevent widespread bank runs and financial panics.
• Additionally, the Central Bank's authority over note issue enables it to enforce legal tender laws. Legal tender laws stipulate that the national currency must be accepted as a means of payment within the country. This ensures the widespread acceptance and use of the national currency, promoting economic transactions and facilitating economic activity.

Overall, the Central Bank's role as a currency authority with the sole authority of note issue provides it with the tools and capabilities to effectively manage the monetary system, maintain price stability, and support the financial system during times of crisis.

Q3: Describe the quantitative and qualitative instruments used by the Central Bank to control money supply and influence credit in the economy.
Ans: Central Banks use both quantitative and qualitative instruments to control the money supply and influence credit in the economy.

• Quantitative instruments are those that directly affect the quantity of money in circulation. The most common quantitative instrument used by Central Banks is open market operations. In this process, the Central Bank buys or sells government securities in the open market, thereby injecting or withdrawing money from the banking system. By increasing or decreasing the money supply, the Central Bank can influence interest rates and credit availability.
• Another quantitative instrument is the reserve requirement. The Central Bank sets a minimum reserve ratio that commercial banks must maintain against their deposits. By adjusting this requirement, the Central Bank can control the amount of money banks can lend out, thereby affecting the overall money supply.
• Qualitative instruments, on the other hand, focus on influencing the composition and quality of credit rather than the overall quantity of money. One such instrument is the Central Bank's ability to set credit ceilings or sectoral lending targets. By imposing limits on specific types of loans or sectors, the Central Bank can direct credit towards priority areas, such as agriculture or small businesses.
• The Central Bank can also use moral suasion or guidance to influence lending behavior. Through public statements or private communication, the Central Bank can encourage banks to adopt certain lending practices or discourage excessive risk-taking.

Overall, the combination of quantitative and qualitative instruments allows the Central Bank to control the money supply, regulate credit availability, and influence the overall functioning of the financial system in line with its monetary policy objectives.

Q4: Analyze the impact of Central Bank's policies on the stability of the internal and external value of a country's currency.
Ans: The policies implemented by the Central Bank have a significant impact on the stability of a country's currency in both internal and external contexts.

• Internally, the Central Bank's monetary policies, particularly those aimed at controlling inflation, play a crucial role in maintaining the stability of the internal value of the currency. By adjusting interest rates, conducting open market operations, or using other tools, the Central Bank can influence the money supply, which in turn affects the purchasing power of the currency. By managing inflation expectations and preventing excessive money supply growth, the Central Bank helps maintain price stability and preserves the internal value of the currency.
• Externally, the Central Bank's policies affect the external value of the currency, also known as the exchange rate. The Central Bank may intervene in the foreign exchange market to influence the value of the currency relative to other currencies. Through buying or selling foreign currencies, the Central Bank can affect the supply and demand dynamics, influencing the exchange rate. Additionally, the Central Bank's monetary policies, particularly those related to interest rates, can affect capital flows and investor sentiment, further impacting the external value of the currency.
• The stability of the internal and external value of a country's currency is crucial for economic stability and international trade. A stable currency reduces uncertainty, promotes domestic and foreign investment, and facilitates international trade by providing a reliable medium of exchange.

In conclusion, the Central Bank's policies have a significant impact on the stability of both the internal and external value of a country's currency. Through its monetary policy tools and interventions in the foreign exchange market, the Central Bank aims to maintain price stability, control inflation, and promote economic stability both domestically and internationally.