Chapter 3
currency and banking system
Question 1: In the modern economy, people save cash for two purposes. One of them is the intent of the transaction. What's the other one?
answer : Imaginative intent.
Question 2 : Name the printing authority that issued paper currency in India.
answer : Reserve Bank of India.
Question 3: What is the cash deposit ratio?
answer : The portion of total deposits that commercial banks are required to deposit with the Central Bank. that part is the cash deposit ratio.
Question 4: Define high power currency.
answer: High-powered currency is the part of the money supply that is directly controlled by the central bank of a country.
Question 5: The face value of which currency is higher than the underlying value?
answer : Symbolic coins.
Q.6 What is the bank rate?
answer : The interest rate at which commercial banks collect loans from the central bank is called the bank rate.
Q.7 What is the velocity of circulation of currency?
answer : The circulation velocity of a currency is the number of times a given amount of currency acts as a medium of exchange over a given period of time.
Question 8: "The imaginary demand for currency is (directly/inversely related) to the market interest rate.” (Choose the correct answer from the brackets and fill in the blanks.)
answer : Conversely.
Q.9 What are the components of denomination currency?
answer : Metal currency and paper currency.
Q.10 Why is a post office not considered as a bank?
answer : The post office is not considered a bank because it cannot lend to the public.
Question 11: What is the practice of exchange?
Answer: Exchange is the exchange of goods instead of goods.
Question 12: What does the T part on the right side of the equation M2 = K. T indicate?
answer : T is the total value of transactions during the specified period.
Q.13 What is the average transaction demand of a person for currency?
answer : Half of the person's monthly turnover.
Question 14: Name one factor that determines the ratio of current currency deposits.
answer : Seasonal expenses.
Question 15: What is the hypothetical demand elasticity of currency in a liquidity trap?
Answer: the infinite
Question 16: Name the Financial Authority that issues currency in India
answer : Reserve Bank of India.
Question 17 : What is cash conservation ratio?
answer : The cash reserve ratio is the portion of the total deposits that the bank is required to deposit with the central bank.
Q.18 What is the statutory liquidity ratio?
answer : The statutory liquidity ratio is the ratio of aggregate demand to time deposits that banks are required to hold in the form of cash-like assets.
Question 19: What is the meaning of currency exchange?
answer : Money is any commodity that is generally accepted as a medium of exchange and serves as a measure of value and store of value.
Q.20 What is meant by deterioration in the purchasing power of money?
answer : A depreciation of the purchasing power of a currency is a decline in the purchasing power of a currency.
Question 21: What is deposit?
answer : Deposits are the amount of savings of banks.
Question 22: What is running deposit?
Answer: A deposit that can be withdrawn by the saver at any time is called a current deposit.
Question 23: What is fixed deposit?
answer : Fixed deposits are deposits that the saver holds in the bank for a fixed period and the bank must be notified in advance to withdraw such deposits.
Question 24 : What is savings deposit?
answer : A portion of a bank deposit can be withdrawn by the saver at his own discretion and the bank must be notified in advance to withdraw the entire deposit.
Question 25: What is the mandated currency?
answer : A currency that gains universal acceptance as a medium of exchange by order of the government is called an ordered currency.
Q.26 What is the intrinsic value of a currency?
answer : The value of the metal from which the coin is made is the intrinsic value of the coin.
Question 27: What is the prescribed currency?
answer : The currency whose acceptability is legal is the prescribed currency.
Question 28: What is narrow currency?
answer : Narrow currency is the combination of notes, low value money, demand deposits, post office savings, bank deposits, etc.
Question 29: Define broad currency.
answer : Broad currency is the combination of notes, low-value money, demand deposits and fixed deposits of commercial banks.
Question 30 : What is the Savings Deposit Ratio?
answer : The reserve deposit ratio is the portion of the total deposit that the commercial bank should reserve without offering it as a loan.
Question 31 : What is currency multiplier?
answer : The currency multiplier is the ratio of the total supply of currency to the circulation capacity of currency.
Q.32 What is the first stage of currency evolution?
answer : Barter practice.
Question 33: What is plastic currency?
answer : Credit Card
Question 34: Give an example of illegal currency.
answer : check
Q.35 What is the full form of ATM?
answer : Automatic Teller Machine.
Sample Question Answer No. 2:
Question 1: What is inflation?
answer : Inflation is the increase in the general price level of goods and services and the depreciation of the currency.
Question 2: What is Ghati financing?
answer : Deficit finance is the process of selling government debt securities to the central bank to cover the budget deficit and borrowing currency from that bank to cover the budget deficit.
Question 3: Differentiate between demand deposit and time deposit.
answer : Demand deposits are deposits that savers can withdraw from the bank at any time. Time deposits, on the other hand, cannot be withdrawn by the saver at any time. The depositor should inform the bank in advance to withdraw this deposit.
Question 4: Define 'liquid trap'
answer : When the imaginary demand for money is infinite at a very low interest rate, the demand line for money becomes horizontal. This horizontal part of the line is called the liquid trap.
Q.5 Why is it necessary for the RBI to reserve commercial banks?
answer : In order to smoothly move forward the reserve deposit ratio of RBI commercial banks, it is necessary to keep reserve funds from those banks.
Question 6: Write down two weaknesses of the exchange system.
answer : (a) Lack of common criteria for determining the value of commodities in the system of exchange.
(b) Commodities cannot be used as stores of value in the exchange system.
Question 7: What is meant by liquid currency exchange?
answer : Liquid currency is the amount of currency in the hands of the public, net demand deposits of banks and other deposits of Reserve Banks that are used as a medium of exchange.
Question 8: Write the concept of total monetary wealth.
answer : Total monetary assets include M,, M2, M, and M2 It refers to the amount of currency in the hands of the public, net demand deposits of banks, other deposits of Reserve Banks, deposits in Postal Savings Banks, fixed deposits of banks, total deposits of Postal Savings Organizations etc.
Question 9: How is the imaginary demand for money related to interest rates?
answer : The relationship between the imaginary demand for currency and interest rates is inverse. The lower the interest rate, the higher the imaginary demand. At very low interest rates, the imaginary demand for currency is infinite and this creates a 'liquidity trap'
Q.10 What are the types of deposits and what are they?
answer : There are three types of deposits:
(a) Current deposits
(b) Fixed deposits
(c) Savings Deposits
Question 11: Is the check currency? By reason.
answer : Checks are not currency. It is a demand on the currency. Failure to accept a check does not constitute a violation of the law. This is unregulated currency.
Question 12: State two reasons for the creation of black money.
answer : (1) Tax evasion
(2) Smuggling.
Question 13: Name two functions of currency.
answer : (a) Medium of exchange
(b) Monetary value criteria.
Question 14 : Explain 'Criteria for Currency Suspended Debt'.
answer : Currency is not just a means of immediate transaction. It is also the medium of all kinds of deferred transactions like lending, borrowing etc. The entire credit system is based on currency. Therefore, currency is considered as the standard of deferred payments.
Question 15: Write down two characteristics of currency.
answer : (a) Currency has general acceptability.
(b) Currency must have divisible properties.
Question 16: Write down two disadvantages of currency.
answer : (a) Inflation or deflation occurs when a currency loses its price stability.
(b) The government loses revenue when black money is created.
Question 17: Write down two components of the money supply.
answer : (a) narrow currency and
(b) Broad currency
Q.18 What are the different types of paper currency?
answer : (a) Representative paper currency.
(b) Convertible paper currency. (c) Convertible paper currency.
Question 19: Name two important functions of commercial banks.
answer : (a) Collection of Deposits
(b) Creation of currency or credit.
Q.20 What are the two main components of the balance sheet of a commercial bank?
answer: (a) Dena and
(b) Payables.
Question 21: Write down two important functions of the Central Bank.
answer : (a) Printing of notes.
(b) Custodian of Foreign Exchange.
Question 22: Name two quantitative credit control tools of the Reserve Bank of India.
answer : (a) Bank rates and
(b) Open Market Process.
Question 23: Name two qualitative credit control tools of the Reserve Bank of India.
answer : (a) Consumer Credit Regulation
(b) Moral appeal
Q24: What is the open market process?
answer : The open market process is the purposeful sale and purchase of short-term and long-term debentures and bills by the central bank.
Sample Question Answer No. 4:
Question 1: The significance of bank rates as a weapon of the Reserve Bank of India
answer : The Reserve Bank of India can change the reserve deposit ratio of commercial banks by adjusting bank rates. lower (or higher) interest rates have lower (or higher) rates of deposit reserves to banks.
encourages them to keep. This is because in such circumstances it is less (or more) expensive to borrow from the Reserve Bank than before. As a result, banks are willing to lend more (or less) to borrowers or investors so the amount of lending by commercial banks depends on the bank rate of the Reserve Bank.
Question 2: Explain the significance of M,, M2, M3 and M in the context of money supply.
answer : M, is the limiting quantity of the money supply. M = C + DD + OD where C is paper notes and coins in the hands of the public, DD is current deposits in all commercial or cooperative banks, OD is other deposits of the Reserve Bank.
M2 = M, + accumulated deposits in the Post Office Savings Bank.
M2 = M2 + Fixed Deposits of Commercial and Co-operative Banks. 1
M2 = M, + Total deposits of the Post Office Savings Bank.
M, and M2 are called narrow currencies. M, and M2 are called extended currencies.
Question 3: Show a sample quotation from RBI.
answer : Sample RBI quotes are:
Question 4: Describe the factors that determine the supply of money.
answer : (a) Financial Authority: The Financial Authority shows the total cash of the money supply determination and the total deposits of the Government and commercial banks with the Central Bank.
(b) Banking System: Currency deposits, reserve deposit ratios, high capacity currency include money supply which is subject to banking system.
(c) Public : The preference of the public to hold cash on hand determines the money supply.
Question 5: Explain the concept of 'liquid trap' with illustrations.
answer : When the imaginary demand for money is infinite at a very low interest rate, the demand line for money becomes horizontal. ^ This horizontal section is called the 'Tarlyfand' Fig. Interest Rate OR Holely Part ab of the currency demand line shows the 'liquidity trap'. The interest rate does not decrease again after this level R. The imaginary demand for currency in this sector is immense. Fantastic demand for liquid fund currency
Question 6: Write the difference between narrow currency and broad currency.
answer : The narrow currency is M, and M2 means the currency in the hands of the public, the net demand deposits of commercial banks, and the savings deposits of post office savings banks.
The broad currency is M, which includes net time deposits of commercial banks and total deposits of post office savings associations. It should be noted that savings deposits of post office savings banks are not included in the comprehensive currency.
Question 7: State four differences between commercial banks and central banks.
answer : (i) The Central Bank is the head bank of all banks. Commercial banks, on the other hand, are subordinate to the central bank.
(ii) It is now the only central bank in the country. But now there are many commercial banks in the country.
(iii) Central banks have the right to print notes but commercial banks do not have this right.
(iv) The Central Bank is the bank of the Government. Commercial banks, on the other hand, are involved with the public.
Question 8: Write the difference between qualitative and quantitative debt control tools.
answer : (i) Qualitative credit control tools consider necessary and non-necessary debt but quantitative tools do not consider this distinction.
(ii) Qualitative instruments affect both lenders and borrowers, but quantitative instruments affect only lenders.
(iii) Qualitative instruments are the credit control instruments of choice, while quantitative instruments are the traditional credit control instruments.
(iv) Quantitative instruments are bank rate policy, free market securities, changes in required reserves. Qualitative tools include consumer debt control, ethical appeals, direct control, etc.
Question 9: List four disadvantages of exchange system.
answer : (i) The exchange system cannot be implemented due to inconsistency of scarcity.
(ii) The indivisibility of commodities in the practice of exchange prevented the satisfaction of shortages.
(iii) Lack of common criteria for determining prices in the exchange system.
(iv) Lack of store of value i.e. goods cannot be used as store of value.
Question 10: Name the activities of four projects of commercial banks.
answer : (i) Purchase and Sale of Shares.
(ii) Assist the customer in transferring funds.
(iii) Commercial banks make various payments for customers such as insurance payments, pensions, dividends, interest etc.
(iv) Commercial banks play an important role in the transfer of funds.
Q.11 How does the Central Bank function as the Government Bank?
answer : The accounts of all government departments and institutions are kept by the Central Bank. It accepts deposits from the government. All government transactions are conducted through the Central Bank. The central bank provides finance to the government and provides advice on finance. The central bank helps the government when there is a budget deficit. If necessary, they try to fill the deficit by creating new currency. In addition to acting as the financial advisor to the government, the central bank also accounts for government revenue and expenditure.
Question 12: Explain the different types of deposits accepted by commercial banks.
answer : Commercial bank deposits can be divided into three categories:
(1) Current deposits
(2) Fixed deposits and
(3) Savings Deposit
If the funds are deposited in the current deposit, the depositor can withdraw the funds from the bank without giving any prior notice to the bank. The bank pays no interest on such deposits.
Banks pay low rates of interest on savings deposits. In such deposits, the depositor must give advance notice to the bank if he wishes to collect more than a certain amount.
Banks pay high interest rates on fixed deposits. The depositor can withdraw the funds from the bank only after the expiry of the period for which the funds are deposited in such deposits.
Question 13: Name any four disadvantages of currency.
answer : (i) Inflation or deflation occurs when a currency loses its price stability.
(ii) Currency helps in the expansion of monopoly business.
(iii) Currency creates black market and the government loses revenue.
(iv) Greed for money can lead to deterioration of moral or social values.
Question 14: Explain the 'open market redemption' strategy of the Central Bank as a tool to control debt.
answer : The purchase and sale of short-term and long-term debentures and bills by the central bank on purpose is called the sale and purchase of debt securities in the open market. To increase the supply of high-strength currency in an economy, the central bank purchases bonds in the open market. It also sells debt securities in the open market to reduce the money supply. During inflation, the central bank purchases debentures in the open market. During inflation, the central bank sells debentures in the open market.
Q.15 How does the Central Bank's 'bank rate' policy help in controlling debt?
answer : The rate at which the central bank extends loans to its subordinate commercial banks is called the bank rate. Commercial banks can raise loans at low interest rates when bank rates fall. As a result, the money supply in the economy increases. An increase in bank rates creates the opposite situation in the economy. Therefore, the central bank raises bank rates to discourage the credit creation of commercial banks during inflation. During economic downturns, the central bank reduces bank rates to create a favorable environment for credit growth.
Sample Question Answer No. 6:
Question 1: Explain the transaction demand for currency.
answer : A person has to spend a portion of his daily income on goods but usually the person does not earn income every day. Therefore, the person must retain a portion of the income. this would be transaction intention-based currency demand .
The amount of income determines the transaction intention-based demand for currency. In the figure, when the quantity of national income is y, the transaction intentional demand for money is OM, when the quantity of income increases to Oy2, the demand for money increases to OM,. By national income we mean real national income.
Question 2: What are the monetary policy tools used by the Reserve Bank of India (RBI)? Explain any two.
answer : The monetary policy instruments used by the Reserve Bank of India are:
(i) Quantitative Method: The tools are: (a) Bank rate (b) Open market process (c) Variable reserve fund ratio.
(ii) Qualitative method: The tools are (a) Marginal requirement determination on credit received (b) Consumer credit control (c) Direct control (d) Ethical appeal.
Notable among such tools are —
(i) Open Market Process: Short-term purposive by the central bank
and the sale and purchase of long-term debentures and bills is called the open market process. The RBI purchases debt securities in the open market to increase the supply of high-strength currency in an economy. They sell bonds in the open market to reduce the money supply in the economy.
(ii) Bank Rate: The interest rate at which the central bank of a country extends loans to its subordinate commercial banks is called the bank rate. Commercial banks can raise loans at low interest rates when bank rates fall. The money supply in the economy increases. Again, when bank rates rise, commercial banks can borrow at higher interest rates, which reduces the money supply.
Question 3: Describe the role of the Reserve Bank of India as a lender of last resort.
answer : In the Indian monetary system, the Reserve Bank is the guarantor for commercial banks. The Reserve Bank extends loans to the bank when the liquidity of the bank deteriorates after the deposits leave the commercial bank as loans ie the bank has difficulty in returning the savings to the depositors. This ensures that bank depositors withdraw their savings from the bank. Therefore, the Reserve Bank is the savior of commercial banks. However, a distressed bank does not take a loan from the RBI in the first place. It will seek a loan from the RBI only if it cannot arrange a loan from other banks. Therefore, the Reserve Bank is considered as the lender of last resort of banks.
Question 4: Describe the concept of deficit financing.
answer : The Reserve Bank of India acts as the bank of the government. It is also a bank of state governments. When the government cannot cover its deficit budget from its tax revenues, it prints new currency. However, the government has no legal authority to print coins in this way. Therefore, it borrows currency by selling government debentures to the Reserve Bank of India. As a result, the Reserve Bank of India supplies currency to the government. The government then pays its expenses with this currency. Thus, the provision of finance for the deficit budget by the government is referred to as deficit financing through central bank loans. This is called deficit financing.
Question 5: Explain the functions of the Reserve Bank of India.
answer : The functions of the Reserve Bank of India are:
(a) Printing of notes: The main function of the Reserve Bank of India is the printing of notes. The Reserve Bank should maintain valuable assets when printing paper currency. For this, the Reserve Bank should deposit certain amounts of gold and foreign debt securities.
(b) Head Bank: Commercial banks in the country are required to deposit a proportion of their deposits with the Reserve Bank. The Reserve Bank can settle transactions with other banks. It is the last-tier lender of commercial banks.
(c) Government Banks: The accounts of all government departments and institutions are kept in the Reserve Bank. It accepts government deposits and provides finance. It helps the government to fill the budget deficit.
(d) Credit Control: The Reserve Bank can increase or decrease the supply of credit through quantitative and qualitative monetary instruments.
(e) Custodian of Foreign Exchange: The Reserve Bank of India acts as the repository of foreign exchange. The Reserve Bank fixes the exchange rate of foreign currencies against the domestic currency.
(f) Collection and Disclosure of Data: Collection and disclosure of various data on the economic sector of the country is also an important function of the Reserve Bank. The Reserve Bank of India is also responsible for publishing and collecting data on the country's production, distribution, currency, debt, exports and imports.
Question 6: Describe the hypothetical demand for currency.
answer: According to economist Keynes, the relationship between current interest rates and expected future interest rates Determine how much currency and how much bills a person can keep as a store of value. The lower the interest rate, the more currency the person will keep with him. In contrast, if interest rates rise in the future, the person's liquidity preference will decrease and the amount of money he has with him will decrease.
Imaginary demand can be explained as follows:
M s = Rmin - r
R- r min
here. is the market interest rate and r max is the upper range of this interest rate, from min will proceed. max is the lowest range of interest rates. When the interest rate moves to r max, the m value increases from 0 to infinity
Question 7: Briefly explain any four functions of commercial banks.
answer : (a) Deposit Collection: The general public deposits money in commercial banks. Banks can deposit money in three ways. Current deposits, cumulative deposits and fixed deposits. In current deposits, depositors can withdraw funds from the bank without giving any prior notice to the bank. Depositors pay low rates of interest on savings deposits. Provides currency at high rates on fixed deposits.
(b) Loans and Investments: Commercial banks keep a portion of the accumulated savings to meet the demand of the depositors and offer the rest as loans to individuals or businesses.
(c) Issuance of cheques: Commercial banks provide security for currency in business transactions through the circulation of various types of cheques. A check acts like currency.
(d) Functions of agents: Commercial banks act as agents of their customers. Commercial banks assist customers in transferring funds, buying and selling shares, collecting dividends.
Question 8: Explain the three types of credit control tools used by the Central Bank.
answer : The three types of credit control tools used by central banks are:
(i) Bank Rate Policy: The interest rate at which commercial banks collect loans from the Central Bank is called bank rate. The amount of lending by commercial banks depends on bank rates. When bank rates fall, commercial banks can raise loans at lower interest rates and the lending capacity of commercial banks increases. Similarly, an increase in bank rates reduces the credit generating capacity of such banks.
(ii) Open Market Process: The open market process is the purposeful purchase and sale of short term and long term debentures and bills by the Central Bank. The RBI buys debentures in the open market to increase the money supply.
(iii) Variable reserve capital ratio: All commercial banks in a country are required by law to deposit a certain portion of their deposits with the Central Bank. This is called the cash reserve ratio. The central bank can increase or decrease the credit creation capacity of commercial banks by increasing or decreasing the cash reserve ratio.
Question 9: Briefly explain any four functions of currency.
answer : The four functions of currency are explained below:
(i) Vehicle of Exchange: The most important function of currency is that it acts as a medium of exchange. The lack of consistency in the barter system created great difficulties in exchange. Currency has overcome these difficulties.
(ii) Price Measures : The prices of goods and services are expressed in currency.
Currency is treated as the dependent value criterion.
(iii) Value of deferred liabilities: Currency acts as the value of future liabilities. Currency can be used to borrow and repay loans very easily.
(iv) Store of value: The value of goods can be stored through currency. Currency can be converted into commodities if necessary. Cannot be stored in materials. The use of currency removed this difficulty. Currency has the highest liquidity of all assets in the world. Currency needs to have its own value stability to also function as a store of value.
Q.10 What are the main functions of currency? How does currency overcome the disadvantages of exchange?
answer : The main functions of currency are:
(i) Currency serves as a medium of exchange.
(ii) Currency acts as a measure of value.
(iii) Currency is the standard of deferred payments.
(iv) Currency acts as a store of value.
(v) Currency is the intent of transaction.
One of the main weaknesses of the exchange system is the inconsistency of scarcity. Transactions can only be settled through exchange if there is a match between people's needs. Currency has eliminated this weakness as transactions can be made through currency even if there is no match. There were no dependent criteria in the exchange system. Currency has also eliminated this problem. Goods cannot be divided in the exchange system. Because currency is divisible, items can be divided into currency values. Currency also serves as a store of value. However, in the exchange system, commodities could not function as stores of value. In addition, there were problems in the exchange system. Currency has also solved this problem.
Q.11 Can commercial banks create currency?
answer : Commercial banks can create currency. The entire commercial banking system is involved in the creation of money. First, commercial banks can create money through lending. It creates demand deposits through lending to customers. The bank keeps a portion of the accumulated savings and offers the rest as loans. The borrower then submits the loan received by check to another bank. The bank retains a portion and offers the rest as a loan. Thus the debt process will continue and currency or debt will be created. Secondly, commercial banks can create money by investing against mortgages. When the bank purchases the mortgage, it pays the seller by cheque. The check is deposited in another bank and a deposit is created against the depositor. Thus, commercial banks can create debt currency.
Question 12: Explain the role of currency in the modern economy.
answer : Money plays a very important role in the modern economy. First, currency is the generally accepted medium of exchange. Currency has been adopted as an intermediate commodity to facilitate transactions. Currency also serves as a convenient unit. The prices of all goods and services can be expressed in monetary units. Currency is not transitory and its storage cost is very low. Currency is acceptable to everyone at any time. Therefore, it is recent
In the economy, currency can act as a storehouse of savings. Wealth can be saved in currency for the future. Therefore, currency is playing a role in the modern financial system as a medium of exchange, a measure of value, the value of deferred debt, a store of value, etc.
