SHIKSHA TUITION

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Class 12
Macro Economics

Money and Banking

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 form Money fulfills this need of the
1. Define money. people. Money as a store of value means
Ans. Any thing which is generally that money is an asset and can be stored
acceptable by the people as medium of for use in future one can hold one’s
exchange, measure of value, standard of earnings until the time one wants to
deferred payment and performs the spend it. This is the store of value
function of store of value. function of Money.
2. What is meant by the term money
supply? 1. Explain the “Lender of Last Resort’
Ans. Total stock of money which are held function of the central bank.
by the public at a particular point of time Ans. Central bank also lends money
in an Economy. directly to commercial banks. Instead of
3. What is bank rate? rediscounting, central bank given loans
Ans. Rate at which central bank lends to against the bill of exchange promissory
the commercial bank. notes, treasury bills, government
4. State two primary functions of money. securities, etc. The direct lending to
Ans. 1. Medium of Exchange commercial bank is referred to as the
2. Measure of value ‘lender of the last resort’ function of
5. What is meant by credit creation? central bank.
Ans. Credit creation means power to 2. Explain the “Government’s Bank”
expand demand deposits of Commercial function of a central bank.
Banks. Ans. A central bank conducts the
6. What is credit multiplier? banking account of government
Ans. Credit multiplier measures, number departments. It performs the same
of times deposits are multiplied as banking functions for the government as
credit. commercial bank performs for its
Credit multiplier customers. It accepts their deposits and
= 1Reserve requirement1Reserve requir undertakes inter-bank transfers. It also
ement gives loans to the government. A central
m=1Rm=1R bank also provides various services as
7. Write two functions of central banks. agent of the government. It manages
Ans. (i) Currency Authority public debt. It also gives advice to the
(ii) Controller of money and credit government regarding money market,
8. What is cash reserve ratio (CRR)? capital market, government loans and
Ans. Commercial Banks are required economic policy matters.
under law to keep a certain percentage 1. What is the main function of money in an
of their total deposit in the central banks economy?
in the form of cash reserves. This is Ans. The main function of money in an
called CRR. economic system is to facilitate the
9. What is statutory liquidity ratio (SLR)? exchange of Goods and services.
Ans. Every Commercial Bank is required 2. Name the System of Note-issue in India.
to keep a fixed percentage (ratio) of its Ans. In India, the system of note issue is
assets in liquid form, called SLR. the Minimum Reserve System. The RBI is
10. What is demand deposits by banks? required to keep minimum reserves of
Ans. Demand deposits are deposits Rs 200 crores.
which can be withdrawn from bank at 3. Define open Market operation.
any time by the account holder. Ans Open Market operations refer to the
11. State two monetary measures of credit purchase or sale of government
control by central bank. securities in the open market by the
Ans. (i) Bank Rate policy. central bank of the country.
(ii) Open market operation 4. The central bank acts as lender of last
12. Explain the significance of the ‘Store of resort. How?
Value’ function of money. Ans. The central bank also acts as lender
OR of last resort for the other banks of the
State the importance of the ‘Store of country. It means that if a commercial
Value function of money. bank fails to get financial
Ans. People save a part of their earnings accommodation from anywhere, it
for use in future. But in what approaches the central bank as a last
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 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.
5. 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. 15000 drawn 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 transactions between the
banks concerned. It facilitates cash
transaction across the entire banking
system, it also reduces requirement of
cash reserves of the commercial banks.
6. What is margin requirement of loans.
Ans. Marginal requirement of loan
means the difference in percentage
between the amount of the loan and
market value of the security offered by
the borrower against the loan.

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