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Chapter – 2
(MONEY AND BANKING)

POINTS TO REMEMBER:-

 Money : Money may be defined as anything which is generally accepted as a medium

of exchange and also act as common measure of value, store of value and standard of
deferred payment.

 Barter System : It is as system of exchange in which goods are directly exchanged

one with other without the use of money.

The system of exchange where goods and services are exchange directly for the
other goods and services. The economy based on the barter exchange system in the
barter economy. A barter economy is a cashless economic system and one of the
earliest, predating monetary systems and even recorded history.

 Difficulties involved in the Barter Exchange : (a) Absence of a common unit (b)
The lack of double coincidence of wants (c) Lacks of any satisfactory units to engage
in contracts involving future payments (d) Does not provide for any method of
storing generalised purchasing power (e) Lack of divisibility.

 Supply of Money : Total Stock of money (Currency notes, coins and demand deposit
of banks) in circulation are held by the public at a given point of time.

 Commercial Bank : Commercial Bank is a financial institution who accepts deposits

from the general public and provide loans facilities for investment with the aim of
earning profit.

Bank is a financial institution that accept deposits of money from the public,
withdrawable by cheques or otherwise, and use the money so collected for lending to
the households, firms, and the government.

 Demand Deposit : Demand deposit are those deposit which can be withdrawn from
the bank on demand or by writing a cheque any time.

 Bank Money: Money in the form of bank deposits created by commercial banks when
they extend credit to firms and households. Thus, bank money consists of the book
credit that banks extend to their depositors.

 Central Bank : Central Bank is an apex institution of monetary and banking system
of country. It makes monetary policy of the country in public interest. It manages,
Supervises and facilitates the banking system of the country.
 Cash Reserve Ratio (CRR): CRR refers to the proportion of total deposit of the
commercial bank which they must keep as cash Reserve with Central bank.

 Statutory Liquidity Ratio (SLR): SLR refers to liquid assets of the commercial
banks which they must maintain (on daily basis) as a minimum percentage of their
total deposits.

 Bank Rate: It is the rate of interest at which central bank lends to commercial
banks without any collateral (security for purpose of loan)

 Repo Rate : It is the rate of interest at which the Central Bank gives short period
loan to the commercial bank.

 Reverse Repo Rate : It is the rate of interest at which the central bank of a
country borrows money from commercial banks.

 Open Market Operation: It consists of buying and selling of government securities

and bound in the open market operation by central bank.

 Classification of Money:-

(i) Full Bodied Money : Money whose face value and commodity value are equal is
called full bodied money, e.g. silver coin during British period in India.

(ii) Credit Money : Credit money refers to money whose face value is much greater
than its commodity value. Example Currency note.

(iii) Legal Tender Money : Legal tender money has legal sanction behind it.

(iv)  Bank Money : Demand deposits with the commercial banks are called bank money.

 Money and High Power Money : Money consists of currency with the public and
demand deposits at banks while high powered money consists of currency held by the
public and cash reserve of banks.

 Measures of Money Supply:

M1 = Currency with the public + Demand deposits + others deposits with RBI
M2 = M1 + saving deposits with post office saving banks.
M3 = M1 + Net time deposits with banks.
M4 = M3 + Total deposits with the post office saving banks.

 Selective Credit Controls (SCCs) : In this method the central bank can give
directions to the commercial bank can give credit for certain purposes or to give
more credit for particular purposes or to the priority sectors.
 Money Multiplier or Credit Multiplier: When the primary cash deposit in the
banking system leads to multiple expansion in the total deposits, it is known as money
multiplier or credit multiplier.

 Marginal Requirement: Business and traders get credit from commercial bank
against the security of their goods. Bank never gives credit equal to the full value of
the security. It always pays less value than the security. So, the difference between
the value of security and value of loan is called marginal requirement.

 Moral Suasion: It implies persuasion, request, information, suggestion, advice and

appeal by the central banks to commercial banks to cooperate with general monetary
policy of the central bank.

 Fiat Money: It refers to money by order/authority of the government. It includes

notes and coins.

 Fiduciary Money: It refers to money backed up by trust between the payer and the
payee.

 Money Supplier: In the modern times the sources of supply of money are
government, central bank of the country and commercial banks.

 Custodian of Foreign Exchange Reserve :

1. The central bank acts as the custodian of the country’s stock of gold and key
currencies Dollars, British Pounds and other prominent currencies.

2. All foreign exchange transactions are routed through the central bank. It means,
all payments in foreign exchange are made by this bank and all earning in foreign
exchange transaction are to be deposited in the market.

3. Central Bank is responsible for keeping the external value of country’s currency
stable.

In case of any fluctuations, the central bank, in order to minimize them, may have
to buy or foreign currency in the market.

The purpose of maintaining cash reserves was 2 fold:

(a) To maintain confidence in domestic currency

(b) To meet emergency requirement of foreign exchange.

 Bank of Central Clearance: A bank may recourse cheque claims of another bank so
in this cash central bank acts as a clearing house. Central bank hold cash resource
 of all banks so it become easy and convey for central bank to act as a clearing
house.

All commercial bank has their account with central bank so central bank can easily
settle their claims against another bank by making entries of debit and credit

 The Process of Credit Creation of Commercial Bank:

Credit creation is a process of creating new deposits form initial deposits. This
process depends on amount of Initial deposits and Legal Reserve Ratio (LRR). LRR is
that part of deposits which are legally required to be kept by banks as Cash
Reserve. If LRR 20% than 80% of deposits can be given on loan.

How many times initial deposits get converted into New Deposits is determined by
LRR. The multiple (how many times) is called money multiplier?
Money Multiplier = 1 ÷ LRR

If LRR = 20% than Money Multiplier will be 5 and if LRR = 10% than Money
Multiplier will be 10. It means that Lower the LRR, Higher the Money Multiplier and
More the more the Money Creation.
Assumption for money creation:
(a) All banks are interlinked
(b) All transactions are completed by using Cheques
Deposits Creation by Commercial Banks:-
Round Deposits (Rs.) Loans (Rs.) Cash Reserves (LRR = 20%)
Initial 100 80 20
Round I 80 64 16
Round II 64 51.20 12.80
- - - -
- - - -
Total 500 400 100

As per above schedule suppose the initial deposit in bank is Rs. 100 and the LRR is
20% than banks can keep Rs. 20 as cash reserve and remaining Rs. 80 can give as a
loan. The bank opens the deposit account in the name of borrowers and deposits the
loan amount of Rs. 80 in that account.

The people who receive Rs. 80 as loans they will issue Cheques for making their
payments. Those who receive these Cheques will deposit the Cheques in their
account. The deposits will increases by Rs. 80 with banks.
The LRR is 20% therefore banks can keep Rs. 16 as cash reserve and remaining Rs.
64 can give as a loan. The process of deposit creation comes to an end when : Total
of LRR = Initial Deposit
 Money Multiplier = 5 (MM = 1 ÷ LRR, MM ÷20% = 5)
Money Creation (New deposits) = Rs. 500 (MC = Initial deposits ÷ LRR, MC = 100 ÷
20%)
So, the banks will create New Deposits of Rs. 500 from initial deposits of Rs. 100 if
LRR is 20%.

Short Answer/MCQ

1. Which of the following is the basic characteristic of money?

(a) Durability (b) Divisibility
(c) General acceptability* (d) None of these

2. A thousand rupee note is called:

(a) Fiat money (b) High powered money
(c) Legal tender money (d) All the above*
3. 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
4. RBI has the sole right to issue currency notes other than:
(a) Rs. 5 note (b) Rs. 10 note
(c) Rs. 1 note* (d) None of these
5. Money whose value as a commodity is equal to its face value is called:
(a) Credit money (b) Full bodied money*
(c) High powered money (d) Legal tender money
6. Money supply is a …………..concept
(a) Stock* (b) Flow
(c) Both (a) and (b) (d) Neither (a) nor (b)
7. Bank money is the money which is:
(a) Issued by RBI (b) Issued by the government
(c) Created by commercial bank* (d) None of these
8. Who regulates money supply?
(a) Government of India (b) Reserve Bank of India*
(c) Commercial Bank (d) Planning Commission
9. 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
10. Money supply includes………….
(a) All deposits in Banks (b) Demand deposits in Banks*
(c) Only time deposits in Banks (d) Currency with the Banks
11. The component of M1 measure of money supply is:
(a) Time deposits (b) Demand deposits*
(c) Cash reserve of banks (d) All the above
12. …………… is the main source of money supply in an economy.
(a) Central Bank (b) Commercial Banks
(c) Both (a) and (b)* (d) Government
13. Money supply consists of:
(a) Currency with the public (b) Demand deposits
(c) Both (a) and (b)* (d) None of the above
14. Demand deposits with banks are a part of:
(a) Money supply * (b) Legal tender
(c) Both (a) and (b) (d) Neither (a) nor (b)
15. Bank money is:
(a) Optional* (b) Legal tender
(c) Neither (a) nor (b) (d) Both (a) and (b)
16. Deposits made by the people from their own resources are called…………..
(a) Primary deposits* (b) Secondary deposits
(c) Time deposits (d) None of these
17. The creation of …………. is called credit creation.
(a) Primary deposits (b) Secondary deposits*
(c) Time deposits (d) None of these
18. Which bank operates in public interest without any profit motive?
(a) Reserve Bank of India* (b) State Bank of India
(c) Punjab National Bank (d) Bank of India
19. Quantitative instrument of monetary policy is:
(a) Bank Rate (b) Cash Reserve Ratio
(c) Statutory Liquidity Ratio (d) All the above*
20. Which of the following is a qualitative method of credit control?
(a) Variation in cash reserve ratio (b) Restriction on consumer credit*
(c) Open market operation (d) Variation in bank rate
21. Which if the following interest rate is applicable to short period lending?
(a) Repo Rate (b) Bank Rate
(c) Reverse Repo Rate (d) Both (a) and (c)*
22. The rate at which the central bank lends money to commercial banks as a lender of the
last resort is known as:
(a) Repo Rate (b) Bank Rate*
(c) Reverse Repo Rate (d) Lending Rate
23. Lowering of CRR by the central bank has the following impact on the credit creation
capacity of the commercial banks:
 (a) Fall (b) Increase*
(c) Can be fall or can be increase (d) No effect
24. If legal reserve ratio is 20% the value of money multiplier would be…………
(a) 2 (b) 3 (c) 5* (d) 4
25. Higher the legal reserve ratio……..……will be the credit creation.
(a) Higher (b) Lower*
(c) Constant (d) None of these
26. 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
27. Which of the following is bank money?
(a) Currency (b) Time deposits at banks
(c) Demand deposits at banks* (d) Cash reserves of banks
28. Which of the following is a component of money supply?
(a) Gold Reserves (b) Demand deposits*
(c) Time deposits (d) None of these
29. A Five hundred rupee note is……………
(a) Legal tender money (b) Fiat money
(c) High powered money (d) All the above*
30. 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
31. By currency we mean:
(a) Currency notes only* (b) Currency notes + coins + DD
(c) Currency notes + coins (d) Both (a) and (b)
32. Demand deposits with commercial banks are a part of:
(a) High powered money (b) Cash reserves of banks
(c) Money Supply* (d) None of these
33. ………… is the main source of money supply in an economy.
(a) Central Bank (b) Commercial Bank
(c) Both (a) and (b)* (d) Government
34. Legal reserve ratio is equal to:
(a) CRR/SLR (b) CRR - SLR
(c) SLR - CLR (d) CRR + SLR

Fill in the blank:

1. …………… is the most liquid of all assets which is generally accepted by all. (Money)
2. …………… refers to totally volume of money held by public at a particular point of time
in an economy. (Money Supply)
3. Money whose face value is equal to commodity value is called……… and the money
whose face value is less than commodity value is called……….. (Full bodied money and
Credit money)
4. …………….. are the deposits which can be withdrawn from banks on demand. (Demand
deposit)
5. Demand deposits created by the commercial banks are called………. (Bank money)
6. The creation of ………… deposits are called credit creation. (Derivative)
7. The rate at which RBI gives short term loans to commercial bank is called……………..
(Repo Rate)
8. ……………. is the main function the central bank. (Note issue)
9. …………. is the rate at which banks can deposit their surplus funds with central bank.
(Reserve repo rate)
10. If the value of money multiplier is 4, the value of LRR is…………. (25%)
11. Money multiplier is…………...related to legal reserve ratio. (Inversely)
12. ………………refers to that proportion of total deposits that a commercial bank has to
keep with itself in form of liquid assets. (Statutory liquidity ratio)
13. A…………... in marginal requirements encourages the people to borrow more.
(Reduction)
14. The difference between the market value of security offered and the value of amount lent
is called………….. (Marginal Requirement)
15. The sum of primary deposits and secondary deposits of the commercial banks
constitute………………(total demand deposits or deposit money)
16. …………….. is the most liquid of all assets which is generally accepted by all. (Money)
17. Signature of ………….. appears on Rs. 2000 currency note. (RBI Governor)

ASSERTION AND REASON BASED QUESTIONS:-

Read the following statements – Assertion (A) and Reason (R). Choose one of the correct
alternatives given below:
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct
explanation of Assertion (A)
(b) Both Assertion (A) and Reason (R) are true but Reason (R) is not the correct
explanation of Assertion (A)
(c) Assertion (A) is true but Reason (R) is false
(d) Assertion (A) is false but Reason (R) is true.

1. Assertion (A) : Money supply is a stock concept.

Reason (R) : Money supply is measured at a point of time
Ans. (a)
2. Assertion (A) : Net demand deposits (and not gross demand deposits) of commercial
banks are included in the money supply.
Reason (R) : Inter-bank deposits are the deposits held by banks on behalf of other banks
and are included in money supply
Ans. (c)
3. Assertion (A) : Demand deposits with commercial banks are a part of money supply.
Reason (R) : Demand deposits with the commercial banks are a part of M1 measure of
money supply. These are checkable deposits and therefore, serve as money like notes and
coins.
Ans. (a)
4. Assertion (A) : High powered money includes currency with the public and demand
deposits with commercial banks.
Reason (R) : Money supply does not include money held by government and banking
system.
Ans. (d)
5. Assertion (A) : Central Bank is also called as ‘Banker Bank’
Reason (R) : Central Bank keeps the cash balances of commercial banks and issues
loans to them on requirements, in the same manner as the commercial banks do for its
consumers.
Ans. (a)
6. Assertion (A) : Commercial Banks keep only a fraction of deposits as cash reserves and
use the remaining deposits for giving loans etc.
Reason (R) : All the depositors of commercial banks do not approach the banks for
withdrawal of money at the same time and also they do not withdraw the entire amount
in one go. Also there is a constant flow of new deposits into the banks.
Ans. (a)
7. Assertion (A) : Money multiplier is inversely related to LRR.
Reason (R) : Commercial banks do not contribute to the supply of money supply in the
economy as they do not issue currency notes.
Ans. (c)
8. Assertion (A) : Higher the legal reserve ratio, greater will be the money creation in the
economy.
Reason (R) : Qualitative instruments of monetary policy affect the direction of credit.
Ans. (d)
9. Assertion (A) : If legal reserve ratio is 20%, the value of money multiplier would be 5.
Reason (R) : Central Bank controls credit, while Commercial Banks create credit.
Ans. (b)
10. Assertion (A) : Repo rate is the rate at which Central Bank of a country borrows funds
from commercial banks within the country.
Reason (R) : Bank rate is the rate at which the Central Bank offers loan to the
commercial banks as ‘a lender of last resort’ for a period of more than 90 days.
Ans. (d)
11. Assertion (A) : Increase in cash reserve ratio adversely affects the capacity of
commercial banks to create credit.
Reason (R) : An increase in cash reserve ratio reduces the excess reserves of commercial
banks and limits their credit creating power.
Ans. (a)
12. Assertion (A) : Aggregate supply curve is a 450 angle straight line originating from point
of origin.
Reason (R) : At break-even point, consumption is equal to national income.
Ans. (b)
13. Assertion (A) : National income is the sum total of consumption expenditure and saving.
Reason (R) : As income of the households increases, their consumption expenditure
increases but not by as much as the increase in their income.
Ans. (b)
14. Assertion (A) : The consumption curve slopes upwards from left to right and starts at
some distance from the origin on the Y-axis.
Reason (R) : Consumption curve does not start from the origin, because of the
assumption that there is some minimum level of consumption even if income level is
zero. There is direct relation between consumption and level of income.
Ans. (a)
15. Assertion (A) : MPC is the ratio between Total Consumption (c) and Total Income (Y).
Reason (R) : The sum of the APC and APS is always equal to one.
Ans. (d)

16. Assertion (A) : There is positive relationship between saving and income.
Reason (R) : Savings are positive even at zero level of national income.
Ans. (c)
17. Assertion (A) : At Break-Even point, consumption is equal to national income.
 Reason (R) : APC falls continuously with increase in income as proportion of income
spent on consumption keeps on decreasing.
Ans. (b)
18. Assertion (A) : Average propensity to consume is always greater than zero.
Reason (R) : Average propensity to save can be negative in situation when saving is
negative or when consumption is greater than income.
Ans. (b)
19. Assertion (A) : Average propensity to save is always greater than zero.
Reason (R) : In a two-sector economy, if consumption is equal to income, average
propensity to save will be zero.
Ans. (d)
20. Assertion (A) : Value of marginal propensity to save (MPS) can never be negative.
Reason (R) : Marginal propensity to consume is the slope of saving curve. And the slope
of saving curve establishes positive relation between saving and income.
Ans. (c)
21. Assertion (A) : Ex-ant savings are those which all the households plan to make at
different levels of income during a period, whereas ex-post savings are the actual amount
of savings made in the economy during a period.
Reason (R) : Average propensity to save can never be greater than 1 as savings can be
more than national income.
Ans. (a)
22. Assertion (A) : Ex-ante savings and ex-ante investment are always equal.
Reason (R) : Ex-ante savings and ex-ante investments are equal only in equilibrium.
Ans. (d)
23. Assertion (A) : In the situation of underemployment, there exists involuntary
unemployment in the economy.
Reason (R) : Voluntary unemployment is not counted while estimating the size of
unemployment.
Ans. (b)
24. Assertion (A) : Fiat money also called legal tenders
Reason (R) : They cannot be refused by any citizen of the country for settlement of any
kind of transaction.
Ans. (a)
25. Assertion (A) : Demand deposits are not legal tenders.
Reason (R) : They are with the banks, so only can be used as a legal tender when
cheques are issued for the transfer.
Ans. (C) A is true but R is false
26. Assertion (A) : Supply of money is a flow variable.
Reason (R) : It is measured at a point of time.
Ans. (d) A is false but R is true
27. Assertion (A) : Coins are limited legal tender money.
Reason (R) : Coins represent money which is accepted by the people to an unlimited
extent.
Ans. (c) A is true but R is false
28. Assertion (A) : Demand deposits are also called bank money.
Reason (R) : Demand deposits are created by commercial banks.
Ans. (a)
29. Assertion (A) : Currency notes and coins are called fiat money.
Reason (R) : RBI is responsible for giving the bearer of the currency equal purchasing
power.
Ans. (a)
30. Assertion (A) : Demand deposits are considered as a convenient mode of payment for
execution of even the high value transactions.
Reason (R) : Demand deposits are non-withdrawable in nature and cannot be withdrawn
against issue of cheques and other similar instruments of payments.
Ans. (c) A is true but R is false
31. Assertion (A) : Indian Monetary System is based on paper currency standard.
Reason (R) : Currency notes issue system is based on minimum reserve system of India.
Ans. (b) A and b true, but not correct reason
32. Assertion (A) : Demand deposits are a liability for the bank.
Reason (R) : The depositor cannot withdraw funds on demand from an account at any
time and the bank is obligated to pay.
Ans. (c) A is true but R is false
33. Assertion (A) : Raghav has surplus money so he opens a bank account and deposits in it.
Whenever he needs money. He can go to his bank and withdraw from there.
Reason (R) : This kind of deposit with the banks are known as Demand Deposit.
Ans. (a)
34. Assertion (A) : The currency notes do not carry as much value in them as is
denominated, still have general acceptance.
Reason (R) : Currency notes are backed by a legal promise from the central bank and
central government of country.
Ans. (a)
35. Assertion (A) : Cheques are fiduciary money.
Reason (R) : It is issued by the government.
Ans. (c) A is true but R is false
36. Assertion (A) : Paper money is becoming more popular these days.
Reason (R) : It is generally acceptable and convenient to carry.
Ans. (a)
37. Assertion (A) : In a modern economy, money comprises cash and bank deposits.
 Reason (R) : Money supply includes currency held by the public and net demand
deposits held by commercial banks.
Ans. (b) A and b true, but B is not correct reason
38. Assertion (A) : Money is a good servant but a bad master.
Reason (R) : Without the additional supply of goods and services, the purchasing powe
of money falls.
Ans. (a)
39. Assertion (A) : Demand deposits are created by commercial bank and are called bank
money.
Reason (R) : Demand deposits are the deposits which can be withdrawn on demand by
the depositors from banks.
Ans. (b) A and b true, but not correct reason
40. Assertion (A) : Inconvertible paper money made legal tender by a government decree is
called fiat money.
Reason (R) : Notes issued by government are fiat money.
Ans. (a)
41. Assertion (A) : M1 is the least liquid measure of money supply.
Reason (R) : M1 includes the currency in circulation, demand deposits with the bank
and other deposits with the RBI.
Ans. (b) A and b true, but not correct reason
42. Assertion (A) : M4 is the least liquid measure of money supply.
Reason (R) : M4 is inclusive of all the money supply included in M3 as well as the Total
Deposits with the Post Office.
Ans. (a)
43. Assertion (A) : Currency issued by the central bank can be held by the public known as
Monetary base.
Reason (R) : It consists coins and paper currency.
Ans. (a)
44. Assertion (A) : Banks can create money.
Reason (R) : Banks can lend simply because they do not expect all the depositors to
withdraw what they have deposits at the same time.
Ans. (b)
45. Assertion (A) : India got its central bank in 1935
Reason (R) : Its name is the ‘Federal Reserve of India’
Ans. (c)
46. Assertion (A) : From the point of view of money supply, we need to focus on its
function of issuing currency.
Reason (R) : This currency issued by the central bank can be held by the public or by the
commercial banks.
Ans. (a)
46. Assertion (A) : The RBI controls the money supply in the economy in various ways.
Reason (R) : The tools used by the central bank to control money supply can be
quantitative or qualitative.
Ans. (a)
47. Assertion (A) : Commercial banks acts as a banker to the Government.
Reason (R) : Reserve Bank is the only institution which can issue currency.
Ans. (d)
48. Assertion (A) : Commercial banks is the bank of central clearance and transfer.
Reason (R) : The commercial banks can borrow from central bank against their eligible
securities.
Ans. (c)
49. Assertion (A) : Money creation is the main function of central banks.
Reason (R) : How many times the total deposit would be of the initial deposit is known
as Money multiplier.
Ans. (b)
50. Assertion (A) : Central Bank primary aim general public welfare.
Reason (R) : Commercial banks primary aim profit making.
Ans. (b)

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CASE-STUDY BASED QUESTIONS:-

Q1. Read the following case study carefully and answer the questions on the basis of the
same:
“If Odisha Industrial Infrastructure Development Corporation (IDCO) provides 100 acre
land, decision to set up currency printing press at two places will be change. If
government land will not be available for the project, we would go for private land
acquisition and start the project.” The team first visited kasba area under sadar tehsil and
then they visited Naraharipur, Baunsamunha and Padagaon villages under Remuna tehsil
for the project.”
It is learnt that India has four currency printed presses – in Nasik (Maharashtra), Dawas
(Madhya Pradesh), Mysore (Karnataka) and the latest in Salboni (west Bengal). India
started printing currency notes back in 1928 with the establishment of India Security
Press Nasik. The second currency note printing press was established in Dewas in 1975.
At present, India prints currency notes using paper substrates made form 100% cotton.

1. What kind of monetary system does India have?

(a) Gold standard (b) Paper standard
(c) Silver standard (d) Commodity standard
2. Issue of currency notes ............... the money supply.
(a) Increases (b) Decreases
 (c) Restricts (d) Checks
3. Fiat money includes
(a) Currency notes (b) Saving deposits at banks
(c) Currency notes and coins (d) All of them
4. In India, coins are issued by:
(a) State bank of India (b) Reserve Bank of India
(c) Ministry of Finance (d) Ministry of Urban development
5. Which of the following system is followed by RBI for issuing currency?
(a) Simple deposit system (b) Proportionate system
(c) Minimum Reserve system (d) Fixed fiduciary issue system

Q2. Read the following case study carefully and answer the questions on the basis of the
same:
The money supply is all the currency and other liquid instruments in a country’s
economy on the date measure. The money supply roughly includes both cash and
deposits that can be used almost as easily as cash. Government’s issue paper currency
and coins through some combination of their central banks and treasuries. Bank
regulators influence money supply available to the public through the requirements
placed on banks to hold reserves, how to extend credit and other regulations.

Economists analyse the money supply and develop policies revolving around it through
controlling interest rates and increasing or decreasing the amount of money flowing in
the economy. An increase in the supply of money typically lowers interest rates, which in
turn, generates more investment and inputs more money in spending. Businesses respond
by ordering more raw materials and increasing production. The increased business
activity raises the demand for labour. The opposite can occur if the money supply falls or
when its growth rate declines.

1. Which of the following statement is not true regarding money supply?

(a) It is a stock variable.
(b) It does not include money held by government and the banking system.
(c) It includes term deposits with the banks.
(d) It includes currency held with public.
2. Who regulates money supply in India?
(a) Government of India (b) Reserve Bank of India
(c) Commercial Banks (d) Planning Commission
3. In a hypothetical economy, Ms. Stuti has deposited Rs. 100 in the bank. If it is assumed
that there is no other currency circulation in the economy, then the total money supply in
the economy will be.................
(a) Zero (b) Rs. 100
(c) Nod defined (d) Rs. 120
4. Which is the least liquid measure of the money supply?
(a) M4 (b) M3
(c) M2 (d) M1
5. Which of the following system is followed by RBI for issuing currency?
(a) Simple deposit system (b) Proportionate system
(c) Minimum Reserve system (d) Fixed fiduciary issue system

Q3. Read the following case study carefully and answer the questions on the basis of the
same:
A day before the RBI announces its decision on interest rate, Canara bank has bucked
the trend to raise the same on deposits. The bank has increased interest rate by 20 basis
points (100 bps = 1 percentage point) from the records lows that it had touched last
month.
According to the bank, due to this increase, interest rates on deposits in the 2 to 3 year
bracket will go up to 5.4% from 5.2% and in the 3 to 10 year tenor to 5.5% from 5.3%.
While fixed deposits returns continue to remain below 6%, the recent increase marks a
reversal of trends.
The Times of India, November 4, 2020
1. ................ are cash deposits with the commercial banks made by the people
(Primary/Secondary)

2. Demand deposits include ................ (Choose the correct alternative)

(a) Saving account deposits and fixed deposits.
(b) Saving account deposits and current account deposits.
(c) Current account deposits and fixed deposits
(d) None of these
3. ..................... deposits are also referred to as ‘derivative deposits’ (Primary/Secondary)
4. Which out of the following items is not included in money supply of a country?
(a) Time deposits (b) Currency with public
(c) Demand deposits (d) None of these
5. Which of the following system is followed by RBI for issuing currency?
(a) Simple deposit system (b) Proportionate system
(c) Minimum Reserve system (d) Fixed fiduciary issue system

Q4. Read the following case study carefully and answer the questions on the basis of the
same:
“The Reserve Bank of India (RBI), cut Repo Rate to 4.4%, the lowest in at least 15
years. Also, it reduced the Cash Reserve Ratio (CRR) maintained by the banks for the
first time in over seven years. CRR for all banks was cut by 100 basis points to release
 Rs. 1.37 lakh crores across the banking system. RBI governor Dr. Shashikanta Das
predicted a big global recession. Aggregate demand may weaken and ease core
inflation.”
The Economic Times, March 27, 2020
1. Cut in Repo Rate by RBI is likely to ................ the demand for goods and service in the
economy. (increase/decrease)

2. Decrease in Cash Reserve Ratio will lead to ....................... (Choose the correct
alternative)
(a) Fall in aggregate demand
(b) No change in aggregate demand
(c) Rise in aggregate demand
(d) Fall in general price level
3. The difference by which actual aggregate demand exceeds the aggregate demand,
required to establish full employment equilibrium is known as ............. (inflation
gap/Deflationary gap)
4. The impacts of ‘Excess Demand’ under Keynesian theory of income and employment, in
an economy are:
(a) Decrease in income, output, employment and general price level.
(b) Decrease in nominal income, but no change in real output.
(c) Increase in income, output, employment and general price level
(d) No change in output/employment but increase in general price level.

**************************************************************************

SOLVED QUESTION:-

Q1. Explain ‘Medium of Exchange’ function of money?

Ans. Money as a medium of exchange means money as a means of payment for exchange of
goods and services. Goods and services are exchanged for money when people sell
things. Money is exchanged for goods and services when people buy things. The medium
of exchange function of money solves the problem of double coincidence of wants
inherent in the barter system of trade.

Q2. Explain the ‘lender of last resort’ function of the central Bank.

Ans. When commercial banks fail to meet their financial requirements from other sources,
they approach the central bank to give loans and advances as lender of the last-resort.
Central bank assists these banks through discounting of approve securities and bills of
exchange.

OR
 Central bank also lend money directly to commercial banks. Instead of rediscounting,
central bank given loans against the bill of exchange promissory notes, treasury bills,
government securities, etc. The direct lending to commercial bank is referred to as the
‘lender of the last resort’ function of central bank.

Q3. Explain the problem of double coincidence of wants faced under barter system. How has
money solved it?

Ans. Barter system can work only when both buyer and seller are ready to exchange each
other’s goods. A can exchange goods with B only, when A has what B wants and B has
what A wants.

Use of money allows purchase and sale to be conducted independently of each other.
This function of money facilitates trade and helps in conducting transactions in an
economy.

Q4. Explain the ‘bank of issue’ function of central bank.

Ans. Central bank is the sole authority of issue currency in the country. Since no other
authority is allowed, this ensures uniformity in issue of currency. Since currency with
public is a part of money supply, it gives the central bank some control over money
supply in the economy.

Q5. Explain how ‘marginal requirements’ are helpful in controlling credit creation?

Ans. Marginal requirements refer to discount fixed by the central bank on the security
mortgages by the borrower. Raising marginal requirement reduces the maximum amount
a borrower can borrow from commercial banks. In this way it helps in controlling credit
creation.

Q6. Explain how open market operations are helpful in controlling credit creation.

Ans. Open market operations refers to selling and buying of government securities by the
central bank by selling securities in the open market money flow out of commercial
banks and into central bank. This reduces demand deposits with the commercial banks
and lowers their capacity to create credit, borrowing from banks becomes less, and
money supply is reduced.

Q7. What is C-C economy?

Ans. C-C economy is the one in which commodities are exchanged for commodities or in
which goods are exchanged for good and money is not involved.

Q8. What is meant by double coincidence of wants?

Ans. When two persons want goods in each other’s possession, it is called double coincidence
of wants.

Q9. Define money supply.

Ans. Money supply refers to the stock of money in circulation at any point of time in a
country.

Q10. State two primary functions of money.

Ans. Medium of exchange and measure of value are the two primary functions of money.

Q11. State secondary functions of money.

Ans. Standard of deferred payments, store of value and transfer of value are the three
secondary functions of money.

Q12. What do you mean by liquidity?

Ans. Liquidity means that an asset can be converted into cash at a very short notice and
without loss of value.

Q13. Distinguish between fiat money and fiduciary money.

Ans. Fiat Money : It refers to money by order/authority of the government. It includes notes
and coins.

Fiduciary Money : It refers to money backed up by trust between the payer and payee.
Cheques are fiduciary money as these are accepted as a means of payment on the basis of
trust. This is also called optional money.

Q14. What is a commercial bank?

Ans. A commercial bank is an institution that deals in money and credit with a view to earn
profit.

Q15. What are demand deposits or chequeable deposit?

Ans. Demand deposit refer to those deposits which are payable by banks on demand. They are
chequeable deposits, as cheques can be written against them.

Q16. What are time deposit or non-chequeable deposit?

Ans. Time deposit refer to those deposits which are payable by the banks after a fixed period
to time. They are non-chequeable deposits, as no cheques can be written against them.

Q17. What are primary deposits?

Ans. Primary deposits in cash by the public in banks are called primary deposits.

Q18. What are secondary deposits?

Ans. Secondary deposits refers to those demand deposits which come to the banks through
their lending operations.

Q19. What is money multiplier?

Ans. Money multiplier (m) is the ratio of total money supply (M) to stock of High Powered
Money (H) in the economy. Symbolically: m = M/H

Q20. Give the formula of money creation.

Ans. Money Creation = Initial Deposit x 1 / LRR

Q21. What is meant by cash reserve ratio?

Ans. Cash reserve ratio refers to the ratio of total deposits that the commercial banks are
legally required to keep with the central bank at nil rate of interest.

Q22. Define marginal requirement.

Ans. Marginal requirement refers to the difference between market value of the security
offered for loan and the amount of loan offered by bank.

Q23. What is moral suasion?

Ans. Moral suasion refers to combination of persuasion and pressure that Central Bank applies
on member banks in order to get them act in line with its policy.

Q24. What are the two essential conditions for a financial institution to become a bank?

Ans. Acceptance of deposits and advancing of loans are the two conditions for a financial
institution to become a bank.

Q25. Mention two reasons for setting up Central Bank.

Ans. Two reasons for setting up the Central Bank are:

(i) Central bank is set up to control the supply of money and credit in the country.

(ii) It is set up to control the entire banking system of a country.

Q26. What is meant by ‘selective credit control’?

Ans. Selective credit control refers to the discriminatory policy of the central bank regarding
certain sectors of the economy.

Flow of credit may be encouraged to the priority sectors to boosts production in these
sectors.

Central bank may also restrict the availability of credit to non-priority sectors.

Q27. What is meant by double coincidence of wants?

Ans. Double coincidence of wants means simultaneous fulfilment of the mutual wants of
buyers and sellers.
Q28. What is transaction money?

Ans. Money, that can directly be used for carrying out transaction, is called transaction money.
Example currency held by people.

Q29. What is bank money?

Ans. Bank money refers to demand deposits created by commercial banks in the process of
giving loans.

Q30. Define the term deposits.

Ans. Term deposits are those deposits which can be withdrawn only after the expiry of fixed
time period.

Q31. What do you mean by liquidity?

Ans. Liquidity means that an asset can be converted into cash at a very short notice and
without loss of value.

Q32. What is meant by inter-bank deposits? Why inter-bank deposits do not form part of
money supply?

Ans. Inter-bank deposits are the deposits held by banks on behalf of other banks. Inter-bank
deposits do not belong to the public (i.e. do not come into circulation). In other words,
these deposits do not act medium of exchange. So they do not form part of money
supply.

Q33. What do ‘other deposits’ with the RBI include?

Ans. Other deposits with the RBI include the following:

(i) Demand deposits of public financial institutions like NABARD (National Bank of
Agriculture and Rural Development)

(ii) Demand deposits of foreign central banks and of foreign government.

(iii) Demand deposits of international financial institutions like International Monetary

Fund and World Bank.

Q34. What is meant by credit creation?

Ans. Credit creation refers to the creation of secondary deposits on the basis of primary
deposits.

Q35. What are primary deposits?

Ans. The amount deposited in cash by the public in banks are called primary deposits.

Q36. What are secondary deposits?

Ans. Secondary deposits refer to those demand deposits which come to the banks through their
lending operation.

Q37. What is money multiplier?

Ans. Money multiplier (m) is the ratio of total money supply (M) to stock of High Powered
Money (H) in the economy. Symbolically: m = M/H

Q38. What is repo rate?

Ans. Repo Rate is the rate at which the central bank of a country lends money to commercial
bank of a country lends money to commercial banks for a short period.

Q39. What is reverse repo rate?

Ans. Reverse repo rate, is the rate at which RBI borrows from commercial banks for short
period by selling government securities to them.

Q40. What is meant by Statutory Liquidity Ratio?

Ans. Statutory liquidity ratio refers to the minimum percentage of time and demand deposits,
required to be kept by commercial banks with themselves.

Q41. Why is marginal requirement necessary?

Ans. Margin requirement is necessary because if a bank gives a loan equal to the full value of
security, then bank will suffer a loss in case of fall in price of security.

Q42. Distinguish between repo rate and reverse repo rate?

Ans. Repo rate is the rate of interest at which RBI lends money to commercial banks for short
periods against government securities.

Reverse repo rate, on the other hand, is the rate at which RBI borrows from commercial
banks for short period by selling government securities to them.

Q43. What is ‘legal tender’? What is ‘fiat money’?

Ans. Money that has a legal sanction by the government behind it, is called legal tender or
legal tender money. It is money issued by monetary authority or the government which
cannot be refused by any person in payment for transaction. Government issues an order
describing what money is and that becomes legal tender money. Everybody is bound to
accept it in exchange for goods and services and in discharge of debts. No one can refuse
to accept it because non-acceptance is an offence.

Fiat money is any money backed by the order of the government to act as money. People
have to accept it in exchange for goods and services and in discharge of debts as the
government has ordered it to be money. It is also called legal tender as it circulates in the
country on the fiat (i.e. command) of the government. Fiat money is generally created
and issued by the government at the time of crises like war or emergency. Since it is
 issued, without any backing of gold, silver, or other reserves, therefore, it is inconvertible
into anything than itself.

Q44. What do you mean by a Bank and Banking system?

Ans. Bank is a financial institution in which deposits are accepted from the public and loan
facilities for investment are provided is termed as commercial bank. The main aim of the
services provided by commercial banks is to earn profit.

Q45. How does money overcome the problems of barter system? Explain briefly.

Ans. Money overcomes the problem of barter system by replacing the C-C economy with
monetary economy

(i) In a barter system, there was a problem of double coincidence of wants. It is very
difficult to match the expectations of two different individuals. Thus, money was
involved to overcome the problem of coincidence of wants. As it is very difficult
to find two person having goods needed by the other person in the barter system of
exchange.

(ii) When there was not money, it was difficult to give common unit of value to
measure goods or commodities but when money is evoluted, it gives a common
unit of amount to every goods and commodities.

(iii) Money facilitates the contractual and future payments i.e., deferred payments
which, were very difficult at the time of barter system.

(iv) Money is also a legal tender which has a general acceptance which was not the
case under barter system.

Q46. Explain the evolution of money.

Ans. Money finds its origin to facilitate the need of exchange. Earlier under barter system
people were depended on each other to satisfy their wants. Barter system had many
problems in itself. Money has over all those problems and hence, accepted as a medium
of exchange. Money has also over come the problem of double coincidence of wants and
lack of common measure of value.

Q47. Explain the problem of double coincidence of wants faced under barter system. How has
money solved it?

Ans. Double Coincidence of wants: Barter system can only work, when both the persons are
ready to exchange each other’s goods i.e., person A should have the good person B
wanted and vice-versa. But usually, this type of double coincidence is rare, especially in
modern times.

Money eliminates double coincidence of wants: In modern times, the buyer exchanges
goods for money, the seller exchanges goods for money due to common measure of
 value function of money; it facilitates an exchange of goods and services and helps in
carrying on trade smoothly.

Q48. Do you consider a commercial bank creator of money in the economy?

Ans. Commercial banks play the important role of money creator in the economy. They have
the capacity to generate credit through demand deposits. These demand deposits make
credit more than the initial deposits.

The process of money creation can be explained by taking an example of a bank XYZ. A
depositor deposits Rs. 10,000 in his saving account, which will become the demand
deposit of the bank. Based on the assumption that not all customers will turn up at the
same day to withdraw their deposits, bank maintains a minimum cash reserve of 10% of
the demand deposits, i.e., Rs. 1000. It lends the remaining amount of Rs. 9000 in the
form of credit to other customers. This further creates deposits for the bank XYZ. With
the cash reserve of Rs. 1000, the credit creation is worth Rs. 10,000. So the credit
multiplier is given by:

Credit Multiplier = 1/CRR

= 1/10%

= 10

The money supply in the economy will increase by the amount (times) of credit
multiplier.

Q49. What is a barter system? What are its drawbacks?

Ans. Barter system is a system that was used in ancient times to exchange goods. In other
words, this system was used to exchange one commodity for another before the monetary
system came into existence. For example, if a person having rice wants tea, then he can
exchange rice with a person who has tea and needs rice. The economy having the barter
system was called ‘C-C economy’ i.e., commodity is exchange for commodity.

Q50. Elaborate any two instruments of Credit Control, as exercised by the Reserve Bank of
India.

Ans. Two instruments of credit control are

Repo Rate – It is the rate of interest at which central bank lends to commercial banks for
their short-term requirements. An increase in repo rate will force commercial banks to
increase their lending rates. It will make borrowings costlier to general public.

Open Market Operation – Open market operations refers to buying and selling of
government securities by the central bank from and to the general public. When central
bank sells its securities, it reduces liquidity (deposits) with commercial banks and
adversely affects credit creating power of banks.

Q51. Define ‘Money multiplier’.

Ans. Money multiplier is the number by which total deposits can increase due to a given
change in deposits. It is inversely related to legal reserve ratio.

The money multiplier by commercial banks depends on credit multiplier as it is inversely

related to LRR. Higher the credit multiplier, higher will be the total credit created and
vice-versa.

Q52. State the role played by the central bank as the ‘lender of last resort’.

Ans. In case of a financial emergency faced by a bank, central bank is the only institution that
can come to the rescue of the concerned bank.

Q53. What are ‘non-monetary exchanges’?

Ans. Non-monetary exchanges refer to the goods and services produced but not exchanged for
any monetary value. This generally results in undervaluation of GDP of an economy. For
example: value of household chores (cooking, washing, cleaning etc.) by a millions of
home makers is not included in the national income.

Q54. Explain the standard of deferred payment function of money.

Ans. Money simplifies the mechanism of deferred payments by a greater deal. Deferred
payments means further payment. When we take a loan from somebody, we not only pay
the principal amount but also the interest amount. Under barter system of exchange, it
was very difficult to make such transactions. As money maintains a standard value over a
period of time provided price remains constant deferred payments can be easily done.

Q55. Explain the “Government Bank” function of a central bank.

Ans. A central bank conducts the banking account of government departments. It performs the
same banking functions for the government as commercial bank performs for its
customers. It accepts their deposits and undertakes inter-bank transfers. It also gives
loans to the government. A central bank also provides various services as agent of the
government. It manages public debt. It also gives advice to the government regarding
money market, capital market, government loans and economic policy matters.

Q56. What is marginal requirement of loans.

Ans. Marginal requirements of loans means the difference in percentage between the amount
of the loan and market value of the security offered by the borrower against the loan.

Q57. All the currency issued by the central bank is its monetary liability. How?

Ans. 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.

Q58. Central bank performs the function of a clearing house. How?

Ans. 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. 15,000 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 transaction between the banks concerned. It facilitates cash transaction
across the entire banking system, it also reduces requirement of cash reserves of the
commercial bank.

Q59. The central bank acts as lender of last resort. How?

Ans. The central bank also acts as lender of last resort for the other banks of the country. It
means that if a commercial bank fails to get financial accommodation from anywhere, it
approaches the central bank as a last resort. Central bank advances loan to such a bank
against approved securities. As a lender of the last resort, central bank exercises control
over the entire banking system of the country.

Q60. Money acta as a yardstick of standard measure of value to which all other things can be
compared. Discuss it.

Ans. 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.

Q61. Explain the significance of the ‘Store of Value’ function of money.

Ans. People save a part of their earnings for use in future. But in what form money fulfils this
need of the people. Money as a store of value means that money is an asset and can be
stored for use in future one can hold one’s earnings until the time one wants to spend it.
This is the store of value function of Money.

Q62. Explain the ‘Unit of Account’ function of money?

Ans. The ‘unit of account’ function of money is also called the ‘measure of value’ function.
Money as a unit of account means a standard unit for quoting prices. It makes money a
powerful medium of comparing prices of goods and services.

Q63. Explain the ‘Medium of Exchange’ function of money?

Ans. Money as a medium of exchange means money as a means of payment for exchange of
goods and services. Goods and services are exchanged for money when people sell
things. Money is exchanged for goods and services when people buy things. The medium
of exchange function of money solves the problem of double coincidence of wants
inherent in the barter system of trade.

Q64. Why only a fraction of deposits is kept as Cash Reserve?

Ans. Bank operate by taking in deposits and making loans to lenders. Thus, banks can lend out
some of their depositors’ money. While keeping some on hand to satisfy daily
withdrawals by depositors. This is called the fractional-reserve banking system. Banks
keep a fraction of deposits as cash reserves. Any experienced banker from his or her
experience, knows two things, Firstly, all the depositors do not approach the banks for
withdrawal of money at the same time and also, they do not withdraw the entire amount
in one go. And secondly, there will be constant flow of new deposits into the banks every
day. So, to keep only a fraction of deposits into the banks every day. So, to meet the daily
demand for withdrawal of cash, it is sufficient for banks to keep only a fraction of
deposits as cash reserve. It means, if experience of the banks show that withdrawals are
generally around 20% of the deposits, then it needs to keep only 20% of deposits as cash
reserves (LRR).

Q65. How does money overcome the problems of barter system?

Ans. Money can overcome the problems of barter system in following ways:

1. Money as medium of exchange solves the barter’s problem of lack of double

coincidence of wants as money has separated the acts of sale and purchase.

2. Money as measure or unit of value or a unit of account solves the barter’s problem of
absence of common measure of value. Money serves as a unit of value or unit of
account and acts as a yardstick to measures exchange value of all commodities.

3. Money as store of value solves the barter’s problem of difficulty in storing wealth. It
generalised purchasing power.

4. Money as standard of deferred payments helps to solve the barter problem of lack of
standard of deferred payment. Again, it helps to make contracts which involve future
payments.

5. The use of money meant that people could sell their surplus of goods in exchange for
money and use the money earned to buy their needs. During ancient wartime.
Currency was created as it was just too difficult for soldiers to carry around chickens
and beans around to swap for what they needed.

6. Indivisibility of goods was a major problem. Under barter, a serious problem of

indivisibility of certain articles was arisen. Some articles were impossible to divide
into small parts. So, that one of the trading party was compelled to give his indivisible
item in full in exchange for the other’s product.
 7. Difficulty in transfer to wealth was also main problem during that time. Under barter,
the difficulty of transferring of a person’s wealth arises. When he intend to shift his
wealth like house, property, car from one place to another, because it is almost
impossible to find a person in another place, who can exchange his property or
wealth.

Q66. Calculate LRR, if initial deposit of Rs. 200 crore leads to creation of total deposits of Rs.
1600 crores.

Ans. Money Multiplier = Total Deposits / Initial Deposits

= 1600 / 200

=8

Hence Money Multiplier = 1 / LRR

8 = 1 / LRR

LRR = 1.25 or 12.5

Q67. If total deposits created by commercial banks are Rs. 12,000, LRR is 25%, calculate
initial deposit.

Ans. Money Multiplier = 1 / LRR

= 1 / 025

=4

Initial Deposit = Total Deposit / Money Multiplier

= 12000 / 4

= Rs. 3000

Q68. What do you mean by high powered money?

Ans. High powered money or powerful money refers to that currency that has been issued by
the Government and Reserve Bank of India. Some portion of this currency is kept along
with the public while rest is kept as funds in Reserve Bank.

The equation is : H=C+R

Where H = Hight Powered Money, C = Currency with the public (Paper money + Coins)
and R = Government and bank deposits with RBI

Thus the sum total of money deposited with the public and the funds of banks is termed
as powerful money. It is mainly created by the central bank.

Q69. Calculate the value money multiplier and the total deposit created if initial deposit is Rs.
500 crores and LRR is 10%
Ans. Value of money multiplier = 1 / LRR

Which is equal to 1 /0.1 = 10

Initial deposit was Rs. 500 crore

Hence Total deposit will be Initial Deposit X Money Multiplier

= 500 x 10

= 5000 Crores

Q70. Difference between Central bank and Commercial bank.

Ans. Difference between central bank and commercial bank is given below

Central Bank Commercial Bank

Central bank is the apex bank in the money Commercial bank is merely a unit in the
market of a country banking structure of the country.

Its primary aim is generally public welfare. Its primary aim is to make profit.

It has the sole monopoly right to issue A commercial bank is statutorily denier
currency notes function of issuing notes.

It cannot deal with the public It directly deals with the public and
business firms.

It acts as a banker to the government. It has no such responsibility towards tile

state.

It decides its monetary policy to realize It plays a supplementary role and is

economic stability and full employment in quite often regulated by the central
the country. bank.

It is custodian of Nation’s Gold and foreign It does not perform such function.
exchange reserve.

Q71. Difference between Demand deposit and Time deposit

Ans. Difference between Demand deposit and Time deposit is given below

Demand Deposit Time Deposit

Demand deposit refers to those deposits Fixed deposits refer to those deposits
which are repayable by the banks on which are made for a fixed period of
 demand time.

They are chequeable deposits They are non-chequeable depsits

Demand deposits do not carry any interest Fixed deposits carry interest which
varies directly with the period of time.

The depositor can make any number of Deposits generally makes only two
transactions for deposits or withdrawal of transactions deposit of money and on
money. maturity.

TRY TO SOLVE :-

Q1. What do you mean by credit creation? Explain the process of money creation by the
commercial banks with the help of a numerical example.

Q2. Explain the importance of the ‘Store of value’ function of money.

Q3. Explain the ‘Unit of Account’ function of money?

Q4. Explain the ‘Government’s Banks’ function of a central Bank.

Q5. State any three points of distinction between central bank and commercial banks.

Q6. Explain the ‘Standard of deferred payment’ function of money.

Q7. Explain how ‘bank rate’ is helpful in controlling credit creation?

Q8. Explain the process of money creation by the commercial banks with the help of a
numerical example.

Q9. Explain the role of Cash Reserve Ratio in controlling credit creation capacity of
commercial bank.

Q10. Explain the ‘Acceptance of deposits’ function of commercial banks.

(Hint : - Primary function of a bank viz. (1) Currency deposits (2) Saving Deposits (3)
Fixed Deposits.)

Q11. State the four functions of money. Explain anyone of them.

Q12. What is a barter system? What are its drawbacks?

Q13. What are the main functions of money? How does money overcome the short coming of
a barter system?

Q14. What are the alternative definitions of money supply in India?

Q15. What are open market operations? What is their effect on availability of credit?

Q16. Distinguish between SLR and CRR. Explain the role of SLR and CRR in credit control.
Q17. Explain the problem of double coincidence of wants faced under barter system. How has
money solved it?

Q18. Do you consider a commercial bank ‘creator of money’ in the economy?

Q19. What role of RBI is known as ‘lender of last resort’?

Q20. Do you consider a commercial bank ‘creator of money’ in the economy?