NCERT MOST IMPORTANT QUESTIONS CLASS – 12 | MACROECONOMICS IMPORTANT QUESTIONS | MONEY AND BANKING | EDUGROWN |

In This Post we are  providing MONEY AND BANKING NCERT MOST IMPORTANT QUESTIONS for Class 12 which will be beneficial for students. These solutions are updated according to 2021-22 syllabus. These MCQS  can be really helpful in the preparation of Board exams and will provide you with a brief knowledge of the chapter

NCERT MOST IMPORTANT QUESTIONS ON MONEY AND BANKING

Question 1.
Explain the role of reverse repo rate in controlling money supply.
Answer:
Reverse repo rate is the rate at which the RBI or Central Bank borrows from other commercial banks. It plays an effective role in controlling the money supply. For example, an increase in the reverse repo rate implies that the bank will get a higher rate of interest from the RBI on their lendings.

As a result, the banks will lend more to the RBI and less to the public thus, resulting in a decrease in the money supply. Similarly, in case the RBI decreases the reverse repo rate, the banks will get a lower rate of interest on their borrowings. As a result, they will lend more to public, which will in turn increase the money supply.

Question 2.
Distinguish between ‘Qualitative and Quantitative tools’ of credit control as may be used by a Central Bank.
Answer:
Two types of methods are adopted by the central bank to control credit. These are quantitative methods and qualitative methods.
(a) Quantitative methods aim at controlling the cost and volume of credit created by commercial banks by using instruments like bank rate, open market operation and legal reserve ratios.

(b) Qualitative methods regulate the direction of flow of credit among various users rather than influencing just the availability of credit. Example: margin requirement, credit rationing, direct action and moral suasion.

Question 3.
Define money. Explain its main functions.
Answer:
Money can be defined as a generally acceptable medium that can be exchanged for goods and services, and can be used as a measure and store of value.
The following are the important functions of money:
(i) Medium of Exchange: Money acts as an intermediary in the exchange transactions of goods and services. Money solves the problem of double coincidence of wants by acting as a medium of exchange for all goods and services.

(ii) Unit of Value: Money acts as a convenient unit of account. The value of all the goods and services can be expressed in monetary units. Money as a unit of value helps in measuring the value of exchange for various goods and services.

(iii) Store of value: Money is not a perishable item and its storage costs are also considerably low. Moreover, it is acceptable to anyone at any point of time, Thus, money acts as a store of value for individuals.

(iv) Standard of Deferred Payments: Money acts as standard in terms of which future or deferred payments are stated because money maintains a constant value over a period of time.

Question 4.
What is meant by the supply of money? Discuss the factors which determine the supply of money.
Answer:
Money supply refers to the amount of money, which is in circulation in an economy at any given point of time.

Following factors determine the money supply:

• Monetary Standard: Money supply is affected by the monetary standard. If gold standard is adopted, there will be less supply of money. On the other hand, if paper currency system is adopted, money supply can be increased on the basis of demand.
• Production Volume: Volume of production also determines the money supply. If the level of production is high, the money supply will be more.
• Monetary Policy: Monetary policy of the government also affects the money supply. If the Central Bank increases the Cash Reserve Ratio there will be contraction in money supply.
• Fiscal Policy: Fiscal policy of the government determines the money supply. If government prepares deficit budget, money supply will increase.
• Other Factors: Banking habits, velocity of money, liquidity preference and the volume of money multiplier also determine the supply of money.

Question 5.
What are the various money stock measures?
Answer:
The various money stock measures are M₁, M₂, M₃, and M₄.
These are defined as follows:
M₁= C + DD + OD
C is currency held by the public. It consists of paper currency as well as coins. DD is the demand deposits in banks. Only the net demand deposits of banks are included in money supply because the part of demand deposits that represents inter-bank deposits held by one bank with another does not constitute demand deposits held by the public.OD is other deposits with the RBI.

OD includes demand deposits of Public Financial Institutions (like IDBI etc.), Foreign Central Banks and Government, the IMF, the World Bank, etc.

M₂ = M₁ + savings deposits with post office savings bank M₃ = M₁+ net time deposits of banks.
M₄ = M₃ + total deposits with post office savings organisation (excluding National Savings certificates)

Question 6.
Explain the main functions of central bank.
Answer:
The main functions of Central bank are as follows:
(i) Bank of Note Issue: In the modem time, issuing of notes is the main function of the central bank of every country in the world. Central bank has the monopoly in this regard. In India, RBI issues notes as a central bank of the country except one rupee note, which his issued by the ministry of finance, government of India.

(ii) Banker, Agent and Advisor to the Government: The central bank acts as a banker, agent and advisor to the government

(iii) Banker’s Bank: Central bank acts as a banker to all other banks in the country just as commercial banks act as a banker to general public.

(iv) Lender of the Last Resort: During crisis, central bank acts as a lender of the last resort. The central bank stands by the commercial banks as a guarantor and extends loans to ensure the solvency of the latter. This saves the commercial banks from possible breakdown.

(v) Custodian of the Foreign Exchange Reserve: The central bank acts as a custodian of the foreign exchange reserves of the country.

(vi) Custodian of Cash Reserve of the Commercial Banks: The central bank also keeps the cash reserves of the commercial banks.

(vii) Bank of Central Clearance, Settlement and Transfer: Central bank is an institution where all the transactions of commercial banks are cleared, settled, and transferred very easily.

(viii) Control of Credit: The central bank has got so many instruments to control credit like bank rate, open market operation, cash reserve ratio, credit rationing, moral suasion and direct actions.

Question 7.
Explain any two methods of credit control used by Central Bank.
Answer:
Methods of credit control used by central bank are as follows:
(i) Bank Rate: Bank rate is the minimum rate at which the central bank discounts the first class bills of exchange and provides credit to’the commercial banks. The central bank increases the bank rate to correct the situation of inflationary gap or excess demand in the economy, Higher bank rate reduces the lending capacity of the commercial banks as they get funds at a higher interest rate from the central bank.

Consequently, money supply contracts in the economy as the public borrows less at high rate of interest. Similarly, the central bank decreases the bank rate to correct the situation of deflationary gap or deficient demand in the economy, Lower bank rate increases the lending capacity of the commercial banks as they get funds at a lower interest rate from the central bank Consequently, money supply expands in the economy as public borrows more at low rate of interest.

(ii) Open Market Operations: Open market operation is the policy of the central monetary authority to sell and buy the government securities in the market. The central bank sells government securities to commercial -banks and general public in a bid to correct the situation of inflationary gap or excess demand.

This decreases the stock of high powered money in the economy. Similarly, the central bank- purchases government securities from commercial banks and general public in a bid to correct the situation of deflationary gap or deficient demand. This increased the stock of high powered money in the ecbnoitiy.

Question 8.
Explain the main functions of central bank.
Answer:
The main functions of Central bank are as follows:
(i) Bank of Note Issue: In the modem time, issuing of notes is the main function of the central bank of every country in the world. Central bank has the monopoly in this regard. In India, RBI issues notes as a central bank of the country except one rupee note, which his issued by the ministry of finance, government of India.

(ii) Banker, Agent and Advisor to the Government: The central bank acts as a banker, agent and advisor to the government

(iii) Banker’s Bank: Central bank acts as a banker to all other banks in the country just as commercial banks act as a banker to general public.

(iv) Lender of the Last Resort: During crisis, central bank acts as a lender of the last resort. The central bank stands by the commercial banks as a guarantor and extends loans to ensure the solvency of the latter. This saves the commercial banks from possible breakdown.

(v) Custodian of the Foreign Exchange Reserve: The central bank acts as a custodian of the foreign exchange reserves of the country.

(vi) Custodian of Cash Reserve of the Commercial Banks: The central bank also keeps the cash reserves of the commercial banks.

(vii) Bank of Central Clearance, Settlement and Transfer: Central bank is an institution where all the transactions of commercial banks are cleared, settled, and transferred very easily.

(viii) Control of Credit: The central bank has got so many instruments to control credit like bank rate, open market operation, cash reserve ratio, credit rationing, moral suasion and direct actions.

Question 9.
Explain any two methods of credit control used by Central Bank.
Answer:
Methods of credit control used by central bank are as follows:
(i) Bank Rate: Bank rate is the minimum rate at which the central bank discounts the first class bills of exchange and provides credit to the commercial banks.

The central bank increases the bank rate to correct the situation of inflationary gap or excess demand in the economy, Higher bank rate reduces the lending capacity of the commercial banks as they get funds at a higher interest rate from the central bank.

Consequently, money supply contracts in the economy as the public borrows less at high rate of interest. Similarly, the central bank decreases the bank rate to correct the situation of deflationary gap or deficient demand in the economy, Lower bank rate increases the lending capacity of the commercial banks as they get funds at a lower interest rate from the central bank Consequently, money supply expands in the economy as public borrows more at low rate of interest.

(ii) Open Market Operations: Open market operation is the policy of the central monetary authority to sell and buy the government securities in the market. The central bank sells government securities to commercial -banks and general public in a bid to correct the situation of inflationary gap or excess demand.

This decreases the stock of high powered money in the economy. Similarly, the central bank- purchases government securities from commercial banks and general public in a bid to correct the situation of deflationary gap or deficient demand. This increased the stock of high powered money in the economy.

Question 10.
How does money solve the problem of double coincidence of wants? Explain with an example.
Answer:
Money acts as an intermediary in the exchange transactions of goods and services. Money solves services. For example, if a vegetable grocer wants a cart but the cart manufacturer wants clothes, and not vegetables, then the grocer can use money to buy a cart. Similarly, the cart manufacturer can then use the money to buy clothes. Thus, everyone’s wants can be satisfied as money acts as a medium of exchange.

Money is also called a bearer of options or generalised purchasing power. This indicates the freedom of choice that the use of money offers. This function can only be performed properly if the value of money remains constant.