Money and Banking
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Questions and Answers

What is one of the advantages of the sole authority of note issuance by a central bank?

  • Increased competition among banks
  • Higher currency value
  • Better supervision and control (correct)
  • Lower interest rates

    • The central bank acts as a custodian of foreign exchange reserves.

    True

    What does CRR stand for in the context of the central bank?

    Cash Reserve Ratio

    The central bank serves as the __________ for the government by managing its banking transactions.

    <p>banker</p> Signup and view all the answers

    What action does the Central Bank take during inflation regarding the Cash Reserve Ratio (CRR)?

    <p>Increases CRR</p> Signup and view all the answers

    Match the central bank functions with their descriptions:

    <p>Uniformity in note circulation = Ensures public faith and stability in currency Lender of last resort = Provides loans when commercial banks face liquidity issues Custodian of cash reserves = Commercial banks maintain a proportion of reserves Banker to the Government = Handles banking transactions for the government</p> Signup and view all the answers

    The Central Bank buys securities during periods of inflation.

    <p>False</p> Signup and view all the answers

    Which of the following is NOT a function of the central bank?

    <p>Issuing government bonds</p> Signup and view all the answers

    What is meant by 'High powered money'?

    <p>It refers to the money supply that consists of total currency and reserves held at the central bank.</p> Signup and view all the answers

    The Bank Rate Policy refers to the interest rate at which commercial banks lend to the central bank.

    <p>False</p> Signup and view all the answers

    The __________ is the minimum percentage of demand and time liabilities that banks must maintain with themselves.

    <p>Statutory Liquidity Ratio (SLR)</p> Signup and view all the answers

    What role does the central bank play when commercial banks face difficulties in obtaining funds from other sources?

    <p>Lender of last resort</p> Signup and view all the answers

    Match the following monetary policy tools with their functions:

    <p>Open Market Operations = Buying and selling of government securities Cash Reserve Ratio (CRR) = Minimum percentage of deposits banks must keep with central bank Statutory Liquidity Ratio (SLR) = Minimum percentage of deposits banks must maintain with themselves Margin Requirements = Difference between loan amount and market value of security</p> Signup and view all the answers

    Which of the following is NOT a qualitative instrument used by the Central Bank?

    <p>Open Market Operations</p> Signup and view all the answers

    What is one of the primary functions of money?

    <p>Medium of exchange</p> Signup and view all the answers

    How does money help to overcome the problems of the barter system?

    <p>Money serves as a medium of exchange, unit of account, and store of value, simplifying trade.</p> Signup and view all the answers

    The Central Bank always decreases the Statutory Liquidity Ratio (SLR) during deflation.

    <p>True</p> Signup and view all the answers

    Money acts as a store of value due to its difficulty in being stored.

    <p>False</p> Signup and view all the answers

    What does M1 consist of in terms of money supply?

    <p>Currency held by public, demand deposits, and other deposits with Reserve Bank of India.</p> Signup and view all the answers

    Money functions as a ________ of value, helping to express the value of goods and services.

    <p>measure</p> Signup and view all the answers

    Match the functions of money with their descriptions:

    <p>Medium of Exchange = Used to make payments for goods and services Measure of Value = Helps in determining the price of items Store of Value = Allows for holding purchasing power over time Standard of Deferred Payments = Facilitates future payment agreements</p> Signup and view all the answers

    What drawback of the barter system has money overcome?

    <p>Double coincidence of wants</p> Signup and view all the answers

    The value of money remains relatively constant compared to other commodities.

    <p>True</p> Signup and view all the answers

    List two advantages of using money over the barter system.

    <ol> <li>It simplifies transactions. 2. It enables easier storage of value.</li> </ol> Signup and view all the answers

    What does the term 'High Powered Money' refer to?

    <p>Currency in circulation plus bank reserves</p> Signup and view all the answers

    The money multiplier is calculated as the ratio of cash reserves to total deposits.

    <p>False</p> Signup and view all the answers

    What is the cash reserve ratio (C.R.R.) in the given example?

    <p>20%</p> Signup and view all the answers

    The formula for the money multiplier is __________.

    <p>1/LRR</p> Signup and view all the answers

    Which of the following explains why banks do not keep all deposits as cash reserves?

    <p>All depositors do not withdraw funds at the same time.</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>M1 = Currency in circulation plus demand deposits M2 = M1 plus saving deposits M3 = M1 plus net time deposits Central Bank = Apex body regulating the banking structure</p> Signup and view all the answers

    What is the role of a Central Bank?

    <p>To control and regulate the entire banking and monetary structure of the country.</p> Signup and view all the answers

    In the example provided, the total amount of loans created was Rs. 4000.

    <p>True</p> Signup and view all the answers

    The initial deposit in the example was __________.

    <p>Rs. 1000</p> Signup and view all the answers

    What is the money multiplier if the legal reserve ratio (LRR) is 20%?

    <p>5</p> Signup and view all the answers

    The total deposit created by a central bank is always less than the initial deposit.

    <p>False</p> Signup and view all the answers

    What is meant by excess demand in the context of inflation?

    <p>Excess demand refers to a situation where demand for goods and services exceeds their supply, leading to price increases.</p> Signup and view all the answers

    The central bank uses ________ to control inflation by selling government securities.

    <p>open market operations</p> Signup and view all the answers

    If the initial deposit is Rs. 500 crores and the LRR is 10%, what is the total deposit created?

    <p>5000 crores</p> Signup and view all the answers

    Define commercial bank.

    <p>A commercial bank is a financial institution that accepts deposits, provides loans, and offers other financial services to the public.</p> Signup and view all the answers

    The money supply does not influence economic activity.

    <p>False</p> Signup and view all the answers

    Study Notes

    Money and Banking

    • Meaning of Money: Anything generally accepted as a medium of exchange, a measure of value, a store of value, and a means of deferred payment.
    • Functions of Money: Classified as Primary (basic) and Secondary functions.
      • Primary/Basic Functions:
        • Medium of Exchange: Used for transactions of goods and services.
        • Measure/Unit of Value: Helps determine the value of goods and services (price).
      • Secondary Functions:
        • Standard of Deferred Payments: Enables future payments, with relatively stable value compared to commodities.
        • Store of Value: Can be stored without losing value; easy and economical to store. Money's value typically remains relatively constant. Money has overcome the difficulties of the barter system in these ways.
    • Money Supply: Total amount of money in circulation, measured by varying standards (M1, M2, M3, M4).
    • High Powered Money: Refers to currency held by the public plus cash reserves held by banks.
    • Commercial Bank Money Creation: Banks create credit by lending a portion of received deposits, leading to further deposits and a multiplier effect.
      • A fraction of deposits is kept as reserves (e.g., 20%).
      • The rest is lent out, creating new deposits.
      • This process creates credit.
    • Money Multiplier: Calculation showing how an initial deposit can lead to a larger increase in the total money supply.
    • Central Bank Functions:
      • Currency Authority: Controls currency issuance and value.
      • Banker to the Government: Manages government funds and provides banking services.
      • Banker's Bank: Acts as a custodian for commercial bank reserves and a lender of last resort.
      • Controller of Money Supply and Credit: Controls the economy using monetary policy instruments.
    • Quantitative Instruments: Tools used to control the overall money supply.
      • Bank Rate Policy: The rate at which central banks lend to commercial banks. Increased during inflation, decreased during deflation.
      • Open Market Operations: Buying and selling of securities by the central bank to influence money supply.
      • Legal Reserve Ratio (LRR): Minimum percentage of deposits that commercial banks must keep as reserves. Increased during inflationary periods and decreased during deflationary periods.
      • Statutory Liquidity Ratio (SLR): Minimum percentage of their total demand and time liabilities that commercial banks have to maintain in liquid assets.
    • Qualitative Instruments: Tools used to influence the direction of credit
      • Margin Requirements: Difference between the loan amount and the market value of the collateral, increased during inflation to decrease credit.
      • Moral Suasion: Persuading banks to act in a specific manner to influence the direction of credit.

    Short and Long Answer Questions

    • Define Central Bank: An apex body controlling and regulating the entire banking and monetary system of a country.
    • What is Money? Anything generally accepted as a medium of exchange.
    • Functions of Money:
      • Medium of exchange
      • Measure of value
      • Store of value
      • Standard of deferred payment
    • How Barter System Problems Solved by Money:
      • Double coincidence of wants
      • Difficulty in grading values
      • Difficulty in storing value

    High Order Thinking Skills (HOTS)

    • Money Multiplier Calculation: Given initial deposit and LRR, calculate total deposit creation

    Frequently Asked Questions (FAQ)

    • One Mark Questions: Definitions of various terms, concepts, and instruments related to money and banking.
    • Three Marks Questions: Explaining key functions of an entity, like the components of the money supply or functions of a central bank.
    • Four Marks Questions: Detailed comparison, explanations or processes in money and banking.

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    Description

    Explore the concepts of money and its functions in the economy with this quiz on Money and Banking. Understand the primary and secondary functions, the money supply, and the significance of high powered money. Test your knowledge and grasp the fundamental aspects of monetary systems.

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