Explore topic-wise InterviewSolutions in .

The drawback of barter system are :

1) Absence of a common unit of measurement – There was no single unit of measuring the value of different goods as different countries were using different things as money. 

2. Lack of double coincidence of wants – There is no guarantee that both the parties (buyers and sellers) will be agreed to exchange their goods at a time. 

3. Problem of future payments – There was no single unit to engage in contracts involving future payments. 

4. Storage and transfer problem – There was no general method of saving purchasing power. Storage may need more cost or high depreciation. Transferring immovable goods was also impossible. 

As per Banking Regulation act of 1949, RBI has the power to adopt and implement various credit control measures to achieve objectives like proper regulation of volume of credit and prices. 

The instruments of Monetary policy of RBI are as follows:

I. Quantitative measures: The quantitative methods of credit control implemented by RBI are as follows:

(a) Bank Rate Policy: It is the standard rate at which RBI is prepared to buy or rediscount bills of exchange or commercial papers eligible for purchase according to the banking regulation act. It is the rate at which RBI extents advances to commercial banks. This influences the lending rates of commercial banks. Earlier in 1991 the rate was 12% and as on 2005, it was 6% and it was 5.5% in 2008.

(b) Open Market Operations: It refers to purchase and sale of various assets like gold, Government securities, foreign exchange, etc by RBI. The expansion and control of supply of money is done by “Open market operations”. RBI purchases securities during deflation and sells during inflation.

(c) Variable reserve requirements: As per the banking regulation act, every bank has to keep certain percentage of its total deposits with RBI in the form of reserve fund. By changing the ratio (increase or decrease) of these reserves, RBI can control the credit power of banks.

These variable requirements are of two types. They are Cash reserve ratio (CRR) and Statutory liquidity ratio (SLR): 

(1) Cash reserve ratio (CRR): It is the portion of total deposits of the commercial banks which has to keep with RBI in the form known as cash reserves. At present CRR is at 5% as on 21st January 2005.

(2) Statutory liquidity ratio (SLR): It is the portion of total deposits of commercial banks which they have to keep with them selves and these deposits must not be used for credit purpose. In other words, SLR refers to that portion of total deposits which a commercial bank has to keep with it self in the form of liquid assets viz., cash, gold or approved Government securities. The SLR has been reduced to 25% on the entire net demand. This is as per the recommendations of Narasimham committee.

II. Selective credit controls: These are those measures used by RBI along with other measures to control credit. It is used as the supplement to the regular credit regulations. The selective credit controls used by RBI are as follows:

(a) Fixation of margin requirements: A central bank changes the margin requirement from time to time to regulate the volume of the credit. The difference between the market value of securities or assents and the amount actually lent against these securities is called margin. The RBI may increase the margin to reduce the volume of credit and decrease the margin to expand the credit. 

(b) Regulation of Consumer credit: Consumer credit refers to financial assistance given by banks to consumer to purchase vehicles, electronic goods, electric items etc. In order to avoid demand pull inflation, the RBI regulates the consumer’s credit. 

(c) Moral suasion: It implies that persuasion and request made by the Central Bank to Commercial Banks to cooperate with the general monetary policy. 

(d) Direction action: The RBI may take direct action against the erring commercial banks by refusing to rediscount their commercial bills and may charge penal rate of interest. 

(e) Credit Rationing: The RBI through its credit rationing system, directs the commercial banks to borrow loans to a certain limit. In turn, the commercial banks will lend loans to limited sector and there the supply of money gets controlled. 

(f) Publicity: The RBI gives regular publicity about money market trends, educates the commercial banks to regulate the credit. It includes publishing the monthly review of credit and business conditions and the annual reports on the banking sectors.

Currency Deposit Ratio (CDR) is the ratio of money held by the public in currency to that they hold in bank deposit. CDR= CU\DD 

The Reserve Deposit Ration (RDR) banks hold a part of the money people keep in this bank deposit as reserve money. Reserve money consists of two things. Vault cash in banks and deposits of commercial banks with RBI. It is the proportion of total deposits commercial banks keep as reserve.

It is a facility provided by a bank to its current account holders to overdraw their accounts up to certain limit.

1. High powered money 

2. Barter system 

3. Transaction demand for money 

4. Cash reserve ratio 

5. Revenue deficit 

6. Fiscal deficit

According to J.M.Keynes, the three motives of demand for money are as follows: 

• Transaction motive 
• Precautionary motive and 
• Speculative motive.

Important functions of money are :

a) A unit of value – Money is the generally accepted as a unit of value of all goods and services. 

b) Medium of exchange – Money facilitates the buying and selling of goods and services. 

c) A standard of deferred payment – Money helps in settling the loan taken and repayment is made in future date. 

d) Storage of value – Store of value means shifting of purchasing power from the present to the future. As such, the holders of money are holders of generalised purchasing power from present to the future. 

• Bank facilities should be provided to all.
• Delay in business should be avoided.
• Unnecessary formalities and practices should be avoided.
• Large security requirements of banks should be relaxed

Manaswini gets Rs. 15000/- approximately after the period of 5 years.

Bank rate is the rate of interest charged by the Reserve Bank of India while lending loans and advances to commercial banks.

The Transaction Motive:

The principal motive for holding money is to carry out transactions. In general, the transaction demand for money in an economy, MdT, can be written in the following form

Mt = k.T

where T is the total value of (nominal) transactions in the economy over unit period and k is a positive fraction. The number of times a unit of money changes hands during the unit period is called the velocity of circulation of money. In general, equation can be modified in the following way

Mt = kPY

where Y is the real GDP and P is the general price level or the GDP deflator. The above equation tells us that transaction demand for money is positively related to the real income of an economy and also to its average price level.

The Speculative Motive :

An individual may hold her wealth in the form of landed property, bullion, bonds, money, etc. Everyone in the economy will hold their wealth in money balance and if additional money is injected within the economy it will be used up to satiate people’s craving for money balances without increasing the demand for bonds and without further lowering the rate of interest below the floor level. Such situation is called a liquidity trap. The speculative money demand function is infinitely elastic here.

There are four alternative measurement of money supply :

a) M₁ = C + DD + OD

Whose, C = currency held by the public.

DD = demand deposits in the bank (net). 

OD = Other deposits with the RBI. 

b) M₂ = M₁ + Savings deposits with post office savings banks. 

M₃ = M₁ + (net) time deposits with the banks 

M₄ = M₃ + total deposits with post office savings Organisation (excluding National Savings Certificate)

When a bank accepts cash from the customer and opens an account in the name of that customer, it is called a Primary Deposit.

Correct answer c to d

Money can be classified as :

a) Full bodied money – This is a money whose value as a commodity for non monetary purpose is as great as its value as money. (Intrinsic value = Extrinsic value) 

b) Representative full bodied money – Its a paper money which represents in circulation an amount of money with a commodity value equal to the value of the money. (Extrinsic value is greater than intrinsic value)

c) Credit money – It’s the money whose value as money is greater than the commodity value of the material from which money is made. Credit money may be of token coins, representative token money, circulating promissory notes issued by the central bank and deposits at banks. 

We dene money multiplier as the ratio of the stock of money to the stock of high powered money in an economy, viz. MIH. Clearly, its value is greater than 1. We need not always go through the round effects in order to compute the value of the money multiplier. By definition, money supply is equal to currency plus deposits.

M = CU + DD = (1 + cdr) DD where, cdr = CU/DD. Assume, for simplicity, that treasury deposit of the Government with RBI is zero. High powered money then consists of currency held by the public and reserves of the commercial banks, which include vault cash and banks’ deposits with RBI. Thus H = CU + R = cdr.DD + rdr.DD = (cdr+ rdr)DD Thus the ratio of money supply to high powered money.

\(\frac{M}{H} = \frac{1\,+\,cdr}{cdr\,+\,rdr}\) > 1 as rdr < 1

This is precisely the measure of the money multiplier.

Correct answer is (c) \(\frac{M}{H}\)

Stock :

It is a variable which can be measured at a particular point of time. Stock is a static concept e.g. wealth, money supply, inventory.

Flow:

It is a variable which can be measured over a given period of time. It is a dynamic concept,

e.g: income, gross value added (GVA), changes in inventory

Correct answer is (b) 1935

Broad money refers to the money held by the public in the form of savings and Net Time Deposits apart from the currency and demand deposits.

The main functions of a commercial bank are :

a) Acceptance of deposits – The bank accepts three types of deposits

i) Current account deposits – they are payable on demand and can be withdrawn by cheque without any restriction. No interest is paid 

ii) Termed / fixed deposits – they are fixed for a certain time period ; are not payable on demand and bear high rate of interest. 

iii) Savings accounts deposits – these are payable on demand and with draw able by cheque but with restriction and bears lower rate of interest. 

b) Giving loans – Banks advance loans to the borrowers in different forms : 

– Cash credit 

– Demand loans 

– Short term loans.

c) Overdraft – Under this system, the customer can get more than what they have deposited, but with extra interest and a short period of time. This facility is generally given to the businessmen.

d) Discounting bills of exchange – The bank discounts the bills of exchange – a document acknowledging an amount of money in consideration for goods received after deducting the commission and pays the present value of the bill to the party. 

e) Investment – The bank invests extra funds in terms of purchasing securities. 

f) Agency function – The bank performs certain agency functions for its worthy customers in return for a commission. 

g) Miscellaneous function – It includes purchase and sale of foreign exchange, issue of traveller’s cheque, provision of locker and underwriting activities. 

Money is offered for hair.

Correct answer is (c) infinity

Liquidity Trap: 

A situation in the economy may arise when everyone will hold their wealth in money balance. If additional money is injected into the economy, it will not be used to purchase bonds. It will be used to satisfy the people’s drawing for money balance without lowering the rate of interest. Such a situation is called ‘liquidity trap’.

(a) Money supply consists of currency notes and coins issued by the monetary authority of the country.

(b) The total stock of money in circulation among the public at a particular point of time is called money supply. RBI publishes figures for four alternative measures of money supply, viz. M₁, M₂, M₃ and M₄. They are defined as follows.

(c) M₁ and M₂ are narrow money. M₃ and M₄ are broad money

Gopal needs rice. Seenu has rice. But he doesn’t need goat. He needs wheat. So the transaction between Gopal and Srinu is not possible.

The money which is fully liquid and available whenever people need is called narrow money.

1. Whatever the situation, normally banks ask for full payment of loan. 

2. When there is a crop failure or less yield, farmers are unable to repay their loans. 

3. In such situation banks have to reschedule the repayment procedure and has to provide crop loans to the farmers for the next season. 

4. Government shall support the farmers by waiving interest component and directing the banks to provided necessary loans for next crop.

In our village paddy is exchanged for services rendered by washerman, barber etc.

1. The most liquid form of asset is money 

2. Demand deposits usually carries no interest 

3. The responsibility of note issue in India is with RBI 

4. Canara Bank is a private sector bank.

\(M^d_s = \cfrac{r_{max}-r}{r - r_{min}}\)

When r = r_max the equation becomes

= \(\cfrac{r_{max}-r_{max}}{r_{max}-r_{min}}\) = \(\cfrac{0}{r_{max}-r_{min}}\)= 0

The supply of money refers to the total currency notes and coins held by the people in the country at a particular point of time. In other words, it refers to the aggregate stock of money.

Nowadays they are paid money only. But 15 years ago our parents paid them in the form of paddy.

Nowadays they are paid money only. But 15 years back our parents paid them in the form of paddy.

1) Copper, bronze, silver and gold

2) People could buy and sell with the assurance that the money they had in hand would be valuable and sought by others.

3) They did not have to worry that their money might lose value as could happen with grains or cattle.

4) With the invention of money, some problems remained and new problems came up.

5) Medium of exchange.

With the invention of money, some problems remained and new problems came up.

My name is Subba Rao. Once I went to the State Bank of India branch in Mudinepalli One gentleman sat inside a cabin. There is a name plate before him. He was going through some documents and discussing with some others. My mother came there to withdraw some amount. She filled up the withdrawal form and handed over it to the person in counter no. 2. The person in the counter verified the form and the book. He signed it and gave us a token no. 4. We waited there for sometime. In the meanwhile one known person Sri K. Yagnaiah came there and deposited some amount. He wished my mother and went away. Rama Krishna, my brother’s friend, came to the bank to open a new account. He was enquiring about it. Bank people were drafting D.D.s, verifying accounts, opening new accounts and helping the locker holders etc. After 40 minutes there was a call from No. 6 counter. We went to the counter and took our money. I was told by my mother that the Manager looks after the bank management issues and any other problems.

The demand for money includes the sum of transactionary demand for money, precautionary demand for money and speculative demand for money.

Money is anything which is commonly accepted as a medium of exchange for goods and services and acts as a measure of value.

There is no personal relation and identification between the bank people and their customers. If the bank people failed to recollect the debts, it leads to bankrupt. So banks ask for security while lending.

Yes. I have visited the banks many times. Names of Banks:

1. Kotak Mahindra

2. State Bank of India 

3. Andhra Bank 

4. Indian Bank 

5. Vijaya Bank 6. Dena Bank 

7. Kanakadurga Grameena Bank

Copper, bronze, silver and gold.

The high powered money refers to that money which is held by the public, demand deposits of banks and other deposits held by the Reserve Bank of India.

The crossed cheque can be deposited and cashed in the account holder’s account only. No other person can cash it. This system can create confidence in the customers. Otherwise it can be misused.

Self cheque:

1. I will write a cheque for Rs. 2,000/- on my friend’s name and ask her to get cash from the bank. 

2. I will sign on the down and back of the cheque. 

3. I will give her instructions where to handover the cheque in the bank and how to receive cash in counter. 

4. No need of any account to my friend in the bank.

Cross cheque: 

If I wrote an amount on cross cheque, my sister needs an account in any of the banks to change the check into cash.

People can make payments electronically without using cheques by using the internet.

1. Sale and purchase of goods 

2. Raising capitals 

3. Repaying debts 

4. Paying electricity and Phone bills 

5. Transfer of money 

6. Paying income tax 

7. Paying house taxes etc.

Banking is a business activity where money deposits are collected from the public and these deposits can be transferred from one person to another.

1. Kotak Mahindra, 

2. State Bank of India, 

3. Andhra Bank, 

4. Indian Bank.