Understanding Money and Banking System
120 Questions
5 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

Milton Friedman referred to cash balances as the 'temporary abode of purchasing power'.

True

M1 includes fixed deposits but excludes demand deposits.

False

Liquidity is defined as the ease of converting an asset into cash without significant loss of value.

True

Time deposits, such as fixed deposits, are considered the most liquid financial assets.

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

Broad Money (M3) includes only the currency with the public.

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

The problem of double coincidence of wants is eliminated by the use of money.

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

Wealth is a flow concept that measures income over time.

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

People typically withdraw all their money from bank accounts immediately after deposit.

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

Money serves exclusively as a medium of exchange, with no other functions.

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

Faith in the Indian government and the RBI is essential for accepting paper currency as money.

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

Azim Premji is identified as the richest man in India due to his income generated in a year.

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

The stock market plays a minor role in directing finances to firms.

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

The cash balance a household maintains is constant and does not vary over time.

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

Cash balances facilitate the exchange of goods and services, including financial assets.

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

Money offers a standard unit of measurement for economic magnitudes.

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

Income and wealth are defined in the same way within economic terms.

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

Gold Bonds are issued to facilitate the physical handling of the metal.

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

The shareholders of a firm have the first claim on interest or repayment before bond owners.

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

The residual amount received by shareholders from a firm is termed profit.

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

The Bombay Stock Exchange was established in the 1850s and officially recognized in 1875.

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

The National Stock Exchange was formed before the Bombay Stock Exchange.

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

Investing in multiple companies to diversify is made easier for common investors through mutual funds.

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

The British East India Company was established for the sole purpose of agricultural production.

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

The interests of shareholders are considered constant while bond interest can vary.

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

In a bullish stock market, the collective sentiment about the economy leads to falling share prices.

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

The Cash Reserve Ratio (CRR) is the amount of cash that banks must hold in reserve relative to total assets.

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

A mutual fund is a type of financial instrument where investors' funds are pooled and managed to diversify risk.

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

The Double coincidence of wants is essential for successful stock market transactions.

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

The SENSEX index is based on fifty shares traded on the Bombay Stock Exchange.

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

Money Supply (M3) includes the total currency with the public and time deposits held by the banks.

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

The Statutory Liquidity Ratio (SLR) requires banks to maintain a minimum percentage of demand and time liabilities in cash only.

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

NIFTY is an index that covers only five sectors of the Indian economy.

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

The Cash Reserve Ratio (CRR) can range from 20 percent to 10 percent of the deposit liabilities of banks.

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

The Statutory Liquidity Ratio (SLR) is a requirement set by RBI to ensure banks maintain reserves in secure investments.

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

Banks are allowed to lend out all of their deposits without maintaining any cash reserve.

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

Banks created chequable deposits through a process called re-lending of primary deposits.

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

If many customers withdraw their money simultaneously, it may lead to a bank run.

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

Governments initially issued currency backed by gold before transitioning to a system of fiat currency without reserves.

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

RBI allows banks to hold a minimum of 40 percent of their deposit liabilities in gold as part of SLR.

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

The promise to pay currency in India is backed by the RBI's gold reserves alone.

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

What is the primary consequence if a bank fails to meet a surge of withdrawals?

<p>Risk of a bank run</p> Signup and view all the answers

What is the primary function of mutual funds as described?

<p>To pool investments and diversify risk for individual investors</p> Signup and view all the answers

Which of the following accurately describes the SENSEX?

<p>A share price index of thirty actively traded shares</p> Signup and view all the answers

What is the primary purpose of the Cash Reserve Ratio (CRR) mandated by the RBI?

<p>To maintain a minimum cash reserve against deposits</p> Signup and view all the answers

What is one reason individuals might choose to invest through mutual funds instead of directly in stocks?

<p>Expert management by mutual fund managers can lead to better financial returns</p> Signup and view all the answers

What does the Statutory Liquidity Ratio (SLR) require banks to do?

<p>Maintain a proportion of deposits in secure investments</p> Signup and view all the answers

What does NIFTY represent in the context of the Indian stock market?

<p>An index based on fifty shares across various sectors</p> Signup and view all the answers

Which of the following best describes the creation of secondary deposits by banks?

<p>It happens when banks lend out a portion of primary deposits.</p> Signup and view all the answers

How has the Reserve Bank of India (RBI) historically influenced currency backing in India?

<p>By issuing fiat currency with no backing requirements</p> Signup and view all the answers

In the context of stock market investments, what do 'Bulls' and 'Bears' refer to?

<p>Market trends indicating buying and selling sentiments</p> Signup and view all the answers

What is a critical consideration when determining how to invest according to the passage?

<p>The influence of interest rates and tax exemptions</p> Signup and view all the answers

What role does the RBI play concerning the creditworthiness of borrowers?

<p>It mandates banks to avoid giving large loans to risky borrowers.</p> Signup and view all the answers

What historical practice led to the issuance of deposit receipts before modern banking?

<p>Kings issuing paper currency backed by precious metals</p> Signup and view all the answers

Which statement about public limited joint stock companies is true?

<p>They can raise capital through Initial Public Offerings (IPOs).</p> Signup and view all the answers

Which statement about the historical context of currency issuance in India is true?

<p>Kings initially issued coins which later facilitated deposit banking.</p> Signup and view all the answers

Which statement correctly summarizes a key investment strategy mentioned?

<p>Diversify your financial investments across different instruments.</p> Signup and view all the answers

What is a consequence of a bank lowering its Cash Reserve Ratio (CRR)?

<p>More cash is available for lending to firms.</p> Signup and view all the answers

Why is there generally faith in the banking system?

<p>Most depositors do not expect a run on the banks.</p> Signup and view all the answers

What does the term 'bank run' refer to?

<p>A situation where customers withdraw funds in large numbers.</p> Signup and view all the answers

What is one role of the Reserve Bank of India (RBI) regarding the money supply?

<p>To alter the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).</p> Signup and view all the answers

Which of the following is NOT a reason for multiple-deposit creation in banks?

<p>All customers withdraw their money when desiring cash.</p> Signup and view all the answers

The deposit insurance scheme is intended to provide what function?

<p>Protect depositors from losing their money in case of bank failure.</p> Signup and view all the answers

What might occur if a significant number of depositors decide to withdraw their cash simultaneously?

<p>A bank run leading to financial instability.</p> Signup and view all the answers

What is the primary motivation behind RBI changing the money supply in the economy?

<p>To foster economic stability and growth through monetary policy.</p> Signup and view all the answers

What characterizes a bearish stock market?

<p>Falling share prices driven by negative sentiment</p> Signup and view all the answers

How is Money Supply (M2) commonly understood in terms of M1 and other deposits?

<p>M1 plus time deposits and savings accounts</p> Signup and view all the answers

What does the Statutory Liquidity Ratio (SLR) require banks to maintain?

<p>A minimum percentage of demand liabilities in gold and cash</p> Signup and view all the answers

What is defined as the cash reserve ratio (CRR) in banking terms?

<p>The minimum percentage of net demand and time liabilities banks must hold in cash</p> Signup and view all the answers

What does the term 'double coincidence of wants' pertain to in economic transactions?

<p>The need for both parties in a barter system to desire what the other has</p> Signup and view all the answers

Which of the following best describes the term 'share' in the context of stock markets?

<p>A representation of ownership divided in small denominations traded for price</p> Signup and view all the answers

What is a mutual fund primarily designed to achieve for investors?

<p>Diversifying risk by managing pooled funds across various stocks</p> Signup and view all the answers

What does the term 'NIFTY' primarily represent?

<p>A stock market measure based on fifty shares from various sectors of the Indian economy</p> Signup and view all the answers

What distinguishes the ownership rights of shareholders compared to bond owners?

<p>Shareholders are considered residual claimants of profits.</p> Signup and view all the answers

What was a key characteristic of the British East India Company?

<p>It allowed individuals to invest and become owners.</p> Signup and view all the answers

What is the primary function of mutual fund managers?

<p>To manage risk by investing in diverse company shares.</p> Signup and view all the answers

Which of the following statements about dividends is true?

<p>Dividends can fluctuate based on company profits.</p> Signup and view all the answers

What led to the establishment of stock exchanges in India?

<p>The requirement for companies to trade their shares.</p> Signup and view all the answers

How did the Bombay Stock Exchange (BSE) originate?

<p>By share brokers meeting informally under a banyan tree.</p> Signup and view all the answers

Which of the following features is NOT associated with gold bonds?

<p>They are issued to facilitate physical handling of gold.</p> Signup and view all the answers

What role did registered firms have in the stock market formation?

<p>They could raise financial capital for trade or production.</p> Signup and view all the answers

Match the following definitions with their corresponding terms:

<p>M1 = Currency with the public and demand deposits Liquidity = Ease of converting an asset into cash M3 = Broad money including time deposits Double coincidence of wants = Requirement for barter exchange</p> Signup and view all the answers

Match the following assets with their liquidity ranking:

<p>Cash = Most liquid Fixed Deposits = Less liquid than cash Stocks = Relatively liquid Real Estate = Least liquid</p> Signup and view all the answers

Match the following concepts with their characteristics:

<p>Demand deposits = Cheque-writing capability Fixed deposits = Interest-bearing savings Cash balances = Physical currency held Broad Money = Includes all types of deposits</p> Signup and view all the answers

Match the following economic terms to their significance in money transactions:

<p>Temporary abode of purchasing power = Function of money as a store of value Medium of exchange = Facilitates trade without barter Trust in currency = Faith in government backing Checking accounts = Immediate access to funds</p> Signup and view all the answers

Match the following entities with their roles in the banking system:

<p>Central banks = Define money supply like M1 and M3 Banks = Hold deposits and facilitate liquidity Public = Holds currency for transactions RBI = Regulates monetary policy in India</p> Signup and view all the answers

Match the following terms with their associated financial functions:

<p>Currency = Serves as a medium of exchange Demand deposits = Accessible for immediate withdrawals Time deposits = Encourages saving through interest Liquidity = Indicates ease of cash conversion</p> Signup and view all the answers

Match the following deposits with their specific features:

<p>Demand deposits = Checkable accounts Fixed deposits = Time-bound investment Cash = Most immediately usable Broad Money = Combination of various deposits</p> Signup and view all the answers

Match the following statements with the correct types of money:

<p>M1 = Most liquid form of money M3 = Includes less liquid investments Cash = Physical money available for transactions Demand deposits = Funds that can be withdrawn on demand</p> Signup and view all the answers

Match the following financial concepts with their definitions:

<p>Wealth = Accumulation of savings over time Liquidity = Ease of converting an asset into cash Money Supply = Total currency and deposits in an economy Medium of Exchange = Facilitates the exchange of goods and services</p> Signup and view all the answers

Match the following terms with their related functions or concepts:

<p>CRR = Ensures banks maintain cash reserves SLR = Requires investments in secure assets Mutual Funds = Pool and manage investors' funds Stock Market = Directs finances to firms</p> Signup and view all the answers

Match the following terms related to financial institutions with their characteristics:

<p>Banks = Channelling private finances Stock Market = Important partner in directing finances RBI = Central bank regulating money supply Bulls and Bears = Sentiment indicators in the stock market</p> Signup and view all the answers

Match the following historical figures or institutions with their significant contributions:

<p>Azim Premji = Richest man in India due to wealth accumulation British East India Company = Initially focused on agricultural production Bombay Stock Exchange = Officially recognized in 1875 National Stock Exchange = Formed to facilitate stock trading</p> Signup and view all the answers

Match the following categories of money with their descriptions:

<p>Currency = Physical money used in transactions Chequable Deposits = Deposits that can be accessed with checks Time Deposits = Funds held for a fixed term Demand Deposits = Funds available on demand</p> Signup and view all the answers

Match the following economic terms with their usage in financial discussions:

<p>Transactions = Day-to-day financial activities Precautionary = Holding cash for unexpected expenses Speculative = Investing for potential future gains Stock-market sentiment = Collective investor optimism or pessimism</p> Signup and view all the answers

Match the following financial ratios with their definitions:

<p>Cash Reserve Ratio (CRR) = Percentage of deposits banks must hold as reserves Statutory Liquidity Ratio (SLR) = Minimum percentage of holdings in secure investments M1 = Money supply including cash and demand deposits M3 = Broad measure of money including time deposits</p> Signup and view all the answers

Match the following aspects of money with their purposes:

<p>Transactions = Facilitating daily exchanges Precautionary = Providing emergency funds Speculative = Investing for future financial opportunities Medium of Exchange = Allowing smooth trade of goods and services</p> Signup and view all the answers

Match the following financial terms with their correct definitions:

<p>Mutual Funds = Investment vehicles pooling funds from multiple investors Initial Public Offer (IPO) = First sale of stock by a company to the public SENSEX = Index representing 30 actively traded stocks on the BSE NIFTY = Index covering 50 stocks across 21 sectors of the NSE</p> Signup and view all the answers

Match the following investment principles with their descriptions:

<p>Diversification = Spreading investments across various financial instruments Liquidity = Ease of converting an asset to cash without significant loss Risk Tolerance = Investor's ability to endure fluctuations in investment value Tax Exemptions = Reductions in tax liability on certain investments</p> Signup and view all the answers

Match the stock market indicators with their respective exchanges:

<p>SENSEX = Bombay Stock Exchange NIFTY = National Stock Exchange of India BSE = Bombay Stock Exchange NSE = National Stock Exchange</p> Signup and view all the answers

Match the following investor types with their characteristics:

<p>Bulls = Investors expecting rising market prices Bears = Investors anticipating falling market prices Speculators = Investors aiming for high returns with associated risks Conservative Investors = Investors who prioritize capital preservation over high returns</p> Signup and view all the answers

Match the terms related to financial assets with their meanings:

<p>Derivatives = Financial instruments whose value is derived from underlying assets Equities = Shares of ownership in a company Bonds = Debt securities issued by companies or governments Real Assets = Physical assets with intrinsic value</p> Signup and view all the answers

Match the tax considerations with their corresponding potential impacts on investments:

<p>Tax Exemptions = Encourage investment in certain financial instruments Capital Gains Tax = Tax on profits made from selling assets Dividend Tax = Tax on distributions made to shareholders Wealth Tax = Tax on individual net worth</p> Signup and view all the answers

Match each financial concept with its common implication:

<p>Cash Reserves = Necessary for transaction purposes Interest Rates = Influence the cost of borrowing and saver's income Speculative Investments = May lead to higher returns but increased risk Precautionary Savings = Funds set aside for unexpected expenses</p> Signup and view all the answers

Match the items related to stock market participation with their associated actions:

<p>Investing in Mutual Funds = Allows investors to benefit from professional management Subscribing to IPOs = Enables individuals to purchase shares of a new public company Trading in Indices = Involves buying or selling based on overall market trends Acquiring Equities = Purchasing shares directly in companies</p> Signup and view all the answers

Match the following banking terms with their definitions:

<p>Cash Reserve Ratio (CRR) = Minimum cash reserves banks must maintain against deposits Statutory Liquidity Ratio (SLR) = Proportion of secure investments that banks must hold Secondary Deposit = Deposits created by re-lending of loaned amounts Bank Run = A situation where many customers withdraw money simultaneously</p> Signup and view all the answers

Match the following historical banking concepts with their descriptions:

<p>Deposit Receipts = Documents exchanged for deposited precious metals Gold Standard = Currency value backed by physical gold reserves Fiat Currency = Currency not backed by physical commodities Goldsmiths = Early custodians of gold who issued deposit receipts</p> Signup and view all the answers

Match the following roles of the Reserve Bank of India (RBI) with their descriptions:

<p>Enforcing CRR = Mandating minimum cash reserves for banks Setting SLR = Determining required proportions of secure assets Regulating Loan Distribution = Ensuring balance in lending to creditworthy borrowers Currency Backing = Establishing guidelines for currency's value foundation</p> Signup and view all the answers

Match the following types of deposits with their characteristics:

<p>Primary Deposit = Initial cash deposit made by a bank holder Chequable Deposit = Deposits that can be used for transactions Interest-bearing Deposit = Deposits that earn interest for the holder Reserve Deposit = Portion of deposits kept aside for liquidity</p> Signup and view all the answers

Match the following economic concepts with their effects:

<p>Bank Lending = Creates money through the process of deposit multiplication Reserve Requirements = Helps prevent bank runs during financial instability Interest Payment to Depositors = Incentivizes individuals to keep money in the bank Chequable Deposits = Facilitate easy transactions for consumers and businesses</p> Signup and view all the answers

Match the following historical transitions in currency with their impacts:

<p>Transition to Fiat Currency = Reduced reliance on physical commodities for value Issuance of Gold Coins = Established early forms of currency by governments Deposit System by Goldsmiths = Innovated the concept of secure storage for value Government currency regulation = Ensured safer transactions through standardized currency</p> Signup and view all the answers

Match the following financial terms with their implications:

<p>Liquidity = Ease of converting assets into cash without loss Economic Magnitudes = Standardized measurements for assessing financial health Diversification = Reducing risk by investing in multiple assets Creditworthiness = Assessment of a borrower's likelihood to repay loans</p> Signup and view all the answers

Match the following financial principles with their definitions:

<p>Savings Account = Account type that typically earns interest Time Deposit = Account that restricts access for a fixed duration Demand Deposit = Funds readily available for withdrawal at any time Investment Securities = Assets like stocks or bonds held for profit</p> Signup and view all the answers

Match the following financial terms with their definitions:

<p>Money Supply (M1) = Currency with the public plus chequable demand deposits with banks Double coincidence of wants = The matching of mutual demands for two goods for a successful barter exchange Bullish stock market = A stock market sentiment characterized by rising share prices Bearish stock market = A stock market sentiment characterized by falling share prices</p> Signup and view all the answers

Match the following stock market indices with their characteristics:

<p>SENSEX = A share price index of thirty sensitive and actively traded shares NIFTY = An index based on fifty shares traded on the National Stock Exchange of India M3 = M1 plus time deposits with banks M1 = Currency with the public and demand deposits with banks</p> Signup and view all the answers

Match the following monetary policies with their explanations:

<p>CRR = A minimum percentage of net demand and time liabilities that banks must maintain in cash SLR = A minimum percentage of liabilities that banks must maintain in safe investments like government securities Mutual Fund = A financial instrument managed to diversify risk and invest in different stocks Demand for money = The desire to hold money for transaction, precautionary, and speculative purposes</p> Signup and view all the answers

Match the following economic concepts with their roles:

<p>Money = A medium of exchange and a store of value Shares = The stock of a firm divided into smaller denominations traded on the stock market Stock market = A market where various financial instruments are traded Stock = Capital invested in a firm by its owners</p> Signup and view all the answers

Match the following definitions with their corresponding terms:

<p>Liquidity = The ease of converting an asset into cash without significant loss of value Financial intermediation = When institutions facilitate the channeling of funds from savers to borrowers Risks in investments = The potential loss or gain associated with assets or securities Barter system = An economic system where goods are exchanged directly for other goods without using money</p> Signup and view all the answers

Match the following components of the banking system with their definitions:

<p>Demand deposits = Funds held in accounts that can be withdrawn on demand Time deposits = Funds that are held for a fixed term and earn interest Cash reserves = The portion of deposits that banks are required to maintain as liquid cash Government securities = Debt instruments issued by a government to support its spending</p> Signup and view all the answers

Match the following types of wealth with their descriptions:

<p>Real wealth = Physical assets or goods that have intrinsic value Financial wealth = Assets in the form of money or securities Tangible assets = Property and equipment that have physical form Intangible assets = Non-physical assets that cannot be touched but have value</p> Signup and view all the answers

Match the following investment strategies with their objectives:

<p>Diversification = Minimizing risk by spreading investments across various assets Speculation = Investing with the expectation of high returns but with higher risks Long-term holding = Investing with the intention of maintaining assets for several years Active trading = Regular buying and selling of securities to capitalize on short-term price movements</p> Signup and view all the answers

Study Notes

What is Money?

  • Money is a standard unit of measurement for economic magnitudes, like a kilometer for distance or an hour for time.
  • Money represents the cash balance a household has on average during a given period.
  • Money serves as a medium of exchange, facilitating the buying and selling of goods, services, and financial/real assets.

Money and Liquidity

  • Liquidity refers to the ease with which a financial or real asset can be converted into cash without much value loss.
  • Money (currency with the public and demand deposits) is the most liquid financial asset.
  • Time deposits or fixed deposits with banks are considered moderately liquid, offering easier conversion with minimal penalties.

Money and Banking System

  • The banking system plays a crucial role in channelling funds from depositors to firms for investment.
  • Banks create new money by lending a portion of deposits beyond their reserve requirements, which in turn creates additional deposits.
  • Banks charge interest on loans while paying interest to depositors, balancing risk management with profitability.

The Stock Market

  • The stock market serves as a platform for firms to raise capital and for investors to buy and sell shares representing ownership in companies.
  • Companies issue shares, which represent ownership in the company, and their value reflects current and future profitability.
  • Shareholders, or owners of the stock, receive dividends, a portion of the profits made by the company.
  • Bondholders have a first claim on interest and repayment before shareholders.
  • Stock markets can be characterized as bullish (rising share prices) or bearish (falling share prices) depending on market sentiment and company prospects.

Key Terms:

  • CRR (Cash Reserve Ratio): The minimum percentage of demand and time liabilities banks must maintain in the form of cash as mandated by the Reserve Bank of India (RBI).
  • SLR (Statutory Liquidity Ratio): The minimum percentage of net demand and time liabilities banks must maintain in the form of government securities, cash on hand, and gold, as mandated by the RBI.
  • M1 (Narrow Money Supply): Includes currency with the public plus chequable demand deposits with banks and other deposits with the RBI.
  • M3 (Broad Money Supply): Includes M1 plus time deposits with banks.
  • Mutual Fund: A financial instrument allowing specialist managers to diversify risk by investing in different stocks, aiming for reasonable returns for investors.
  • SENSEX: A share price index of thirty sensitive and actively traded shares on the Bombay Stock Exchange.
  • NIFTY: An index based on fifty shares traded on the National Stock Exchange of India, covering twenty-one sectors of the Indian economy.

The Function of Banks

  • Banks act as intermediaries, taking deposits from individuals and lending these funds to firms.
  • Banks maintain a portion of their initial deposits as reserves and loan out the remainder.
  • This process creates secondary deposits and allows banks to create checkable deposits larger than the initial cash deposited.
  • Banks earn interest on loans and pay interest to depositors.
  • Banks must balance the risk of not having enough cash reserves with the potential earnings from lending.

Risk and Regulation in Banking

  • A bank run occurs when depositors panic and withdraw their funds simultaneously, potentially leading to the bank's collapse.
  • To protect against bank runs, the Reserve Bank of India (RBI) mandates the Cash Reserve Ratio (CRR), which requires banks to hold a percentage of their deposit liabilities as cash reserves.
  • The CRR can range from 3% to 20% of deposit liabilities.
  • The RBI also sets the Statutory Liquidity Ratio (SLR), which requires banks to hold a specific percentage of their liabilities as liquid assets.
  • The SLR aims to prevent banks from lending excessively to risky borrowers and helps maintain financial stability.

The Evolution of Money

  • Historically, kings and queens issued gold, silver, and copper coins.
  • Individuals deposited precious metals with goldsmiths, receiving deposit receipts in exchange.
  • Modern governments adopted a similar approach, issuing currency backed by the promise of government guarantees.
  • Governments no longer directly maintain a gold reserve, and the value of currency is ultimately backed by the government's ability to fulfill its promise.

Understanding the Stock Market

  • Firms require capital for their operations and growth.
  • They issue shares that represent ownership in the firm, allowing investors to contribute capital and share in potential profits.
  • These shares are traded on the stock market, providing a platform for individuals to buy and sell ownership stakes in companies.
  • The Bombay Stock Exchange (BSE) is the oldest stock market in Asia, formed in Mumbai during British rule.
  • The National Stock Exchange (NSE), also based in Mumbai, was established in the 1990s.

Mutual Funds

  • Individual investors may find it challenging to diversify their investments across multiple companies.
  • Mutual funds provide a solution by allowing investors to pool their funds together.
  • Professional fund managers then invest this collective capital in various companies, aiming to offer reasonable returns to investors.

Stock Market Indices

  • SENSEX (Sensitive Index) is a benchmark index that measures the performance of 30 actively traded companies on the BSE.
  • NIFTY (National Fifty) is an index based on 50 shares traded on the NSE, representing 21 different sectors of the Indian economy.
  • These indices provide a general indication of the overall health and trend of the stock market.

Investment Considerations

  • The choice of investment options depends on factors such as:
    • Interest rates offered
    • Tax exemptions
    • Risk tolerance
    • Individual beliefs about dividends and expected future returns
  • A key principle when investing is to diversify your portfolio, spreading your investments across different asset classes to reduce risk.
  • Investing in stocks can offer potential for high returns but carries significant risks, requiring research and a long-term perspective.
  • Mutual funds provide a middle ground, offering diversification and professional management but with typically lower potential returns than investing in individual stocks.

The Money Supply and the RBI's Role

  • The RBI can influence the economy's money supply by adjusting the CRR and SLR requirements for commercial banks.
  • Low CRR encourages banks to lend more, increasing the money supply.
  • The RBI's monetary policy decisions about changing CRR and SLR aim to achieve various economic goals, such as controlling inflation or stimulating growth.

Money, Banking, and the Stock Market

  • Money Supply:

    • M1: Currency with the public + demand deposits with banks + deposits with RBI
    • M3: M1 + time deposits with banks

  • Liquidity: The ease of converting an asset into cash without significant loss of value.

    • Most Liquid: Cash
    • Less Liquid: Fixed Deposits, Stocks, Real Estate

  • Banking System:

    • Double Coincidence of Wants: The need for two individuals to have matching demands for a barter exchange. Money eliminates this problem.
    • Banks create Money: Banks hold a portion of deposits as reserves, then lend the rest to firms. This creates more deposits, leading to a multiplier effect.
    • CRR (Cash Reserve Ratio): Minimum percentage of deposits banks must keep as cash, determined by the central bank.
    • SLR (Statutory Liquidity Ratio): Minimum percentage of deposits banks must hold as government securities, gold, or cash.

  • The Stock Market:

    • Shares: Small denominations of a company's stock traded on the market.
    • Public Limited Companies: Companies that can raise capital through IPOs (Initial Public Offers), where the public buys newly issued shares.
    • Stock Market Indices:
      • SENSEX: Reflects the value of 30 sensitive shares on the Bombay Stock Exchange.
      • NIFTY: Reflects the value of 50 shares across 21 sectors on the National Stock Exchange of India.

  • Bull and Bear Markets:

    • Bullish: Positive sentiment, rising share prices, expectations of economic growth.
    • Bearish: Negative sentiment, declining share prices, concerns about economic performance.

  • Investment Considerations:

    • Interest rates
    • Tax exemptions
    • Risk
    • Dividend expectations
    • Expected price fluctuations of financial instruments

  • Financial Diversification: Investing in a variety of financial instruments to spread risk.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Quiz Team

Related Documents

Chapter 3: Money Banking and Stock Market PDF

Description

This quiz explores the fundamental concepts of money, its liquidity, and the banking system's role in the economy. Gain insights into how money functions as a medium of exchange and its importance in facilitating financial transactions. Test your knowledge on these essential economic principles.

More Like This

Use Quizgecko on...
Browser
Open
Browser
Browser