NCERT Solution Economics Part 2 Class 12 Chapter 3 Money and Banking
NCERT Solution Economics Part 2 Class 12 Chapter 3 Money and Banking all questions and answers. Economics Part 2 Class 12 3rd Chapter Money and Banking exercise solution and experts answer. As one of online learning platforms, we (netex.) are excited to offer the NCERT Solution Economics Part 2 Class 12 Chapter 3. This solution is designed to help students who are looking to brush up on their physics concepts on Chapter 3 Money and Banking.
1.) What is a barter system? What are its drawbacks?
Ans -Economic exchanges without the mediation of money are referred to as barter exchanges. However, they presume the rather improbable double coincidence of wants. Consider, for example, an individual who has a surplus of rice which she wishes to exchange for clothing. If she is not lucky enough she may not be able to find another person who has the diametrically opposite demand forrice with a surplus of clothing to offer in exchange Barter exchanges become extremely difficult in large economy because of the high costs people would have to incur looking for suitable persons to exchange their surpluses. A barter system has other deficiencies. It is difficult to carry forward one ’swealth under the barter system.
2.) What are the main functions of money? How does money overcome the shortcomings of a barter system?
Ans-The first and foremost role of money is that it acts as a medium of exchange. Barter exchanges become extremely difficult in a large economy because of the high costs people would have to incur looking for suitable persons to exchange their surpluses. Money also acts as a convenient unit of account. The value ofall goods and services can be expressed in monetary units. A barter system has other deficiencies. It is difficult to carry forward one’swealth under the barter system. Suppose you have an endowment of rice whichyou do not wish to consume today entirely. You may regard this stock of surplusrice 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 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. Money is 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 of value 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.
5.) What is a ‘legal tender’? What is ‘fiat money’?
Ans – The value of the currency notes and coins is derived from the guarantee provided by the issuing authority of these items. Every currency note bearson its face a promise from the Governor of RBI that if someone produces the note to RBI, or any other commercial bank, RBI will be responsible for giving the person purchasing power equal to the value printed on the note.The same is also true of coins. Currency notes and coins are therefore called fiat money. They do not have intrinsic value like a gold or silver coin. They are also called legal tenders as they cannot be refused by any citizen of the country for settlement of any kind of transaction. Cheques drawn on savings or current accounts, however, can be refused by anyone as a mode of payment. Hence, demand deposits are not legal tenders.
6.) What is High Powered Money?
Ans -Central Bank is a very important institution in a modern economy. Almost every country has one central bank. India got its central bank in1935. Its name is the ‘Reserve Bank of India’. Central bank has several important functions. 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. 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, which is discussed in detail later. From the point of view of money supply, we need to focus on its function of issuing currency. This currency issued by the central bank can be held by the public or by the commercial banks, and is called the ‘high-powered money’ or‘ reserve money’ or ‘monetary base’ as it acts as a basis for credit creation..
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7.) Explain the functions of a commercial bank.
Ans – Commercial Banks Commercial banks are the other type of institutions which are a part of the money-creating system of the economy. They accept deposits from the public and lend out part of these funds to those who want to borrow. The interest rate paid 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. Commercial banks mediate between individuals or firms with excess funds and lend to those who need funds. People with excess funds can keep their funds in the form of deposits in banks and those who need funds, borrow funds inform of home loans, crop loans, etc. People prefer to keep money in banks because banks offer to pay some interest on any deposits made. Also, it may be safer to keep excess funds in a bank, rather than at home.
9.) What are the instruments of monetary policy of RBI?
Ans -There are two types of open market operations: outright and repo. Outright open market operations are permanent in nature: when the central bank buysthese securities (thus injecting money into the system), it is without any promise to sell them later. Similarly, when the central bank sells these securities (thus withdrawing money from the system), 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 buysthe security, this agreement of purchase also has specification about date andprice 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 agreementis called a reverse repurchase agreement or reverse repo. The rate at whichthe money is withdrawn in this manner is called the reverse repo rate. The Reserve Bank of India conducts repo and reverse repo operations at various maturities: overnight, 7-day, 14- day, etc. This type of operations have now become themain tool of monetary policy of the Reserve Bank of India.
10.) Do you consider a commercial bank ‘creator of money’ in the economy?
Ans-Yes , commercial bank are consider as creator of money in the economy . Commercial banks are the other type of institutions which are a part ofthe money-creating system of the economy.
11.) What role of RBI is known as ‘lender of last resort’?
And -Reserve Bank is the only institution which can issue currency. When commercial banks need more funds in order to be able to create more credit, they may go to market for such funds or go to the Central Bank. Central bank provides them funds through various instruments. This role of RBI, that of being ready to lend to banks at all times is another important function of the central bank, and due to this central bank is said to be the lender of last resort.
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