Semester/ATKT/Ex. Examination Dec.

2023
Generic Elective
Money & Banking

Section–A Objective Type Questions

Q. 1 Choose the correct option-
(i) The amount of money in India is controlled by?
Ans: Reserve banks of India.
(ii) Bank provides loans for
Ans: All of the above.
(iii) Which of the following isn't really actual banks responsibility?
Ans: Providing credit to commercial banks.
(iv) Which bank is in charge of India's banking and monetary system?
Ans: Reserve bank of India.
(v) Which of the following is the closest to the money?
Ans: Bonds.

Section–b Short Answer Type Questions

Q. 2 Explain essential quality of good money.

General Acceptability: An important quality of money is its acceptance. Good

money requires acceptance to all without any hesitation. Since the law declares
Money as the legal tender, it has an inherent quality of general acceptability.

Portability: good money also requires portability. If people can carry or transfer
money from one place to another, then it is good money.
Durability: The material used to make money must last for a long time without
losing its value. For example, ice and fruits are not good money since they lose their
value quickly with the passage of time. After all, ice melts and fruits perish.
Therefore, durability is an essential quality of good money.

Divisibility: it is important to remember the divisibility of money. If someone wants

to buy a smaller unit of a commodity, then divisibility of money can make it
possible. For example, cows cannot function as good money. This is because you
cannot divide a cow without making it lose its value.

Homogeneity: If we take a look at 2 100 rupee notes, they look and feel identical.
They also have the same value. In fact, nobody can distinguish between 2 currency
notes right out of the mint. It is an important quality of good money. If money is not
homogeneous, then transactions will become uncertain as people would be unsure
of what they are receiving.

Cognoscibility: The ability to recognize money is critically important. Now a days,

we can look at a currency note and tell its correct value. If money is not cognizable,
then people can find it difficult to determine if they are dealing with money or some
inferior asset.

Stability: Stability is probably the most essential one. The value of money cannot
change for a long period of time and hence remain stable. If the value of money
keeps changing, then it will fail to function as a measure of value and as a standard
of deferred payment.

Q. 3 Explain the term value of money.

Ans: The value of money is the amount of goods and services that can be purchased
with a unit of money. It is also known as the purchasing power of money. The value
of money is inversely proportional to the price of goods and services. This means
that when the price level increases, the value of money decreases, and vice versa.
The value of money can also refer to the idea that money earned in the past is more
valuable than the same amount earned in the future. This is because money can be
invested to earn a return, and inflation causes the purchasing power of money to
decrease over time. This concept is important for personal financial decisions like
saving and retirement planning, as well as for corporate investment decisions.
The value of money can be unstable due to inflation or deflation in the economy.
Q. 4 Explain Indian money market.
The Indian money market is a financial market that facilitates the short-term
borrowing and lending of funds. It is a key part of the economy, providing a
platform for participants to meet their immediate cash needs and manage
liquidity. It also allows the central bank to influence interest rates and liquidity in
the economy.
 Participants: The money market includes governments, corporations,
financial institutions, and individual investors.
 Instruments: The money market deals with financial instruments that are
close substitutes for money, such as treasury bills, commercial papers, certificates
of deposit, repos, forward rate agreements, and interest rate swaps.
 Maturities: The money market deals with short-term funds with maturities
ranging from overnight to one year.
 Regulation: The Reserve Bank of India (RBI) regulates the money market and
is responsible for collecting, compiling, and disseminating information about it.
 Central bank intervention: The money market provides a focal point for the
central bank to intervene in the market and influence liquidity and interest rates.
 Sub-markets: The money market is made up of diverse sub-markets, each
dealing in a particular type of short-term credit.
 Sources of funds: The main sources of short-term funds in the Indian money
market are the unorganized indigenous sector and the organized modern sector.

Q. 5 Throw light on commercial bank.

A commercial bank is a kind of financial institution that carries all the operations
related to deposit and withdrawal of money for the general public, providing loans
for investment, and other such activities. These banks are profit-making institutions
and do business only to make a profit.
 How they make money: Commercial banks make money by earning interest
from loans, such as mortgages, business loans, auto loans, and personal loans.
 What they offer: Commercial banks offer a variety of services,
including accepting deposits, disbursing payments, collections, safeguarding money,
 maintaining and servicing checking, savings, and custodial accounts, issuing traveler
cheques, offering locker facilities, issuing debit cards and credit cards.
 How they help the economy: Commercial banks provide liquidity by bridging
sources of capital from depositors and creating credit that can be extended to
borrowers. They also help bridge the wealth divide.
 Types of commercial banks: Commercial banks include private sector banks
and public sector banks.

Q. 6 Explain functions of reserve bank of India.

The Reserve Bank of India was established in 1935 and is headquartered in

Mumbai. It is overseen by a central board of directors headed by a governor. The
RBI is India's central bank and has many functions, including:
 Regulating the financial system: The RBI supervises the financial sector,
including banks, financial institutions, and non-banking finance companies. This
helps ensure financial stability and public confidence in the banking system.
 Managing the currency and credit system: RBI regulates the issue of
banknotes and coins, and manages the country's foreign exchange market. The
Reserve Bank has a monopoly for printing the currency notes in the country. It has
the sole right to issue currency notes of various denominations except one rupee
note (which is issued by the Ministry of Finance).
 Formulating and implementing monetary policy: RBI creates and carries out
the government's monetary policy.
 Acting as the banker to the government: RBI acts as a bank for the
government, carrying out financial transactions. It performs all the banking
functions of the State and Central Government and it also tenders useful advice to
the government on matters related to economic and monetary policy.
 Managing international payments: RBI manages the country's international
payments. For the purpose of keeping the foreign exchange rates stable, the
Reserve Bank buys and sells foreign currencies and also protects the country's
foreign exchange funds. RBI sells the foreign currency in the foreign exchange
market when its supply decreases in the economy and vice-versa.
 Accounting for GST collections: RBI accounts for all GST collections in the
government's accounts.
 Facilitating GST payments: RBI allows taxpayers to pay GST directly into the
government's accounts using NEFT or RTGS.
 Other Functions: The Reserve Bank performs a number of other
developmental works including the function of clearinghouse arranging credit for
agriculture through NABARD, collecting and publishing the economic data, buying
and selling of Government securities (gilt edge, treasury bills etc.) and trade bills,
giving loans to the Government buying and selling of valuable commodities etc. It
also acts as the representative of the Government in the International Monetary
Fund (I.M.F.) and represents the membership of India.

Long Answer Type Questions

Q. 7 A What do you mean by money? Explain its functions.

Money is a system of value that facilitates the exchange of goods in an economy.
Using money allows buyers and sellers to pay less in transaction costs, compared
to barter trading. The first types of money were commodities. Further, money is
the most liquid assets among all our assets. It also has general acceptability as a
means of payment along with its liquid nature. Usually, the Central Bank or
Government of a country creates and issues money. It is also called cash money.
This is a legal tender and hence there is a legal compulsion on citizens to accept it.

Functions of Money:

In general terms, the main function of money in an economic system is to

facilitate the exchange of goods and services and help in carrying out trade
smoothly. Money performs a number of primary, secondary, contingent and
other functions which not only remove the difficulties of barter but also oils the
wheels of trade and industry in the present day world. We discuss these functions
one by one.

1. Primary Functions: The two primary functions of money are to act as a medium
of exchange and as a unit of value.

a) Medium of Exchange: By serving as a medium of exchange, money removes the

need for double coincidence of wants and the inconveniences and difficulties
associated with barter. The introduction of money as a medium of exchange
decomposes the single transaction of barter into separate transactions of sale and
purchase thereby eliminating the double coincidence of wants. Thus money gives
us a good deal of economic independence and also perfects the market
mechanism by increasing competition and widening the market. As a medium of
exchange, money acts as an intermediary, which facilitates exchange.

b). Unit of Account or Measure of Value: Money serves as a unit of account or a

measure of value. Money is the measuring rod, i.e., it is the units in terms of
which the values of other goods and services are measured in money terms and
expressed accordingly. Different goods produced in the country are measured in
different units like cloth in meters, milk in liters and sugar in kilograms. Without a
common unit, exchange of goods becomes very difficult. Values of all goods and
services can be expressed easily in a single unit called money.

2. Secondary Functions: Money performs the following three secondary functions

which are as follows:

a) Store of Value: As a secondary function, money acts as a store of value. Wealth

can be stored in terms of money for future. It serves as a store value of goods in
liquid form. By spending it, we can get any commodity in future. People therefore
normally wish to keep a part of their wealth in the form of money because savings
in terms of goods is very difficult. Clearly money is the best form of store of value.
Wheat or any other product which will command a value cannot be stored for a
long period.

b) Standard of Deferred Payments: Deferred payments are payments which are

made some time in the future. The use of money as the standard of deterred or
delayed payments immensely simplifies borrowing and lending operations
because money generally maintains a constant value through time. Thus, money
facilitates the formation of capital markets and the work of financial
intermediaries like Stock Exchange, Investment Trust and Banks. Money is the link
which connects the values of today with those of the future.

c) Transfer of Value: Since money is a generally acceptable means of payment and

acts as a store of value, it keeps on transferring values from person to person and
place to place. A person who holds money in cash or assets can transfer that to
any places.

3. Contingent Functions: Money also performs certain contingent or incidental

functions. The ways that money helps economic agents, like consumers and
producers, make economic decisions. Some examples of contingent functions of
money including assisting consumption decisions, helping production decisions,
increasing productivity of assets, creating the basis of credit system,
measurement and maximization of utility, liquidity to wealth.

4. Other Functions: Money also performs such functions which affect the
decisions of consumers and governments.

a) Helpful in making decisions: Money is a means of store of value and the

consumer meets his daily requirements on the basis of money held by him. In this
way, money helps in taking decisions.

b) Money as a Basis of Adjustment: To carry on trade in a proper manner, the

adjustment between money market and capital market is done through money.
Similarly, adjustments in foreign exchange are also made through money.

Q. 8 Explain quantity theory of money.

Definition of Quantity Theory of Money

Quantity theory of money states that money supply and price level in an economy
are in direct proportion to one another. When there is a change in the supply of
money, there is a proportional change in the price level and vice-versa.

Classical Quantity Theory of Money

The principle of the classical theory is that the economy is self-regulating. The
economy is always the potential of achieving the natural level of real GDP or
output. This is the level of real GDP which is obtained when the economy’s
resources are fully employed.
Basics of Monetary Economics
Monetary economics is the branch of economics that studies the different
theories of money. The quantity theory of money is the primary research area for
this branch of economics. According to the quantity theory of money, the money
supply in an economy is proportional to the general price level of goods and
services.

The Quantity Theory of money is one of the Western theories of Money.

Formulation of Quantity Theory of Money

This theory was formulated by a Polish mathematician named Nicolaus
Copernicus in the year 1517, but it was later popularized by the economists
Milton Friedman and Anna Schwartz. They popularized the theory after publishing
their book which was named “A Monetary History of the United States, 1867-
1960” in the year 1963.

Supply and Demand of Money per Quantity Theory of Money

According to the quantity theory of money, if the amount of money in the
economy gets doubled up then the price level also doubles. It means that the
customers will have to pay twice as much for the same amount of goods and
services. This drastic increase in the price levels will result in a rising inflation
level. A measure of the rate of the rising prices of goods as well as of the services
in an economy is known as inflation. It is the same forces that will influence the
supply and demand of any commodity that will also influence the supply and the
demand for money. An increase in the supply of money will decrease the marginal
value of the money. In simple words, when the money supply will increase, the
purchasing capacity of one unit of currency will decrease. To adjust this decrease
in the money’s marginal value, the prices of the goods and the services will rise.
This will eventually result in a higher inflation level.
 Calculating QTM
The basic equation for the quantity theory of money is MV = PY, where:
 M: The quantity of money in circulation.
 V: The velocity of money, or the average number of times a unit of money is spent
in a given time period
 P: The price level, or the average price of goods and services in an economy
 Y: The real output, or the total quantity of goods and services produced in an
economy over a given period, adjusted for inflation.

The quantity theory of money states that the price level is proportional to the
quantity of money. The equation implies that if T and V are fixed, then P must be
proportional to M.

Q. 9 What do you mean by money market? Explain its importance.

Money market refers to a financial market where participants can lend and
borrow money for very short terms, usually maturing within a year, allowing
businesses, governments, and financial institutions to manage their immediate
cash flow needs by accessing highly liquid, low-risk investments to maintain
stability in the financial system; essentially acting as a quick and accessible way to
obtain short-term funding.

Stability and Security: A money market fund is one of the least volatile types of
investment available. This characteristic can be useful in offsetting the greater
volatility of stock and bond investments you may have in your portfolio. In
addition, they give you a secure, short-term investment option when no other is
feasible.

Short-term focus: Money markets deal with financial instruments that mature
within a short period, like a year or less, unlike the capital market which focuses
on longer-term investments.
High liquidity: The primary feature of the money market is its high liquidity,
meaning assets can be easily bought and sold quickly without significant price
fluctuations.
Low risk: Due to the short-term nature of investments, the money market is
generally considered a low-risk option for investors.
Instruments traded: Common money market instruments include Treasury bills,
commercial paper, certificates of deposit, and federal funds.

Potential Tax Efficiency: Investors in money market funds may find that the
interest payments from some fund investments are exempt from federal and,
potentially, state income taxes.

Importance of the money market:

It plays a crucial role in financing both internal as well as international trade. It
reflects short-term interest rates, offering insights into the broader economy's
health. Interest rates in the money market serve as benchmark rates for the
economy.
Liquidity management: The money market allows institutions to easily access
funds when needed to meet short-term cash flow requirements, ensuring smooth
financial operations.
Interest rate stability: By facilitating the lending and borrowing of short-term
funds, the money market helps to stabilize interest rates in the economy.
Government funding: Governments can use the money market to raise funds for
short-term needs through issuing Treasury bills.
Corporate financing: Companies can utilize the money market to manage working
capital needs by issuing commercial paper.
Investor safety: For investors seeking a secure place to park excess cash with easy
access, money market funds are a popular option.

Q. 10 What do you mean by bank? Explain its functions.

Bank is a lawful financial institution that primarily accepts deposits from
customers that can be withdrawn on demand (like savings or checking accounts)
and then lends that money out to borrowers, essentially acting as a middle
ground between people who have extra money and those who need to borrow
money; their key functions include storing deposits, providing loans, facilitating
financial transactions, and offering various investment services like mutual funds
or stocks.
Key functions of a bank:
Accepting and withdrawing deposit: Receiving money from individuals and
businesses to store in accounts like savings, checking, or certificates of deposit
(CDs) and withdraw customers’ deposit whenever needed.
Making loans: Lending money to customers for various purposes like personal
loans, mortgages, business loans, based on creditworthiness.
Payment services: Processing transactions like check clearing, wire transfers, and
electronic payments.
Investment services: Offering investment options like mutual funds, stocks, and
bonds to customers looking to grow their money.
Currency exchange: Facilitating the exchange of different currencies for
international transactions.
Safe deposit boxes: Providing secure storage for valuable items like jewelry or
important documents.
Financial advisory services: Offering financial planning and guidance to customers
on managing their money
Important points about banks:
Role in the economy: Banks play a crucial role in the economy by facilitating the
flow of money between savers and borrowers, contributing to economic growth.
Regulation: Banks are regulated by government agencies to ensure financial
stability and protect customer deposits.
Different types of banks: Depending on their focus, banks can be categorized as
commercial banks (general banking services), investment banks (focus on large
corporate transactions), or specialized banks (like agricultural banks).
Q. 11 Throw light on nationalization of bank and its objectives.
Nationalization of banks means the government taking over ownership and
control of private commercial banks, essentially converting them into public
sector entities, with the primary objective of directing credit towards priority
sectors like agriculture, small-scale industries, and underdeveloped regions to
promote equitable economic development and financial inclusion across the
country, often aiming to reduce regional disparities and control the concentration
of economic power in a few hands; this is usually done to achieve social welfare
goals by providing wider access to banking services to marginalized
communities. Nationalization of banks in India means that there are no longer any
barriers, social, economic, or political between the bankers and customers. This
enabled in a massive quantitative expansion in the customer base and also helped
improve the services.
Objectives of bank nationalization:
 Social welfare: To ensure equitable distribution of credit by prioritizing
lending to sectors like agriculture, small businesses, and rural areas, thereby
promoting social and economic development.
 Regional development: To address regional imbalances by expanding
banking services to underserved areas, reducing the urban-rural divide.
 Financial inclusion: To increase access to banking services for a larger
population, including marginalized communities, by providing them with
affordable credit facilities.
 Controlling private monopolies: To prevent the concentration of economic
power in the hands of a few private banks and ensure that credit is not directed
solely towards profitable sectors.
 Mobilizing national savings: To channel public savings towards productive
investments through the banking system.
 Economic planning: To align banking operations with national economic
development plans by directing credit towards priority sectors as determined by
the government.
Important points:
 Impact on the banking system: Nationalization can lead to greater stability
in the banking system by providing government support and oversight.
 Government control: After nationalization, the government has significant
control over lending policies and interest rates.
 Criticisms: Some argue that nationalization can lead to bureaucratic
inefficiencies and reduced competition within the banking sector.