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NIOS Class 12 Economics Chapter 28 Money And Banking
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Money And Banking
Module – XI: Money, Banking And Government Budget
TEXT BOOK QUESTIONS WITH ANSWERS
INTEXT QUESTIONS 28.1.
1. Under barter system a good was exchanged for coins. [True or False]
2. Simran wants to have 6 pencils in exchange of a note book from Kavita. But Kavita is not agreeing to this condition. The problem may be related to lack of double coincidence of wants. [True or False]
3. Ahmed took 10 kg of rice from Asghar last year as loan. Now he is willing to return the same. But Asghar is not accepting it. Give one possible reason for it.
Ans. Quality of rice may be lower/loss of interest.
INTEXT QUESTIONS 28.2.
Q. Which of the following statements are true and which are false?
(i) M1 is a narrow measure and M is a broader measure of money supply.
(ii) Currency notes and coins are not an important component of money supply.
(iii) Supply of money is measured over a period of time.
(iv) High powered money consists of cash with public, reserves with banks and other deposits with R.B.I.
(v) Government has no role in producing high powered money in an economy.
INTEXT QUESTIONS 28.3.
Q. Which of the following statements are true and which are false?
(i) Commercial banks are controlled and operated only by the public sector.
(ii) Rate of interest on savings account deposits is less than fixed deposits.
(iii) Functions of commercial banks are rising day by day in modern economy.
(iv) Overdraft facility is an important form of granting loan to the public by banks.
(v) Increase in legal reserve ratio reduces credit creating power of commercial banks.
INTEXT QUESTIONS 28.4.
Q. Which of the following statements are true and which are false?
(i) Central Bank is an apex bank in an economy.
(ii) Central bank has little role in controlling and regulating the operations of commercial banks.
(iii) Central bank acts as banker to the government.
(iv) Central bank plays an important role in controlling and regulating money supply in an economy.
(v) Quantitative methods of credit control influences the overall supply of money in an economy.
(vi) Increase in bank rate reduces supply of money in an economy.
(vii) During inflation the central bank increases bank rate and during deflation it reduces the bank rate.
(viii) During inflation the central bank starts purchasing securities in the market.
(ix) Selective credit control measures influence supply of money only in some sectors of the economy.
(x) Credit rationing is an important form of selective credit control.
Q. 1. What is barter system of exchange?
Ans. Barter system of means the exchange of goods and services directly for goods and services. In other words economic exchange without the medium of money is referred to as barter system.
Q. 2. What were the difficulties of barter system of exchange?
Ans. The difficulties of barter system of exchange is-
(i) Absence of a common measure of value.
(ii) Lack of double coincidence.
(iii) Lack of division of goods.
(iv) Lack of common unit of measurement.
Q. 3. Define money.
Ans. Money is anything that is acceptable to all us a medium of exchange, as a standard for deferred payment and as a store of value.
Q. 4. How money could solve difficulties related to barter system?
Ans. Money solve difficulties related to barter system in many ways:
1. Unit of value: Money serves as a unit of value in terms of which the value of all goods and services are measured. This helps in measuring the exchange values of commodities. The prices of all goods and services can be fixed in terms of money and the problem of expressing of the value of each commodity in money quantities of other goods can be avoided.
2. Medium of exchange: Money by serving as a medium of exchange has reduced the time and energy spent in barter system. The major drawback of barter system was the double coincidence of wants. But by acting as intermediary money has facilitated trade and thus exchange between different groups of people.
3. Bearer of purchasing power: Money by being a bearer of purchasing power gives the freedom of choice to buy the things from those who offer the best bargain. The generalised purchasing power in the form of money helps in buying things in future and avoided the difficulty of storage of goods and then,quick disposal without loss.
4. Standard of deferred payments: The fourth major drawback of barter system that it lacks any unit to be contracted for future payments. This problem is also solved by money as contracts for payments of wages, salaries, rent and taxes are made for future. Money by being beard of purchasing power can make all deferred payments.
Q. 5. Explain different measures of money supply.
Ans. Money supply refers to the total quantity of money held by public in various forms at any point of time in an economy. The main components of money supply are currency held by the public and net-demand deposits held by the commercial banks. The money supply in Indian economy is generally measured in following forms:
(i) M₁ = Currency (notes and coins) with the public + Demand deposits + other deposits held with the Reserve Bank of India.
(ii) M₂ = M₁ + Post Office saving deposits.
(iii) M₃ = M₁ + Time deposits of all commercial banks and co-operative banks (excluding interbank time deposits).
(iv) M₄ = M₃ + Total deposits with the Post Office Saving Organisation (excluding National Saving Certificate).
Of all the concepts of money supply stated above, M₁ is referred to as narrow measure and M₃ the broader measure of money supply. M₁ is the most important measure of money supply. M₁ is most liquid whereas M₄ is least liquid.
Q. 6. What is a commercial bank?
Ans. A commercial bank is a type of financial institution that provides services such as accepting deposits, making business loans and offering basic investment products. Commercial bank also refer to a bank or a division of a large bank, which more specifically deals with deposits and loan services provided to corporations or large/middle-sized business-as opposed to individual members of the public/small business.
Q. 7. Explain important functions of commercial banks.
Ans. Functions of a commercial bank: Following are main functions of a commercial bank:
1. Acceptance of deposits: This is an important primary function of the commercial banks. The commercial banks accept deposits from individuals, business firms and other institutions. This is economically useful function in the sense that it helps in the mobilization of savings for production purposes. The commercial banks accept deposits in several forms according to the requirements of different sections of the society.
(a) Current account deposits: Deposits in current accounts are payable on demand. They can be drawn upon by cheque without any restriction. These accounts are usually maintained by businessmen and are used for making business payments. No interest is paid in these deposits.b However, the banks offer various services to the account holders for a nominal charges. The most important being the choque facility. Banks keep regular accounts of all transactions made in a particular account and submits statements or the sane to the account holder at regular intervals.
(b) Fixed term deposits: These are deposits for a fixed term (period of time) varying from a few days to a few years. They are not payable on demand and do not enjoy chequing facilities. The money deposited in such accounts become payable only on the maturity of the fixed period for which the deposits was initially made. Interest is paid on these deposits was initially made. Interest is paid on these deposits, the rate of interest increases with the term of the deposits.
A variant of fixed deposits are recurring deposits. In these accounts, a depositor makes a regular deposits on an agreed sum over an agreed period e.g., 100 per month for 5 years. Interest is paid on the deposits in these accounts.
(c) Saving account deposits: These deposits combine the features of both current account deposits and fixed deposits. They are payable on demand and also withdrawal by cheque, but with certain restrictions on the number of cheques issued in a period of time. Interest is paid on the deposits in these accounts but the interest paid on savings account deposits is less than that of the fixed deposits.
In monetary analysis deposits are classified into two types: demand deposits and time deposits. Demand deposits are payable on demand either through cheque or otherwise. Only demand deposits may serve as a medium of exchange, because their ownership can be transferred from person to another through cheques. All other deposits that are not payable on demand are called time deposits.
All current account deposits are demand deposits and all term deposits are time deposits.
2. Advancing of Loans: Extending loans is another important primary function of the commercial banks. It is also the main source of their income. Traditionally, bankers charged a service charge from the depositors, as they did not use the deposits for lending purposes. Gradually, they realized that there is no point in keeping all the money which they received from depositors as revenue. All the depositors never approached bankers to withdraw their money at one point of time. In the beginning, their lending out of deposits were confined to short-term loans to provide working funds for current business operations. Now, banks have extended their lending activities to investment in long-term bonds. Furthermore, today, commercial banks lend to consumers and government units besides financing trade and industry to meet the divergent needs of their customers. In the manner, they could find safe and lucrative outlets for their funds. The normal performance for banks is for secured loans, but they often give loans to business firms of high credit standing without security.
3. Transfer of Funds: The banks provide
the facility of fund transfer to its customers through the instruments of cheque, demand draft or electronic transfer from one place to another or one person to another.
4. Agency Functions: Banks receive and collect different types of payments on behalf of their clients through the instruments of cheques, drafts, bills and promissory notes etc. Banks also buy and sell gold, silver and other securities on behalf of their customers.
5. Sale and Purchase of Foreign Exchange: This is another important function of a commercial bank which has increased tremendously with increasing volume of international trade particularly in the era of globalization.
6. General Utility Services: In modern days the banks also perform some very useful functions for the benefit of its customers and the economy like collection and publication of data, advisory functions, issue of lockers and underwriting of loans, shares and debentures issued by the government.
Q. 8. What are different types of deposits accepted by commercial banks?
Ans. Acceptance of Deposit: This is an important primary function of the commercial banks. The commercial banks accept deposits from individuals, business firms and other institutions. This is economically useful function in the sense that it helps in the mobilization of savings for production purposes. The commercial banks accept deposits in several forms according to the requirements of different sections of the society. Various forms of deposits are as follows:
(i) Current Account Deposits: Deposits in current account are payable on demands. They can be withdrawn upon cheques without restrictions. These accounts are usually maintained by the businessmen.
(ii) Fixed Deposits: These deposits are for a fixed term. They are not payable on demand and do not enjoy facilities. They are paid on maturity of time. A variant of fixed deposits are recurring deposits.
(iii) Saving Account Deposits: They are payable on demand and also are drawn by cheques. But there is certain restrictions on the number of with drawal. Interest paid on saving account is less than that of the fixed deposits.
Q.9. What is credit creation?
Ans. Credit creation is one of the most important functions of commercial bank. Banks create credit out of the deposits that is mobilised by them. Credit creation is also called money creation or deposits creation. Therefore commercial bankS are also known as creator of money or credit.
Q. 10. Briefly explain the process of money creation or credit creation.
Ans. The process of credit/ money creation: Money is not created by commercial banks by actually printing of notes or minting of coins. The money is created by granting loans and advances to public and making relevant entries into the books of accounts of the lending banks. Loans are granted out of the deposits received by the banks Normally, the amount of loan granted by a bank is greater than the amount of deposits received by, it. This is mainly because of the fact that when money is deposited by the depositors in a bank, the bank by its experience knows that not all the money would be withdrawn by the depositors at once at any point of time. This peculiar habit of the depositors leaves the bank with huge amount of surplus fund which in turn is used to create Louis by the banks. The banks keep certain proportion of its total deposits in form of cash to honour the demand of its customers. Further, every commercial bank is required to keep certain proportion of its total deposits with the R.B.I. which is known as Cash Reserve Ratio (CRR). Besides CRR, the bank is also required statutorily to maintain certain proportion of its total deposits as liquid assets in form of cash, gold, and certain government approved securities. This is known as Statutory Liquidity Ratio (SLR.), The CRR and SLR together form the Legal Reserve Ratio (LRR) which is determined by the central bank of a country (R.B.I. in case of India). When LRR is increased by the central bank the capacity of the commercial banks to create depot or credit decreases and when LRR is decreased the capacity to create more credit increases.
Q. 11. What is high powered money?
Ans. The high powered money refers to the currency need by the public, cash reserves of banks (R) and other deposits of the R.B.I. High powered money is produced by the R.B.I. and the Government of India and held by the public and the banks.
Q. 12. What is central bank?
Ans. Lender of last resort’ function of the Central Bank: Central bank acts as the lender of last resort. When commercial banks have exhausted all resources to supplement their friends at the time of liquidity crisis, they approach to central bank as last resort. The central bank gives guarantee of solvency and provides financial accommodation to commercial banks in the following way:
1. It rediscounts their eligible securities and bills of exchange.
2. It provides loan against their securities.
Q. 13. What are the important functions of central bank?
Ans. Functions of central bank: Mary functions are performed by central bank.
(i) Banker’s bank and supervisory function of the central bank: Central bank acts as a banker and financial advisor to the government. As a banker to the government it keeps accounts of all government banks and manages government treasures. The loans are given to the government without any interest for short term. It also buys shares and securities etc.., on behalf of the government.
The central bank supervises, regulates and controls the commercial banks. The regulation of banks may be related to their licensing, branch expansion, liquidity of assets, management, amalgamation and liquidation. The control is exercised by periodic inspection of banks and the returns filed by them.
(ii) Banker to the government: The central bank acts as the banker to the government. As government’s banker central bank keeps their banking accounts of the government, both the centre and of the states. As a banker, the central bank offers all those services to the Government which a commercial bank offers to the general public. It accepts deposits from Government departments as well as institutions and operate their accounts on regular basis. It also collects cheques and drafts drawn on the other banks in favour of the government. Central bank also makes available cash for the payments of salaries, wages and other disbursements by the government. In brief, the central bank carries out all government transactions including purchases or sales oi foreign currencies.
(iii) Bank of Issue: The central bank enjoys the sole monopoly of issuing currency in order to secure control over the volume of, currency and credit. These notes circulate throughout the country as legal tender money. For issuing currency, the central bank has to keep assets of equal value as reserves in the form of gold and foreign securities, government securities. Following are the main reasons for giving monopoly right of note issue to the central bank:
1. It brings uniformity.
2. It keeps the public faith in the paper currency.
3. It is easier to control credit when there is single agency of note issue.
4. It helps in stabilisation of the internal and external value of the currency.