GNG 2.

0 By RAJAT ARORA SIR

Ch- Money and Banking

DAY -6 GNG 2.O By Rajat Arora Sir

Q 1. ________ is the main source of money supply in an economy.

a) Central Bank
b) Commercial Banks
c) Both (a) and (b)
d) Government

Q 2. If Harish has a Mobile and he wants a Tablet. Shivam has a Laptop and he wants a Mobile
in exchange of laptop, than what problem Harish and Shivam are facing:
a) Lack of Measure of Value
b) Lack of Double Coincidence of Wants
c) Lack of Store of Value
d) None of these

GNG 2.0 By RAJAT ARORA SIR

Q 3. ________ are termed as Legal Tender Money.

a) Demand deposits
b) Time Deposits
c) Inter-bank deposits

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d) Currency Notes

Q 4. 'If you have 2 meters cloth and you want wheat against it, then how much wheat you should
get drawback of Barter Exchange is highlighted?

a) Lack of Medium of Exchange

b) Lack of Store of Value
c) Lack of Measure of Value
d) None of these

Q 5. A can exchange goods with 8 only when A has what B wants and B has what A wants: This is
referred to as under Barter System.
a) Standard of Deferred Payments
b) Common Measure of Value
c) Double Coincidence of Wants
d) None of these

Q 6. ________is also known as transaction money.

a) M1
b) M2
c) M3
d) M4

Q 7. In India , money creating sector are:

a) Banking System
b) Govt. of the country
c) Both a) and b)
d) None of these

Q 8. Which function of money is highlighted when we say: “It helps to measure the value of
goods and services?

a) Medium of exchange
b) Standard of deferred payments
c) Measure of value
d) Store of value

Q 9. Identify the function of money which has led to capital formation and economic
development of economy
OR
Which function of money has removed the difficulty of contractual and future payments?
a) Medium of exchange
b) Measure of value
c) Store of value
d) Standard of deferred payments

Q 10. Which function of money is highlighted in the given statement: 'It works as common
denomination”?

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a) Store of value
b) Unit of value
c) Medium of Exchange
d) None of these

Q 11. i) Define Money Multiplier.

ii) ‘Credit creation is inversely related to the reserve deposit ratio’. Justify the give statement,
using a hypothetical example.

Q 12. Elaborate the 'Banker's Bank and ‘Supervisor’ function performed by the Reserve Bank of
India.
OR
Explain the function of central bank as 'Banker's Bank and Supervisor.

Q 13. Explain the role of Central Bank as Governments' agent and advisor.

OR
Discuss the function of central bank as Banker Agent and Advisor to Government.

Q 14. Distinguish between CRR and SLR.

Q 15. Differentiate between central bank and commercial bank.

Q 16. Government of India has recently launched ‘Jan-Dhan Yojna’ aimed at every household in
the country to have at least one bank account. Explain how deposits made under the plan are
going to affect national income of the country.

Q 17. “Reserve Ratio and Credit Creation are inversely related.” Do you agree with the given
statement? Justify your answer with a suitable numerical example.

Q 18. Read the following text carefully, discuss briefly the relevant function of the central bank,
indicated: Recently, Reserve Bank of India (RBI) conducted a statutory inspection of supervisory
evaluation against a commercial bank was imposed with stringent penalties, owing to
deficiencies in regulatory compliances.

As per the Central bank, the inspection revealed non- compliance vis-a- vis different directions
issued by RBI, on the following fronts:

i) ATM card frauds

ii) Ensuring integrity and quality of data
iii) Loans to small borrowers

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Answer Key
Ans 1. c) Both (a) and (b)
Ans 2. b) Lack of Double Coincidence of Wants
Ans 3. c) Inter-bank deposits
Ans 4. c) Lack of Measure of Value
Ans 5. c) Double Coincidence of Wants
Ans 6. a) M1
Ans 7. c) Both a) and b)
Ans 8. c) Measure of value

Ans 9. Standard of deferred payments

Ans 10. b) Unit of value
Ans 11. i) "Money Multiplier".
Money multiplier refers to the number of times the credit is created by the commercial
banks with respect to the initial deposit.

(ii) Reserve deposit ratio is the minimum reserve which a Commercial Bank must maintain as
per the instructions of the Central Bank.
Credit Creation = 1/ (Reserve Ratio)
Thus, credit creation is inversely related to the reserve deposit ratio.
For example: Suppose the Reserve Ratio is 0.2 and initial deposit is ₹1,000 crores. Total Credit
created: = Initial Deposits X 1/ 0.2 × 1,000 = ₹ 5,000 crores Now, suppose Reserve Ratio is
increased to 0.5 Total Credit Created
= Initial Deposits X 1 / 0.5 = 1,000 = 2,000 crores
Thus, on the basis of the above illustration we can say that there exists an inverse relation
between reserve ratio and credit creation.

Ans 12 . Banker’s bank and Supervisor:

• There should be some agency to regulate and supervise the proper functioning of
commercial banks in a country.
• Being the Apex bank, the Central Bank acts as the banker to other banks.
• In this sense, it bears the same relationship with commercial banks as the latter
maintains with the general public.
• As the banker to banks, the central bank functions in three capacities:
a) Custodian of cash reserves/Cash Reserve Ratio (CRR):
• Commercial banks are required to keep a certain proportion of their
deposits (CRR) with the central bank.
• In this way, the central bank acts as a custodian of the cash reserves of
commercial banks.
b) Lender of the last resort:
• When commercial banks fail to meet their financial requirements from
other sources, they approach the central bank to give loans and
advances as a lender of the last resort.
• Central Bank assists these banks through discounting of approved
securities and bills of exchange.
c) Clearing house:
• As the central bank holds the cash reserves of all the commercial banks,
it becomes easier and more convenient for it to act as their clearing
house.
• All commercial banks have their accounts with the central bank.
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• Therefore, the central bank can easily settle claims of various
commercial banks against each other, by making debit and credit
entries in their accounts.
• As a Supervisor, the central bank regulates and controls the commercial
bank. The regulation of banks may be related to their licensing, branch
expansion, liquidity of assets, management, merging, winding up, etc.
The control is exercised by periodic inspection of banks and the returns
filed by them.

Ans 13 . Banker to the government:

• The Reserve Bank of India acts as a banker, agent, and financial advisor to the
Central Government and all the state governments.
• It maintains a current account for keeping its cash balances.
• It accepts receipts and makes payments for the government and carriers out of
the exchange, remittance, and other banking operations.
• It also gives loans and advances to the government for temporary periods. The
government borrows money by selling treasury bills to the central bank.
• As a financial advisor, the central bank advises the government from time to time
on economic, financial, and monetary matters.
• As an agent, the central bank also has the responsibility of managing public debt.

Ans 14. CRR is the fraction of the deposits which commercial banks are required under law to
keep as cash reserves with the Central Bank CRR is a powerful instrument to control credit and
lending capacity of the banks.
SLR is a part of deposits which Commercial Banks have to keep with themselves. Banks are
required to keep a fixed percentage of its assets in cash, gold or other securities. SLR is raised to
reduce the ability of the banks to give credit.

Ans 15. The differences between Central Bank and Commercial Bank are:

Basis Central Bank Commercial Bank

Meaning The central bank is an apex body A commercial bank is an institution that
that controls, operates, performs the functions of accepting
regulates, and directs the entire deposits, granting loans, and making
banking and monetary structure investments to earn profits.
of the country.
Status It is the apex institution in the It is merely a unit in the banking
money market. structure of the country and operates
under the control of the central bank.

Ownership It is generally owned and It can be owned and governed by the

governed by the government. government or the private sector.

Objective It operates in the public interest It aims to maximize profits.

without profit.
Number of There is only one central bank in There are several commercial banks in a
banks a country due to the peculiar country for example:
nature of its activities. For 1) State Bank of India
example, RBI in India. 2) Bank of India, etc.
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Public dealing It does not deal directly with the It deals directly with the public.
public.

Ans 16. The deposits made under the plan are going to affect national income of the
country in the following way:

• Opening more bank accounts means more bank deposits.

• More deposits means increase in the lending capacity of the commercial banks.
• More lending by banks means more investment in the country.
• More investment means more national income.
Ans 17. Yes, there an inverse relationship between Reserve Ratio and Credit creation in
the economy we know that:
Money Multiplier = 1/ Reserve Ratio
Credit Creation = Initial Deposits x Money multiplier
Assuming that the value of initial deposits is Rs. 10,000 crore.

Reserve Ratio Money Multiplier Initial Deposits Credit Creation =

Initial Deposits x
Money Creation
10% 1/0.1 = 10 10,000 1,00,000
25% 1/0.25 = 4 10,000 40,000

From the above calculations, we can conclude that higher the reserve Ratio, lesser credit will be
created by Commercial banks in the economy.

Ans 18. The given text indicates the 'supervisory function' of the Central Bank, under which the
Reserve Bank of India (RBI) regulates and supervises routine functioning of the commercial
banks.

Under this function, the RBI may exercise periodic inspections/audits of commercial banks,
filing of reports by commercial banks and other statutory compliances. Central bank may take
necessary corrective and punitive actions against the banks owing to deficiencies in regulatory
compliances.

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GNG 2.0 Rajat Arora Sir

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