CBSE Class 12 Economics Money And Banking Worksheet Set A

Question. Which of the following is not a problem of barter system of exchange ?
(a) store of value
(b) double coincidence of wants
(c) unit of account
(d) unemployment. 
Answer: D

Question. The concept of global economy has came into existence due to :
(a) store of value
(b) transfer of value
(c) measure of value
(d) none of these 
Answer: B

Question. Supply of money refers to quantity of money :
(a) As on 31st March
(b) During any specified period of time
(c) As on any point of time
(d) During a fiscal year.
Answer: C

Question. Money supply includes :
(a) All deposits in banks
(b) Only demand deposits in banks
(c) Only time deposits in banks
(d) Currency with the banks.
Answer: B

Question. Credit creation in commercial banks is determined by
(a) Cash Reserve Ratio
(b) Statutory Liquidity Ratio
(c) Initial Deposits
(d) All of the above 
Answer: D

Question. If an economy is to control recession like most of the Euro-Zone nations, which of the following can be appropriate :
(a) Reserve Bank of India
(b) Reducing CRR
(c) Both (i) and (ii)
(d) None of (i) and (ii) 
Answer: B

Question. Repo rate is rate at which :
(a) commercial banks purchase government securities from the central bank
(b) commercial banks can take loans from the central bank
(c) commercial banks can keep their deposits with the central bank
(d) short-term loans are given by commercial banks
Answer: B

Question. Demand deposits include
(a) Saving account deposits and fixed deposits
(b) Saving account deposits and current account deposits
(c) Current account deposits and fixed deposits
(d) All types of deposits 
Answer: B

Question. Who regulates money supply ?
(a) Government of India
(b) Reserve Bank of India
(c) Commercial Banks
(d) Planning Commission.
Answer: B

Question. Which of the following agency is responsible for issuing ₹ 1 currency note in India ?
(a) Reserve Bank of India.
(b) Ministry of Finance
(c) Ministry of Commerce
(d) Niti Aayog 
Answer: B

Question. The central bank can increase availability of credit by :
(a) Raising repo rate
(b) Raising reverse repo rate
(c) Buying government securities
(d) Selling government securities
Answer: C

Question. is the main source of money supply in an economy.
(a) Central Bank
(b) Commercial Banks
(c) Both (i) and (ii)
(d) Government
Answer: C

Question. Which of the following is not a Quantitative Method of credit control ?
(a) Open Market Operation
(b) Margin Requirements
(c) Variable Reserve Ratio
(d) Bank Rate Policy.
Answer: B

Question. The ratio of total deposits that a commercial bank has to keep with Reserve Bank of India is called :
(a) Statutory liquidity ratio
(b) Deposit ratio
(c) Cash reserve ratio
(d) Legal reserve ratio 
Answer: C

Fill in the Blanks: 

Question. In barter system of exchange, goods are exchanged for.
Answer: goods

Question. For the commercial banks, the source of profit is _______. 
Answer: spread,

Question. is the rate at which Central Bank of the country borrows funds from commercial banks within the country.
Answer: Reverse repo rate

Question. Money supply constitutes money held by public (or outside the banks) and_________.
Answer: demand deposits 

Question. _______ are deposits which can be withdrawn after a fixed period of time.
Answer: time deposits

Question. With an increase in SLR, flow of credit in the economy_________ . 
Answer: decreases

Question. In order to curb inflation, repo rate is __________. 
Answer: increased.

Short Answer Type Questions

Question. Explain the meaning of CRR and SLR.
OR
Distinguish between CRR and SLR.
Answer: 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.

Question. Explain “difficulty in storing wealth” problem faced in the barter system of exchange.
Answer: Under barter system, there were difficulties in storing wealth. Wealth is stored to be used in future. All goods cannot be stored. Perishable goods cannot be stored. All goods cannot be transported from one place to another. All goods may not be acceptable as medium of exchange. No single physical good has all these qualities. So, in the barter system of exchange there was difficulty in storing wealth.

Question. Explain the problem of double coincidence of wants to be faced under barter system. How money has solved it ?
Answer: The problem of double coincidence of wants arises when there is no medium of exchange. In such a case, the buyer has to make a search for the seller who also wants to buy the same good which the buyer itself offers for exchange. Money has solved the problem by working as a medium of exchange. The seller can sell the goods in the market in return for money and buy the goods he wants to buy in return for the money.

Question. State any three functions of money. 
Answer: (i) Medium of Exchange (ii) Unit of account. (iii) Store of value. (iv) Standard of deferred payments.

Question. Explain the concept of Money Supply.
Answer: The Supply of Money means the total stock of money (paper notes, coins and demand deposits of banks) in circulation held by the public at any particular point of time. Thus, two components of money supply are : (i) Currency (paper notes and coins), and (ii) Demand Deposits of Commercial Banks. Money supply or supply of money means total amount of money available in an economy. In other words, money supply refers to the volume of money held by the people in the country for transactions or settlement of debts.

Question. State the functions of Money. Explain any one of them.
OR
Explain any two functions of money.
Answer: Functions of money : (i) Primary Functions:
(a) Medium of Exchange (b) Measure of Value (ii) Secondary Functions: (a) Standard of Deferred Payment (b) Store of Value (c) Transfer of Value

Question. Explain the ‘Medium of Exchange’ function of money. How has it solved the problem created by barter system ?
Answer: Money serves as a medium of exchanging goods and services. People sell goods for money and use the money for buying goods they want. It has removed the problem of double coincidence of wants faced in the Barter System.
Money, as a medium of exchange, means that it can be used to make payments for all transactions of goods and services. It is the most essential function of money. Money has the quality of general acceptability. So, all exchanges take place in terms of money. This function has removed the major difficulty of lack of double coincidence of wants and inconveniences associated with the barter system. Use of money allows purchase and sale to be conducted independently of one another. This function of money facilitates trade and helps in conducting transactions in an economy. Money has no power to satisfy human wants, but it commands power to purchase those things, which have utility to satisfy human wants.

Question. Explain the ‘Store of Value’ function of money. How has it solved the related problem created by barter?
Answer: We find that individuals don’t spend their entire income. They may save a part of their income to store it for use at later date. They do this as they know that money will be acceptable at any time in future for buying any commodity which they desire. In the barter system, it is difficult to store commodities as it involves costly storage/reduction in quality or value of the stored commodity. Thus, money overcomes the problem of storage that exist in barter system.

Question. Explain the working of money multiplier with the help of a numerical example.
Answer: Money multiplier refers to the process of creation of credit by the commercial banks, with the help of initial deposits made by the public and legal reserve ratio.
Money Multiplier = 1/legal reserve ratio
Suppose there is an initial deposit of ₹ 1000 crores and the legal reserve ratio is 10%; then
Money Multiplier = 1/0.10 = 10
Total Deposits = Initial Deposit x 1/legal reserve ratio
Credit Creation = 1000 x 10 = ₹ 10,000 crores

Question. Explain the ‘Standard of Deferred Payment’ function of money. How has it solved the related problem created by barter system?
Answer: Money, as a standard of deferred payments, means that money acts as a ‘standard’ for payments, which are to be made in future. Every day, millions of transactions take place in which payments are not made immediately. Money encourages such transactions and helps in capital formation and economic development of the economy. Money as a standard of deferred payments has simplified the borrowing and lending operations. It has led to the creation of financial institutions. Under barter system, it was very difficult to make future payments and contractual payments such as salaries, loans, interest payments, etc. For example, it was difficult to decide whether wages to a labour are to be paid in terms of food grains or any other commodity. This is because it was difficult to value the services of labour in terms of a commodity. Similarly, if a loan is taken in the form of a commodity, then the problem will arise in its repayment. However, as superior to the Barter System, money made the system of deferred or contractual payments such as salaries, interest payments, etc. possible.

Question. Explain the ‘Bank of Issue’ function of the Central Bank.
OR
Explain the “Currency Authority” function of Central Bank.
Answer: Central Bank as “Bank of Issue” The Central Bank of a country has the sole authority of issuing currency notes and coins in the country.
All the currency issued by the Central Bank is unlimited legal tenders. No other Commercial Bank or financial institution can issue these currencies except Central Bank. Often, the Central Bank divides its functions into two departments– Banking Department and Issue Department. It is the issue department that is responsible for note-issuing. It issues currency to cope with the demand for it, which depends upon the level of economic activity in the economy. Hence, Central Bank is also known as Bank of Issue.

Question. Explain ‘Government’s Bank’ function of central bank.
OR
Explain ‘banker to the government’ function of the central bank.
Answer: Central bank acts as bankers’ fiscal agent and adviser to the government. As banker to the government, the central bank keeps the deposits of the central and state governments and makes payments on behalf of governments. But it does not pay interest on government deposits. It buys and sells foreign currencies on behalf of the government. It keeps the stock of gold of the government. Thus, it is the custodian of government money and wealth.
As a fiscal agent, the central bank makes short- term loans to the government. It floats loans, pays interest on them, and finally repays them on behalf of the government. Thus, it manages the entire public debt. The central bank also advises the government on such economic and money matters as controlling inflation or deflation, devaluation or revaluation of the currency, deficit financing, balance of payments, etc.

Question. Explain the ‘’Banker’s Bank Function’’ of the Central Bank.
Answer: Banker’s Bank - the central bank controls, organizes, regulates, direct and supervises the commercial banks. It performs various banking functions with the commercial banks like lending funds, maintaining reserves of the banks, parking the surplus funds of the banks, etc. These kinds of the reserves can be utilized by the central bank in the case of any crisis.