2nd PUC Economics Question Bank Chapter 9 Money And Banking

You can Download Chapter 9 Money And Banking Questions and Answers, Notes, 2nd PUC Economics Question Bank with Answers Karnataka State Board Solutions help you to revise complete Syllabus and score more marks in your examinations.

Karnataka 2nd PUC Economics Question Bank Chapter 9 Money And Banking

2nd PUC Economics Money And Banking One Mark Questions and Answers

Question 1.
Write the meaning of Barter System.
Answer:
Exchange of goods for goods is called as Barter System.

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Question 2.
What is money?
Answer:
Money is anything which is commonly accepted as a medium of exchange for goods and services and acts as a measure of value.

Question 3.
Define Money.
Answer:
According to F. A. Walker “Money is what money does”.

Question 4.
Write any two Primary functions of money.
Answer:
The two primary functions of Money are  (a) Medium of exchange (b) Measure of value.

Question 5.
What is high powered money?
Answer:
The high powered money refers to that money which is held by the public, demand deposits of banks and other deposits held by the Reserve Bank of India.

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Question 6.
What is demand for money?
Answer:
The demand for money includes the sum of transactionary demand for money, precautionary demand for money and speculative demand for money.

Question 7.
Write the meaning of supply of money.
Answer:
The supply of money refers to the total currency notes and coins held by the people in the country at a particular point of time. In other words, it refers to the aggregate stock of money.

Question 8.
Expand ATM.
Answer:
Automated Teller Machine.

Question 9.
What is narrow money?
Answer:
The money which is fully liquid and available whenever people need is called narrow money.

Question 10.
What is broad money?
Answer:
Broad money refers to the money held by the public in the form of savings and Net Time Deposits apart from the currency and demand deposits.

Question 11.
What do you mean by Primary Deposit?
Answer:
When a bank accepts cash from the customer and opens an account in the name of that customer, it is called a Primary Deposit.

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Question 12.
What is bank rate?
Answer:
Bank rate is the rate of interest charged by the Reserve Bank of India while lending loans and advances to commercial banks.

Question 13.
What is overdraft?
Answer:
It is a facility provided by a bank to its current account holders to overdraw their accounts upto certain limit.

Question 14.
What is cash reserve ratio (CRR)?
Answer:
The CRR is a certain percentage of bank deposits which commercial banks are required to keep with the RBI in the form of reserve funds.

Question 15.
What do you mean by Statutory Liquidity Ratio (SLR)?
Answer:
There is an RBI directive to commercial banks to maintain a certain percentage of their total demand and time deposits with themselves, in the form of liquid assets like cash, precious metals or approved securities like bonds. The ratio of the liquid assets to time and demand liquidities is termed as SLR which is 22.5% at present.

Question 16.
What is Precautionary motive of money?
Answer:
The demand for money to meet the unforeseen and unexpected expenses is known as precautionary demand for money.

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2nd PUC Economics Money And Banking Two Marks Questions and Answers

Question 1.
Mention any four difficulties of Barter system.
Answer:
The four major difficulties of barter system are:

  1. Lack of double coincidence of wants.
  2. Lack of common measure of value.
  3. Lack bf divisibility.
  4. Difficulty in storing wealth.

Question 2.
State the differences between narrow money and broad money.
Answer:

Narrow money

Broad money

(i) It is highly liquid money. (i) It includes both full liquid and less liquid money.
(ii) It includes coins and currency notes with public, demand deposits with banks and other deposits with RBI. (ii) It includes money held in the form of savings, net time deposits, currency and demand deposits.
(iii) It is represented as MN=C+DD+OD (iii) It is represented as MB = C+DD+SD+TD

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Question 3.
Distinguish between Primary deposits and Derivative deposits.
Answer:

Primary Deposits

Derivative Deposits

(i) It is created when customers deposit their money in the bank by opening new accounts. (i) It arises when customers are granted loans and advances by a bank.
(ii) It does not create any kind of credit creation. (ii) It contributes directly towards credit creation activity of commercial banks
(iii) Whenever customer makes payment to the banks, primary deposits are created (iii) Whenever the loan is granted, derivate deposit is created.

Question 4.
Mention the motives of demand for money as per J.M.Keynes.
Answer:
According to J.M.Keynes, the three motives of demand for money are as follows:

  • Transaction motive
  • Precautionary motive and
  • Speculative motive.

Question 5.
State the various types of deposits.
Answer:
The types of deposits are as follows:

  1. Current account deposits
  2. Savings account deposits.
  3. Fixed Deposits
  4. Recurring Deposits.

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Question 6.
Write the four objectives of monetary policy.
Answer:
The four objectives of monetary policy are as follows:

  1. To establish Exchange rate stability.
  2. To achieve Price stability.
  3. To control business cycles.
  4. To provide full employment.

Question 7.
What do you mean by open market operations?
Answer:
Open market operation is an instrument of monetary policy which involves buying and selling of Government securities in the open market between RBI and other commercial banks and the public. RBI sells Government securities to decrease the flow of credit and buys them back to increase credit flow, as the situation warrants.

Question 8.
Distinguish between Scheduled and non-scheduled commercial banks.

Scheduled Banks Non-Scheduled Banks
These banks are those which are included in second schedule of RBI Act 1934. These are the banks which are not included in the second schedule of RBI Act 1934.
The paid up capital and reserve fund is more than Rs.5,00,000. The paid up capital and reserve fund is less than Rs.5,00,000.

Question 9.
What are the contingent functions of Money?
Answer:
The contingent functions of money are as follows:

  • Distribution of National Income.
  • Basis of credit.
  • Maximizes the satisfaction of both consumers and producers.
  • Gives liquidity to wealth.

Question 10.
Mention various types of loans and advances of Commercial Banks.
Answer:
The major types of loans and advances are Overdraft, Cash Credit, Loans and Discounting of Bills of Exchange.

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2nd PUC Economics Money And Banking Five Marks Questions and Answers

Question 1.
Briefly explain the Primary functions of Money.
Answer:
The primary functions of money are as follows:
a) Medium of Exchange: Money plays an important role as a medium of exchange. It facilitates exchange of goods for money. It has solved the problems of barter system. It helps the people to sell in one place and buy in another place. Money has widened the scope of market transactions. Money has become a circulating material between buyers and sellers.

b) Measure of Value: The money acts as a common measure of value. The values of all goods and services can be expressed in terms of money. As a measure of value, money performs following functions:

  • The value of all goods and services measured and expressed in terms of the money.
  • Rate of exchange of goods and services expressed in money.
  • Facilitates the maintenance of accounts.
  • It facilitates price mechanism.
  • It makes goods and services comparable in terms of price.

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Question 2.
Write a note on the supply of money.
Answer:
The supply of money is the total of all forms of money held by the community at any particular point of time. Milton Friedman defines the money supply at any moment of time as ‘Literally the number of dollars they have to their credit at banks or in the forms of demand deposits and also commercial bank time deposits’.

The RBI working group on money supply has modified the parameters of measuring money supply in the form of NM1, NM2 and NM3.
NM1 = Currency with the public + demand deposits with the banking system + other deposits with the RBI
NM2 = NM1 + short term time deposits of the public
NM3 = NM2 + long term time deposits of the public + term funding from financial institutions.

Narrow Money and Broad Money :
Narrow Money:
It is highly liquid money. It includes coins and currency notes with public, demand deposits with banks and other deposits with RBI. It is represented as MN = C + DD + OD

Broad Money:
It includes both full liquid and less liquid money.
It includes money held in the form of savings, net time deposits, currency and demand deposits. It is represented as Mb = C+ DD + SD + TD.

Question 3.
Briefly explain the quantitative methods of Credit control.
Answer:
As per Banking Regulation act of 1949, “RBI has the power to adopt and implement various credit control measures to achieve objectives like proper regulation of volume of credit and prices. Different quantitative measures implemented by RBI are as follows:

a) Bank Rate Policy: It is the standard rate at which RBI is prepared to buy or re-discount bills of exchange or commercial papers eligible for purchase according to the banking regulation act. It is the rate at which RBI extents advances to commercial banks. This influences the lending rates of commercial banks. Earlier in 1991 the rate was 12% and as on 2005, it was 6% and it was 5.5% in 2008.

b) Open Market Operations: It refers to purchase and sale of various assets like gold, Government securities, foreign exchange, etc by RBI. The expansion and control of supply of money is done by “Open market operations”. RBI purchases securities during deflation arid sells them during inflation.

c) Variable reserve requirements: As per the banking regulation act, every bank has to keep certain percentage of its total deposits with RBI in the form of reserve fund. By changing the ratio (increase or decrease) of these reserves, RBI can control- the credit power of banks.

These variable requirements are of two types. They are Cash reserve ratio (CRR) and Statutory liquidity ratio (SLR):
i) Cash reserve ratio (CRR): It is the portion of total deposits of the commercial banks . which they have to keep with RBI in the form known as cash reserves. At present CRR is at 5% as of 21st January 2005.

ii) Statutory liquidity ratio (SLR): It is the portion of total deposits of commercial banks which they have to keep with themselves and these deposits must not be Used for credit purpose. In other words, SLR refers to that portion of total deposits which a commercial bank has to keep with itself in the form of liquid assets viz., cash, gold or approved Government securities. The SLR has been reduced to 25% on the entire net demand. This is as per the recommendations of Narasimham committee.

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Question 4.
Explain the qualitative or selective methods of credit control.
Answer:
Selective credit controls are those measures used by RBI along with other measures to control credit. It is used as the supplement to the regular credit regulations. The selective credit controls used by RBI are as follows:

a) Fixation of margin requirements: A central bank changes the margin requirement from time to time to regulate the volume of the credit. The difference between the market value of securities or assents and the amount actually lent against these securities is called margin. The RBI may increase the margin to reduce the volume of credit and decrease the margin to expand the credit.

b) Regulation of Consumer credit: Consumer credit refers to financial assistance given by banks to consumer to purchase vehicles, electronic goods, electrical items etc. In order to avoid demand pull inflation, the RBI regulates the consumer’s credit.

c) Moral Suasion: It implies that persuasion and request made by the Central Bank to Commercial Banks to cooperate with the general monetary policy.

d) Direction action: The RBI may take direct action against the erring commercial banks by refusing to rediscount their commercial bills and may charge penal rate of interest.

e) Credit Rationing: The RBI through its credit rationing system, directs the commercial banks to borrow loans to a certain limit. In turn, the commercial banks will lend loans to limited sector and there the supply of money gets controlled.

f) Publicity: The RBI gives regular publicity about money market trends, educates the commercial banks to regulate the credit. It includes publishing the monthly review of credit and business conditions and the annual reports on the banking sectors.

Question 5.
Explain the objectives of Monetary Policy.
Answer:
According to R.P. Kent, monetary policy is ‘the management of the expansion and contraction of volume of money in circulation for the explicit purpose of attaining specific objectives’.

The main objectives of Monetary policy are as follows:
a) To stabilize money market: The main objective of monetary policy is to stabilize the money market and to reduce the fluctuations in the interest rates to the minimum. The neutral monetary policy should be introduced to achieve the equilibrium in the demand and supply of money.

b) To stabilize the Exchange rate: The unstable exchange rate in international market is not favourable for the foreign trade of a country. The central tries to bring stability in foreign exchange rate through controlling credit creation activities of commercial banks.

c) To stabilize Price level: Price stability is an important objective of monetary policy. The fluctuation in price level leads to ups and downs in business. The RBI, through its monetary policy controls the inflationary situations.

d) To control business or trade cycles: The Business cycles are ups and downs in business. Existence of business cycle brings instability in economy. It is one of the objectives of monetary policy of RBI to control business cycles and bring stability.

e) Full employment: The economic stability with full employment and high per capita income has been considered as an important objective of monetary policy. In order to achieve the objective of full employment, cheap monetary policy should be made applicable.

Question 6.
Explain the primary functions of Commercial Banks.
Answer:
Commercial banks play a major role, in the economic development of a country. They are the backbone of investment activities. They perform many functions. The primary functions of commercial banks are as follows:

a) Accept Deposits: The main function of commercial hanks is accepting deposits. They maintain different types of deposits from the public. They are as follows:
(i) Current account deposits: These are the deposits payable on demand. Money can be withdrawn any number of times as per the desires of depositors. Usually, no interest is paid. The current account deposits are meant for traders and businessmen. Such deposits are also called as demand deposits.

(ii) Savings account deposits: Savings deposit accounts are generally opened by the people of low income, salary earners and others. The banks impose certain restrictions on the withdrawal of amount. Low rate of interest is paid on these deposits. This type of deposits encourage small savings in the society.

(iii) Fixed deposits: These are the deposits in which money deposited is fixed for a period of time and cannot be withdrawn before the stipulated time. Higher rate of interest is paid. Interest rate depends on the duration of deposit. Higher interest is paid for longer duration and vice versa. Such deposits are also called as Time deposits.

(iv) Recurring Deposits: Under these deposits, customer deposits money regularly in monthly installments for period of one year or more. After the stipulated time period, the total amount deposited is paid to the customer along with interest. The rate of interest is higher when compared to savings account deposits.

(b) Provide Loans: Providing loans to customers is another important primary function of commercial banks. They provide several types of loans and advances. They are as follows:
(i) Overdraft: It is a facility provided by a bank to its current account holders to overdraw their accounts upto a certain limit. Interest is charged on the amount actually overdrawn by the customer. This type of loan is provided to businessmen and joint stock companies.

(ii) Cash Credit: This type of loan is given to the customers against the assets like shares, stocks, bonds, etc. Under this scheme, the customer is allowed to withdraw the amount up to a certain limit in accordance with the value of the assets he possessed. Interest is charged only on the amount which is withdrawn.

(iii) Loans: Under this type, commercial banks provide specified sum of money to a person or firm against surety or security of an asset, movable or immovable. Loans are given to a borrower by crediting the loan amount to the new account opened by the banker. The borrower can withdraw money as per his needs. The interest is charged on the whole loan amount which is sanctioned by the banker.

(iv) Discounting of bills of exchange: Discounting of bills of exchange refers to encashing, the commercial bills from the banks before the date of maturity. The banks charge some commission while discounting bills of exchange. Here, the loans are given as advance payment against the bills payable.

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Question 7.
What are commercial banks? Explain the types of Commercial banks.
Answer:
Commercial banks are those banks which accept deposits from public and lend loans to public. They perform all kinds of banking business and generally finance trade and commerce. They deal in money and credit.

The major features of a Commercial bank are as follows:

  • It accepts deposits and lends loans.
  • It deals in credit and it has ability to create credit.
  • It is a commercial financial institution which tries to get profit.
  • It creates demand deposits which serve as a medium of exchange.

According to RBI ACT, 1934, Indian commercial banks are classified as follows:
a) Scheduled Banks: These are the banks which are included in the second schedule of RBI Act, 1934. Their paid up capital is more than Rs.5 lakhs.

b) Non-Scheduled Banks: These are those commercial banks which are not included in second schedule of RBI Act, 1934. Their paidup capital is less than Rs.5 lakhs.

The commercial banks are classified on the basis of ownership as follows:
a) Public Sector Banks: The banks which are owned and managed by the Government are called as Public Sector Banks, e.g. State Bank of India, State Bank of Mysore, Canara Bank, Punjab National Bank, etc.

b) Private Sector Banks: The banks which are owned and managed by the private individuals or companies. They consists of both Indian and foreign private banks.

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2nd PUC Economics Money And Banking Ten Marks Questions and Answers

Question 1.
Explain the functions of money.
Answer:
The functions of Money are broadly classified as follows:
I. Primary functions
II. Secondary functions
III. Contingent functions and
IV. other functions

I. Primary Functions:
The primary functions of money are as follows:
a) Medium of Exchange: Money plays an important role as a medium of exchange. It facilitates exchange of goods for money. It has solved the problems of barter system. It helps the people to sell in one place and buy in another place. Money has widened the scope of market transactions. Money has become a circulating material between buyers and sellers.

b) Measure of value: The money acts as a common measure of value. The values of all goods and services can be expressed in terms of money. As a measure of value, money performs the following functions:

  • The value of all goods and services are measured and expressed in terms of money.
  • Rate of exchange of goods and services expressed in money.
  • Facilitates the maintenance of accounts.
  • It facilitates price mechanism.
  • It makes goods and services comparable in terms of price.

II. Secondary functions: The secondary functions of money are as follows:
a) Store of value: People can save part of their present income and hold the same for future. Money can be stored for precautionary motives needed to overcome financial stringencies.

b) Standard of deferred payments: All the credit transactions are expressed in terms of money. The payment can be delayed or postponed. So, money can be used for delayed settlement of dues or financial commitments.

c) Transfer of value: Money acts as a transfer of value from person to person and from place to place. As a transfer of value, money helps us to buy goods, properties or anything from any part of the country or the world. Further, money earned in different places can be brought or transferred to anywhere in the world.

III. Contingent Functions of Money:
Other than Primary and Secondary functions, money also performs other functions which are as follows:
a) Basis of Credit: Money serves as a basis of the credit. The modern credit system exists only because of existence of money.

b) Distribution of National Income: Money helps in distribution of national income. The reward paid to factors of production in the form of rent, wages, interest and profit are nothing but the distribution of National Income at factor prices.

c) Provides Liquidity and Uniformity: Money provides liquidity to all kinds of assets both movable and immovable. Money can be converted into any type of asset and all assets can be converted into money.

d) Helps in consumers’ and producers’ equilibrium: All goods and services are expressed in terms of money. The consumer attains equilibrium when the price of a product is equal to his marginal utility. Similarly, the producers reach equilibrium if they get maximum satisfaction. Both consumers and producers try to achieve equilibrium with the help of money.

IV. Other functions of money:

a) Money helps in decision making.
b) Helps the Government in collection of taxes and undertaking expenditure.
c) The solvency of a person can be determined with the help of money.
d)Money helps in determining purchasing power of rich or poor.

Question 2.
Explain the three motives of Demand for Money.
Answer:
Demand for money refers to desire to hold money for.fulfilling different requirements. People keep money for day-to-day activities, to meet consequential expenses and to invest on shares and debentures. J.M.Keynes, in his General Theory used a new term ‘liquidity preference’ for the demand for money. J.M.Keynes suggested three motives which led to the demand for money in an economy. They are as follows:

a) Transaction demand for money: When people hold cash to meet daily transactions is called transaction demand for money. The transaction motive relates to the demand for money for the day to day expenditure of individuals and business firms. The need for holding cash arises due to a time gap between receipt of income and the consumption expenditure. As income increases, people like to spend more and in turn they demand more money to hold. The Transaction demand for money is represented as follows:
MdT = f (Y) where, MdT represents the transaction demand for money, Y represents the income of an individual and T represents functional relationship between two variables.

b) Precautionary Motive: People keep money to meet unexpected expenses or circumstances, e.g. people hold cash to meet medical treatment, accidents, emergencies, to perform some rituals or celebrations etc. We need to hold cash for meeting such emergencies in our life. If we demand money for such needs, it is known as precautionary demand for money. As income rises, precautionary demand for money also gets increased and if the income falls, the precautionary demand for money also falls. This can be expressed as follows:

Mdp = f (Y), where Mdp represents the precautionary demand for money, Y represents the income of an individual and ‘f’ represents functional relationship between two variables.

c) Speculative Motive: Some people hold cash to invest on shares, debentures, gold, immovable properties etc. The speculative demand for money refers to the demand for money that people hold as idle cash to speculate with the aim of earning capital gains and profits. According to J.M.Keynes there will be inverse relationship between the rate of interest and speculative demand for money. If the rate of interest is low the people desire to keep more cash with them and vice versa. So, the speculative demand for money is inversely related to the expected rate of interest. This can be expressed as follows:

Mds = f (ie), where Mds represents the Speculative demand for money, (ie), represents the expected rate of interest, and ‘f ’ represents functional relationship between two variables.

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Question 3.
Explain the functions of Commercial Banks.
Answer:
Commercial banks play a major role in the economic development of a country. They are the backbone of investment activities. They perform many functions. The functions commercial banks are classified as Primary functions and Secondary Functions.

I. Primary Function:
The primary functions of commercial banks are as follows:

a) Accept Deposits: The main function of commercial banks is accepting deposits. They maintain , different types of deposits from the public. They are as follows:

i) Current account deposits: These are the deposits payable on demand. Money can be withdrawn any number of times as per the desires of depositors. Usually, no interest is paid. The current account deposits are meant for traders and businessmen. Such deposits are also called as demand deposits.

ii) Savings account deposits: Savings deposit accounts are generally opened by the people of low income, salary earners and others. The banks impose certain restrictions on the withdrawal of amount. Low rate of interest is paid on these deposits. This type of deposits encourage small savings in the society.

iii) Fixed deposits: These are the deposits in which money deposited is fixed for a period of time and cannot be withdrawn before stipulated time. Higher rate of interest is paid. Interest rate depends on the duration of deposit. Higher interest is paid for longer duration and vice versa. Such deposits are also called as Time deposits.

iv) Recurring Deposits: Under these deposits, customer deposits money regularly in monthly installments for period of one year or more. After the stipulated time period, the total amount deposited is paid to the customer along with interest. The rate of interest is higher when compared to savings account deposits.

b) Provide Loans: Providing loans to customers is another important primary function of commercial banks. They provide several types of loans and advances. They are as follows:

i) Overdraft: It is a facility provided by a bank to its current account holders to overdraw their accounts upto a certain limit. Interest is charged on the amount actually overdrawn by the customer. This type of loan is provided to businessmen and joint stock companies.

ii) Cash Credit: This type of loan is given to the customers against the assets like shares, stocks, bonds, etc. Under this scheme, the customer is allowed to withdraw the amount up to a certain limit in accordance with the value of the assets he possessed. Interest is charged only on the amount which is withdrawn.

iii) Loans: Under this type, commercial banks provide specified sum of money to a person or firm against surety or security of an asset, movable or immovable. Loans are given to a borrower by crediting the loan amount to the new account opened by the banker. The borrower can withdraw money as per his needs. The interest is charged on the whole loan amount which is sanctioned by the banker.

iv) Discounting of bills of exchange: Discounting of bills of exchange refers,to encashing the commercial bills from the banks before the date of maturity. The banks charge some commission while discounting bills of exchange. Here, the loans are given as advance payment against the bills payable.

II Secondary Functions:

The secondary functions of commercial banks are as follows:

a) Agency functions: The commercial banks act as agents to their customers in various money transactions. On behalf of their customers they make payments and accept deposits.
b) General Services: The commercial banks are also providing general utility services like electronic fund transfer, Automated Teller machine, e-banking, merchant banking, mobile banking, etc.

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Question 4.
What is credit creation? How do the banks create credit?
Answer:
The creation of credit or deposits is one of the most important functions of commercial banks. Credit creation is a process in which expansion of bank deposits takes place along with the investments in the form of loans and advances. Like other companies, the banks also aim at earning profits. For this purpose, they accept cash in demand deposits and advance loans on credit to customers. According to R.S.Sayers, “Banks are not merely purveyors of money but also manufacturer of money”.

The bank loan is not paid directly to the borrower but is only credited to his account and allows him to withdraw the required cash. Every loan creates its own deposits in the bank., So. the credit is created by the bank by expanding its deposits.

The bank deposits are created in two ways. They are as follows:

  • Primary Deposits: This type of deposit is created when the bank accept deposits from the public. The primary deposits act as base for providing loans to the public.
  • Derivative Deposits: These deposits arise when banks lend loans to customers. The bank loan is not paid directly to the borrower but is only credited to his account and allows him to withdraw the required cash. So, whenever a loan is granted, derivative deposit is created by the bank.

Credit creation by commercial Banks:
The process of credit creation starts with banks lending money from primary deposits. Banks lend money after keeping certain portion of primary deposits in the form of reserves as per the directions of the Central Bank. The following assumptions are assumed to illustrate the process of credit creation by commercial banks.

  • Existence of many banks in the country.
  • Every bank has to maintain 10% cash reserve.
  • Initial deposit of Rs. 1000 is made by the customer into the bank.
  • Existence of banking habits.

with the above assumptions, if a Canara Bank receives Cash deposits of Rs.1000 from a customer. Given the reserve ratio of 10%, the bank keeps Rs. 100 in reserves and provide loan of Rs.900 to Mr.A. The balance sheet of Canara Bank will be as

2nd PUC Economics Question Bank Chapter 9 Money And Banking 1

When Canara bank lends Rs.900 to Mr.A, he may deposit it with the same bank or some other bank. If the deposits Rs.900 with Vijaya Bank, then Vijaya Bank receives Rs.900 as initial deposit called Primary deposit. By keeping 10% reserve i.e., Rs.90, it can lent Rs.810 to Mr.B. Then the balance sheet of Vijaya Bank will be as follows:

2nd PUC Economics Question Bank Chapter 9 Money And Banking 2

Thus the process will continue till the primary deposit of Rs. 1000 is fully used in the process of credit. The cash deposit of Rs. 1000 results in a derivative deposit of Rs.900+810+………and so on. The following table shows the whole banking system’s credit creation activity:

2nd PUC Economics Question Bank Chapter 9 Money And Banking 3

Question 5.
Explain the functions of Reserve Bank of India.
Answer:
RBI is the Apex Bank in the country. It was established on 1st April 1935. It was started as private shareholders bank. After independence, Government of India nationalized it and made it as the central bank. It is the head of all banks and financial institutions.

Mumbai is the head Office of RBI. RBI has its regional offices in Delhi, Kolkata, Mumbai and Chennai. It also has its branches in Bengaluru, Hyderabad, Lucknow and Kanpur. The present Governor of R.B.I is Dr. Subba Rao.

Functions of RBI:
The main functions of RBI are as follows:
It is the central bank of the country. Like any other central banks which operate in different countries, RBI functions in the same manner. It basically performs three functions.

They are
I. Traditional and primary functions.
II. Development functions and
III. Other functions.

I Traditional and primary functions of RBI are as follows:
1. Printing and issuing currency notes: It has complete authority of printing and issuing currency notes in the country. RBI issue all denominations, of currency notes (Rs. 2, Rs. 10, Rs. 20, Rs. 50, Rs. 100, Rs. 500 and Rs. 1000) except one rupee note, which is issued by Finance Ministry of Central Government Minimum reserve system of note issue was followed by RBI after 1956.

2. Banker to Government: RBI works as banker to the Government. It does all activities of banking on behalf of government activities like opening account, receiving money, making payments, transfer government funds, manages public debt and also maintains accounts of expenditure of.government. It also gives credit to government Relating to financial matters, RBI gives advise to Government.

RBI also acts as agent to the Government through performing the transfer of funds from Government to beneficiaries.
RBI also advises the Government during some circumstances like not to go for over expenditure during inflation.

3. Act as Bankers’ bank: All banks and financial institutions in India are under the control of RBI. It advices and gives direction on all transactions of commercial banks. All commercial banks in India have to keep certain portion of its deposits as cash reserves with RBI. All commercial banks have to submit a detailed document and report about its transactions to RBI.

As a banker’s bank RBI functions as follows:

  • Lender of last resort: RBI provides financial assistance to commercial banks like giving credit, discounting bills, giving advances, etc during their financial crisis and helps the banks as a lender of last resort.
  • Clearing House: Commercial Banks in crisis can approach RBI for loans and advances. RBI re-discounts bills and lends money to commercial banks. It also advances money on other securities.

4. Controls credit creation activities of commercial banks: The credit provided by all commercial banks is controlled by RBI. RBI implements both Quantitative and qualitative techniques to control the credit generated by commercial banks. The quantitative measures to control credit are Bank rate policy, Open market operation, Cash reserve ratio and Statutory liquidity ratio. The qualitative techniques of credit control include fixation of margin requirements for loans, introduction of a system of credit rationing, moral suasion and Direct action.

5. Controls money market: RBI is the leader of money market. All the activities and components of money market like commercial banks and financial institutions are controlled and directed by RBI.

6. In-charge of foreign exchange reserves: RBI has regular and continuous contacts with international monetary institutions relating to foreign exchange reserves. Precious foreign exchanges is preserved and protected by it.

II Developmental functions performed by RBI are as follows:

  • Finance to agriculture: A separate department in RBI is engaged in providing credit and advances to agricultural sector indirectly. It operates through NABARD (National Bank for Agriculture and Rural Development) and state co-operative banks. It has taken steps to develop and reorganize co-operative societies.
  • Financing industries: RBI has taken lot of interest in establishment and development of industries. Various financial institutions like IDBI, ICICI, SFC and IFC are established by RBI to cater the financial needs of industries.

III Other functions:

1. Special functions:

  •  It gives training facilities to bank staff.
  • It conducts seminars and debates on various subjects.
  • It has regular and continuous contact with international monetary institutions and takes steps to improve co-
  • operative movement in the country.
  • It studies various problems in agriculture, industry and provides ideal solutions to it.

2. Research functions of RBI are as follows:

  • It collects information on different sectors of the economy.
  • It issues periodicals regularly.
  • It issues special bulletins on various issues like supply of finance, financial matters of both Central and State Governments.

KSEEB Solutions

Question 6.
Discuss the instruments of Monetary policy of Reserve Bank of India.
Answer:
As per Banking Regulation act of 1949, RBI has the power to adopt and implement various credit control measures to achieve objectives like proper regulation of volume of credit and prices. The instruments of Monetary policy of RBI are as follows:

I. Quantitative measures: The quantitative methods of credit control implemented by RBI are as follows:
a) Bank Rate Policy: It is the standard rate at which RBI is prepared to buy or rediscount bills of exchange or commercial papers eligible for purchase according to the banking regulation act. It is the rate at which RBI extents advances to commercial banks. This influences the lending rates of commercial banks. Earlier in 1991 the rate was 12% and as on 2005, it was 6% and it was 5.5% in 2008.

b) Open Market Operations: It refers to purchase and sale of various assets like gold, Government securities, foreign exchange, etc by RBI. The expansion and control of supply of money is done by “Open market operations”. RBI purchases securities during deflation
and sells during inflation.

c) Variable reserve requirements As per the banking regulation act, every bank has to keep certain percentage of its total deposits with RBI in the form of reserve fund. By changing the ratio (increase or decrease) of these reserves, RBI can control the credit power of banks.

These variable requirements are of two types. They are Cash reserve ratio (CRR) and Statutory liquidity ratio (SLR):
(1) Cash reserve ratio (CRR): It is the portion of total deposits of the commercial banks which has to keep with RBI in the form known as cash reserves. At present CRR is at 5% as on 21st January 2005.

(2) Statutory liquidity ratio (SLR): It is the portion of total deposits of commercial banks which they have to keep with them selves and these deposits must not be used for credit purpose. In other words, SLR refers to that portion of total deposits which a commercial bank has to keep with it self in the form of liquid assets viz., cash, gold or approved Government securities. The SLR has been reduced to 25% on the entire net demand. This is as per the recommendations of Narasimham committee.

II. Selective credit controls: These are those measures used by RBI along with other measures to control credit. It is used as the supplement to the regular credit regulations. The selective credit controls used by RBI are as follows:

a) Fixation of margin requirements: A central bank changes the margin requirement from time to time to regulate the volume of the credit. The difference between the market value of securities or assents and the amount actually lent against these securities is called margin. The RBI may increase the margin to reduce the volume of credit and decrease the margin to expand the credit.

b) Regulation of Consumer credit: Consumer credit refers to financial assistance given by banks to consumer to purchase vehicles, electronic goods, electric items etc. In order to avoid demand pull inflation, the RBI regulates the consumer’s credit.

c) Moral suasion: It implies that persuasion and request made by the Central Bank to Commercial Banks to cooperate with the general monetary policy.

d) Direction action: The RBI may take direct action against the erring commercial banks by refusing to rediscount their commercial bills and may charge penal rate of interest.

e) Credit Rationing: The RBI through its credit rationing system, directs the commercial banks to borrow loans to a certain limit. In turn, the commercial banks will lend loans to limited sector and there the supply of money gets controlled.

f) Publicity: The RBI gives regular publicity about money market trends, educates the commercial banks to regulate the credit. It includes publishing the monthly review of credit and business conditions and the annual reports on the banking sectors.

KSEEB Solutions