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Class 12 - Economics
Money Test - 04

1. High Powered Money includes:

a) C + R + OD
b) C + R + TD
c) C + DD + OD
d) C + DD + TD
2. Barter system is:
a) Exchange of foreign exchange
b) Exchange of trade
c) Exchange of goods
d) Exchange of money
3. An economy based on barter system is also called as:
a) D-D economy
b) M-M economy
c) C-C economy
d) B-B economy
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4. Name the deposits which are payable on demand without any restriction.
a) Current account deposits
b) Saving account deposits
c) Recurring account deposits
d) Fixed term deposits
5. Match the following:
(a) Commercial Bank (1) Accept deposits and issue loans

(b) Reserve Bank (2) Apex bank for agriculture

(c) Barter System (3) Control the entire banking system

(d) NABARD (4) Exchange of Goods and Services

6. What is a commercial bank?
7. What is the form of credit created by banks?
8. What are trading costs in context of barter?
9. What are the characteristics or features of money ?
10. Explain the medium of exchange function of money.
11. What is the difference between money and high power money?
12. Explain the ‘Unit of account’ function of money.
13. What is the money multiplier? How will you determine its value? What ratios play an important role in the determination
of the value of the money multiplier?
14. Explain the problem of double coincidence of wants faced under barter system. How has money solved it?
15. How do changes in Bank Rate affect the money supply in an economy? Explain.

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Class 12 - Economics
Money Test - 04

Solution

1. (a) C + R + OD
Explanation: High-powered money = C + R + OD where C denotes currency, R denotes reserve and OD denote excess
reserve.
2. (c) Exchange of goods
Explanation: A barter system is an old method of exchange. This system has been used for centuries and long before
money was invented. People exchanged services and goods for other services and goods in return.
3. (c) C-C economy
Explanation: C-C economy is a commodity economy. In this economy, Commodities are exchanged for commodities.
In such an economy, the barter system prevails for the fulfilment or satisfaction of wants.
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4. (a) Current account deposits
Explanation: Big businessmen, companies, and institutions such as schools, colleges, and hospitals have to make
payment through their bank accounts. Since there are restrictions on the number of withdrawals from a savings bank
account, that type of account is not suitable for them. They need to have an account from which withdrawal can be made
any number of times.
5. Commercial Bank -: Accept deposits and issue loans
Reserve Bank -:Control the entire banking system
Barter System -: Exchange of Goods and Services
NABARD-: Apex bank for agriculture
6. A bank or a commercial bank is a financial institution that performs the functions of accepting deposits from the general
public and lending.
7. Demand deposits
8. Trading costs are the costs of engaging in trade.
9. i. Durability: Money must be durable and not likely to deteriorate rapidly with frequent handling. Currency notes and
coins are being used repeatedly and shall continue to be used for many years.
ii. Medium of exchange: Money acts as a medium of exchange for the sale and purchase of goods and services.
iii. Weight: Money must be light in weight. Paper money is better than metal coins because it is light in weight.
iv. Measure of value: It not only serves as medium of exchange but also acts as a measure of value. The value of all the
goods and services is expressed in terms of money. This solved the major problem of the barter system.
10. The most important function of money is that it serves as a medium of exchange between two parties involved in a
transaction. In the barter economy, great difficulty was experienced in the exchange of goods as the exchange in barter
system required a double coincidence of wants. Money avoids the practical problems of wastage of time and resources,
involved in the barter system of an exchange and it improves the transactional efficiency. It also promotes allocational
efficiency in the trade and production of goods and services. Hence, it can be said that money has separated the acts of
sales and purchases.
11. The difference between money and high power money lies in the fact that while the former consists of currency and
demand deposits, the latter consists of currency and cash reserves with the bank.
12. i. Another important function of money is that it serves as a common measure of value or a unit of account.

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ii. Under barter economy there was no common measure of value in which the values of different goods could be
measured and compared with each other. Money has also solved this difficulty. As Geoffrey Crowther Puts it,
“Money acts as a standard measure of value to which all other things can be compared.” Money measures the value
of economic goods.
iii. Money works as a common denominator into which the values of all goods and services are expressed.
iv. When we express the values of a commodity as a price, it is easy to calculate exchange ratios between them by
knowing the price of various commodities..
13. The money multiplier is one of various closely related ratios of commercial bank money to central bank money (also
called the monetary base) under a fractional-reserve banking system. It may be defined as the ratio of the stock of money
to the stock of high powered money in an economy. It is determined by the following formula:
Money multiplier = M

where M = Stock of money, H = Stock of high powered money.

Since the stock of money is always greater than high powered money, the value of money multiplier is greater than 1
(one).
Following ratios play an important role in the determination of the value of the money multiplier:
i. Currency deposit ratio = CU

DD

where CU = Currency held by the public.

DD = Net demand deposits held by commercial banks.
ii. Reserve deposit ratio- Reserve deposit ratio is a proportion (ratio) of total deposits which commercial banks keep as
reserves.
14. (i) “Money performs the following four functions: A medium, a measure, a standard, a store”.
(ii) Money has overcome the short-coming of a barter system in the following manner:
(a) Medium of exchange
Under barter system, there was lack of double coincidence of wants. It was difficult to find a person who had the
product that we meeded and who needed our product. So the exchange was verr much restricted.
With money as a medium exchange individual can exchange their goods and services for money and then use this
money to buy other goods and services according to their needs and conveniences.
A buyer can buy goods for money and seller can sell goods for money.
(b) Measure of value
Under barter system, there was no common measure of value. The exact value of the commodities being
exchaned could not be measured. Money has also solved this difficulty.
As Geoffrey Crowther puts it, “Money acts as a standard measure of value to which all other things can be
compared.” Money measures the value of economic goods.
Money works as a common denominator into which the values of all goods and services are expressed.
When we express the values of a commodity in terms of money, it is called price and by knowing prices of the
various commodities, it is easy to calculate exchange ratios between them.
(c) Store of value
Under barter system it eas very difficult tc store wealth for future use.
Most of the goods are perishable and their storage requires huge space and transportation costs snd thry will get
spoiled also.
Wealth can be conveniently stored in the form of money.
Money can be stored without loss in value.
Money can easily be stored for future use.
(d) Standard of deferred payments
Under barter system, transactions on deferred payments are not possible.

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With money, the debtors make a promise that they will make payments on some future dates. In those situations
money acts as a standard of deferred payments.
It has become possible because money has general acceptability, its value is stable, it is durable and
homogeneous.
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15. The rate at which Commercial Banks can borrow money from RBI when they run short of reserves is called bank
rate. If this rate is lowered, the commercial banks can avail funds from the RBI at a lower rate thus further lowering the
rates at which customers borrow loans from commercial banks and in turn maintaining more liquidity in the market. In
the other case, if this rate is high banks will have to shell out a larger amount by way of interest on the money that they
borrow from the RBI and this, in turn, will increase the interest burden on customers. Thus there will be lesser liquidity
in the market.
As opposed to repo rate, which is also the rate at which commercial banks borrow money from the RBI, borrowing by
way of bank rate doesn't involve any collateral security and hence the rate is higher which is the opposite in case of repo
rates.

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