NCERT Class 12 Economics Part 2 Chapter 3 Money and Banking Extra Questions and Answers
Class 12 Economics Part 2 Chapter 3 Extra Inside Questions and Answers – Money and Banking. Here in this Page Class XII Students can Learn Extra Questions & Answer 3rd Chapter Economics Part 2 fully Inside.
We Provided Here Money and Banking Economics Part 2 Chapter 3 Long Answer Type Question, MCQ Questions & Answer, Short Answer Type Questions (2 or 3 marks), and Very Short answer Type Question (1 marks) Solution.
Class 12 Economics Part 2 Chapter 3 Inside based Question
Economics Part 2 Chapter 3 Money and Banking Class 12 Inside 6 Marks, 3 marks, 2 Marks & And 1 Marks Important Questions and Answers.
1.) How money solve the problems of barter system ?
Ans – A barter system has many deficiencies. It is difficult to carry forward one’swealth under thebarter system. Suppose you have an endowment of rice which you do not wish to consume today entirely. You may regard this stock of surplus rice as an asset which you may wish to consume, or even sell off, for acquiring other commodities at some future date. But rice is a perishable item and cannot be stored beyond a certain period. Also, holding the stock of rice requires a lot of space. You may have to spend considerable time and resources looking for people with a demand for rice when you wish to exchange your stock for buying other commodities. This problem can be solved if you sell your rice for money. Moneyis not perishable and its storage costs are also considerably lower. It is also acceptable to anyone at any point of time. Thus money can act as a store ofvalue for individuals. Wealth can be stored in the form of money for future use. However, to perform this function well, the value of money must be sufficiently stable. A rising price level may erode the purchasing power of money. It may benoted that any asset other than money can also act as a store of value, e.g. gold,landed property, houses or even bonds (to be introduced shortly). However, they may not be easily convertible to other commodities and do not have universal acceptability.
2.) How interest rate affect the demand for money ?
Ans -The demand for money tells us what makes people desire a certain amount of money. Since money is required to conduct transactions, the value of transactions will determine the money people will want to keep:the larger is the quantum of transactions to be made, the larger is the quantity of money demanded. Since the quantum of transactions to be made depends on income, it should be clear that a rise in income will lead to rise in demand for money. Also, when people keep their savings in the form of money rather than putting it in a bank which gives them interest, how much money people keep also depends on rate of interest. Specifically, when interest rates go up, people become less interested in holding money since holding money amounts to holding less of interest-earning deposits, and thus less interest received. Therefore, at higher interest rates, money demanded comes down.
3.) Explain the functions of the Central Bank (RBI)?
Ans – Central Bank is a very important institution in a modern economy. Almost every country has one central bank. Central Bank of India is Reserve Bank of India . Following are the features of central bank.
- It issues the currency of the country.
- It controls money supply of the country through various methods, like bank rate, open market operations and variations in reserve ratios.
- iii. It acts as a banker to the government.
- It is the custodian of the foreign exchange reserves of the economy.
- It also acts as a bank to the banking system.
4.) What is mean by spread ?
Ans – Commercial banks are accept deposits from the publicand lend out part of these funds to those who want to borrow. The interest ratepaid by the banks to depositors is lower than the rate charged from the borrowers.This difference between these two types of interest rates, called the ‘spread’ is theprofit appropriated by the bank.
5.) What does the bank do with the funds that have been deposited by people ?
Ans -Assuming that not everyone who has deposited funds with it will ask for their funds back at the same time, the bank can loan these funds to someone who needs the funds at interest . So the bank will typically retain a portion of the funds to repay depositors whenever they demand their funds back, and loan the rest. Since banks earn interest from loans they make, any bank would like to lend the maximum possible. However, being able to repay depositors on demand is crucial to the bank’s survival. Depositors would keep their funds in a bank only if they are fully confident of getting them back on demand. A bank must, therefore, balance its lending activities so as to ensure that sufficient funds are available to repay any depositor on demand.
6.) There is a limit to money or credit creation by banks?
Ans -Yes, and this is determined by the Central bank (RBI). The RBI decides a certain percentage of deposits which every bank must keep as reserves. This is done to ensure that no bank is ‘over lending’. This is a legal requirement and is binding on the banks. This is called the ‘Required Reserve Ratio’ or the ‘Reserve Ratio’ or ‘Cash Reserve Ratio’ (CRR).
7.) Why RBI said to be the lender of resort ?
Ans -Reserve Bank is the only institution which can issue currency. When commercialbanks need more funds in order to be able to create more credit, they may go tomarket for such funds or go to the Central Bank. Central bank provides themfunds through various instruments. This role of RBI, that of being ready to lendto banks at all times is another important function of the central bank, and dueto this central bank is said to be the lender of last resort.
8.) Explain the quantitativeor qualitative tool of central bank ?
Ans – The RBI controls the money supply in the economy in various ways. Thetools used by the Central bank to control money supply can be quantitativeor qualitative. Quantitative tools, control the extent of money supply bychanging the CRR, or bank rate or open market operations. Qualitative toolsinclude persuasion by the Central bank in order to make commercial banksdiscourage or encourage lending which is done through moral suasion, marginrequirement, etc.
9.) what is mean by Bank rate ?
Ans -The RBI can influence money supply by changing the rate at which it givesloans to the commercial banks. This rate is called the Bank Rate in India
10.) Explain the type of open market operations.
Ans -There are two types of open market operations: outright and repo. Outright open market operations are permanent in nature when the central bank buys these securities it is without anypromiseto sell them later. Similarly, when the central bank sells these securities it is without any promise to buy them later. As a result, the injection/absorption of the money is of permanent nature.However, there is another type of operation in which when the central bank buys the security, this agreement of purchase also has specification about date and price of resale of this security. This type of agreement is called a repurchase agreement or repo.The interest rate at which the money is lent in this way is called the repo rate. Similarly, instead of outright sale of securities the central bank may sell the securities through an agreement which has a specification about the date and price at which it will be repurchased. This type of agreement is called a reverse repurchase agreement or reverse repo.
11.) what is mean by Barter system ?
Ans – Exchange of commodities without the mediation of money is called Barter Exchange.
For more
- NCERT Class 12 Economics part 2 Introduction Extra Questions and Answers
- NCERT Class 12 Economics part 2 National Income Accounting
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