CBSE Class 12th Economic exam is scheduled for 13th March 2020. In this article we have complied a list of important questions from Chapter 3 of Part B (Macroeconomics): Money & Banking. Questions given below are important questions and are expected to be asked in Class 12 Economics board exam 2019-20.
Ques 1: State any two components of M1 measure of money supply.
Solution: Two components of money supply are:
(i) Currency held with the public
(ii) Demand deposits held with commercial banks
Ques 2: Elaborate any two instruments of Credit Control, as exercised by the Reserve Bank of India.
Solution: Two instruments of credit control are
- Repo rate– It is the rate of interest at which central bank lends to commercial banks for their short term requirements. An increase in repo rate will force commercial banks to increase their lending rates. It will make borrowings costlier to general public.
- Open market operationsrefer to buying and selling of government securities by the central bank from and to the general public. When central bank sells its securities, it reduces liquidity (deposits) with commercial banks and adversely affects credit creating power of banks.
Ques 3: Define Credit Multiplier. What role does it play in determining the credit creation power of the banking system ? Use a numerical illustration to explain.
Solution: Credit multiplier measures the amount of money that the banks are able to create in the form of deposits with every initial deposit.
The credit creation by commercial banks depends on credit multiplier as it is inversely related to LRR. Higher the credit multiplier, higher will be the total credit created and vice - versa.
For Example suppose the LRR is 0.2 and initial deposit is 1000
Credit multiplier =
0.2 = 5
Total credit created = 5 x 1,000= 5,000
Whereas, suppose LRR is 0.5 and initial deposit is Rs. 1,000
Credit multiplier =
0.5 = 2
Total credit created = 2 x 1000 = 2,000
Thus, with the same initial deposit total credit creation decreases with an increase in the value of credit multiplier.
Ques 4: Define ‘money multiplier’.
Solution: Money multiplier is the number by which total deposits can increase due to a given change in deposits. It is inversely related to legal reserve ratio.
Ques 5 Distinguish between ‘Qualitative and Quantitative tools’ of credit control as may be used by a Central Bank.
Solution: The tools used by the Central bank to control money supply can be quantitative tools or qualitative tools. Quantitative tools control the extent of
money supply by changing the CRR or bank rate or open market operations.
Qualitative tools include persuasion by the Central bank in order to make commercial banks discourage or encourage lending which is done through moral suasion, margin requirement, etc.
Ques 6 State the role played by the central bank as the ‘‘lender of last resort’’.
Solution: In case of a financial emergency faced by a bank, central bank is the only institution that can come to the rescue of the concerned bank.
Ques 7 Explain the following functions of the Central Bank :
(i) Banker’s bank
(ii) Authority of currency issue
Banker’s Bank:- As the banker to the banks, the central bank holds surplus cash reserves of commercial banks. It also lends to commercial banks when they are in need of funds. Central bank also provides a large number of routine banking functions to the commercial banks. It also acts as a supervisor and a regulator of the banking system.
Authority of currency issue:- The central bank is the sole authority for the issue of currency in the country. It promotes efficiency in the financial system. It leads to
uniformity in the issue of currency, and gives central bank control over the money supply.
Ques 8 If legal reserve ratio is 20%, the value of money multiplier would be __________ . (Choose the correct alternative)
Solution: c) 5
Ques 9 What are ‘non-monetary exchanges’ ? Discuss with suitable example.
Solution: Non-monetary exchanges refer to the goods and services produced but not exchanged for any monetary value. This generally results in undervaluation of GDP of an economy. For example: value of household chores (cooking, washing, cleaning etc.) by a millions of homemakers is not included in the national income.
Ques 10 In order to encourage investment in the economy, the Central Bank may ___________. (Choose the correct alternative)
(a) Reduce Cash Reserve Ratio
(b) Increase Cash Reserve Ratio
(c) Sell Government securities in open market
(d) Increase Bank Rate
Solution: a) Reduce Cash Reserve Ratio