Money and Banking

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Money and Banking — solved practice questions

8 Class 12 Economics questions with step-by-step solutions. Attempt each, then reveal the answer.

1. Q1easy

   Which of the following is NOT a function of money?

   • AMedium of exchange
   • BMeasure of value
   • CStore of value
   • DCreation of double coincidence of wants
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   Correct answer: (D) Creation of double coincidence of wants

   The main functions of money are a medium of exchange, a measure/unit of value, a store of value and a standard of deferred payments. Money removes the double coincidence of wants; it does not create it.

2. Q2easy

   The main problem of the barter system of exchange that money solves is the:

   • ALack of double coincidence of wants
   • BExcess of double coincidence of wants
   • CShortage of goods
   • DSurplus of money
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   Correct answer: (A) Lack of double coincidence of wants

   Barter requires a double coincidence of wants — each party must want what the other offers. Money as a medium of exchange removes this difficulty by acting as a generally acceptable intermediary.

3. Q3medium

   In the measure of money supply, M1 consists of currency with the public, demand deposits with banks and:

   • ATime deposits with banks
   • BSavings deposits with post offices
   • COther deposits with the RBI
   • DNet foreign exchange reserves
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   Correct answer: (C) Other deposits with the RBI

   M1 = Currency and coins with the public + Demand deposits with commercial banks + Other deposits with the RBI. It is the most liquid measure of money supply.

4. Q4easy

   The central bank of India, which is the sole authority for issuing currency notes (other than one-rupee notes and coins), is the:

   • AState Bank of India
   • BReserve Bank of India
   • CNABARD
   • DMinistry of Commerce
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   Correct answer: (B) Reserve Bank of India

   The Reserve Bank of India (RBI) is the central bank of India and has the sole right to issue currency notes except one-rupee notes and coins, which are issued by the Government of India (Ministry of Finance).

5. Q5hard

   If the Legal Reserve Ratio (LRR) is 20% and the initial deposit is Rs 1,000, the total money (credit) created by the banking system will be:

   • ARs 200
   • BRs 2,000
   • CRs 5,000
   • DRs 20,000
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   Correct answer: (C) Rs 5,000

   Total money created = Initial deposit x (1/LRR) = 1000 x (1/0.20) = 1000 x 5 = Rs 5,000. The money multiplier is the reciprocal of the LRR.

6. Q6medium

   The value of the money multiplier when the Legal Reserve Ratio is 25% is:

   • A4
   • B2.5
   • C25
   • D0.25
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   Correct answer: (A) 4

   Money multiplier = 1 / LRR = 1 / 0.25 = 4. It indicates the number of times total deposits become of the initial (primary) deposit.

7. Q7hard

   When the central bank sells government securities in the open market, the effect on the money supply is that it:

   • AIncreases the money supply
   • BDecreases the money supply
   • CHas no effect on money supply
   • DDoubles the money supply
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   Correct answer: (B) Decreases the money supply

   Open Market Operations of selling securities withdraws cash from commercial banks and the public, reducing their reserves and lending capacity. This decreases (contracts) the money supply.

8. Q8medium

   The rate at which the central bank lends money to commercial banks for the short period against government securities is called the:

   • ABank deposit rate
   • BPrime lending rate
   • CReverse repo rate
   • DRepo rate
   Show answer & solution

   Correct answer: (D) Repo rate

   The Repo Rate (repurchase rate) is the rate at which the RBI lends short-term funds to commercial banks against government securities. A rise in the repo rate makes borrowing costlier and reduces the money supply.

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