Explore topic-wise InterviewSolutions in .

1. the difficulties of the barter system

2. Black money

3. Bank money

4. Legal tender money

5. Plastic money

6. Prof. Walker

Correct Answer is Black money

Advantages of cashless payments or plastic money: 

• It reduces the burden of carrying cash while traveling. 
• It is easy to use plastic money like debit cards and credit cards. 
• It will restrict the inflow of duplicate money as cash is not used at all. 
• Fear of loss of money while traveling will not be there. If the card is lost we can inform our banks and get all transactions stopped.
• Corruption and black money transaction will be controlled as all transactions will be done through banks which will bring transparency to our transactions. 
• We also get a credit period if payments are made through credit cards.

Correct Answer is  Barter System

Correct Answer is E-money

Demonetization. 

Demonetization is a tool to control black money in a country. A note ban is a case of demonetization.

Deferred payment

Digital system

Money makes the world go round is a popular saying. It means money is the most important thing in the world. But in ‘Money’, the poet does not accept this view. He had money but he could not say that he possessed it. There were many insincere men who said they were friends.

Contentment is the main thing for being happy, not worldly possessions. Lack of money is a problem. We need it for things like health or education. When all needs are taken care of, then excess money is not necessary. Money is needed in life but it is not the only important thing in life.

The poet repeats that money brought many false men to be near him. But in poverty only a few true friends were with him.

(a) When the poet was rich he had many callers. They claimed they were friends. They were being friendly because he had money. They were not true friends. Such people are called ‘fair-weather friends’.

(b) Poor men have no worries. They do not have to safeguard their wealth from liars and cheats. They don’t have false friends who actually love his money and not him. When a man is satisfied with what he has he is happy. He is not chasing wealth and or pretending. The wives are busy and do not have the time to wish for fancy things or gossip. So a happy man has a happy busy wife.

Poor ones laugh because – poor people live a simple life. If the basic needs are fulfilled the poor man is happy. He has nothing to worry about or fear. When a man has wealth he has to safeguard it. The poor man is worry-free like health or education. When all needs are taken care of, then excess money is not necessary. Money is needed in life but it is not the only important thing in life. The poet repeats that money brought many false men to be near him. But in poverty, only a few true friends were with him.

Points : 

(a) Money is used as capital in the business. 

(b) It is used by traders to Jill up stocks 

(c) It is used by the common man for buying essentials/necessities. 

(d) Everyone uses the money for paying transport fare/food-bill/wages and so on.

Requirement of reserves acts as a limit to money (credit) creation. This is determined by the central Bank (RBI). The RBI decides a certain percentage of deposits which every bank must keep as reserves. This is done to ensure that no bank is ‘over lending’. This is a legal requirement and is binding on the banks. This is called the ‘Required Reserve Ratio’ of the ‘Reserve Ratio’ or ‘Cash Reserve Ratio’ (CRR).

CRR is the percentage of deposits which a bank has to maintain with the RBI and Certain portion of reserves it has to keep with itself in the form of liquid assets which is also called as Statutory Liquidity Ratio (SLR).
For example, if a Bank receives ₹100 as deposit and CRR is 20%, then with deposit of ₹100, the bank will need to keep ₹20 as cash reserve. Only the remaining amount of deposits ₹80 can be used to give loans.

These tools play an important role today for controlling the supply of money in the economy and to have a price stabilization and stability in the economy.

It is the system of exchange in which transactions are made by exchange of goods.

(i) Lack of double coincidence of wants. 

(ii) Difficulty in measurement of value.

It is a facility to a (customer) depositer for overdawing the amount more than the balance amount in his account.

(i) Bank Rate policy

(ii) Open market operation 

Rationing of credit is a system under which central bank of country fixes the maximum limit of credit creation by commercial bank for creation purposes.

Credit multiplier measures, number of times deposits are multiplied as credit.

Credit multiplier = 1/CRR

Credit creation means power to expand demand deposits of Commercial Banks.

A cheque is an instrument that instructs the bank to transfer funds from cheque issuer’s account to the receiver of the cheque.

(i) Money with the public

(ii) Demand Deposits

(i) Money with the public

(ii) Demand Deposits

(b) Reserve Bank of India

(i) Money with the public

(ii) Demand Deposits

The Supply of Money means the total stock of money (paper notes, coins and demand deposits of banks) in circulation held by the public at any particular point of time. Thus, two components of money supply are:

(i) Currency (paper notes and coins), and (ii) Demand Deposits of Commercial Banks

Money supply or supply of money means total amount of money available in an economy. In other words, money supply refers to the volume of money held by the people in the country for transactions or settlement of debts.

India, at present, follows a ‘managed paper currency standard.’

Speculation means future changes in interest rate and bond prices.

(i) Monetary policy of Central Banks 

(ii) Credit creation capacity and policy of Commercial Banks

Money supply refers to the stock of money in the country on a particular day. It has two components: currency with public outside the banks and demand deposits with banks. Demand deposits are deposits which can be withdrawn by writing cheque. Both these are directly usable for carrying out transactions at will.

Marginal requirement of loan means the difference in percentage between the amount of the loan and market value of the security offered by the borrower against the loan.

The deposits which can be withdrawn from the banks on demand through cheques.

Commercial Banks are required under law to keep a certain percentage of their total deposite in the central banks in the form of cash reserves. This is called CRR.

Time Deposits are deposits which can be withdrawn after a fixed period.

Money/Credit Creation is an important function of the Commercial Banks. By creating credit, Commercial Banks contribute to money supply in the economy. They create credit in the form of demand deposits. Demand deposits of the Commercial Banks are many times more than their cash reserves. If cash reserves are (say) Rs.1,000 and if demand deposits are (say) Rs.10,000, then the Commercial Banks are creating credit ten times of their cash reserves. Accordingly, on the basis of cash reserves of Rs.1,000, the Commercial Banks are contributing Rs.10,000 to the supply of money. The process of credit creation is like this: Initially, bank receives deposits of Rs.1,000. The required reserves to tackle the liability of Rs.1,000 is equal to Rs.100 (on the assumption that Cash Reserve Ratio is 10% of total deposits). Implying that the banks have excess reserves = Rs.1,000 – Rs.100 = Rs.900 which they can use for the purpose of lending. When these excess reserves are loaned out, total deposits of the banks amount to Rs.1,000 + Rs.900 = Rs.1,900. The bank need to hold cash reserves as 10% of 1,900 or 190, while their actual reserves are < 1,000. Implying excess reserves of Rs.1,000 – Rs.190 = Rs.810 which can be loaned. This process continues tilt total demand deposits are Rs.10,000 and cash reserves are Rs.1,000. Thus, if required reserve ratio is equal to 10%, total cash reserves of Rs.1,000 allows the bank to create demand deposits up to Rs.10,000. So that,

Demand Deposits = 1/RR x Cash Reserves

= 1/10% x Rs.1000

= 10 x Rs.1000

= Rs.10000

Here, RR refers to reserve requirement of the Commercial Banks as a percentage of their demand deposits.

Here, it is important to note that loans are never offered in cash. These are always reflected as demand deposits in favour of the borrowers. Accordingly, when loans are offered, demand deposits of the banks lend to build up. In the above example, cash reserves of Rs.1,000 allow demand deposits of Rs.10,000 which serve as a source of money supply.

Commercial Banks are the important source of money supply in the economy. They contribute to money supply by creating credit. They create credit in the form of demand deposits. Demand deposits of the Commercial Banks are many times more than their Cash Reserves.

Money creation is determined by:

(i) The amount of the initial fresh deposits.

(ii) The Legal Reserve Ratio (LRR). It is the minimum ratio of deposits legally required to be kept as cash by the banks.

Total Money Creation = Initial Deposits x 1/LRR

Example: Let the LRR be 20%

Fresh deposits = Rs.10,000

Amount required by the banks to keep = Rs.2,000 as cash. Suppose the banks lend the remaining amount of Rs.8,000.

The Commercial Banks also know by way of their historical experience that all the depositors would not show up in the banks to withdraw all their deposits at a point of time. Those person who borrow, use this money for making payments. Further it is also assumed that, those who receive fresh deposits of Rs.8,000, the banks again keep Rs.1,600 as cash and lend Rs.6,400. In this way, the money goes on multiplying and ultimately total money creation is Rs.50,000.

As according to the formula.

Total money creation = Initial Deposits x 1/LRR

Money creation (or deposit creation or credit creation) by the banks is determined by (i) the amount of the initial fresh deposits and (ii) the Legal Reserve Ratio (LRR), the minimum ratio of deposit legally required to be kept as liquid assets by the banks. It is assumed that all the money that goes out of banks is redeposited into the banks. Let the LRR be 20% and there is fresh deposits of Rs.10,000. As required the bank keep 20% i.e., Rs.2000 as reserves. Suppose the bank lend the remaining Rs.8,000. Those who borrow, use this money for making payment. As assumed those who receive payments, put the money back into the banks. In this way, banks receive fresh deposits of Rs.8,000. The banks again keep 20% i.e. Rs.1600 as reserves and lend Rs.6,400, which is also 80% of the last deposit. The money again comes back to the banks leading to a fresh deposit of Rs.6,400. The money goes on multiplying in this way, and ultimately total money creation is Rs.50,000.

Given the amount of fresh deposit and the LRR, the total money creation is:

Total Money Creation = Initial Deposits x 1/LRR

Narrow money comprises of M1 and M2.

1935, April 1st.

Government of India nationalized 14 commercial Banks in 1969.

The currency of Japan is yen.

nflation occurs when supply of money is more than the availability of goods and services in a country.

Functions of R.B.I.

1. A monopoly of Note issue: RBI has the monopoly of issuing currency notes of Rs 2 and above, namely Rs 5, Rs 10, Rs 20, Rs 100, Rs 200, Rs 500, and Rs 2000. One Rupee is issued and circulated by RBI on behalf of the Central Government. 

2. Banker to Government: The RBI accepts the deposits of Central and State Governments, collects money (like taxes and other charges) and also makes payments on behalf of the Government. 

3. Bankers’ bank: It also acts as the bank for all banking institutions in the country. All the banks of the country have to keep a predetermined part of their deposits as reserves with the RBI. 

4. National Clearing House: RBI acts as the clearinghouse for the settlement of transactions across banks. This function helps banks to settle their inter banks claims easily. 

5. Controller of credit: The RBI regulates the amount of credit issued by the banks, according to the monetary situation of the country. 

6. Custodian of Foreign Exchange Reserves. 

7. Promotion of Banking Habits.

The metallic coins were unsafe to carry from one place to another. Therefore, traders began to carry the written documents issued by well known financiers as evidence of the quantity of money at their command. The written documents were not actual money, but were accepted and exchanged for money. When such documents were issued by governments, they were called as promissory notes’ or currency. Later on, the central banks established by the government started printing notes that had the guarantee of the government. This paper money became legal tender that is the legally acceptable money. No individual can refuse the legal tender in that respective country. The legal tender is called as Rupee in India: Dollar in the USA; Pound in England: Euro in Europe: Yen in Japan: Yuan in China, etc.

The function of Money: 

The important primary functions of money are:

1. Primary or main functions: 

• Medium of exchange or means of payment: Money is used for selling and buying goods and making corresponding payments. 
• Measure of Value: The prices of all goods and services are expressed in terms of money only. 

2. Secondary functions: 

• Standard of deferred payments: Money eases future transactions too. A borrower is under an obligation to pay a specified sum of money on a specified future date. 
• Store of value: Since the future value is assured, money has made it possible to save or store wealth for the future and help in its accumulation. 
• Transfer of value: The introduction of money has made the exchange of goods to distant places possible.

Barter is the exchange of goods for Goods.

Correct Option (1) a, b, d

Correct option (4) a, b, c, d

Correct option (3) a, b, c

Money can be easily stored without any loss in its value. Thus, store of value as a function of money implies that money can easily be saved and used for future needs. Money’s function of storing value can be justified because of the following reasons:

i. Money is the most widely accepted medium of exchange

ii. There is no loss in the value of money over time. Though there is a loss in the value of money due to inflation, it is negligible.

iii. Money can be stored conveniently and does not involve any cost