CBSE Class 12 Economics HOTs Money And Banking Set 02

B. Fill in the Blanks

Question. Choose appropriate word and fill in the blank: A thing which is commonly accepted as a medium of exchange is called _______ (commodity/money)
Answer: money

Question. A system where goods are exchanged for goods is known as _______ (barter system of exchange/monetary system of exchange)
Answer: barter system of exchange

Question. Evolution of money has facilitated _______ (current payments/contractual payments)
Answer: contractual payments

Question. Main characteristic of money is _______ (liquidity/solidness)
Answer: liquidity

Question. _______ value of a paper note is what is written on it. (Money/Commodity)
Answer: Money

Question. _______ money is accepted as a medium of exchange because of the trust between the payer and the payee. (Fiat/Fiduciary)
Answer: Fiduciary

Question. Under the barter system of exchange, acts of sale and purchase of an individual occur at the _______ point (s) of time. (same/different)
Answer: same

Question. _______ refers to total stock of money held by the people of a country at a point of time. (Supply of money/Demand for money)
Answer: Supply of money

C. True or False

Question. State whether the following statements are True or False: C-C economy is an economy dominated by barter system of exchange.
Answer: True

Question. In barter system, deferred payments are made in the form of goods.
Answer: True

Question. In case of credit money, money value is less than commodity value.
Answer: False

Question. Expansion of exchange has led to expansion of the markets for goods and services.
Answer: True

Question. Fiat money includes all notes and cheques which the people in a country are legally bound to accept as a medium of exchange.
Answer: False

Question. Supply of money includes stock of money held by the government.
Answer: False

Question. Commercial banks add to the supply of money through demand deposits.
Answer: True

Question. Only net demand deposits are taken as a part of money supply.
Answer: True

D. Matching the Correct Statements

Question. From the set of statements given in Column I and Column II, choose the correct pair of statements:
Column I
(a) Full bodied money
(b) Term deposits
(c) Barter system of exchange
(d) Gross demand deposits
(e) High powered money

Column II
(i) Money value > Commodity value of money
(ii) Chequeable deposits
(iii) Goods are exchanged for money
(iv) Does not include inter-banking claims
(v) Base money in the economy

Answer: (e) High powered money—(v) Base money in the economy

Question. Identify the correct sequence of alternatives given in Column II by matching them with respective items in Column I:
Column I
(a) Government of a country
(b) Supply of money
(c) RBI
(d) Fiduciary money
(e) Notes and coins

Column II
(i) Legal tenders
(ii) Cheques
(iii) Supplier of money
(iv) Principal supplier of money
(v) A stock concept

Answer: (a)—(iii), (b)—(v), (c)—(iv), (d)—(ii), (e)—(i)

E. 'Very Short Answer' Objective Type Questions

Question. What is barter system of exchange?
Answer: Barter system of exchange is a system in which goods are exchanged for goods. Money as a medium of exchange does not exist.

Question. Define C-C economy.
Answer: C-C economy refers to that economy in which commodities are exchanged for commodities or in which goods are exchanged for goods.

Question. What do you mean by double coincidence of wants?
Answer: Double coincidence of wants means that goods in possession of two different individuals are needed by each other at the same time.

Question. What is meant by money?
Answer: Money can be defined as something that is generally accepted as a medium of exchange and acts as a measure and a store of value.

Question. What is fiat money?
Answer: Fiat money refers to money backed with order (authority) of the government.

Question. What is fiduciary money?
Answer: Fiduciary money is the money backed with mutual trust between the payer and the payee.

Question. Define full bodied money.
Answer: Full bodied money refers to money in terms of coins whose commodity value is equal to the money value as and when these are issued.

Question. What is credit money?
Answer: Credit money is the money of which money value (face value) is more than commodity value (intrinsic value).

Question. What is bank money?
Answer: Bank money is the money created by the commercial banks in the form of demand deposits, over and above cash deposits of the people with the banks.

Question. Define high powered money.
Answer: High powered money refers to monetary base or base money in the country. It includes: (i) currency held by the people, (ii) vault cash of the commercial banks, and (iii) cash reserves of the commercial banks with the RBI.

Question. Define money supply.
Answer: Money supply refers to the total quantity or stock of money available in the economy at a point of time.

Question. Write the components of money supply.
Answer: (i) Currency with the people, (ii) Demand deposits with commercial banks, and (iii) Other deposits.

Question. Who are the suppliers of money in India?
Answer: (i) The government of the country, (ii) The central bank of the country, and (iii) The commercial banks.

Question. Define demand deposits.
Answer: Demand deposits of commercial banks are those deposits which can be withdrawn from the bank on demand or by writing a cheque any time.

Question. Define term deposits.
Answer: Term deposits are those deposits which cannot be withdrawn from the bank as and when needed or by writing a cheque any time. These deposits involve a lock-in period.

2. Reason-based Questions (Comprehension of the Subject-matter)

Question. Read the following statements carefully. Write True or False with a reason: Double coincidence of wants is an essential requirement of exchange.
Answer: False. Though it is an essential requirement for the barter economy, in a money economy, exchange can take place without double coincidence of wants.

Question. Face value of money is always greater than its intrinsic value.
Answer: False. In case coins are made of gold and silver, intrinsic value of money may over time exceed its face value.

Question. Stock of money with the money issuing authorities is an important component of money supply.
Answer: False. Supply of money does not include the stock of it with the money issuing authorities.

Question. Fiat money is the same as fiduciary money.
Answer: False. Fiat money is the money backed with order of the government whereas fiduciary money is the money backed with the mutual trust between the payer and the payee.

Question. Money supply includes demand deposits of the people with the commercial banks.
Answer: True. Demand deposits of the people with the commercial banks is a component of money supply. Because, these deposits are converted in cash just by writing a cheque.

Question. Double coincidence of wants is a typical feature of monetary system of exchange.
Answer: False. Double coincidence of wants is a typical feature of barter system of exchange.

Question. Money has separated the acts of sale and purchase.
Answer: True. With the introduction of money, an individual can buy or sell a thing without selling or buying anything in return.

Question. There is no medium of exchange in the barter system.
Answer: False. Under barter system, goods themselves are the medium of exchange for goods. Of course, there is no common medium of exchange like money.

Question. There is no common unit of value in barter system.
Answer: True. There is a lack of common unit of exchange in barter system. Evolution of money offered a common unit of value.

Question. Money may be used as a commodity.
Answer: True. It happens when intrinsic value (commodity value) of money exceeds its face value (money value).

Question. Credit money is the money received as a credit from the banks.
Answer: False. Credit money is money whose money value is more than its commodity value.

Question. Monetary system of exchange facilitates much greater exchange than the barter system.
Answer: True. Because monetary system (unlike barter system) does not require double coincidence of wants.

Question. \( M_1 \) measure of money supply includes only notes and coins held by the people.
Answer: False. \( M_1 \) = Notes and coins held by the people + Demand Deposits + Other Deposits.

Question. Money supply in the economy refers to only the fiat money issued by the RBI.
Answer: False. Money supply in the economy includes both fiat money (backed by authority of the RBI) as well as fiduciary money (backed by mutual trust between the payer and the payee).

Question. Commercial banks play no role in the stock of money supply in the economy.
Answer: False. Commercial banks contribute to the stock of money supply in the economy by way of credit creation.

Question. Cash reserves with the banks are an important component of money supply.
Answer: False. Cash reserves with the banks are not a component of money supply. Because cash reserves of the suppliers of money is not treated as a part of money supply.

3. HOTS & Applications

Question. What is meant by an ideal supply of money?
Answer: Ideal money supply is that amount of money supply which keeps the total purchasing power in a state of balance with the supply of goods and services in the economy, so that the economy does not slip into inflationary or deflationary situations.

Question. Commodity value of money has never been greater than the face value (or money value). Is it true?
Answer: No, the given statement is false. In good old days when coins were made of gold and silver, commodity value of money (referring to the value of metal contained in the coins) would sometimes exceed the face value of coins which is why coins were sometimes melted and sold as a metal.

Question. Is it true that high powered money refers to cash reserves of the commercial banks with the central bank?
Answer: No, it is incorrect. High powered money refers to (i) currency with public, (ii) vault cash of the commercial banks, and (iii) cash reserves of the commercial banks with the RBI.

Question. Money becomes a commodity when intrinsic value of money exceeds its face value. Defend or refute.
Answer: Yes, the above statement is correct. Because when intrinsic value exceeds face value of money (as it often happened in case of gold and silver coins), money is used as a commodity (implying metal content of money is sold as a commodity).

Question. A curb on high powered money will lead to a curb on the creation of credit by the commercial banks in the economy. Do you agree?
Answer: Yes, the given statement is correct. This is because high powered money includes currency with the public as well as cash reserves of the commercial banks with the RBI. It serves as a monetary base for the creation of credit in the economy. A curb on high powered money will definitely lead to a curb on the creation of credit by the commercial banks.