CBSE Class 12 Economics Money and Banking Revision Notes

Money :-

Money occupies a unique position in modern economy. In its absence the whole prosperous economic life would collapse like a pack of cards.

Barter system of exchange :-

Barter system of exchange is the system in which commodities are exchanged for commodities. This is also called commodity for commodity exchange economy.

Difficulties of Barter System of Exchange :-

1. It lacks double coincidence of wants.
2. It lacks a common unit of exchange.
3. It lacks the system of future payments or deferred payments.
4. It lacks the system of store of value.

Definition of Money :-

Legal Definition :- Money is anything declared by law as money Functional Definition :- Money is anything that acts as a medium of exchange, measure of value, store of value and standard for deferred payments.

Classification of Money :- It is classified on the basis of value of money as money and value of money as commodity as following :-

1. Full bodied money.
2. Representative full bodied money.
3. Credit money.

Functions of Money :-

‘ Money is matter of functions four, a medium, A measure, A standard and a store, as this does not complete the picture, we may add transferability more’ Functions of money are classified into following three categories:-

1)   Primary or main function.

2)   Secondary or subsidiary functions.

3)   Contingent functions.

1)  Primary or main functions:-

1. Medium of exchange:- It means that money acts as an intermediary  for the goods and services in an exchange transaction.
2. Measure of value or unit of value:- Money serves as a measure of value in terms of unit of account. Unit of account means that the value of each good or service is measured in the monetary unit.

2)  Secondary or subsidiary functions:-

     A. Standard of deferred payments:- Money is functioning as  deferred    

         Payments  because its price remains relatively stable.

1. Store of value:- It is convenient to store value in terms of money because storage of money does not need much spaceIndian Monetary System:- It is based on paper currency standard. Currency is issued in India by RBI based on minimum reserve system. Currency issued in India is inconvertible. The issuing authority will not convert it into bullion – gold or silver.

Money Supply:- The supply of money means the total stock of all the forms of money       (Paper money, Coins and Bank deposits). Which are held by the public at any particular point of time. In India RBI uses four alternative measures of money supply called as M₁, M₂, M₃, M₄.

BANKING

Commercial Banks :- Banking is defined as the accepting for the purpose of landing or investment of deposits money from the public, repayable on demand or otherwise.

Functions of commercial Banks:-

i) Primary functions

A) Acceptance of deposits :- The bank accepts three types of deposits from the public 1) Current account deposits 2) Fixed/term deposit 3) Saving account deposits.

B) Advancing Loans :- The different types of loans and advances made by banks are as follows – cash credit, demand loans, and short term loans and over draft.

C) Credit Creation :- Banks create credit by giving more loan than their cash reserves.

ii) Secondary function:-

A)    Agency functions :-

1)     Transfer of funds

2)     Collection of funds

3)     Purchase and sale of securities.

4)     Collection of dividends

5)     Payment of bills & insurance

6)     Acting as executors and trustees of wills.

7)     Acceptance of income tax payment

8)     Acting as correspondent and agent of customers.

B)    General utility services:-

1)     Locker facilities

2)     Travellers cheque and letters of credit

3)     Business information and statistics

4)     Help in transportation of goods

i)  Social functions :- 1) Capital formation

                                  2) Inducement to innovations

                                  3)  Development of rural sector

                                  4) Increasing market demand  

                                  5) Implementation of monetary policy.

Central Bank :- The central bank is the apex institution of a country’s monetary system. The design and control of the country’s monetary policy is its main responsibility.India’s central bank is the Reserve Bank ofIndia.

Functions of Central Bank :-

1) Currency Authority :- The central Bank is the sole authority for the issue of currency in the country. All the currency issued by the central bank is its monetary liability. This means that the central bank is obliged to back the currency with assets of equal value.

2) Banker to the government :- The central bank acts as a banker to the government both central as well as state governments. It carries out all the banking business of the government and the government keeps its cash balances on current account with the central bank.

3) Bankers Bank and supervisor :- As the banker to banks , the Central Bank holds a part of the cash reserves of banks, lends them short term funds and provides them with centralized clearing and remittance facilities.

4) Controller of Money Supply and Credit :- The Central Bank controls the money supply and credit in the best interests of the economy by various instruments as quantitative and qualitative instruments.

I) Quantitative Instrument :- A. Bank Rate Policy:- The bank rate is the rate at which the Central Bank lends funds as a lender of last resort to banks against approved securities or eligible bills of exchange.

B. Open Market Operations:- Open market operations is the buying and selling of government securities by the central bank from/to the public and banks on its own account. The sale of government securities to banks will have the effect of reducing their reserves.

C. Varying Reserve Requirements :- Banks are obliged to maintain reserves with the central bank on two accounts. One is the cash reserve ratio and the other is Statutory Liquidity Ratio. Varing CRR and SLR are tools of monetary and credit control.

 II) qualitative Credit Control :- A) Imposing margin requirement on secured loans:- A margin is the difference between the amount of the loan and market value of the security offered by the borrower against the loan. The advantages of this instrument are manifold.

B) Moral Suasion :- This is a combination of persuasion and pressure that the Central Bank applies on the other banks in order to get them to fall in line with its policy.

C) Selective credit controls :- These can be applied in both a positive as well as a negative manner.

Very Short Question /Answer

Q1.  Define a Bank

Ans. Bank is an institution which borrows and lends money.

Q2. Write the one main function of bank in an economy.

Ans. One main function of bank in an economy is – Acceptance of  deposits :- The bank accepts three types of deposits from the public  1) Current account deposits 2) Fixed/term deposit 3) Saving account deposits.

Q3.  Define Central Bank. Write the name of Central Bank of India.

Ans. Central Bank designs and controls the monetary policy of the country. The name of Central Bank is Reserve Bank ofIndia.

Q4.  Why are all financial institutions not commercial bank?

Ans. A financial institution becomes a commercial bank only when it performs both the activities of a) Accepting deposits from the people and b) Making loan to the people.

Q5. Which institution is responsible for the monetary policy of the country?

Ans. The Central bank is responsible for the monetary policy of the Country.

Q6.  Write two Social functions of the Commercial bank.

Ans. 1) Capital formation 2) Development of rural sector.

Q7.  Name the institution which issued the currency notes of the country.

Ans. The Central Bank(Reserve Bank of India) issues the currency notes of the country.

Short Question Answer

Q1  Write the main functions of the Commercial Bank.

Ans. The main functions of the Commercial bank are:-

 A) Acceptance of deposits :- The bank accepts three types of  deposits from the public 1) Current account deposits 2) Fixed/term  deposit 3) Saving account deposits.

 B) Advancing Loans :- The different types of loans and advances  made by banks are as follows – cash credit, demand loans, and short  term loans and over draft.

(C)Credit Creation :- Banks create credit by giving more loan than  their cash reserves.

Q2.  Write the functions of Central Bank.

Ans. 1) Currency Authority 2) Banker to the government

        3) Bankers Bank and supervisor

        4) Controller of Money Supply and Credit

Q3.  What is the meaning of Banking?

Ans. Banking is defined as the accepting for the purpose of landing or investment of deposits.

Q4. Write the six agency function of the Commercial Bank.

Ans.

 Agency functions :-

1)  Transfer of funds

2)  Collection of funds

3)  Purchase and sale of securities.

4)  Collection of dividends

5)  Payment of bills & insurance

6)     Acting as executors and trustees of wills.

Q5.  How the Bank rate control the credit?

Ans. Bank rate is the rate of interest at which Central bank lends to Commercial  banks. By raising the bank rate central bank raises the  cost of borrowing. This forces the Commercial banks to raise in turn the rate of interest from the public. As lending rate rises demand for loan for investment and other purposes falls.

Long Question Answer:-

Q1.  Which are the Quantitative instrument to control the money supply and credit in the economy?

Ans.  The Quantitative instrument to control the money supply and credit in the economy are

1) Bank Rate policy – the bank rate is the rate at   which the control bank lends funds as a lender of last resort to banks against approved securities.

 2) Open market operation :- Open market operation is the buying and selling of government securities by the Central Bank from/to the public and bank on its own account.

 3) Varying Reserve Requirements :- Banks are obliged to maintain reserves with the Central bank on two account. One is the cash reserve ratio and the other is  Statutory Liquidity Ratio. Varing  CRR and SLR are tools of monetary and credit control.

Q2. Write the Qualitative instruments to control the credit of the  Central Bank.

Ans. The Qualitative instruments to control the credit of the Central Banks are :-

  A) Imposing margin requirement on secured loans:- A margin is the difference between the amount of the loan and market value of the security offered by the borrower against the loan.

 B) Moral Suasion :- This is a combination of persuasion and pressure that the Central Bank applies on the other banks in order to get them to fall in line with its policy.

C) Selective credit controls :- These can be applied in both a positive as well as a negative manner.

Q3.  Write the two function of each Central Bank and Commercial Bank.

Ans. Function of Central Bank :-      

 1) Currency Authority :- The central Bank is the sole authority for  the issue of currency in the country. All the currency issued by the central bank is its monetary liability. This means that the central bank is obliged to back the currency with assets of equal value.           

2) Banker to the government :- The central bank acts as a banker to  the government both central as well as state governments. It  carries out all the banking business of the government and the government keeps its cash balances on current account with the central bank.

Functions of the Commercial Bank:-

A) Acceptance of deposits :- The bank accepts three types of deposits from the public 1) Current account deposits 2) Fixed/term   deposit 3) Saving account deposits.

 B) Advancing Loans :- The different types of loans and advances made by banks are as follows – cash credit, demand loans, and short term loans and over draft.