Money NCERT SOLUTION CLASS 12TH MACRO ECONOMICS | EDUGROWN NOTES

Textbook Question And Answer:

Q.1 What is Barter system? What are its drawbacks? [3 Marks]
ANSWER: Barter system of exchange is a system in which goods are exchanged for goods.
It’s Drawbacks are:

1. Lack of double coincidence of wants.
2.  Lack of divisibility.
3.  Difficulty in storing wealth.
4.  Absence of common measure of value.
5.  Lack of standard of deferred payment.

Q.2 What are the main functions of money? How does money overcome the shortcoming of a barter system?
Or
Explain the problem of double coincidence of wants faced under barter system. How has money solved it?
ANSWER:

1.  “Money is a matter of the following four functions: A medium, a measure, a standard, a store”.
2.  Money has overcome the short¬coming of a barter system in the following manner:
   (a) Medium of exchange
   • Under barter system, there is lack of double coincidence of wants.
   • With money as a medium exchange individuals can exchange their goods and services for money and then use this money to buy other goods and services according to their needs and conveniences.
   • A buyer can buy goods through money and a seller can sell goods for money.
   (b) Measure of value
   • Under barter system, there was no common measure of value. Money has also solved this difficulty.
   • As Geoffrey Crowther puts it, “Money acts as a standard measure of value to which all other things can be compared.” Money measures the value of economic goods.
   • Money works as a common denominator into which the values of all goods and services are expressed.
   • When we express the values of a commodity in terms of money, it is called price and by knowing prices of the various commodities, it is easy to calculate exchange ratios between them.
   (c) Store of value
   • Under barter system it is very difficult to store wealth for future use.
   • Most of the goods are perishable and their storage requires huge space and transportation cost.
   • Wealth can be conveniently stored in the form of money.
   • Money can be stored without loss in value.
   • Money can easily be stored for future use.
   (d) Standard of deferred payments
   • Under barter system, transactions on deferred payments are not possible.
   • With money, the debtors make a promise that they will make payments on some future dates. In those situations money acts as a standard of deferred payments.
   • It has become possible because money has general acceptability, its value is stable, it is durable and homogeneous.

Q.3 What is transaction demand for money? How is it related to the value of transactions over specified period of time?
ANSWER: Deleted from syllabus.

Q.4 Why is speculative demand for money inversely related to the rate of interest?
ANSWER: Deleted from syllabus

ANSWER: The alternative definitions of money supply in India can be the four measures of money supply. They are explained as under:
Measures of M₁ include:

1.  Currency notes and coins with the public (excluding cash in hand of all commercial banks) [C]
2. Demand deposits of all commercial and co-operative banks excluding inter-bank deposits. (DD),
   Where demand deposits are those deposits which can be withdrawn by the depositor at any time by means of cheque. No interest is paid on such deposits.
3.  Other deposits with RBI [O.D]
   M₁ = C + DD + OD Where, Other deposits are the deposits held by the RBI of all economic units except the government and banks. OD includes demand deposits of semi-government public financial institutions (like IDBI, IFCI, etc.), foreign central banks and governments, the International Monetaiy Fund, the World Bank, etc.

Measures of M₂

1.  M₁[C + DD + OD]
2.  Post office saving deposits

Measures of M₃

1. M₁
2.  Time deposits of all commercial and co-operative banks.
   Where, Time deposits are the deposits that cannot be withdrawn before the expiry of the stipulated time for which deposits are made. Fixed deposit is an example of time deposit.

Measures of M₄

1.  M₃
2. Total deposits with the post office saving organization (excluding national savings certificates).

Q.5What is a ‘legal tender’? What is ‘fiat money’?
ANSWER:

1.  Legal tender:
   (a) Legally, money is anything proclaimed by law as a medium of exchange.
   (b) Paper notes and coins (together called currency) is money as a matter of law.
   (c) Nobody can refuse its acceptance as medium of exchange.
2. FIAT Money: It is defined as a money which is under the ‘FIAT’ (order/authority) of the government to act as a money.

Q.6 What is High powered money?
ANSWER:  It is money produced by the RBI and the government. It consists of two things:

1.  currency held by the public and
2. Cash reserves with the banks.

Very Short Answer type Question:

Q.1 Define Barter system.
ANSWER: Barter system of exchange is a system in which goods are exchanged for goods.

Q.2 What is meant by double coincidence of wants?
ANSWER: Double coincidence of wants means that goods in possession of two different persons must be useful and needed by each other.

Q.3 Define Money.
ANSWER: Money is something which is generally acceptable as a medium of exchange and can be converted into other assets without loosing its time and value.

Q.4What is the basic characteristic of money?
ANSWER:  Durability and weight.

Q.5What is the legal definition of money?
ANSWER: Legally, money is anything proclaimed by law as a medium of exchange. Paper notes and coins (together called currency) is money as a matter of law.

Q.6 Define money supply.[CBSE Foreign 2004, 2031]
ANSWER: The stock of money held by the public at a point of time, in an economy,
is referred to as the money supply. Money supply is a stock concept.

Q.7What items are included in the M₃ measure of money supply?
ANSWER:

1.  M₃(currency notes and coins with public + demand deposits of commercial and co-operative banks + other deposits with RBI),
2.  Time deposits of all commercial and co-operative banks.

Q.8 State two components of money supply. [CBSE Sample Paper 2010] Or
State the components of money supply. Or [CBSE 2010]
What is included in money supply?[CBSE 2010C, 2011]
ANSWER: Currency notes and coins with public + demand deposits with the banks.

Q.9 Define demand deposits.[CBSE 2013, Set I, HOTS ]
ANSWER: Demand deposits are those deposit which can be withdrawn by the depositor at any time by means of cheque. No interest is paid on such deposits.

Q.10 What are time deposits in banks?[AI 2013, C Set I]
ANSWER:  Time deposits are the deposits which can not be withdrawn before the expiry of the stipulated time for which deposits are made. Fixed deposit is an example of time deposit.

Q.11 State the components of supply of money. [AT 2013 Set I]
ANSWER:

1.  Coins and currency notes with public.
2.  Demand deposits with banks.

Short Answer Type Question:

Q.1 Explain the ‘medium of exchange’ function of money.[CBSE Delhi 2014, AI 2013]
ANSWER:

1. Money when used as a medium of exchange helps to eliminate the basic limitation of barter trade, that is, the lack of double coincidence of wants.
2. Individuals can exchange their goods and services for money and then can use this money to buy other goods and services according to their needs and convenience.
3. Thus, the process of exchange shall have two parts: a sale and a purchase.
4. The ease at which money is converted into other goods and services is called “liquidity of money”.

Q.2 Explain the ‘ Unit of account’ function of money. [CBSE 2004C; AI 2007]
ANSWER:

1.  Another important function of money is that it serves as a common measure of value or a unit of account.
2. Under barter economy there was no common measure of value in which the values of different goods could be measured and compared with each other. Money has also solved this difficulty.
3. As Geoffrey Crowther puts it, “Money acts as a standard measure of value to which all other things can be compared.” Money measures the value of economic goods.
4. Money works as a common denominator into which the values of all goods and services are expressed.
5. When we express the values of a commodity in terms of money, it is called price and by knowing prices of the various commodities, it is easy to calculate exchange ratios between them.

Q.3 Explain Standard of deferred payments function of money.[CBSE Delhi 2004 C, 2007, 2012, Sample Paper 2013]
ANSWER:

1. Credit has become the life and blood of a modem capitalist economy.
2. In millions of transactions, instant payments are not made.
3. The debtors make a promise that they will make payments on some future date. In those situations money acts as a standard of deferred payments.
4. It has become possible because money has general acceptability, its value is stable, it is durable and homogeneous.

Q.4 Explain Store of value function of money.[CBSE 2006, 2006C, 2007; AI 2007, 2013 C, Sample Paper 2013]
ANSWER:

1. Wealth can be conveniently stored in the form of money. Money can be stored without loss in value.
2.  Savings are secured and can be used whenever there is a need.
3.  In this way, money acts as a bridge between the present and the future.
4.  Money means goods and services. Thus, money serves as a store of value.
5. It is also known as asset function of money.

Q.5 Explain the problem of double coincidence of wants faced under barter system. How has money solved it? 2013
ANSWER:

1.  Under barter system, there is lack of double coincidence of wants.
2. With money as a medium exchange individuals can exchange their goods and services for money and then use this money to buy other goods and services according to their needs and conveniences.
3.  A buyer can buy goods through money and a seller can sell goods for money.