In this article, we are going to provide important questions and answers from Class 12 Economics, Chapter 3 – Money and Banking. This content is prepared strictly according to the latest syllabus and is useful for board examinations as well as revision purposes. The questions are arranged in a systematic manner, covering very short, short, and long answer types to help students understand the chapter easily and score better in exams.
Class 12 Economics – Chapter 3: Money and Banking
A. VERY SHORT ANSWER QUESTIONS (1 Mark)
1. What is barter system?
Ans: Barter system of exchange refers to the system where goods are exchanged for goods.
2. In the equation of transaction demand for money Mdᵀ = K.T what does T stand for?
Ans: T = Transaction.
3. What is velocity of circulation of money?
Ans: The number of times the rupee has been circulated is known as velocity of circulation.
4. A person earns Rs. 700 per month. Calculate his average cash holding.
Ans: Average Cash Holding = 700 ÷ 2 = Rs. 350.
5. What is a person’s average transaction demand for money?
Ans: It is half of his monthly transaction.
6. Write True or False:
The transaction demand for money is positively related to real income and price level.
Ans: True.
7. At liquidity trap, what is the elasticity of speculative demand for money?
Ans: Infinity.
8. “The speculative demand for money is —— related to the market rate of interest.”
Ans: Inversely.
9. People hold money for two motives. One is transaction motive. What is the other?
Ans: Speculative motive.
10. Name the monetary authority that issues currency notes in India.
Ans: Reserve Bank of India (RBI).
11. Why is reserve keeping with RBI costly for commercial banks?
Ans: It reduces the borrowing capacity of commercial banks.
12. Why is it necessary for RBI to keep reserves from commercial banks?
Ans: For credit creation.
13. What is Cash Reserve Ratio (CRR)?
Ans: It is the percentage of time and demand deposits kept by banks with RBI.
14. What is Statutory Liquidity Ratio (SLR)?
Ans: It is the percentage of deposits kept by banks with themselves.
15. What is borrowing rate of a commercial bank?
Ans: It is the rate of interest at which banks accept deposits.
16. How is credit worthiness judged by banks?
Ans: By investigating current assets of the person.
17. Define high-powered money.
Ans: Currency created by the central bank including public currency and bank reserves.
18. The fraction of bank deposits kept with RBI is called:
Ans: Cash Reserve Ratio (CRR).
19. Fixed deposits do not have fixed maturity period. (True/False)
Ans: False.
20. ____ is the most liquid asset accepted by all.
Ans: Money.
21. What is Money?
Ans: Anything widely accepted for exchange of goods and services.
22. Money is a convenient unit of account. (True/False)
Ans: True.
23. What is deterioration of money?
Ans: Decline in value of money compared to other currencies.
24. What is liquid money?
Ans: Money that can be easily converted into other assets.
25. Demand deposits are not legal tender. (True/False)
Ans: True.
26. Mention one factor on which Currency Deposit Ratio depends.
Ans: Demand deposits.
B. SHORT ANSWER QUESTIONS (3 Marks)
1. Calculate bond price with 10% interest for 3 years (Rs. 600).
Ans:
1st Year = Rs. 540
2nd Year = Rs. 486
3rd Year = Rs. 437.40
2. Bond price Rs. 400, interest 5%, total return after 2 years?
Ans: Rs. 441.
3. Distinguish between demand deposits and time deposits.
Ans:
- Demand deposits are payable on demand; time deposits after maturity.
- Demand deposits earn no interest; time deposits earn interest.
- Demand deposits are chequeable; time deposits are not.
- Demand deposits are part of money supply; time deposits are not.
4. What is flat money? Can coins be flat money?
Ans: Flat money is money ordered by government to act as money.
5. What is Currency Deposit Ratio? Why does it increase during festivals?
Ans: It is cash held by public and deposits with banks. It rises due to higher liquidity demand.
6. Explain Reserve Deposit Ratio.
Ans: Portion of deposits banks keep as reserves like CRR and SLR.
7. Significance of Bank Rate as RBI tool.
Ans: Bank rate influences borrowing cost and credit flow.
8. Exhibit a sample balance sheet of a commercial bank.
Ans: (As given in text – no numerical data provided.)
9. What is inflation?
Ans: Continuous rise in general price level over time.
10. Three shortcomings of barter system.
Ans:
- Lack of coincidence of wants
- Lack of storage
- Lack of value measurement
C. SHORT ANSWER QUESTIONS (4 Marks)
1. Functions of money & how it overcomes barter difficulties.
Ans:
- Medium of exchange
- Measure of value
- Store of value
- Standard of deferred payments
2. What is liquidity trap?
Ans: Situation of very low interest where people prefer holding money.
3. Relationship between speculative demand & interest rate.
Ans: Inverse relationship.
4. Significance of M1, M2, M3, M4.
Ans:
- M1 = Currency + Demand deposits + Other deposits
- M2 = M1 + Post office savings
- M3 = M1 + Time deposits
- M4 = M3 + Post office deposits
D. LONG ANSWER QUESTIONS (5 Marks)
1. Describe speculative demand for money.
Ans: Demand for money to store wealth, inversely related to interest rate.
2. Explain transaction demand for money.
Ans: Demand for day-to-day transactions, depends on income level.
3. Define money multiplier.
Ans: Measures deposit creation per unit of reserve.
4. Explain multiplier process of money supply.
Ans: Expansion of money supply through deposits based on reserve ratios.
5. Functions of RBI.
Ans:
- Issue of currency
- Banker to government
- Banker’s bank
- Controller of credit
- Lender of last resort
6. Can commercial banks create money?
Ans: Yes, through demand deposits.
7. Explain deficit financing.
Ans: Creation of new money to meet excess government expenditure.
8. What is demonetization?
Ans: Withdrawal of legal tender status of currency (India: 2016 ₹500 & ₹1000).
