Question 1

Q1: 1. What is a barter system? What are its drawbacks?

Accepted Answer

A barter system is a system of economic exchange where goods and services are directly exchanged for other goods and services without the use of money.  The primary drawbacks of the barter system are:    Lack of Double Coincidence of Wants: This is the most significant drawback. For an exchange to o...

Question 2

Q10: 10. Do you consider a commercial bank 'creator of money' in the economy?

Accepted Answer

Yes, a commercial bank is considered a 'creator of money' in the economy. While the central bank is the sole authority to issue currency (high-powered money), commercial banks create credit, which constitutes a major part of the money supply (specifically, the deposit component). The process of mone...

Question 3

Q11: 11. What role of RBI is known as 'lender of last resort'?

Accepted Answer

The role of the RBI as the 'lender of last resort' means that it stands ready to provide funds to commercial banks when they face a financial crisis and are unable to secure funds from other sources. Commercial banks may face situations where they need immediate funds to meet their obligations, such...

Question 4

Q2: 2. What are the main functions of money? How does money overcome the shortcomings of a barter system?

Accepted Answer

The main functions of money in a modern economy are: 1.  Medium of Exchange: Money acts as an intermediate good that is commonly accepted by all parties in a transaction. This eliminates the need for a double coincidence of wants. 2.  Unit of Account: Money provides a common measure of value. The va...

Question 5

Q3: 3. What is transaction demand for money? How is it related to the value of transactions over a specified period of time?

Accepted Answer

The transaction demand for money refers to the money that people desire to hold in order to carry out their day-to-day transactions. People hold cash balances because their income is typically received at discrete points in time (e.g., monthly salary), while their expenditure occurs continuously thr...

Question 6

Q4: 4. What are the alternative definitions of money supply in India?

Accepted Answer

The Reserve Bank of India (RBI) publishes figures for four alternative measures of money supply, which are categorized based on their liquidity. These measures are:    M1 = CU + DD        Where CU is currency (notes and coins) held by the public, and DD is net demand deposits held by commercial bank...

Question 7

Q5: 5. What is a 'legal tender'? What is 'fiat money'?

Accepted Answer

Fiat Money: Fiat money refers to currency (notes and coins) that does not have intrinsic value, unlike a gold or silver coin. Its value is derived from the guarantee provided by the issuing authority, which is the government or the central bank (the RBI in India). People accept it as a medium of exc...

Question 8

Q6: 6. What is High Powered Money?

Accepted Answer

High Powered Money, also known as 'reserve money' or 'monetary base', is the total currency issued by the central bank of a country (the Reserve Bank of India). This money can be held either by the public (as currency in circulation) or by the commercial banks (as reserves). It is called 'high-power...

Question 9

Q7: 7. Explain the functions of a commercial bank.

Accepted Answer

Commercial banks are institutions that are part of the money-creating system of an economy. Their primary functions are:    Accepting Deposits: Commercial banks accept deposits from the public, providing a safe place for individuals and firms to keep their excess funds. They offer interest on these...

Question 10

Q8: 8. What is money multiplier? What determines the value of this multiplier?

Accepted Answer

The money multiplier is the mechanism by which the banking system can create a total amount of money (in the form of deposits) that is a multiple of the initial reserves. It represents the maximum amount of money that can be created for every unit of reserves in the banking system. The value of the...

Question 11

Q9: 9. What are the instruments of monetary policy of RBI?

Accepted Answer

The tools used by the Reserve Bank of India (RBI) to control the money supply are known as instruments of monetary policy. They can be classified as quantitative and qualitative tools. Quantitative Tools: These tools control the total volume of money supply in the economy. 1.  Reserve Ratios: The RB...

NCERT Solutions