OISG CBSE Grade 12

Worksheet: Unit 2: Money and Banking

Sub: Economics

1) Define Money Supply and explain its components.

2) What are demand deposits?
3) Define ‘money multiplier’.
4) Explain the effect of an increase in bank rate on credit creation by commercial banks.
5) Define Credit Multiplier. What role does it play in determining the credit creation
power of the banking system? Use a numerical illustration to explain.
OR
Assuming that initial deposits with bank is Rs. 5000 and LRR is 10%, explain the
process of credit creation by the bank.
6) How does a central bank control the availability of credit by open market operation?
7) Explain the components of the Legal Reserve Ratio.
8) To control recession, which of the following can be appropriate:
a) Reducing Repo rate
b) Reducing CRR
c) Both a) and b)
d) None of a) and b)
e)
9) Supply of money refers to:
a) Currency held by public.
b) Currency held by RBI.
c) Currency held by the public and demand deposits with commercial banks.
d) Currency held in government account.

10) Read the following statements- Assertion (A) and Reason (R). Choose one of
the correct alternatives given below:
Assertion (A): Higher cash reserve ratio implies a lower capacity of the commercial
banks to create credit.
Reason (R): Credit multiplier is the reciprocal of cash reserve ratio.
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct
explanation of Assertion (A).
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct
explanation of Assertion (A).
c) Assertion (A) is true but Reason (R) is false.
d) Assertion (A) is false but Reason (R) is true.

11) Read the following statements- Assertion (A) and Reason (R). Choose one of
the correct alternatives given below:
Assertion (A): CRR is determined by the RBI.
Reason (R): The central bank offers loans to the government.
 a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct
explanation of Assertion (A).
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct
explanation of Assertion (A).
c) Assertion (A) is true but Reason (R) is false.
d) Assertion (A) is false but Reason (R) is true.

Read the following statements- Assertion (A) and Reason (R). Choose one of
the correct alternatives given below:
Assertion (A): All commercial banks function under the control of the central bank.
Reason (R): The principal function of the central bank is to control the money supply
or credit in the economy.
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct
explanation of Assertion (A).
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct
explanation of Assertion (A).
c) Assertion (A) is true but Reason (R) is false.
d) Assertion (A) is false but Reason (R) is true.

12) For the commercial banks, the source of profit is:

a) Unclaimed deposits.
b) Grants by the government.
c) Spread: the difference between the interest they charge and the interest they
pay.
d) None of these.

13) Primary deposits are:

a) Cash deposits with the commercial banks.
b) Gold reserve with the commercial banks.
c) Reserves of foreign exchange.
d) None of these.

14) Cash reserves of commercial banks with RBI, as a percentage of their total deposits
refers to:
a) Cash reserve ratio.
b) Repo rate.
c) Cash deposits.
d) Statutory liquidity ratio.

15) With an increase in market rate of interest, cost of credit:

a) Decreases.
b) Increases.
c) Remains constant.
d) None of these.

16) Repo rate relates to:

a) Short term borrowings by the commercial banks.
b) Long term borrowings by the commercial banks.
c) Overnight borrowings by the commercial banks.
d) None of these.
17) Margin requirements are:

a) Current value of the security offered for loan – value of loan granted.
b) Current value of the security offered for loan ÷ value of loan granted.
c) Current value of the security offered for loan X value of loan granted.
d) Current value of the security offered for loan + value of loan granted.

18) The value of money multiplier ______ with decrease in cash reserve ratio.
a) Increases.
b) Decreases.
c) Remains unchanged.
d) None of these.