CBSE Class 12 Economics Money And Banking Worksheet Set C

Question. Bank money is that money which is:
(a) printed by the government
(b) printed by RBI
(c) generated in the form of credit creation
(d) All of the above
Answer : C

Question. Identify which of the following statements is true?
(a) Expansion of exchange has led to expansion of markets for goods and services.
(b) Supply of money includes stock of money held by the government.
(c) Evolution of money has facilitated current payments.
(d) Main characteristic of money is solidness.
Answer : A

Question. Which of the following is not concerned with banking organisation?
(a) Credit creation
(b) Fiscal deficit
(c) Cash reserve ratio
(d) Bank rate
Answer : B

Question. Identify which of the following statements is true?
(a) Facilitation of exchanges is considered to be the only role of money.
(b) India got its Central Bank in 1945.
(c) Central Bank expands money supply of the country.
(d) Economic exchanges without the mediation of money are referred to as barter exchanges.
Answer : D

Question. The broad definition of money is based on :
(a) Medium of payment function
(b) Store of value function
(c) Transferability of money
(d) None of these
Answer : B

Question. Identify which of the following statements is true?
(a) Demand deposits are equal to cash deposits with the Commercial Banks.
(b) The Central Bank is a banker to the government.
(c) In India, CRR and SLR are fixed by the Commercial Banks themselves.
(d) The Central Bank issues currency on the basis of CRR.
Answer : B

Question. Identify which of the following statements is true?
(a) The Central Bank focuses on growth and stability of the economy.
(b) The commercial bank is a banker to the government.
(c) Market rate refers to the rate at which the RBI lends money to the commercial banks.
(d) In India, LRR is determined by the commercial banks themselves.
Answer : A

Question. Identify which of the following statements is true?
(a) Supply of money is a flow concept.
(b) Notes and coins are legal tenders.
(c) OD includes deposits of the government of the country with RBI.
(d) Supply of money includes stock of money held by the government.
Answer : B

Question. In the time of COVID-19, the fiscal packages so far have aimed at cushioning the immediate impact of the sudden drop in economic activity on firms and households, and to preserve countries’ productive capacity. This will result into which money supply component to increase primarily.
(a) M1
(b) M2
(c) M3
(d) M4
Answer : A

Question. Which of the following determines credit creation by Commercial Banks?
(a) Legal Reserve Ratio
(b) Initial Deposits
(c) Both (a) and (b)
(d) None of these
Answer : C

Question. What will happen to the money supply when the government purchases securities from the open market?
(a) Money supply will increase
(b) Money supply will decrease
(c) Money supply will remain same
(d) None of these
Answer : A

Question. Which of the following is a qualitative instrument of the monetary policy of the Central Bank to control money supply?
(a) Repo Rate
(b) Margin Requirement
(c) Bank Rate
(d) None of these
Answer : B

Question. The rate at which Central Bank lends money to commercial banks for immediate cash requirement is called:
(a) Repo Rate
(b) Reverse Repo Rate
(c) Bank Rate
(d) Statutory Liquidity Ratio
Answer : C

Question. The deposits from which money can be withdrawn anytime by writing a cheque are called:
(a) Time deposits
(b) Fixed Deposits
(c) Demand Deposits
(d) Near Deposits 
Answer : C

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

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

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. The rate at which the Central Bank lends money to commercial banks
(a) CRR
(b) SLR
(c) bank rate
(d) all of these
Answer : C

Question. The function performed by Central Bank
(a) currency authority
(b) banker to commercial banks
(c) banker to the Government
(d) all of these
Answer : D

Question. Loans offered by commercial banks are:
(a) Less than the deposits received by them
(b) More than the deposits received by them
(c) Equal to the deposits received by them
(d) None of these
Answer : A

Question. Supply of money refers to …................
(a) currency held by the public
(b) currency held by Reserve Bank of India (RBI)
(c) currency held by the public and demand deposits with commercial banks
(d) currency held in the government account
Answer : C

Question. In India, coins are issued by .................... .
(a) Reserve bank of India
(b) Commercial Bank
(c) State Bank of India
(d) Ministry of Finance
Answer : D

Question. Money that is issued by the authority of the government is called ....................... .
(a) full bodied money
(b) credit money
(c) fiat money
(d) fiduciary money
Answer : C

Question. Money value is .................... Commodity value in full bodied money whereas Money value is ....................Commodity value in credit money.
(a) greater than, equal to
(b) equal to, greater than
(c) greater than, greater than
(d) equal to, equal to
Answer : B

Question. Money has separated the act of ......................... and.......................... .
(a) sale, purchase
(b) bank money, credit money
(c) goods, services
(d) None of these
Answer : A

Question. .................... and .......................... are primary functions of money.
(a) Store of value, standard for deferred payments
(b) Standard for deferred payments, measure of value
(c) Medium of exchange, measure of value
(d) Medium of exchange, store of value
Answer : C

Question. In a modern economy, money comprises ...................... and ...................... .
(a) security deposits, cash
(b) exchange, distribution
(c) cash, bank deposits
(d) None of these
Answer : C

Question. ....................... is the narrower among the all measures of money supply.
(a) M1
(b) M2
(c) M3
(d) M4
Answer : A

Question. ............................ is an apex institute of banking structure of India.
(a) Central Bank
(b) Commercial Bank
(c) State bank of India
(d) Government of India
Answer : A

Question. Lower repo rate will lead to .................. .
(a) decrease in money supply
(b) increase in money supply
(c) the same supply of money in the economy
(d) decrease in money demand
Answer : B

Question. ...................... is the money whose monetary value is more than the commodity value.
(a) Fiat Money
(b) Credit Money
(c) Full Bodied Money
(d) Fiduciary Money
Answer : B

Question. The part of LRR kept by the banks with themselves is called ............... .
(a) SLR
(b) CRR
(c) Repo rate
(d) Reserve Repo rate 
Answer : A

Question. ................... as a standard for deferred payments has led to the emergence of ............... .
(a) notes, commodity market
(b) coins, financial market
(c) money, commodity market
(d) money, financial market
Answer : D

Question. Credit cards issued by the banks ............................... .
(a) encourage consumer spending
(b) increase aggregate demand in the economy
(c) both (a) and (b)
(d) None of these
Answer : C

Question. .................... is known as the most liquid assets.
(a) gold
(b) cash
(c) securities
(d) all of these
Answer : B

Question. Money has led to the .................. of exchange.
(a) contraction
(b) limitation
(c) expansion
(d) None of these
Answer : C

Question. Money plays .................. role in a situation when there is .................. exchange.
(a) significant, no
(b) no, significant
(c) no, no
(d) None of these
Answer : C

Question. CRR is .................. to lower credit creation capacity of the .................. banks.
(a) decreased, central
(b) raised, commercial
(c) raised, central
(d) None of these
Answer : B

Question. Monetary policy in India is implemented by........................ .
(a) Economic Planning Commission
(b) NITI Aayog
(c) Reserve Bank of India
(d) Finance Dept.
Answer : C

 

Short Answer Type Questions

Question. What is monetary policy ? State any three instruments of monetary policy.
Answer: Policy adopted by the Central Bank of an economy in the direction of credit control or money supply is known as Monetary Policy. Instruments of Monetary Policy are Bank Rate, Repo Rate, Reverse Repo Rate, Cash Reserve Ratio.

Question. Explain the ‘Unit of Account’ function of money. How has it solved the related problem created by barter system?
Answer: With the introduction of money, the value of each commodity can be estimated from its price which is in terms of a common unit, say rupees. E.g., we know that the value of one pen is ` 10 and value of a notebook is ₹20. Therefore, 2 pens are equivalent to 1 notebook. Therefore, the relative value of goods can be determined. In barter system, if there are 10 goods the price of each good is measured in terms of 9 other goods which makes the exchange more complex. Thus, there is no common measure of value which gets overcome with the introduction of money.

Question. Define Money Supply and explain its components.
Answer: Money Supply is the total stock of money in circulation held by public at a given point of time. In other words, Volume of money held by public for transactions or settlement of debts. But it doesn’t include the stock of money with the supplier of money. Components of Money Supply :
(i) Currency with public : Currency coins and notes issued by government ot Central Bank of the country.
(ii) Demand Deposits : Deposits of the public with the banks which can be withdrawn at any time.

Question. How the following tools can be used for credit control by the Central Bank in an economy (i) Open Market Operations (ii) Margin Requirements
OR
Explain any two methods of credit control used by Central Bank. 
Answer: (i) Open Market Operations (OMO) refers to the sale and purchase of government securities in the open market by the Central Bank (RBI). By selling such securities the Central Bank soaks liquidity from the economy and by purchasing the government securities, Central Bank releases liquidity. This is an important method of regulating the money supply (liquidity) in the market. (ii) The Margin Requirement of loan refers to the difference between the current value of the security offered and amount of loan granted.
When margin requirement is lowered by the Central Bank, the borrowers are able to secure larger amount of funds from the banks which will increase the money supply in the economy. Conversely, a rise in the margin requirements will contract the supply of credit in the economy.

Question. Explain the role of statutory liquidity ratio in increasing money supply.
Answer: Statutory liquidity ratio is the ratio of deposits kept by the commercial banks with themselves. When the central bank wants to increase money supply, it reduces this ratio. Banks keep less amount as reserves. The remaining part of deposit can now be used for giving loans. Credit creation capacity of bank rises. Since deposits are a part of money supply, money supply increases.

Question. Explain the ‘‘varying reserve requirements’’ method of credit control by the central bank.
Answer: Commercial banks have the power to create credit on the basis of deposits they receive. The central bank exercises control over this power through changing legal reserve requirement from time to time. There are two components of such reserves:
Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio(SLR). When the central bank raises CRR or SLR or both less money is left with commercial banks for lending. Opposite happens when CRR or SLR or both are reduced.

Question. Explain how ‘Repo Rate’ can be helpful in controlling Credit Creation. 
OR
Explain the role of repo rate in reducing money supply. 
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. Explain the role of Reverse Repo Rate in controlling Credit Creation.
OR
Explain the role of reverse repo rate in controlling money supply. 
Answer: Reverse Repo Rate refers to the rate of interest paid by the Central Bank on deposits made by the Commercial Banks. When it is raised, Commercial Banks are encouraged to make more deposits with Central Bank. As a result, funds available for lending with the Commercial Banks decrease. Their capacity of lending declines and Credit Creation is less.

Question. How is bank rate used by Central Bank in influencing credit creation by Commercial Banks ? Explain.
OR
How do changes in bank rate affect money creation by Commercial Banks ? Explain.
OR
Explain the role of bank rate in decreasing money supply. 
Answer: Bank rate is the rate at which central bank offers loans to the Commercial Banks as a lender of last resort. During inflation, when supply of credit is to be reduced, bank rate is increased. This reduces borrowing by the Commercial Banks, implying a reduction in their cash reserve and therefore, a reduction in their capacity to create credit. Following increase in bank rate, market rate of interest is also raised, implying a check on borrowings from the Commercial Banks. Thus, overall supply of credit is reduced in the economy. Exactly opposite is done to combat deflation : bank rate is lowered to increase the supply of credit.

Question. How will ‘Reverse Repo Rate’ and ‘Open Market Operations’ control excess money supply in an economy?
Answer: Reverse Repo rate is the rate at which Central Bank borrows money funds from commercial banks. Increase in Reverse Repo Rate induces banks to transfer funds to Central Bank and Reduces banks’ ability to create credit. Open Market Operations refers to buying and selling of government securities by Central Bank from/to public and commercial banks. Sale of such securities reduces the reserve of commercial banks and adversely affects bank’s ability to create credit and hence, decreases the money supply in the economy.

Question. What is Legal Reserve Ratio ? Explain its components. U [OD Set-I, II, III Comptt. 2013]OR Explain the components of Legal Reserve Ratio.
Answer: Legal Reserve Ratio (LRR) refers to that legal minimum fraction of deposits which the banks are mandate to keep as cash with themselves. Legal Reserve Ratio has two variants : (i) Cash Reserve Ratio, and (ii) Statutory Liquidity Ratio. Cash Reserve Ratio (CRR) : It refers to cash reserves of Commercial Banks with the Central Bank as a percentage of their deposits. Statutory Liquidity Ratio (SLR) : It refers to reserves in the form of liquid assets (including (i) cash, (ii) gold, and (iii) approved securities) with the Commercial Banks themselves, as a percentage of their total deposits. Both CRR and SLR are fixed by the Central Bank, and both are a legal binding for the Commercial Banks. In this sense, both CRR and SLR are legal reserve ratios.

Question. Currency is issued by the Central Bank, yet we say that Commercial Banks create money. Explain, how is this money creation by Commercial Banks likely to affect the national income ?
Answer: It is true that Commercial Banks create money through credit creation. The Central Bank issues credit on the basis of primary deposits and create money many more times than the deposits. These banks lend money for productive work which increases production, productivity and ultimately National Income.

Question. Explain the role of ‘Cash Reserve Ratio’ in Controlling ‘Credit Creation’. 
OR
Explain the role of cash reserve ratio in increasing money supply.
Answer: CRR refers to the minimum proportion of the total deposits that the commercial banks has to maintain with the central bank in the form of reserves. A decrease in CRR, would mean that banks would be required to keep a lesser portion in form of deposits with the central bank. This implies that the commercial banks are left with more amount
of funds to lend out. Hence, the lending capacity of the banks increase, leading to increase in the money supply. On the contrary, a rise in CRR will lead to a decrease in the money supply.

Long Answer Type Questions

Question. Explain any two functions of Money.
Answer:
The functions of money can be classified into the following two categories :
(i) Primary Functions : These are those functions which are common to all countries during all time periods. These include the following :
(a) Medium of exchange : It means that money acts as an intermediary for the exchange of goods and services. (b) Measure of Value : Money serves as a measure of value in terms of unit of account, i.e., in monetary units. For example, value of sugar can be expressed in monetary unit by saying that price of sugar is ₹15 per kg.
(ii) Secondary Functions : These are those functions which are supplementary to the primary functions discussed above. These include the following :
(a) Standard of Deferred Payments : Deferred payments refer to those payments which are made in future. Money is accepted as a standard of deferred payments because : (1) its price remains stable, (2) it has general acceptability (3) it is more durable compared to other commodities.
(b) Store of Value : It is convenient to store value in terms of money because : (1) it has general acceptability, (2) stability of its value, (3) it is convenient to store money. (c) Transfer of Value : Money serves as a convenient mode of the transfer of value because of its general acceptability and the merit of liquidity.

Question. How does money overcome the problems of barter system ? Explain briefly. 
Answer: Use of money overcomes the drawbacks of barter system of exchange in the following manner : (i) With the introduction of money, double coincidence of wants is no longer needed.
(ii) Money facilitates storage of value which was difficult in barter system.
(iii) Money facilitates satisfaction of wants even in smaller units which was not possible in barter system.
(iv) Money serves as a medium of exchange. Accordingly, scope of exchange has greatly widened.

Question. Explain the process of credit creation by Commercial Banks.
Answer: Money/Credit Creation is an important function of the Commercial Banks. By creating credit, Commercial Banks contribute to money supply in the economy. They create credit in the form of demand deposits. Demand deposits of the Commercial Banks are many times more than their cash reserves. Suppose, customer deposits ` 1000 in bank. Bank has to pay interest on this amount for which bank should lend this money to someone. A part of the amount is to be retained with bank to meet its customer’s obligations. Say, if LRR is 20%, the banks will keep 20% of deposits as reserves and will lend remaining 80%, i.e., ₹ 800. Those who borrow will spend this money and same ` 800 will come back to banks in form of deposits. This raises the total deposits to ` 1,800 now. Banks again keep 20% of ₹ 800 as reserve and lend ` 640 to those who needs. This will further raise the deposits with banks. In this way deposits will go on increasing @ 80% of the last deposit. The number of times the total deposit will become, is determined by money multiplier, i.e., 1/LRR = 1/0.2 = 5 times. Total deposits will be Initial Deposits × Money Multiplier = ₹ 1000 × 5 = ₹ 5,000

Question. Describe any two functions of a Central Bank.
OR
Explain the following functions of the Central Bank : (i) Bank of Issue (ii) Bankers’ Bank.
Answer: (i) Bank of Issue : Refers to the legal right to issue currency. The Central Bank enjoys complete monopoly of note issue. This brings about uniformity in note circulation. At the same time, it gives the Central Bank power to influence money supply because currency with public is a part of money supply. 3 (ii) Bankers’ Bank : Commercial Banks have to keep a certain percentage of its deposits as cash reserves with the Central Bank. The Central Bank uses these reserves to meet the emergency cash needs of the Commercial Banks. The Central Banks in this way gives loans to these banks. It makes the Central Bank the banker’s bank.

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 the : (i) Quantitative techniques are those techniques which influence the quantum of credit in the economy like open market operations, bank rate policy, repo and reverse repo rate policy, etc. (ii) Qualitative techniques or selective credit control techniques are the ones which influence the direction of credit in the economy like margin requirements and moral suasion.

Question. Describe any two methods by which Reserve Bank of India can regulate money supply.
Answer: The following are the two principal methods of credit control used by central bank : (i) Repo Rate : Repo rate is the rate at which the central bank lends money to the commercial banks. The increase (or decrease) in repo rate is often followed by increase (or decrease) in the market rate of interest. Accordingly, the cost of credit (also called the cost of capital) changes in the market. During inflation, the cost of capital is increased by increasing the repo rate. This reduces the flow of credit, as desired. On the other hand, during deflation the cost of capital is reduced by reducing the repo rate. This increases the flow of credit. (ii) Open Market Operations : Open market operations refers to sale and purchase of securities by the central bank in the open market. To increase money supply (as during deflation) securities are purchased by the central bank. On the other hand, to decrease money supply (as during inflation) securities are sold off. By buying the securities, the central bank releases liquidity and hence, a rise in capacity to create credit of the commercial banks. By selling the securities, liquidity is sucked from the economy and hence, a reduction in capacity to create credit of the commercial banks.

Question. Explain the meaning of ‘open market operations’. How is it used to reduce money supply in the economy ?
Answer: Purchase or sale of government securities by the central bank (RBI) to the general public is called open market operations. In order to reduce the supply of money, RBI will start selling government securities. Those who buy make payments by cheques. This reduces deposits with banks and this in turn reduces credit creation by banks. Thus, money supply is reduced.

Question. (i) What is meant by Repo Rate ? How does the Central Bank use this measure to control inflationary conditions in an economy ? (ii) What is meant by Margin Requirement ? How does the Central Bank use this measure to control deflationary conditions in an economy ?
Answer: (i) Repo rate is the rate of interest at which Central Bank lends money to commercial banks for a short-term. The Central Bank fixes the Repo Rate and it plays the role of an indicator of lending rate and deposit rate fixation by the banks. Under inflationary conditions, Central Bank increases the Repo Rate. (ii) Marginal requirement refers to the difference between market value of the security offered for loans and the amount of loans offered by the Commercial Banks. The Central Bank fixes the margin requirements and under deflationary conditions Central Bank reduces the margin requirements.

Question. Imagine yourself the RBI Governor. How would you use the instrument of CRR to increase investment in the economy?
Answer: CRR refers to the proportion of total deposit of the commercial banks which they must keep as cash reserves with Central Bank. To increase the investment in the economy, it would be appropriate to reduce the CRR. Reduction of CRR increases credit creation capacity of the commercial banks, as banks will have more money to lend. Accordingly, the flow of credit increases in the market. Also when availability of credit increases, rate of interest decreases. Consequently demand for credit increases for the purpose of investment.

Question. If CRR is abolished as a legal requirement, do you think the banks can create unlimited amount of money supply?
Answer: No. Even if CRR is abolished as a legal requirement, the commercial banks cannot create unlimited amount of money supply as they must continue to keep some cash reserves as a percentage of their demand deposits to meet uncertainties. People may start withdrawing their deposits from the banks en masse. In this case, if CRR has been abolished as a legal requirement by RBI, banks will face crisis of cash to cope with withdraws. Thus, banks on their own must hold cash reserves on the basis of their historical experience, as to how much of cash reserves should be enough to cope with the routine cash withdrawals by the depositors.

 

 

1. Define money.

 

2. If Legal Reserve Ratio is 20% and initial primary deposit is Rs. 300 crores, The money creation by the banking system will be:

a. 1500 crores   b. 600 crores   c. 1000 crores   d. 1200 crores

 

3. When there is a recessionary trend in the economy, Central Bank should: (Choose correct answer)

 

a. Reduce Legal Reserve Ratio Requirement

b. Sell Government bonds in open market

c. Increase Bank Rate

d. Reduce taxation rate

 

4. What is high powered money

 

5. Define banking

 

 

1. In an economy the credit creation by the banking system is estimated as Rs.200 thousand crores from the primary deposit worth Rs. 4 thousand crores. What could be the Legal Reserve Ratio?

 

2. Explain the ‘bank of issue’ function of Central Bank.

 

3. State the meaning of:

a. Fiat money   b, Credit money   c. Limited legal tender money

 

4. Define money supply. Why is it considered as a stock component? What are its components?

 

5. How does Central Bank function as a lender of last resort?

 

 

1. What are the major functions of money? Explain

 

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

 

3. A large increase in Foreign Direct Investment has increased the money supply in the economy and creates an inflationary pressure? How can central bank sterilise the economy from such fluctuation.

 

4. How does central bank function as banker to government?

 

 

1. Explain the functions of central bank as

a.Banker’s bank and   b. the currency authority.

 

2. Economy faces decrease in aggregate demand and a recessionary trend.Economists suggest an increase in money supply, credit creation and Investment to rectify the situation. Explain the role of Central Bank to solve the problem.

 

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

 

4. How does commercial bank create credit and contribute to increase in money supply in an economy? Explain with numerical illustration.