Concept Classes

NO. 202 SECOND FLOOR E BLOCK MARKET, VIKAS PURI

MONEY & BANKING

Class 12 - Economics
Time Allowed: 1 hour
Maximum Marks: 40

1. How do commercial banks contribute to the supply of money in a country? [2]

2. Explain the problem of storing wealth in the context of barter. How has money solved this problem? [2]
3. Explain the concept of overdraft facility granted by commercial banks. [2]
4. Distinguish between demand deposit and time (term) deposit. [3]
5. Explain the credit creation role of Commercial Banks with the help of a numerical example. [3]
6. How central bank controlled credit creation by the commercial banks? [5]
7. Explain the impact of following on the credit creation by commercial banks :
[2]
(i) Increase in bank rate

(ii) Increase in Primary deposits

(iii) Decrease in SLR

8. Read the given information and answer the following questions :
[2]
India;s Central Bank, the Reserve Bank of India has announced a reduction in the cash reserve ratio (CRR) by 75
basis points and has lowered the statutory liquidity ratio (SLR) to 23% from 24% to boost the slowing economic
growth in the country by improving liquidity. Ahead of its mid-quarterly policy review, the Reserve Bank of
India today also hinted at cut in bank rates, saying mode-ration in inflation due to lower economic growth and
cooling global oil prices provide room for easing monetary policy. The 75 bps cut would increase the liquidity
by Rs.48,000 in the countrys economy. The additional funds in the economy would help the economy in the
coming months as the liquidity position is expected to become tighter in mid- March due to advance tax
outflows.

The RBI governor has already indicated that the central bank is considering a reversal of the monetary policy as
the inflation is falling and the high interest rates have affected economic growth in the country. The fall in
inflation is due to a good Khari harvest as well as a high base. The fall comes as a relief to the government and
the central bank. Finance Minister has said that he is satisfied with the fall in food items and believes that if the
trend continues, the overall inflation will be under control allowing authorities to increase interest rates and
boost economic growth, which has shown signs of a slowdown in recent months
i. What is CRR ?
ii. What is SLR ?
iii. What is bank rate ?
iv. How will lowering the legal reserves create liquidity in the market ?
v. What is inflation ?
vi. How inflation and production of crops are related to each other ?
9. Explain the banker to the government function of the Central Bank. [2]
10. Explain the role of cash reserve ratio in controlling credit creation. [3]

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11. Elaborate, how does a Central Bank stabilize money supply through Bank Rate. [3]
12. Explain the meaning of open market operations. How is it used to reduce money supply in the economy? [5]
Question No. 13 to 18 are based on the given text. Read the text carefully and answer the questions:

The central bank adopts various measures to control the supply of money in the economy. Largely, these measures relate to
credit supply by commercial banks. The increase (or decrease) in bank rate is often followed by an increase (or decrease) in
the market rate of interest (the interest rate charged by the commercial banks from the general public). Accordingly, the
cost of credit (also called the cost of capital) changes in the market. Inflation is corrected by selling the securities and
soaking liquidity, while deflation is corrected by buying the securities and releasing liquidity. During inflation, the cost of
capital is increased by increasing the repo rate. This lowers the demand for credit and accordingly, the supply of money in
the economy, as desired. When the reverse repo rate is lowered banks are discouraged to park their surplus funds with the
RBI. Instead, the banks may use these funds as (RR-funds with the RBI. This leads to a rise in credit supply (money
supply) by commercial banks. When the supply of money is to be increased, CRR is lowered, and when the supply of
money is to be reduced, CRR is raised. To decrease the supply of money (as during inflation), the central bank increases
SLR.

13. Assertion (A): Inflation is corrected by selling the securities and soaking liquidity, while deflation is corrected [1]
by buying the securities and releasing liquidity.

Reason (R): Such purchase and sale of securities to control credit is known as open market operations.

a) Both A and R are true and R is the correct b) Both A and R are true but R is not the
explanation of A. correct explanation of A.

c) A is true but R is false. d) A is false but R is true.

14. The Central Bank issues the currency of the country. It can be held by the public or by commercial banks. This [1]
money is given various names. Pick the odd one out.

a) High-powered money b) Reserve money

c) Bank deposit money d) Monetary base

15. Credit control means: [1]

a) extension and contraction of money supply b) contraction of credit only

c) extension of credit only d) all of these

16. Reverse repo rate: [1]

a) is increased to curb inflation b) generates interest income

c) is not a policy rate d) Both generates interest income and is

increased to curb inflation
17. The central bank has several important functions. Which among the following does not help it control the money [1]
supply?

a) credit creation b) bank rate

c) reserve ratios d) open market operations

18. Given below are the functions of commercial banks. Choose the incorrect option: [1]

a) It takes away the excess funds from b) Funds can be kept in the form of deposits in

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 individuals or firms and supplies them to the banks and borrowed as loans.
poor people.

c) People prefer to keep money in banks d) Acts as a mediator between individuals or

because banks offer to pay some interest on firms with excess funds
any deposits made.

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