Economics 3 Marks Question

Under barter system there were difficulties in storing wealth. Wealth is stored to be used in future. All goods cannot be stored. Perishable goods cannot be stored. All goods cannot be transported from one place to another. All goods may not be acceptable as medium of exchange. No single physical good has all these qualities. So in the barter system of exchange there was difficulty in storing wealth.

Money serves as a medium of exchange. Goods can be purchased with money. Goods can also be sold for money. Thus money acts as a medium of exchange.

The unit of account function means that monetary unit is treated as the standard unit for quoting prices or borrowing & lending activities, etc. This function has made possible keeping of accounts and the emergence of the banking system.

Deferred payments mean payment contracted to be made at some future date. Money serves as a standard of such deferred payments, like in borrowing and lending activities. It has made possible the creation of banking system.

Less money supply i.e. stock of money with people leaves less purchasing power in their hands. Therefore, people demand less goods and services. AD falls.

Money serves as a standard of payments contracted to be made in future. It makes borrowings and lending convenient.

It acts as banker to the government. It accepts deposits from government and gives loans to the government.

1. Acceptance of Deposits: Commercial bank accepts deposits from the public. Deposits are broadly of two types demand deposits and time deposits.
2. Giving Loans: Lending by commercial banks consists mainly of cash credit, loan to private investors.
3. Investment of funds: Commercial banks invests their surplus funds in different types of securities.

Evaluation of money in terms of commodity money, metallic money paper money, bank money.

Anything that serves as a medium of exchange is money.

1. Medium of Exchange.
2. Unit of account.
3. Store of value.
4. Standard of deferred payments.

Medium of exchange function has solved the problem of double coincidence of wants. The buyer can pay money to the seller and the seller in turn can buy what he wants to buy. Money facilitates the exchange.

The problem of double coincidence of wants arises when there is no medium of exchange. In such a case the buyer has to make a search for the seller who also wants to buy the same good which the buyer itself offers for exchange.
Money has solved the problem by working as a medium of exchange. The seller can sell the goods in the market in return for money and buy the goods he wants to buy in return for the money.

• Available in fractional denominations.
• Easily portable.
• Serves as medium of exchange at all times.

It is possible that with rise in GDP, inequalities in the distribution of income may also increase. It means gap between rich and poor increases. So, the welfare of the people may not rise as much as the rise in GDP.

Lending by the central bank to the commercial banks is called the lender of the last resort function. Commercial bank borrow from central bank in times of need.

1. Central bank acts in public interest while commercial banks work with profit motive.
2. Central bank does not do the ordinary banking business of accepting deposits and giving loans while commercial banks do.
3. Central bank has the power of printing notes while commercial banks do not have such power.

Open market operations refer to the sale and purchase of government securities by the central bank.When the central bank sells securities, people make payments by withdrawing money from the commercial banks. This reduces deposits with commercial banks. This in turn reduces supply of credit by commercial banks. Similarly, buying of securities by central bank increases supply of credit.

Changing of bank rate (the interest rate at which the central bank lends to the commercial banks) to influence credit availability is called bank rate policy.When bank rate is raised, It forces the commercial banks to raise the interest rate at which they lend. This reduces demand for credit. Similarly a lowering of bank rate will increase demand for credit.

1. The central bank has the sole monopoly to issue currency notes. Commercial banks cannot issue currency notes. Currency notes issued by the central bank are the legal tender money.
2. Legal tender money is one, which every individual is bound to accept by law in exchange for goods and services and in the discharge of debts.
3. Central bank has an issue department, which is solely responsible for the issue of notes.
4. However, the monopoly of central bank to issue the currency notes may be partial in certain countries.
5. For example, in India, one rupee notes and all coins are issued by the government and all other notes are issued by the Reserve Bank of India.

1. Legal Reserve Ratio: It is the minimum ratio of deposits legally required to be kept by the commercial banks with themselves and with the central bank.
2. It's components are:

1. Cash Reserve Ratio: It refers to the minimum percentage of a bank's total deposits, which it is required to keep with the central bank.
2. Statutory Liquidity Ratio: It refers to minimum percentage of net total demand and time liabilities, which commercial banks are required to maintain with themselves.

Yes, it is correct that printing of currency is not always a matter of concern as new currency might be printed on the virtue of replacing older ones. Also with the growth of an economy, demand increases hence new currency are printed in accordance with the growth of the economy.

Under the barter system of exchange, acts of sale and purchase of an individual were to occur at the same point of time. To buy a thing, an individual must at the same time sell something needed by the other person. Also, sale and purchase by an individual must be of equal value.
But with the introduction of money (as a medium of exchange), an individual can buy a commodity or service with money without selling anything at the same time. Likewise, he can sell a commodity for money without buying anything at the same time. Thus, with the introduction of money, acts of sale and purchase are separated.

1. As banker to the banks, the central bank acts as the lender of the last resort.
2. In other words, in case the commercial banks fail to meet their financial requirements from other sources, they can, as a last resort, approach to the central bank for loans and advances.
3. The central bank assists such banks through discounting of approved securities and bills of exchange.

Value: Analytic.

Pradhan Mantri Jan-Dhan Yojana (PMJDY): is National Mission for Financial Inclusion to ensure access to financial services, namely, Banking Savings and Deposit Accounts, Remittance, Credit, Insurance, Pension in an affordable manner. Account can be opened in any bank Branch or Business Correspondent (Bank Mitr) outlet.

When you pay for goods or services with your debit card, you have an option for the payment to be processed in two different ways: as an offline transaction via a credit card processing network, or as an online transaction via an EFT system, requiring a personal identification number (PIN) to complete the process.

An e-payment system is a way of making transactions or paying for goods and services through an electronic medium, without the use of cheques or cash. The electronic payment system has grown increasingly over the last decades due to the growing spread of internet based banking and shopping.

Significance of centralised cash reserves with Central Bank are:

1. Banks get financial accommodation when required.
2. Central Bank gets an opportunity to exercise control over banking system of the country.
3. It maintains uniformity in currency notes.

No, credit card is not money, as money is what we pay for goods and services but credit signifies owing money by the borrowers. e.g. If you buy a washing machine using credit card, it means you are owing money from bank which issued the credit card in order to facilitate the monetary transaction and later on, it collects the cash back when you pay-off your financial liability.
Thus, credit card is not a form of money, but it is an instrument which is used by the people as a medium of exchange at the time of financial transactions. However, credit cards are considered as near money as they perform several other functions of money.

Advantages of commercial banks are as follows:

1. Commercial banks facilitate savings and capital formation by accepting deposits from the households and firms.
2. They offer loans to the households for consumption purposes and to the firms for investment purpose. This raises the level of Aggregate Demand in the economy which is very important during depression.
3. Commercial banks offer overdraft facilities to the firms. This helps the firms in fulfilling their emergent financial requirements.
4. They create credit and accordingly contribute to the flow of money in the economy.

Currency in India is printed by special subsidiaries appointed by the Issue Department of RBI. Coins and ₹ 1 note are minted by RBI on the directions of Government of India The RBI circulates and regulates the currency, so printed.

Components of money supply are:

1. Coins and currency held outside of banks by the public.
2. Net demand deposits held by the commercial banks.

The difference between money and high powered money lies in the fact that the former consists of currency and demand deposits and the later consists of currency and cash reserves with the bank. High powered money is also known as 'monetary base'.

Money is a dynamic factor because:

1. It has facilitated exchange beyond limits.
2. It has facilitated accumulation of wealth for the purpose of investment.
3. It has facilitated flow of capital from one place to other and from developed countries to less developed countries of the world.

Briefly, money is a dynamic factor because it helps economic stability and promotes the process of growth and development.

Demand deposits are the deposits which can be withdrawn on demand at any point of time. Also these are chequable deposits, i.e. cheques can be drawn against such deposits. On the other hand, time deposits are the deposits which cannot be withdrawn before a specified period of time. These deposits are non-chequable, i.e. one cannot draw cheques against such deposits.It includes:

1. Fixed deposits.
2. Recurring deposits.

Analytically demonetisation comprises of:

1. A contraction of money supply, but only one type of money, i.e, cash.
2. A tax on unaccounted private wealth maintained in the form of cash, i.e., black money.
3. A tax on savings outside the formal financial system.

High Powered Money:High powered money or monetary base refers to the money produced by R.B.I. and Government of India. Alternatively, total liability of monetary authority of the country and R.B.I. is called monetary base or high powered money. It consists of:

1. Currency in the hands of public.
2. Cash reserve of commercial banks.
3. Other deposits with RBI.

So, to sum up, high powered money is:
H = C + R
Where,

• H - High powered money.
• C - Currency.
• R - Cash Reserves of commercial banks.

Two components of LRR are CRR and SLR. Under CRR, the banks are required to deposit a percentage of their net demand and time deposits with the Central Bank whereas under SLR, the banks are required to maintain a specified percentage of their net deposits in the form of designated liquid assets.

The special feature of Indian monetary system is that it has adopted inconvertible paper currency system. Paper currency is not convertible into precious metal (gold), i.e. backing it. Thus, currency is said to be inconvertible.

Money can be classified as:

1. Full-bodied money: It is the money whose value as commodity is equal to its value as money. e.g. Gold, silver.
2. Representative full-bodied money: It is usually made of paper. It is that money which is fully backed up by gold and silver.
3. Credit money: It is that money whose value as money is more than the commodity value of the material which is used to make the money. It can be in the form of:

1. Token coins.
2. Representative token money.
3. Circulating promissory notes issued by the Central Bank.
4. Bank money.

Money value of money refers to what is inscribed on a coin or written on a paper note. Thus, money value of a paper note is what is written on it, i.e. ₹ 100, ₹ 500, etc. You can buy goods and services worth of that amount in the market. Commodity value of money refers to value of the material out of which coins or currency notes are made.

It is because of the following two reasons:

1. The banking experience has revealed that not all depositors approach the banks for withdrawal of money at the same time and also that normally they withdraw a fraction of deposits.
2. There is a constant flow of new deposits into the banks. Therefore to meet the daily demand for withdrawal of cash. it is sufficient for banks to keep only a fraction of deposits as a cash reserve.

As Central Bank has the sole authority of printing currency notes, it has certain advantages which are as follows:

1. Uniformity in the currency.
2. Control over the money supply.
3. Faith in banking system.
4. Maintenance of reserves.

It is true that value can be stored in the form of gold or diamond for future use, however it again has certain drawbacks such as:

1. Being limited in supply these were not available in abundance.
2. These involved certain transactions cost in exchange of goods for such metals.
3. These were not liquid form of exchange, because not everyone was able to accept it.
4. Divisibility was also a problem while dealing in these goods.

Money supply is the stock of money on a specific day. It consists of:

1. Currency which includes coins and currency notes. Currency is also called fiat money which is money which under law, must be accepted for all debts. Money supply includes only that currency which is held outside banks i.e. currency held only by the public.
2. Demand deposits which are chequable deposits.