If you're a student preparing for your Money and Banking Class 12 Economics exam, you'll want to make sure you're fully prepared for the test. To help you out, we've compiled a list of important questions and answers that cover key topics like the functions of money, the supply of money, the process of credit creation, the functions of the central bank, and demonetization. Use these resources to study and improve your chances of acing the exam!
| Board | CBSE and State Boards |
| Class | 12 |
| Subject | Economics |
| Book Name | Macroeconomics |
| Chapter No. | 3 |
| Chapter Name | Money and Banking |
| Type | Important Questions and Answers (Including Numericals) |
| Session | 2023-24 |
| Weightage | 06 marks |
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Expert-Recommended Money and Banking Class 12 Important Questions & Answers
Q. No. 1) Multiple Choice Questions (MCQs)
i. Money can be used to transfer purchasing power from the present to the future. Which specific function of money is this called?
a. store of value
b. unit of account
c. medium of exchange
d. double coincidence of wants
Ans. Option (a)
ii. “The value of all goods and services can be expressed in monetary units.” On the basis of the given statement, identify the function performed by money:
a. Medium of exchange
b. Store of Value
c. Unit of account
d. Means of a standard of deferred payments
Ans. Option (c)
iii. Credit cards are excluded from all measures of the quantity of money because they are not really a method of payment, but a method of deferring payment. When you buy a meal with a credit card, the bank that issued the card pays the restaurant the amount that is due. At a later date, you will have to repay the bank, perhaps with interest. For this, you might use the money in your demand deposits, and that money is included in the economy's stock of money.
Which of the following can happen with an increased use of credit cards in an economy?
a. increase in money supply
b. decrease in money supply
c. increase in money demand
d. decrease in money demand
Ans. Option (d)
iv. Supply of money refers to……................. (Choose the correct alternative)
a. currency held by the public
b. currency held by Reserve Bank of India (RBI)
c. currency held by the public and demand deposits with commercial banks
d. currency held in the government account
Ans. Option (c)
v. Supply of money refers to the 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
Ans. Option (c)
vi. Which of the following formulae is INCORRECT?
a. M1 = currency + net demand deposits
b. M2 = M1 + savings with post office savings banks
c. M3 = M2 + net time deposits of commercial banks
d. M4 = M3 + total deposits with post office savings banks
Ans. Option (c)
vii. Demand Deposits include______ and _________. (Fill up the blank with the correct alternative)
- Saving account deposits
- Fixed deposits
- Current Account Deposits
- Post Office Savings
Alternatives:
a. 1 and 2
b. 2 and 3
c. 1 and 3
d. 1 and 4
Ans. Option (c)
viii. Read the following statements -Assertion (A) and Reason(R). Choose one of the correct alternatives given below:
- Assertion (A): Demand Deposits are considered a convenient mode of payment for the execution of even high-value transactions.
- Reason(R): Demand Deposits are non-withdrawable in nature and cannot be withdrawn against the issue of cheques and other similar instruments of payment.
Alternatives:
a. Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
b. Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A).
c. Assertion (A) is true but Reason (R) is false.
d. Assertion (A) is false but Reason (R) is true.
Ans. Option (c)
ix. Identify which of the following bank does not interact directly with the general public? (Choose the correct alternative)
a. Bank of India
b. State Bank of India
c. Central Bank of India
d. Reserve Bank of India
Ans. Option (d)
x. _________ is an institution that accepts deposits for lending purposes. (Fill up the blank with the correct alternative)
a. Commercial Banks
b. Life Insurance Corporation
c. Reserve Bank of India
d. Government of India
Ans. Option (a)
xi. In a hypothetical economy, Mr. Neeraj has deposited ₹100 in the bank. If it is assumed that there is no other currency circulation in the economy, then the total money supply in the economy will be ________________. (Fill up the blank with the correct alternative)
a. zero
b. ₹ 100
c. not defined
d. ₹ 120
Ans. Option (b)
xii. Money supply in India may increase if, ________________(Choose the correct alternative)
- Reserve Bank of India(RBI) injects more money into circulation
- Commercial banks expand their credit operation
- Tax rates are reduced by the Central Government
- Reserve Bank of India increases the Bank Rate
Alternatives:
a. 1, 2, and 3 are correct
b. 2, 3, and 4 are correct
c. 1, 3, and 4 are correct
d. 1, 2, and 4 are correct
Ans. Option (a)
xiii. Read the following statements carefully and choose the correct alternatives given below:
- Statement 1 – The value of the money multiplier is determined by the reserve ratio prevailing in the monetary system.
- Statement 2 – The process of credit creation directly relates to the value of the reserve ratio.
Alternatives:
a. Both statements are true.
b. Both statements are false.
c. Statement 1 is true and Statement 2 is false
d. Statement 2 is true and Statement 1 is false
Ans. Option (c)
xiv. Suppose in an economy, the initial deposits of ₹ 400 crores lead to the creation of total deposits worth ₹ 4000 crores.
Under the given situation the value of reserve requirements would be________ (Fill up the blank with the correct alternative)
a. 0.01
b. 1
c. 0.1
d. 0.4
Ans. Option (c)
xv. Find the missing figures and choose the correct alternative:
| Round | Deposits | Loans (80%) | Reserve Ratio (20%) |
| I | 1,000 | 800 | 200 |
| II | 800 | ...(i)... | 160 |
| Total | ...(ii)... | ...(iii)... | ...(iv)... |
Alternatives:
a. 640, 1000, 4000, 5000
b. 960, 5000, 4000, 1000
c. 640, 4000, 1000, 5000
d. 640, 5000, 4000, 1000
Ans. Option (d)
xvi. 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
Ans. Option (b)
xvii. The Reserve Bank of India can increase the money supply in the economy by ____________. (Choose the correct alternative)
a. demonetization of currency
b. buying government bonds
c. increasing the cash reserve ratio
d. persuading banks to discourage loans
Ans. Option (b)
xviii. Which of these do not fall under the purview of the Central Bank?
- controlling money supply
- providing loans to citizens
- issuing currency
- holding foreign exchange reserves
Alternatives:
a. only 4
b. only 2
c. 2 and 4
d. 1 and 3
Ans. Option (b)
xix. A bank ‘run’ occurs when a large number of customers of a bank withdraw their deposits simultaneously. This can cause a bank to become insolvent if it cannot pay back all the depositors. Which of the following facts about a bank make a bank run possible?
a. Banks hold only about 15% of their deposits as cash. The rest of the deposits are given out as loans.
b. Banks have to pay a specific amount to the person in whose name a cheque has been issued.
c. Banks charge a higher interest rate on loans than what they offer on deposits.
d. Banks pay an amount to account holders as interest on deposits.
Ans. Option (a)
xx. Which of the following agency is responsible for issuing ₹ 1 currency notes in India?
a. Reserve Bank of India.
b. Ministry of Finance
c. Ministry of Commerce
d. Niti Aayog
Ans. Option (b)
xxi. Identify which of the following is not a function of the Reserve Bank of India? (Choose the correct alternative)
a. To act as the banker to the Government of India.
b. To act as the custodian of the gold reserve of India
c. To act as the financial advisor to the Government of India
d. To issue coins and one rupee note
Ans. Option (d)
xxii. Ms. Sakshi, an economics teacher, was explaining the concept of a ‘minimum percentage of the total deposits to be kept by any commercial bank with the Central Bank of the country, as per norms and statute prevailing in the country’. From the following, choose the correct alternative which specifies the concept explained by her.
a. Cash Reserve Ratio
b. Repo Rate
c. Bank Rate
d. Statutory Liquidity Ratio
Ans. Option (a)
xxiii. Read the following statements carefully and choose the correct alternative from the following:
- Statement 1 – Demonetization was the step taken by the Government of India in order to tackle the problems of corruption, black money, terrorism, and circulation of fake currency in the Indian Economy.
- Statement 2 – Demonetization has ensured improved tax compliance in India over the period of time.
Alternatives:
a. Both statements are true.
b. Both statements are false.
c. Statement 1 is true and Statement 2 is false
d. Statement 2 is true and Statement 1 is false
Ans. Option (a)
Q. No. 2) Which of the following statements are true and which are false?
i. M1 is a narrow measure and M3 is a broader measure of money supply.
ii. Currency notes and coins are not an important component of the money supply.
iii. Supply of money is measured over a period of time.
Ans. i. True
ii. False
iii. False
Q. No. 3) Fill in the blank:
i. Value of Money Multiplier ………………(increases/decreases/remains unchanged) with an increase in Cash Reserve Ratio.
Ans. decreases.
ii. In the present COVID-19 times, many economists have raised their concerns that the Indian economy may have to face a deflationary situation, due to reduced economic activities in the country.
Suppose you are a member of the high-powered committee constituted by the Reserve Bank of India (RBI).
You have suggested that as the supervisor of commercial banks, ______ (restriction/release) of the money supply be ensured, by the Reserve Bank of India (RBI). (Choose the correct alternative)
Ans. release
iii. Cut in Repo rate by RBI is likely to……….. (increase/decrease) the demand for goods and services in the economy. (choose the correct alternative)
Ans. increase
Q. No. 4) What are demand deposits?
Ans. Demand deposits are deposits that can be withdrawn on demand by the depositors from banks.
Q. No. 5) What is the money supply?
Ans. It refers to the total quantity of money in circulation in the economy at a given point of time.
Q. No. 6) a. Define money multiplier.
Ans. The money multiplier is the process by which commercial banks create credit, based upon the reserve ratio and initial deposits.
b. Calculate the value of the money multiplier if the legal reserve requirements are 20%.
Ans. Money Multiplier= 1/LRR = 1/20% = 100/20 = 5
Q. No. 7) “Credit creation is inversely related to the reserve deposit ratio”. Justify the given statement, using a hypothetical example.
Or,
‘Reserve Ratio and Credit Creation are inversely related.’ Do you agree with the given statement? Justify your answer with a suitable numerical example.
Ans. The reserve deposit ratio is the minimum reserves that a commercial bank must maintain as per the instructions of the Central Bank.
Money multiplier = 1/reserve ratio
Credit Creation =Initial deposits x Money multiplier = Initial deposits/reserve ratio
Thus, credit creation is inversely related to the reserve deposit ratio.
For Example: Suppose the initial deposit is ₹ 1,000 crores.
| Reserve Ratio | Initial Deposits | Credit Creation = Initial deposits/reserve ratio |
| 20% | ₹ 1,000 crores. | 1000/20% = 1000 x 100/20 = 5,000 crores |
| 50% | ₹ 1,000 crores. | 1000/50% = 1000 x 100/50 = 2,000 crores |
From the above calculation, we can conclude that the higher the reserve Ratio, the lesser credit will be created by Commercial Banks in the economy.
Thus, on the basis of the above illustration, we can say that there exists an inverse relation between reserve and credit creation.
Q. No. 8) Illustrate with the help of a hypothetical numerical example the process of credit creation.
Ans. The credit creation by commercial banks is determined by the amount of the initial deposit and the legal reserve ratio.
Suppose a customer deposits ₹ 1,000 in a bank. Bank has to pay interest on this amount for which the bank should lend this money to someone. A part of the amount is to be retained with the bank to meet its customer’s obligations. Say, if LRR is 20%, the banks will keep 20% of deposits as reserves and will lend the remaining 80% i.e. ₹ 800. Those who borrow will spend this money and the same ₹ 800 will come back to banks in the form of deposits. This raises the total deposits to ₹ 1,800 now. Banks again keep 20% of ₹ 800 as a reserve and lend ₹ 640 to those who need it. This will further raise the deposits with banks. In this way, deposits will go on increasing @ 80% of the last deposit. The number of times the total deposit will become is determined by the money multiplier i.e. 1/LRR = 1/20% = 5 times.
Total credit created = Initial Deposits X Money Multiplier = 1000 X 5 = ₹ 5,000
Q. No. 9) ‘During the last few years’ initiatives such as Jan Dhan Yojna, Aadhar-enabled payment systems, e-Wallets, National Financial Switch (NFS), and others have strengthened the government's resolve to go cashless.’ (Source: NCERT)
Elaborate on how such initiatives may have affected the Indian economy.
Ans. These initiatives affect the economy by:
- increasing the total number of bank deposits
- leading to more deposition of money
- the lending capacity of banks increases due to more accounts
- easing of payments systems
- availability of loans, investments increase
- all these lead to more pumping of money into the economy leading to the overall growth in the National Income.
Q. No. 10) Name any two quantitative tools to control credit creation in an economy.
Ans. i) CRR, ii) SLR, iii) Bank Rate, iv) Repo rate, v) Reverse repo rate.
Q. No. 11) Discuss the following functions of a central bank:
a) As the government’s bank
b) Open market operations.
Ans. a. Central Bank as government’s bank - The Central Bank acts as a banker to both central as well as state governments. The Central Bank accepts receipts and makes payments for the government and carries out exchange, remittance, and other banking operations. It advances credit/loans to the government to meet its requirements in case of crisis. It also acts as an agent to buy and sell government securities & advises the government on various financial matters.
b. Open Market Operations by Central Bank - Open Market Operations refers to buying and selling of government securities (bonds) by the Central Bank from/to the general public. It is an important step that may be undertaken to control the money supply in the economy. The Central Bank may sell government securities to reduce the money supply in the hands of the general public and vice-versa.
Q. No. 12) Elaborate on the ‘Banker’s Bank and Supervisor’ function performed by the Reserve Bank of India.
Ans. Central bank accepts deposits from commercial banks and also advances loans to them as and when required. It maintains reserves of all commercial banks and utilizes them to settle inter-bank claims.
Being the supreme authority of the banking system, it acts as the financier of the last recourse to the commercial banks. It forwards short-term credit to commercial banks against approved securities.
The Central Bank supervises, regulates, and controls the commercial banks. The regulation of banks may be related to their licensing, branch expansion, liquidity of assets, management, amalgamation, and liquidation.
Q. No. 13) Read the following text carefully, and discuss briefly the relevant function of the Central Bank, indicated:
Recently, the Reserve Bank of India (RBI) conducted a statutory inspection for supervisory evaluation against a Commercial Bank. The commercial bank was imposed with stringent penalties, owing to deficiencies in regulatory compliance.
As per the Central Bank, the inspection revealed non-compliances vis-à-vis different directions issued by RBI, on the following fronts:
i. ATM Card fraud
ii. Ensuring integrity and quality of data
iii. Loans to small borrowers
Ans. The given text indicates the ‘supervisory function’ of the Central Bank, under which the Reserve Bank of India (RBI) regulates and supervises the routine functioning of commercial banks.
Under this function, the RBI may exercise periodic inspections/audits of commercial banks, filing of reports by commercial banks, and other statutory compliances. Central bank may take necessary corrective and punitive actions against the banks owing to deficiencies in regulatory compliances.
Q. No. 14) How the following tools can be used for credit control by the central bank in an economy:
a) Open Market Operations
b) Margin Requirements
Ans. a. Open Market Operations (OMO) refers to the sale and purchase of government securities in the open market by the Central Bank (RBI). By selling such securities the Central Bank soaks liquidity from the economy and by purchasing the government securities, Central Bank releases liquidity. This is an important method of regulating the money supply (liquidity) in the market.
b. The Margin Requirement of a loan refers to the difference between the current value of the security offered and the amount of loan granted.
When the margin requirement is lowered by the Central Bank, the borrowers are able to secure a larger amount of funds from the banks which will increase the money supply in the economy. Conversely, a rise in the margin requirements will contract the supply of credit in the economy.
Q. No. 15) a) What is meant by Repo Rate? How does the Central Bank use this measure to control inflationary conditions in an economy?
b) What is meant by Margin Requirement? How does the Central Bank use this measure to control deflationary conditions in an economy?
Ans. a. Repo rate is the rate of interest at which the central bank lends money to commercial banks for a short term. The central bank fixes the Repo Rate and it plays the role of an indicator of lending rate and deposit rate fixation by the banks. Under inflationary conditions, the central bank increases the Repo Rate.
b. Marginal requirement refers to the difference between the market value of the security offered for loans and the amount of loans offered by commercial banks. The central bank fixes the margin requirements and under deflationary conditions, the central bank reduces the margin requirements.
Q. No. 16) a. What is meant by Reverse Repo Rate?
Ans. Reverse Repo Rate is the rate at which the central bank of a country (RBI in India) borrows funds from commercial banks within the country.
b. How will ‘Reverse Repo Rate’ control excess money supply in an economy?
Ans. The reverse Repo rate is the rate at which Central Bank borrows money funds commercial banks. An increase in Reverse Repo Rate induces banks to transfer more funds to Central Bank and reduces banks’ ability to create credit.
Q. No. 17) “With an objective to reduce inflation, Reserve Bank of India may promote the commercial banks to park their surplus funds with it.”
Discuss the rationale behind the step taken by the Reserve Bank of India.
Ans. The reverse repo rate is the rate at which commercial banks may park their surplus funds with the Central Bank.
In order to decrease inflation in an economy, the Reserve Bank of India (RBI) may increase the reverse repo rate. With the increase in the reverse repo rate, it becomes lucrative for commercial banks to park surplus funds with the central bank. Consequently, this may lead to a reduction in their lending capacity. Thereby, a fall in Aggregate Demand curbs the level of inflation.
| Also, See: Money and Banking Class 12 Notes |
| Also Read: Class 12 Important Questions Class 12 Notes |
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