CBSE Class 12 Economics Money And Banking Worksheet Set A

 

Question. Which of the following is not a problem of barter system of exchange ?
(a) store of value
(b) double coincidence of wants
(c) unit of account
(d) unemployment. 
Answer: D

Question. The concept of global economy has came into existence due to :
(a) store of value
(b) transfer of value
(c) measure of value
(d) none of these 
Answer: B

Question. Supply of money refers to quantity of money :
(a) As on 31st March
(b) During any specified period of time
(c) As on any point of time
(d) During a fiscal year.
Answer: C

Question. Money supply includes :
(a) All deposits in banks
(b) Only demand deposits in banks
(c) Only time deposits in banks
(d) Currency with the banks.
Answer: B

Question. Credit creation in commercial banks is determined by
(a) Cash Reserve Ratio
(b) Statutory Liquidity Ratio
(c) Initial Deposits
(d) All of the above 
Answer: D

Question. If an economy is to control recession like most of the Euro-Zone nations, which of the following can be appropriate :
(a) Reserve Bank of India
(b) Reducing CRR
(c) Both (i) and (ii)
(d) None of (i) and (ii) 
Answer: B

Question. Repo rate is rate at which :
(a) commercial banks purchase government securities from the central bank
(b) commercial banks can take loans from the central bank
(c) commercial banks can keep their deposits with the central bank
(d) short-term loans are given by commercial banks
Answer: B

Question. Demand deposits include
(a) Saving account deposits and fixed deposits
(b) Saving account deposits and current account deposits
(c) Current account deposits and fixed deposits
(d) All types of deposits 
Answer: B

Question. Who regulates money supply ?
(a) Government of India
(b) Reserve Bank of India
(c) Commercial Banks
(d) Planning Commission.
Answer: B

Question. Which of the following agency is responsible for issuing ₹ 1 currency note in India ?
(a) Reserve Bank of India.
(b) Ministry of Finance
(c) Ministry of Commerce
(d) Niti Aayog 
Answer: B

Question. The central bank can increase availability of credit by :
(a) Raising repo rate
(b) Raising reverse repo rate
(c) Buying government securities
(d) Selling government securities
Answer: C

Question. is the main source of money supply in an economy.
(a) Central Bank
(b) Commercial Banks
(c) Both (i) and (ii)
(d) Government
Answer: C

Question. Which of the following is not a Quantitative Method of credit control ?
(a) Open Market Operation
(b) Margin Requirements
(c) Variable Reserve Ratio
(d) Bank Rate Policy.
Answer: B

Question. The ratio of total deposits that a commercial bank has to keep with Reserve Bank of India is called :
(a) Statutory liquidity ratio
(b) Deposit ratio
(c) Cash reserve ratio
(d) Legal reserve ratio 
Answer: C

Question. Supply of money refers to quantity of money –
(a) As on 31st March
(b) During any specified period of time
(c) As on any point of time
(d) During a fiscal year
Answer. C

Question. Money supply includes _________
(a) All deposits in bank
(b) Only demand deposits in banks
(c) Only time deposits in banks
(d) Currency with the banks
Answer. B

Question. Who regulates money supply in India?
(a) Government of India
(b) Reserve Bank of India
(c) Planning Commission
(d) NITI Aayog
Answer. B

Question.  __________ is the main source of money supply in an economy.
(a) Central Bank
(b) Commercial Banks
(c) Government
(d) Both a and b
Answer. D

Question.  _______ is the primary function of money.
(a) transfer of value
(b) medium of exchange
(c) standard of deferred payment
(d) store of value
Answer. B

Question. The creation of ________ is called credit creation.
(a) time deposits
(b) primary deposits
(c) secondary deposits
(d) none of these
Answer. C

Question. Limitation of barter system of exchange
(a) lack of unit of value
(b) lack of store of value
(c) lack of standard of deferred payments
(d) all of these
Answer. D

Question. High powered money includes –
(a) currency and demand deposits
(b) demand deposits and saving deposits
(c) currency held by public and cash reserves with banks
(d) none of these
Answer. C

Question. Money supply is a ________ concept.
(a) Flow
(b) Stock
(c) Variable
(d) All of these
Answer. B

Question. _________ are called legal tenders.
(a) demand deposits
(b) time deposits
(c) inter-bank deposits
(d) currency notes and coins
Answer. D

 

CBSE Class 12 Economics Chapter 3 Money And Banking Very Short Answer Questions

Question. Name the System of Note-issue in India.
Answer. In India, the system of note issue is the Minimum Reserve System. The RBI is required to keep minimum reserves of Rs 200 crores.

Question. Define open Market operation.
Answer. Open Market operations refer to the purchase or sale of government securities in the open market by the central bank of the country.

Question. Name the additional facility which the businessman gets in the current deposit account of the bank.
Answer. The businessman gets the facility of overdraft (OD) in the current account of the bank.

Question. What is margin requirement of loans?
Answer. Marginal requirement of loan means the difference in percentage between the amount of the loan and market value of the security offered by the borrower against the loan.

Question. A curb on high powered money will lead to a curb on the creation of credit by the commercial banks in the economy. Do you agree?
Answer. Yes, the given statement is correct. This is because high powered money includes currency with the public as well as cash reserves of the commercial banks with the RBI. It serves as a monetary base for the creation of credit in the economy. A curb on high powered money will definitely lead to a curb on the creation of credit by the commercial banks.

Question. Do you agree with the view that the excess of money supply hinders the process of economic growth? Give reasons. 
Answer. Yes, it is correct to say that the excess of money supply hinders the process of economic growth. The following reasons explain this point of view: (i) Excess of money supply is a situation when purchasing power (also called liquidity) with the people is more than the existing market value of the goods and services available in the economy. Consequently, pressure of demand mounts up on the available supply of goods and services. This leads to a rise in the general price level.
(ii) If excess supply of money continues to persist, the situation of rising price level also continues to persist. This is called a situation of inflation-a situation of 'price spiral'.
(iii) Persistent inflation leads to a rise in the rate of interest. Implying that the cost of investment tends to rise.
(iv) High cost of investment leads to a cut in the volume of investment.
(v) When investment declines, the GDP growth also declines.
Thus, excess supply of money tends to hinder the process of economic growth. It lowers the growthrate of rea l GDP.

Question. Commercial banks do not have the note issuing authority, but they do contribute to money supply in the economy. Comment.
Answer. Yes, the given statement is correct. The central bank is the sole authority of issuing notes in the country. However, by advancing loans through credit creation, commercial banks contribute to money supply in the economy.

Question. Analyse the impact of demonetisation (of 500 and 1,000 rupee notes) on credit creation by the commercial banks in the Indian economy. 
Answer. Demonetisation has led to huge deposits of cash i n the commercial banks. Primary deposits of the banks have risen significantly. This enables them to keep higher CRR-deposits with the RBI .Accordingly, credit creation capacity of the commercial banks is expected to rise.

Question. If the commercial banks buy government securities, their capacity to create credit is reduced. Do you agree? 
Answer. Yes, the given statement is correct. By allowing or inducing the commercial banks to buy government securities, the central bank soaks cash balances of the commercial banks that they could use to create credit. Accordingly, the credit creation capacity of the commercial banks is reduced.

Question. If CRR is lowered, investment demand must rise. Defend or refute.
Answer. Yes, the above statement is correct. If CRR is lowered, cred it creation capacity of the commercial banks is enhanced . Higher availability of credit and at lower interest rate must lead to a rise in investment demand.

Question. Why do all the compensations in form of money than toys more convenient to an employee working in a toy manufacturing factory?
Answer. There is lack of general acceptability in case of toys, while in the case of money there is general acceptability; so, he can purchase any goods and services with the help of money at any point of time and he does not have to face any problem of lack of double coincidence of wants.

Question. Money acts as a yardstick of standard measure of value to which all other things can be compared. Discuss it.
Answer. Money serves as a measure of value in terms of unit of account. Measurement of value Was the main difficulty of the barter system. Introduction of money has removed this difficulty. It acts as a yardstick of standard measure of value to which all other things can be compared.” Money measures the value of everything or the prices of all goods and services can be expressed in terms of money. This function of money also enables the trading firms to ascertain their costs, revenues, profits and losses.

CBSE Class 12 Economics Chapter 3 Money And Banking Short Answer Type Questions

Question. What is the high powered money?
Answer. High powered money is a sum of currency held by the public and cash reserve of the banks.

Question. Explain the working of money multiplier with the help of a numerical example. 
Answer. Money multiplier refers to the process of creation of credit by the commercial banks, with the help of initial deposits made by the public and legal reserve ratio (LRR).
Money Multiplier = 1/𝐿𝑅𝑅 Suppose there is initial deposit of Rs.1000 crores and LRR is 10%, then
Money Multiplier = 1/10% = 10
Total deposits = Initial deposits X 1/𝐿𝑅𝑅
Credit Creation = 1000 X 10 = Rs.10000 Crore.

Question. Explain how introduction of money has led to the expansion of markets. 
Answer. Following observations may be noted in this regard : (i) Introduction of money has led to the expansion of markets through the expansion of exchange. Because, barter system of exchange requires 'double coincidence of wants' while the monetary system does not.
(ii) Money has led to the emergence of financial market and financial intermediaries (banks and other financial institutions). Availability of funds, both for purpose of consumption and investment, has substantially increased. Consequently, markets have expanded.

Question. Explain the ‘Bank of issuing currency’ function of central bank. 
Answer. Central Bank is the sole authority to issue currency in the country. Since no other authority is allowed, this ensures uniformity in issue of currency with public is a part of money supply, it gives the Central Bank some control over money supply in the economy.

Question. Explain how repo rate can be helpful in controlling credit creation. 
Answer. Repo rate is the rate of interest at which Central Bank lends money to commercial banks for short period. Raising repo rate makes borrowing by commercial banks costlier. So these banks are forced to raise their lending rates. Since borrowing becomes costly for people, they borrow less. Banks, therefore, create less credit.

Question. Discuss how the central bank plays the role of controller of credit in an economy.
Answer. This is the most crucial function played by any central bank in the modern times. Central banks are supposed to regulate and control the volume and direction of the credit by using –
Quantitative techniques are those techniques which influence the quantum of credit in the economy like open market operations, bank rate policy, repo rate and reverse repo rate etc.
Qualitative techniques are the ones which influence the direction of credit in the economy like margin requirement and moral suasion.

Question. Calculate the value of money multiplier and total deposit created if the initial amount is Rs.700 crores and LRR is 10%.
Answer. Value of money multiplier = 1/𝐿𝑅𝑅
= 1/10% = 10

Thus total deposit = Initial deposit X money multiplier
= 700 X 10 = Rs. 7000 Crore

Question. What is Barter system? What are its drawbacks? 
Answer. Barter system of exchange is a system in which goods are exchanged for goods. It’s Drawbacks are:
Lack of double coincidence of wants.
Lack of divisibility.
Difficulty in storing wealth.
Absence of common measure of value.
Lack of standard of deferred payment.

Question. Central bank performs the function of a clearing house. How?
Answer. Every bank keeps cash reserves with the central bank. The claims of banks against one another can be easily and conveniently settled by simple transfers from and to their account. Supposing, Bank A receives a cheque of Rs 10,000 drawn on Bank B and Bank B receives a cheque of Rs. 15000 drawn on Bank A. The most convenient method of settling or clearing their mutual claims is that Bank A should issue a cheque amounting to Rs 5000 in favour of Bank B, drawn on central Bank. As a result of this transference, a sum of Rs 5000 will be debited to the account of Bank A and credited to the account of B. There is not need of cash transactions between the banks concerned. It facilitates cash transaction across the entire banking system, it also reduces requirement of cash reserves of the commercial banks.

Question. All the currency issued by the central bank is its monetary liability. How?
Answer. The Central Bank is obliged to back the currency with assets of equal value. These assets usually consist of gold coin, gold bullion, foreign securities and the domestic government’s local currency securities. The country’s Central government is usually authorised to borrow money from the central bank. Government does this, by selling local currency securities to the central bank. When the central bank acquires these securities, it issues currency. Putting and withdrawing currency into and from circulation is also the job of the central bank.

 

CBSE Class 12 Economics Chapter 3 Money And Banking Long Question Answer 

Question. What are the alternative definitions of money supply in India?
Answer. The alternative definitions of money supply in India can be the four measures of money supply. They are explained as under: Measures of M1 include:
Currency notes and coins with the public (excluding cash in hand of all commercial banks) [C]
Demand deposits of all commercial and co-operative banks excluding inter-bank deposits. (DD), Where demand deposits are those deposits which can be withdrawn by the depositor at any time by means of cheque. No interest is paid on such deposits.
Other deposits with RBI [O.D] M1 = C + DD + OD Where, Other deposits are the deposits held by the RBI of all economic units except the government and banks. OD includes demand deposits of semi-government public financial institutions (like IDBI, IFCI, etc.), foreign central banks and governments, the International Monetaiy Fund, the World Bank, etc.
Measures of M₂
M1[C + DD + OD]
Post office saving deposits
Measures of M₃
M₁
Time deposits of all commercial and co-operative banks. Where, Time deposits are the deposits that cannot be withdrawn before the expiry of the stipulated time for which deposits are made. Fixed deposit is an example of time deposit.
Measures of M₄
M₃
Total deposits with the post office saving organization (excluding national savings certificates).

Question. What are the instruments of monetary policy of RBI? How does RBI stabilize money supply against exogenous shocks? 
Answer. (a) Quantitative Instruments, (i) Bank Rate (ii) Repo rate
(iii) Reverse Repo rate (iv) Open Market Operations (OMO)
(b)Qualitative Instruments
(i) Margin requirement
(ii) Moral Suasion

 

CBSE Class 12 Economics Chapter 3 Money And Banking Fill in the Blanks: 

Question. In barter system of exchange, goods are exchanged for.
Answer: goods

Question. For the commercial banks, the source of profit is _______. 
Answer: spread,

Question. is the rate at which Central Bank of the country borrows funds from commercial banks within the country.
Answer: Reverse repo rate

Question. Money supply constitutes money held by public (or outside the banks) and_________.
Answer: demand deposits 

Question. _______ are deposits which can be withdrawn after a fixed period of time.
Answer: time deposits

Question. With an increase in SLR, flow of credit in the economy_________ . 
Answer: decreases

Question. In order to curb inflation, repo rate is __________. 
Answer: increased.

CASE STUDY

Read the following case study paragraph carefully and answer the questions on the basis of the same.

Repo (repurchase) rate also known as the benchmark interest rate is the rate at which the RBI lends money to the commercial banks for a short-term (a maximum of 90 days). When the repo rate increases, borrowing from RBI becomes more expensive. If RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate similarly, if it wants to make it cheaper for banks to borrow money it reduces the repo rate. If the repo rate is increased, banks can’t carry out their business at a profit whereas the very opposite happens when the repo rate is cut down. Generally, repo rates are cut down whenever the country needs to progress in banking and economy. If banks want to borrow money (for short term, usually overnight) from RBI then banks have to charge this interest rate. Banks have to pledge government securities as collateral. This kind of deal happens through a re-purchase agreement. If a bank wants to borrow, it has to provide government securities at least worth ₹ 1 billion (could be more because of margin requirement which is 5%–10% of loan amount) and agree to repurchase them at ₹1.07 billion (US$15 million) at the end of borrowing period. So the bank has paid ₹65 million (US$910,000) as interest. This is the reason it is called repo rate.

Question. What kind of tool RePO rate is:-
a) Qualitative tool
b) Quantitative tool
c) Fiscal tool
Answer: A

Question. Why RePO rate is called Repurchasing rate:-
a) Commercial bank has to mortgage its securities with RBI
b) Commercial bank has to make an agreement to repurchase the securities mortgage with RBI
c) Commercial banks have to pay interest on borrowings
Answer: B

Question. If inflationary conditions persist in economy then what should be done with RePo rate
a) RePo rate should be reduced
b) RePo rate should be increased
c) Does not change RePO rate
d) None of above
Answer: B

Question. On which type of borrowing RePO rate is charged by RBI
a) On short term borrowings
b) No long term borrowings
c) Borrowings to maintain reserves
d) Borrowings to purchase assets
Answer: A

CBSE Class 12 Economics Chapter 3 Money And Banking Short Answer Type Questions

Question. Explain the meaning of CRR and SLR.
                              OR
Distinguish between CRR and SLR.
Answer: CRR is the fraction of the deposits which commercial banks are required under law to keep as cash reserves with the central bank. CRR is a powerful instrument to control credit and lending capacity of the banks. SLR is a part of deposits which Commercial Banks have to keep with themselves. Banks are required to keep a fixed percentage of its assets in cash, gold or other securities. SLR is raised to reduce the ability of the banks to give credit.

Question. Explain “difficulty in storing wealth” problem faced in the barter system of exchange.
Answer: Under barter system, there were difficulties in storing wealth. Wealth is stored to be used in future. All goods cannot be stored. Perishable goods cannot be stored. All goods cannot be transported from one place to another. All goods may not be acceptable as medium of exchange. No single physical good has all these qualities. So, in the barter system of exchange there was difficulty in storing wealth.

Question. Explain the problem of double coincidence of wants to be faced under barter system. How money has solved it ?
Answer: The problem of double coincidence of wants arises when there is no medium of exchange. In such a case, the buyer has to make a search for the seller who also wants to buy the same good which the buyer itself offers for exchange. Money has solved the problem by working as a medium of exchange. The seller can sell the goods in the market in return for money and buy the goods he wants to buy in return for the money.

Question. State any three functions of money. 
Answer: (i) Medium of Exchange (ii) Unit of account. (iii) Store of value. (iv) Standard of deferred payments.

Question. Explain the concept of Money Supply.
Answer: The Supply of Money means the total stock of money (paper notes, coins and demand deposits of banks) in circulation held by the public at any particular point of time. Thus, two components of money supply are : (i) Currency (paper notes and coins), and (ii) Demand Deposits of Commercial Banks. Money supply or supply of money means total amount of money available in an economy. In other words, money supply refers to the volume of money held by the people in the country for transactions or settlement of debts.

Question. State the functions of Money. Explain any one of them.
          ​​​​​​​          ​​​​​​​          OR
Explain any two functions of money.
Answer: Functions of money : (i) Primary Functions:
(a) Medium of Exchange (b) Measure of Value (ii) Secondary Functions: (a) Standard of Deferred Payment (b) Store of Value (c) Transfer of Value

Question. Explain the ‘Medium of Exchange’ function of money. How has it solved the problem created by barter system ?
Answer: Money serves as a medium of exchanging goods and services. People sell goods for money and use the money for buying goods they want. It has removed the problem of double coincidence of wants faced in the Barter System.
Money, as a medium of exchange, means that it can be used to make payments for all transactions of goods and services. It is the most essential function of money. Money has the quality of general acceptability. So, all exchanges take place in terms of money. This function has removed the major difficulty of lack of double coincidence of wants and inconveniences associated with the barter system. Use of money allows purchase and sale to be conducted independently of one another. This function of money facilitates trade and helps in conducting transactions in an economy. Money has no power to satisfy human wants, but it commands power to purchase those things, which have utility to satisfy human wants.

Question. Explain the ‘Store of Value’ function of money. How has it solved the related problem created by barter?
Answer: We find that individuals don’t spend their entire income. They may save a part of their income to store it for use at later date. They do this as they know that money will be acceptable at any time in future for buying any commodity which they desire. In the barter system, it is difficult to store commodities as it involves costly storage/reduction in quality or value of the stored commodity. Thus, money overcomes the problem of storage that exist in barter system.

Question. Explain the working of money multiplier with the help of a numerical example.
Answer: Money multiplier refers to the process of creation of credit by the commercial banks, with the help of initial deposits made by the public and legal reserve ratio.
Money Multiplier = 1/legal reserve ratio
Suppose there is an initial deposit of ₹ 1000 crores and the legal reserve ratio is 10%; then
Money Multiplier = 1/0.10 = 10
Total Deposits = Initial Deposit x 1/legal reserve ratio
Credit Creation = 1000 x 10 = ₹ 10,000 crores

Question. Explain the ‘Standard of Deferred Payment’ function of money. How has it solved the related problem created by barter system?
Answer: Money, as a standard of deferred payments, means that money acts as a ‘standard’ for payments, which are to be made in future. Every day, millions of transactions take place in which payments are not made immediately. Money encourages such transactions and helps in capital formation and economic development of the economy. Money as a standard of deferred payments has simplified the borrowing and lending operations. It has led to the creation of financial institutions. Under barter system, it was very difficult to make future payments and contractual payments such as salaries, loans, interest payments, etc. For example, it was difficult to decide whether wages to a labour are to be paid in terms of food grains or any other commodity. This is because it was difficult to value the services of labour in terms of a commodity. Similarly, if a loan is taken in the form of a commodity, then the problem will arise in its repayment. However, as superior to the Barter System, money made the system of deferred or contractual payments such as salaries, interest payments, etc. possible.

Question. Explain the ‘Bank of Issue’ function of the Central Bank.
          ​​​​​​​          ​​​​​​​          ​​​​​​​          OR
Explain the “Currency Authority” function of Central Bank.
Answer: Central Bank as “Bank of Issue” The Central Bank of a country has the sole authority of issuing currency notes and coins in the country.
All the currency issued by the Central Bank is unlimited legal tenders. No other Commercial Bank or financial institution can issue these currencies except Central Bank. Often, the Central Bank divides its functions into two departments– Banking Department and Issue Department. It is the issue department that is responsible for note-issuing. It issues currency to cope with the demand for it, which depends upon the level of economic activity in the economy. Hence, Central Bank is also known as Bank of Issue.

Question. Explain ‘Government’s Bank’ function of central bank.
          ​​​​​​​          ​​​​​​​          ​​​​​​​          OR
Explain ‘banker to the government’ function of the central bank.
Answer: Central bank acts as bankers’ fiscal agent and adviser to the government. As banker to the government, the central bank keeps the deposits of the central and state governments and makes payments on behalf of governments. But it does not pay interest on government deposits. It buys and sells foreign currencies on behalf of the government. It keeps the stock of gold of the government. Thus, it is the custodian of government money and wealth.
As a fiscal agent, the central bank makes short- term loans to the government. It floats loans, pays interest on them, and finally repays them on behalf of the government. Thus, it manages the entire public debt. The central bank also advises the government on such economic and money matters as controlling inflation or deflation, devaluation or revaluation of the currency, deficit financing, balance of payments, etc.

Question. Explain the ‘’Banker’s Bank Function’’ of the Central Bank.
Answer: Banker’s Bank - the central bank controls, organizes, regulates, direct and supervises the commercial banks. It performs various banking functions with the commercial banks like lending funds, maintaining reserves of the banks, parking the surplus funds of the banks, etc. These kinds of the reserves can be utilized by the central bank in the case of any crisis. 

 

 

1. Which of the following is not the function of the central bank?

a. Banking facilities to the government

b. Banking facilities to the public

c. Lending to government

d. lending to commercial bank

 

2. Which of the following agency is responsible for issuing Rs 1 currency note in India?

a. Reserve bank of India

b. Ministry of commerce

c. Ministry of finance

d. Niti Aayog

 

3. The part of LRR kept by the bank themselves is called :

a. SLR c. CRR

b. Reverse Repo Rate d. None of the above

 

4. The ratio of total deposit that a commercial bank has to keep with Reserve Bank of India is called :

a. Statutory Liquid Ratio

b. Deposit Ratio

c. Cash Reserve Ratio

d. Legal Reserve ratio

 

5. ______________ refers to the buying and selling of government securities by the central bank in the open market.

 

6. ______________ is an apex institution of the monetary and banking structure of a country.

 

7. ______________ is the interest rate at which the commercial banks can deposit their funds with the central bank.

 

8. Define bank money.

 

9. What are time deposits?

 

10. Give the meaning of high powered money.

 

 

11. Define money supply. How it measured in India.

 

12. Distinguish bank rate and repo rate.

 

13. Explain the components of Legal reserve ratio.

 

 

14. Explain the functions of central bank asa. Banker’s bank and b. the currency authority. C. Banker to the Government

 

15. Explain the process of money and credit creation by commercial banks.

 

16. Briefly explain the credit control measures (Monetary policy measures) of the central bank of a country.