CBSE Class 12 Economics Money and Banking Assignment

Case Study Questions  Money and Banking Class 12 Economics  

Read the following article and answer the questions given below:

India's total Money Supply (M3) stood at ₹17804885 crores as on October 23rd 2020, recording a rise of 11.60% over the same time last year. Currency with the public stood at ₹2619612, up 21.2% over the year.
Demand deposits with banks were up 10% at ₹1625734 crores. Time deposits with banks were also up 10% at ₹13518822 crores. The bank credit to commercial sector rose 5.2% on year to ₹10999604 crores.
Money supply in the economy has increased over the months. We can look at money supply from the component side and the sources side. One of the ways of measuring money supply is M3, which is a sum of the currency with the public, the demand deposits with the banking system, which include current deposits and savings deposits, the time deposits with the banking system, such as fixed deposits, recurring deposits, and other deposits of RBI. The currency with the public has grown by more than 21% since June and so have bank deposits. This has led to M3 growing by over 12% since June.
Heightened uncertainty in India caused by the coronavirus pandemic has led to a surge in currency in circulation as people hoard cash or park money in accessible deposits to safeguard themselves against salary cuts or job losses.
Foreign money continuously keeps coming into India, leading to an increase in demand for the rupee against the dollar. To prevent the rupee from appreciating, RBI sold rupees and bought dollars, adding to the increase in M3. 

Question: Sum of currency with public, demand deposits and time deposits with banks is ________measure of money supply.
(a) M1
(b) M2
(c) M3
(d) None of the above 
Answer: C

Question: Money supply in the economy has increased over 5 months since June due to:
(a) Public holding cash for transaction and precautionary
(b) Inflow of foreign exchange
(c) Uncertainty caused by corona virus pandemic
(d) All of these 
Answer: D 

Question: Money supply refers to the total _______ of money in circulation in the economy which can be directly used for transactions.
(a) Stock
(b) Flow
(c) Depreciation
(d) Value 
Answer: A

Question: ____ and ____ are the components of money supply.
(a) Currency held with public, fixed deposits
(b) Currency held with public, demand deposits
(c) Coins, paper currency
(d) Goods, services 
Answer: B

Read the following article and answer the questions given below:

Demonetisation was a new initiative taken by the Government of India in November 2016 to tackle the problem of corruption, black money, terrorism and circulation of fake currency in the economy. Old currency notes of Rs 500, and Rs 1000 were no longer legal tender. New currency notes in the denomination of Rs 500 and Rs 2000 were launche(d) The public were advised to deposit old currency notes in their bank account till 31 December 2016 without any declaration and upto 31March 2017 with the RBI with declaration Further to avoid a complete breakdown and cash crunch, notes government had allowed exchange of Rs 4000 old currency the by new currency per person and per day. Further till 12 December 2016, old currency notes were acceptable as legal tender at petrol pumps, government hospitals and for payment of government dues, like taxes, power bills, et(c)
This move received both appreciation and criticism. There was long queues outside banks and ATM booths. The shortage of currency in circulation had an adverse impact on the economic activities. However, things improved with time and normalcy returne(d)
This move has had positive impact also. It improved tax compliance as a large number of people were bought in the tax ambit. The savings of anindividual were channelized into the formal financial system. As a result,banks have more resources at their disposal which can be used to provide more loans at lower interest rates. It is a demonstration of State’s decision to put a curb on black money, showing that tax evasion will no longer be tolerate(d) Tax evasion will result in financial penalty and social condemnation. Tax compliance will improve and corruption will decrease.
Demonetisation could also help tax administration in another way, by shifting transactions out of the cash economy into the formal payment system.
Households and firms have begun to shift from cash to electronic payment technologies. 

Question: Which currency notes have been demonetised
(a) Rs 500
(b) Rs 1000
(c) both (a) and (b)
(d) none of the above 
Answer: C

Question: Demonetisation announced for the purpose of
(a) To tackle the problem of corruption
(b) To tackle the problem of Black money
(c) To tackle the problem of terrorism
(d) All of the above 
Answer: D

Question: Criticism on demonetisation
(a) Long queues outside banks and ATM centres
(b) Shortage of the currency in circulation
(c) Both (a) and (b)
(d) None of the above 
Answer: C

Question: positive impacts of demonetisation
(a) large number of people was brought in the tax ambit
(b) savings are channelized into the formal financial system
(c) Both(a) and (b)
(d) None of the above 
Answer: C

Read the following article and answer the questions given below:

The Reserve Bank of India unexpectedly cut its key deposit rate on Friday, for the second time in three weeks, to discourage banks from parking idle funds with it and spur lending instead, to revive a flagging economy amid the coronavirus lockdown.
This week, Prime Minister Narendra Modi extended until May 3 a lockdown of the population of 1.3 billion as India’s tally of infections exceeded 10,000, despite the three-week shutdown ordered from March 24.
The RBI cut its reverse repo rate by 25 basis points (bps) to 3.75% with immediate effect,Governor Shaktikanta Das told a video conference. The rate had already been cut by 90 bps on March 27.
“The surplus liquidity in the banking system has risen significantly in the wake of government spending and the various liquidity enhancing measures undertaken by the RBI,” he adde(d)
“In order to encourage banks to deploy these surplus funds in investments and loans in productive sectors of the economy, it has been decided to reduce the fixed-rate reverse repo rate.” 

Question: RBI’s measure of reduction in reverse repo rate is done to enable commercial banks ___.
(a) To use the surplus funds for investment
(b) To grant loans for productive purposes
(c) To widen economic and financial landscape
(d) All of these 
Answer: D

Question: The reserve bank of India lowered reverse repo rate to discourage banks from parking idle funds with ________.
(a) RBI
(b) Commercial banks
(c) Cooperative banks
(d) NABARD 
Answer: A

Question: When reverse repo rate is reduced, it _____
(a) Discourage the commercial banks to park their surplus funds with RBI
(b) Encourage the commercial banks to park their surplus funds with RBI
(c) Both (a) and (b)
(d) Neither (a) or (b) 
Answer: A

Question: Reverse repo rate is _____ to correct excess deman(d)
(a) Decreased
(b) increased
(c) Constant
(d) Flexible 
Answer: B

Read the following article and answer the questions given below:

The reserve bank of India unexpectedly cut its key deposit rate for the second time in three weeks, to discourage banks from parking idle funds with it and spur lending instead, to revive a flagging economy amid the corona virus lockdown.
This week, Prime Minister Narendra Modi extended until May 3 a lockdown of population of 1.3 billion as India’s tally of infections exceeded 10000, despite the 3 week shutdown order from March 24.
The RBI cut its reverse repo rate by 25 basis points (bps) to 3.75 percent with immediate effect.Governer Shaktikanta Das told a video conference. The rate had already been cut by 90bps on March 27.
“The surplus liquidity in the banking system has risen significantly in the wake of government spending and the various liquidity enhancing measures undertaken by the RBI”.He adde(d) “In order to encourage banks to deploy these surplus funds in investments and loans in productive sectors of the economy, it has been decided to reduce the fixed-rate reverse repo rate”. 

Question: RBI’s measure of reduction in reverse repo rate is done to enable commercial banks_________
(a) To use the surplus funds for investment
(b) To grant loans for productive purposes
(c) To widen economic and financial land space
(d) all of these 
Answer: D

Question: The Reserve Bank of India lowered reverse repo rate to discourage banks from parking idle funds with ________ (RBI/Commercial Banks) 
Answer: RBI 

Question: When reverse repo rate is reduced, it__________
(a) Discourages the commercial banks to park their surplus funds with RBI
(b) Encourages the commercial banks to park their surplus funds with RBI
(c) Both (a) and (b)
(d) Neither (a) nor (b) 
Answer: A

Question: Reverse repo rate is _______(increased/decreased) to correct excess demand 
Answer: increased 

Read the following article and answer the questions given below:

India’s total Money Supply (M3) stood at Rs 17804885 crore as on October 23rd 2020, recording a rise of 11.60% over the same time last year. Currency with the public stood at Rs 2619612, up 21.2% over the year. Demand deposits with banks were up 10% at Rs 1625734 crore. Time deposits with banks were also up 10% at Rs 13518822 crore. The bank credit to commercial sector rose 5.2% on year to Rs 10999604 crore.

Money supply in the economy has increased over the months. We can look at money supply from component side and sources side. One of the ways of measuring money supply is M3, which is sum of the currency with the public, thedemand deposits with the banking system, which include current deposits and saving deposits, the time deposits with the banking system, such as fixed deposits and recurring deposits, and other deposits of RBI. The currency with the public has grown by more than 21% since June and so have bank deposits. This led to M3 growing by over 12% since June.
Heightened uncertainty in India caused by the corona virus pandemic has led to a surge in
currency in circulation as people hoard cash or park money in accessible deposits to safeguard themselves against salary cut or job losses.
Foreign money continuously keeps coming to India, Leading to an increase in demand for the rupee against the dollar. To prevent rupee from appreciating, RBI sold rupees and bought dollars adding to the increase in M3.

Question: Sum of currency with public, demand deposits and time deposits with the bank is _________(M2/M3) Measure of money supply.
Answer: M3

Question: Money supply in the economy has increased over 5 months since June due to:
(a) Public holding cash for transaction and precautionary motive.
(b) Inflow of foreign exchange.
(c) Uncertaintycaused by corona virus pandemic
(d) all of these 
Answer: D

Question: Money supply refers to the total _______(stock/flow) of money in circulation in the economy which can be directly used for transactions. 
Answer: Stock

Question:_______ and ________ are the components of money supply.
Answer: Currency held by public, net demand deposits held by the commercial banks

ASSERTION AND REASON BASED QUESTIONS

Question. Assertion (A)- RBI gives licence to commercial banks and supervise them.
Reason (R)- RBI is the largest bank of country.
a) both (A) & (R) both are true and (R) is correct explanation of (A)
b) both (A) & (R) both are true and (R) is not correct explanation of (A)
c) (A) is true but (R) is false
d) (A) is false but (R) is true
Answer : A

Question. Assertion (A)-Central bank purchase and sell government securities according to conditions.
Reason (R)-Central bank works as a banker to the government.
a) both (A) & (R) both are true and (R) is correct explanation of (A)
b) both (A) & (R) both are true and (R) is not correct explanation of (A)
c) (A) is true but (R) is false
d) (A) is false but (R) is true
Answer : A

Question. Assertion (A)- when CRR is increased, credit creation capacity of commercial banks reduces.
Reason (R)- with increase in reserve ratios, banks have less funds available for loans.
a) both (A) & (R) both are true and (R) is correct explanation of (A)
b) both (A) & (R) both are true and (R) is not correct explanation of (A)
c) (A) is true but (R) is false
d) (A) is false but (R) is true
Answer : C

Question. Assertion (A)- Margin requirement is a qualitative tool for controlling credit creation process.
Reason (R)- margin requirement changes the availability of supply of money in economy.
a) both (A) & (R) both are true and (R) is correct explanation of (A)
b) both (A) & (R) both are true and (R) is not correct explanation of (A)
c) (A) is true but (R) is false
d) (A) is false but (R) is true
Answer : C

Question. Assertion (A)-Credit creation process is now a main function of commercial banks.
Reason (R)- Commercial banks are the secondary money suppliers.
a) both (A) & (R) both are true and (R) is correct explanation of (A)
b) both (A) & (R) both are true and (R) is not correct explanation of (A)
c) (A) is true but (R) is false
d) (A) is false but (R) is true
Answer : A

POINTS TO REMEMBER

❑ Money : Money may be defined as anything which is generally acceptable as a medium of exchange and does the function of ‘unit of account’ and measures of value.
❑ Barter Exchange : It is a system of exchange in which transactions are made by exchange of goods.

❑ Difficulties involved in the Barter Exchange
1. Absence of a common unit.
2. The lack of double coincidence of wants
3. Lacks of any satisfactory units to engage in contracts involving future payments.
4. Does not provide for any method of storing generalised purchasing power.
5. Lack of divisibility.
❑ Supply of Money : Total stock of money with the public at a given point of time.
❑ Commercial Banks : Commercial Banks is a financial institution who accepts deposits from the general public and provide loans facilities.
❑ Central Banks : The central Bank is the apex institution of monetary and banking system of country.

MONEY CREATION CREDIT CREATION BY COMMERCIAL BANKS
K =
K = Credit Multiplier
R = Cash reserve ratio

Important Questions for Class 12 Economics Money And Banking

VERY SHORT ANSWER TYPE QUESTIONS

Question. Define money.
Answer: Any thing which is generally acceptable by the people as medium of exchange, measure of value, standard of deferred payment and performs the function of store of value.

Question. What is meant by M.
Answer: M₁ = currency held with public + demand deposit in banks + other deposit in RBI.

Question. What is meant by the term money supply?
Answer: Total stock of money which are held by the public at a particular point of time in an Economy.

Question. What is bank rate?
Answer: Rate at which central bank lends to the commercial bank.

Question. State two primary functions of money.
Answer: 1. Medium of Exchange
2. Measure of value

Question. What is meant by credit creation?
Answer: Credit creation means power to expand demand deposits of Commercial Banks.

Question. What is credit multiplier?
Answer: Credit multiplier measures, number of times deposits are multiplied as credit.

Question. Write two functions of central banks.
Answer: Credit multiplier = 
(i) Currency Authority
(ii) Controller of money and credit

Question. What is cash reserve ratio (CRR)?
Answer: Commercial Banks are required under law to keep a certain percentage of their total deposit in the central banks in the form of cash reserves. This is called CRR.

Question. What is statutory liquidity ratio (SLR)?
Answer: Every Commercial Bank is required to keep a fixed percentage (ratio) of its assets in liquid form, called SLR.

Question. What is demand deposits by banks?
Answer: Demand deposits are deposits which can be withdrawn from bank at any time by the account holder.

Question. State two monetary measures of credit control by central bank.
Answer: (i) Bank Rate policy.
(ii) Open market operation

Question. What are various money stock measures?
Answer: Following four measures of money stock are used.
M1 = C + DD + OD
M2 = M1 + Saving deposit in Post Office Saving banks.
M3 = M1 + Net time deposit of banks
M4 = M3 + Total deposits with post office saving organisation (except NSC).

Question. What is margin requirement of loans.
Answer: 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.

Question. What do you mean by ‘Money supply’? Explain its components.
Answer: Money supply: It refers to stock of various forms of money held by the public at the particular point of time in an economy.

Features of money supply
1. It is the ‘stock variable’ as it is measured at a particular point of time.
2. It includes money supply with public only. The term ‘public’ means money using sectors like individuals and business firms. It does not include money creating sectors like government and banking systems as such balances do not come into actual circulation.

Components of Supply
1. Currency: It includes paper notes and coins held by the public. So, it excludes money with the government and banking sector.
2. Net demand deposits: It refers to demand deposits of the public with the commercial bank i.e. deposits of public with the banks in the form of current accounts, because such deposits can be withdrawn at any time by the account holder.
It is to be noted that net demand deposits exclude inter-bank deposits i.e. deposits by one bank into another bank.

Measures of Money Supply
M1= Currency + Net Demand Deposits + Other deposits with RBI
M2= M1 + saving deposits with post office savings account
M3= M1 + Net time deposits with banks
M4= M3 + Total deposits with post office savings organisation (excluding NSC)
             M1 & M2 = Narrow money                      M3 & M4 = Broad money

Question. What do you mean by ‘legal tender money’ and ‘optional money’?
Answer: Legal tender money: It refers to that money which is used by the government or by the monetary authority of the country. The payment or tender of it is constituted by the law as sufficient to discharge any debt. Everyone is bound to accept it as a medium of exchange or repayment of debt, its non-acceptance is an offence. It is also called fiat money as it serves as money by the order of the government.
Optional money: It refers to that non-legal tender money which is used as money based on trust that their issuer commands. It includes credit instruments like cheques, drafts, bills of exchange, etc. It is also known as fiduciary money

Question. What is bank?
Answer: Any financial institution which accepts the deposits from the public, repayable on demand, withdrawable by cheque, draft, bill of exchange, etc. and provides various types of loans and advances, is called bank.

Question. Explain the process of ‘credit creations’/ ‘money creation’/ ‘deposits creation’ by commercial bank.
Answer: The commercial bank has the power to create credit which is multi-times of initial deposits. The process of credit creation by the commercial banks is determined by two factors: –
1. The amount of initial fresh deposits.
2. Legal Reserve Ratio(SLR+CRR), it means minimum ratio of deposits legally required to be kept as a reserve by the banks.

The process of credit creation is explained on the basis of two assumptions: –
I. The entire banking system is taken as a single unit and termed as ‘Banks’.
II. The entire money that goes out of the bank is redeposited into the bank. Thus, all the receipts and payments in the economy are routed through banks.

Let legal reserve ratio be 20% and there is fresh deposit of ?1,00,000. As required, the banks keep the 20% i.e. ?20,000 as reserves.
Suppose the banks lend remaining ?80,000 to the borrowers. As assumed, those who receives the payment put the money back into the bank. By this way, bank receives fresh deposits of ?80,000, the bank again keeps 20% i.e. ?16,000 as reserves and lends ?64,000 which is also 80% of rest deposits. The money again comes back into the bank leading to fresh deposits of ?64,000.
The money goes on multiplying in this way and ultimately, the total money creation is ?5,00,000, which is shown as below

Total Deposits Created = 1/LRR x Initial Deposits
= 1/20% x 1,00,000 Total Deposits Created
= ₹5,00,000