SSC CGL Exam > SSC CGL Notes > Tier 2 - Study Material, Online Tests, Previous Year > Short and Long Answer Questions (without Solutions) - Money and Banking
Short and Long Answer Questions (without Solutions) - Money and Banking
SHORT AND LONG ANSWER QUESTIONS
- Define Central Bank.
- Give the meaning of money.
- Discuss the functions of money.
- Describe how money over comes the problems of barter system?
- What are the measures of money supply?
- What do you mean by High powered money?
- Describe the process of money creation or credit creation by commercial banks.
- Why only a fraction of deposits is kept as Cash Reserves?
- Discuss the functions of Central Bank.
- Bring out the role of Central Bank as the controller of money supply or credit
- Explain the various qualitative and quantitative instruments used by the central bank in controlling the money supply during the times of a) excess demand/inflation b) deficient demand/deflation.
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FAQs on Short and Long Answer Questions (without Solutions) - Money and Banking
| 1. What is the difference between money supply and monetary base in banking? |  |
Ans. Money supply refers to the total amount of currency and demand deposits circulating in an economy, while monetary base is the foundation comprising physical currency and bank reserves held by the central bank. Money supply is broader and includes M1, M2, and M3 classifications, whereas monetary base is the narrowest measure controlled directly by the Reserve Bank of India through open market operations and reserve requirements.
| 2. How do commercial banks create credit and what role do they play in money creation? | |
Ans. Commercial banks create credit by accepting deposits and advancing loans to borrowers, multiplying the initial deposit through the credit creation process. When a bank lends money, it creates a demand deposit in the borrower's account, expanding the money supply beyond the original currency. This process depends on reserve ratios and cash reserve requirements, enabling banks to function as money creators rather than mere intermediaries in the financial system.
| 3. What exactly is meant by velocity of money and why does it matter for inflation? | |
Ans. Velocity of money measures how quickly currency circulates through the economy in a given period, calculated as the ratio of nominal GDP to money supply. Higher velocity implies each monetary unit is spent more frequently, increasing inflationary pressure without requiring additional money creation. During economic booms, velocity rises as consumers and businesses spend aggressively, whereas recessions see declining velocity as people hoard cash and reduce transactions.
| 4. Can you explain the relationship between interest rates and inflation according to monetary policy? | |
Ans. Central banks raise interest rates to combat inflation by making borrowing expensive, thereby reducing spending and investment in the economy. When inflation rises above target levels, higher policy rates decrease money supply growth and cool demand-side pressures. Conversely, during deflationary periods or economic slowdowns, lower interest rates encourage borrowing and spending, stimulating economic activity while increasing the money supply through expanded credit creation.
| 5. What is quantitative easing and how does it differ from traditional monetary policy tools like open market operations? | |
Ans. Quantitative easing involves central banks purchasing government bonds and other securities directly to inject liquidity into the economy during crisis periods when interest rates are already near zero. Unlike traditional open market operations that buy short-term securities, QE focuses on longer-term assets, permanently expanding the monetary base. This unconventional tool aims to lower long-term borrowing costs and encourage lending when conventional rate cuts prove ineffective in stimulating economic growth.
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