CBSE Class 12 Economics Money And Banking VBQs Set 04

SUPPLY OF MONEY

1. Objective Type Questions

A. Multiple Choice Questions

Question. Which of the following is correct?
(a) Supply of money is a stock concept
(b) Supply of money does not include stock of money held by the government
(c) Supply of money does not include stock of money held by the banking system of a country
(d) All of the options
Answer: (d) All of the options

Question. Which of the following is not a component of M1 measurement of money supply?
(a) Demand deposits
(b) Currency
(c) Other deposits
(d) Term deposits
Answer: (d) Term deposits

Question. In India, coins are issued by:
(a) State Bank of India
(b) Reserve Bank of India
(c) Ministry of Finance
(d) Ministry of Urban development
Answer: (c) Ministry of Finance

Question. Which of the following systems is followed by Reserve Bank of India for issuing currency?
(a) Proportionate system
(b) Simple deposit system
(c) Minimum reserve system
(d) Fixed fiduciary issue system
Answer: (c) Minimum reserve system

Question. Term deposits are those:
(a) against which no cheque can be issued
(b) against which no interest is paid to the depositors
(c) which are fixed deposits
(d) both (a) and (c)
Answer: (d) both (a) and (c)

B. Fill in the Blanks

Question. Supply of money means stock of money with the _______. (people/supplier of money)
Answer: people

Question. _______ demand deposits are taken as a part of money supply. (Gross/Net)
Answer: Net

Question. _______ is called monetary base in the economy. (Bank money/High powered money)
Answer: High powered money

C. True or False

Question. In India, note issue system conforms to Minimum Reserve System.
Answer: True

Question. Term deposits are deposits withdrawn by cheque.
Answer: False

Question. In India, one rupee notes are issued by the Government of India.
Answer: True

D. Very Short Answer Questions

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. [Note: It does not include stock of money held by the suppliers of money, viz., the central bank, the commercial banks and the government.]

Question. Define M1 measure of money supply.
Answer: M1 = Currency (including notes and coins held by the people) + Demand deposits + Other deposits.

Question. What are the components of money supply?
Answer: The components of money supply are: (i) Currency held by the public, (ii) Demand deposits of the people with the commercial banks, and (iii) Other deposits (demand deposits with RBI of domestic and foreign institutions other than that of the government of the country and commercial banks within the country).

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

Question. What is the difference between term deposits and demand deposits?
Answer: Term deposits are always for a specific period of time called 'the term'. Cheques cannot be issued against term deposits. Demand deposits, on the other hand, are not for any specific period of time. Cheques can be issued against demand deposits.

2. Reason-based Questions 

Question. Demand deposits with commercial banks are a part of money supply.
Answer: True. Demand deposits with the commercial banks are a part of M1 measure of money supply. These are chequeable deposits and therefore, serve like notes and coins.

Question. Money supply in the economy include only notes and coins issued by the central bank.
Answer: False. Money supply in the economy includes notes and coins with the people as well as demand deposits with the banks.

Question. Money can be withdrawn as and when needed by the depositors in case of term deposits.
Answer: False. Depositors cannot withdraw money as and when needed in case of term deposits because term deposits are always for a specific period of time. These are not chequeable deposits.

Question. Stock of money with the government is a part of money supply.
Answer: False. Stock of money with the suppliers/creators of money is not to be treated a part of money supply in the country. We know, the government is the supplier of money.

Question. Commercial banks are the principal suppliers of money in India.
Answer: False. RBI (Reserve Bank of India) is the principal supplier of money in India.

Question. Gross demand deposits are not a part of money supply while net deposits are.
Answer: True. Gross demand deposits include inter-banking claims whereas net demand deposits do not include inter-banking claims. Inter-banking claims are not a part of demand deposits of the people. Hence, only net demand deposits are taken as a part of money supply, not the gross deposits.

Question. Term deposits are near money, and therefore should be treated as a component of M1 supply of money.
Answer: False. M1 supply of money includes only most liquid components of money supply. There are those components (like currency with the people) which can be used for purpose of sale and purchase of goods any time. Term deposits are not so liquid and therefore, not included in M1 supply of money.

COMMERCIAL BANKS

1. Objective Type Questions

A. Multiple Choice Questions

Question. A commercial bank is that financial institution:
(a) which only accepts deposits from the people
(b) which only offers loans to the people
(c) which accepts deposits from the people as well as offers loans to them
(d) which only deals in foreign exchange transactions
Answer: (c) which accepts deposits from the people as well as offers loans to them

Question. For the commercial banks, the source of profit is:
(a) unclaimed deposits
(b) grants by the government
(c) spread: the difference between the interest they charge and the interest they pay
(d) none of the options
Answer: (c) spread: the difference between the interest they charge and the interest they pay

Question. Those deposits against which money cannot be withdrawn any time are called:
(a) fixed deposits
(b) term deposits
(c) non-chequeable deposits
(d) All of the options
Answer: (d) All of the options

Question. Commercial banks advance loans:
(a) only to the extent of their term deposits
(b) only to the extent of their gold reserves
(c) only to the extent of their demand deposits
(d) multiple times of their required cash reserves with the RBI
Answer: (d) multiple times of their required cash reserves with the RBI

Question. Primary deposits are:
(a) cash deposits with the commercial banks
(b) gold reserves with the commercial banks
(c) reserves of foreign exchange
(d) none of the options
Answer: (a) cash deposits with the commercial banks

Question. Those deposits which arise on account of loans by the banks to the people are called:
(a) primary deposits
(b) secondary deposits
(c) cash deposits
(d) term deposits
Answer: (b) secondary deposits

Question. Cash reserves of the commercial banks with RBI, as a percentage of their total deposits refer to:
(a) cash reserve ratio
(b) repo rate
(c) reverse repo rate
(d) statutory liquidity ratio
Answer: (a) cash reserve ratio

Question. Credit creation by the commercial banks is equal to:
(a) \( \frac{1}{RR} \)
(b) \( \frac{1}{RR} \times \text{Cash Reserves} \)
(c) \( \frac{1}{RR} \times \text{Total Deposits} \)
(d) \( \frac{1}{RR} \times \text{Cash Reserves} \)
Answer: (b) \( \frac{1}{RR} \times \text{Cash Reserves} \)

Question. CRR in India is fixed by:
(a) the commercial banks
(b) the government
(c) the RBI
(d) supply-demand forces in the money market
Answer: (c) the RBI

Question. Money that the commercial banks can create on the basis of CRR is:
(a) the maximum amount of money that they can create
(b) the minimum amount of money that they can create
(c) the amount of money that they wish to create
(d) none of the options
Answer: (a) the maximum amount of money that they can create

B. Fill in the Blanks

Question. _______ deposits indicate savings of the depositors with the banks. (Primary/Secondary)
Answer: Primary

Question. Profit earning is the basic objective of the _______. (commercial bank/central bank)
Answer: commercial bank

Question. Higher the cash reserve ratio _______ is the credit creation. (lower/higher)
Answer: lower

Question. Loans offered by the commercial banks _______ the supply of money in the economy. (increase/decrease)
Answer: increase

C. True or False

Question. Commercial bank is a note issuing authority.
Answer: False

Question. Bank money is the money created by the banks.
Answer: True

Question. Primary Deposits + Secondary Deposits = Demand Deposits.
Answer: True

Question. Commercial bank does not deal with the general public.
Answer: False

D. Very Short Answer Questions

Question. Define the term commercial bank.
Answer: Commercial banks are those financial institutions which accept deposits from the people and offer them loans for purpose of consumption and investment.

Question. Name the two primary functions of the commercial banks.
Answer: (i) Acceptance of deposits, and (ii) Advancing of loans.

Question. Define credit multiplier.
Answer: Credit multiplier is the reciprocal of CRR. It is the number of times cash reserves of the commercial banks multiply to be equal to demand deposits. Credit Multiplier = \( \frac{1}{CRR} \). Example: If CRR = 5%, Credit multiplier = \( \frac{1}{5\%} = 20 \).

Question. Define primary deposits.
Answer: Primary deposits are cash deposits with the commercial banks by the people. These are reflected as a part of demand deposits of the banks.

Question. Define secondary deposits.
Answer: Secondary deposits are those deposits which arise on account of loans by the banks to the people. These are reflected as a part of demand deposits of the banks. These are also called derivative deposits.

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

Question. The commercial banks generate their profits by way of 'spread'.
Answer: True. The commercial banks generate their profits by way of 'spread' which is the difference between the rate of interest charged by the banks for the loans they offer and the rate of interest paid by the banks for the deposits they accept.

Question. All financial institutions are banking institutions.
Answer: False. All financial institutions are not banking institutions, even when all banking institutions are financial institutions. Example: LIC is a financial institution, but not a banking institution. A financial institution is a banking institution only when: (i) it accepts deposits from the people, and (ii) offers loans to the people.

Question. Loans offered by the commercial banks are a part of the cash reserves of the commercial banks.
Answer: False. Loans offered by the commercial banks are a part of demand deposits of the commercial banks.

Question. Higher cash deposit ratio implies higher credit creation capacity of the commercial banks.
Answer: True. Higher cash deposit ratio would lead to greater cash reserves of the commercial banks. Implying higher credit creation capacity of the commercial banks.

Question. Both primary and secondary deposits are demand deposits.
Answer: True. Both primary and secondary deposits are demand deposits because these can be withdrawn on demand by writing cheques.

Question. If reserve requirement = 25% of deposits, the credit multiplier = 10.
Answer: False. If reserve requirement = 25% of deposits, Credit Multiplier = \( \frac{1}{\text{Reserve Requirement}} = \frac{1}{25\%} = 4 \).

Question. CRR and SLR are the two components of LRR.
Answer: False. CRR and SLR are not the two components of LRR. These are the two variants of LRR. These cannot be added up to find LRR.

Question. Total demand deposits of the commercial banks is equal to the difference between the primary deposits and secondary deposits of the commercial banks.
Answer: False. Total demand deposits of the commercial banks is equal to the sum total of primary deposits and secondary deposits of the commercial banks.