Solution

TEST 1 11/03/2024

Class 12 - Economics
Section A
1. (b) create money
Explanation: create money
2. (b) Reserve bank of India
Explanation: Reserve bank of India
3. (b) minimum reserve
Explanation: minimum reserve
4. (c) Ministry of Finance
Explanation: Ministry of Finance
5. (b) Finance Ministry
Explanation: The sources of supply of money are government, the central bank of the country, and commercial banks.
6. (c) It is governed by the monetary policy of the Reserve Bank of India.
Explanation: It is governed by the monetary policy of the Reserve Bank of India.
7. (a) demand deposits
Explanation: demand deposits
8. (d) to earn profits
Explanation: to earn profits
9. (c) central bank
Explanation: central bank
10. (b) Both A and R are true but R is not the correct explanation of A.
Explanation: Both A and R are true but R is not the correct explanation of A.
11. (a) scheduled, non-scheduled
Explanation: scheduled, non-scheduled
12. (b) lower, spread
Explanation: lower, spread
13. (b) Reserve Bank of India
Explanation: Reserve Bank of India
14. (d) money market
Explanation: money market
15. (a) Both A and R are true and R is the correct explanation of A.
Explanation: Both A and R are true and R is the correct explanation of A.
16. (d) reserves
Explanation: reserves
17. (d) Stocks
Explanation: In the case of a bank, apart from buildings, furniture, etc., its assets are loans given to the public. Another asset
that a bank has reserves.
18. (d) All of these
Explanation: The central bank also plays an important part in the regulatory role as it decides whether or not to grant charters
to new banks. In most countries around the world, charters are granted by judicial bodies and not by central banks. In this case,
it advises the judicial bodies while such charters are being granted and indirectly influences the number of new banks entering
the market.
19. (b) Both A and R are true but R is not the correct explanation of A.
Explanation: Both A and R are true but R is not the correct explanation of A.

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20. (c) Bank deposit money
Explanation: Bank deposit money
21. (a) extension and contraction of money supply
Explanation: extension and contraction of money supply
22. (d) Both generates interest income and is increased to curb inflation
Explanation: Both generates interest income and is increased to curb inflation
23. (a) credit creation
Explanation: credit creation
24. (a) It takes away the excess funds from individuals or firms and supplies them to the poor people.
Explanation: It takes away the excess funds from individuals or firms and supplies them to the poor people.
25. (b) Both A and R are true but R is not the correct explanation of A.
Explanation: Both A and R are true but R is not the correct explanation of A.
26. (c) Managed floating
Explanation: Managed floating
27. (c) decreases
Explanation: decreases
28. (d) cash reserves with the RBI
Explanation: cash reserves with the RBI
29. (d) cushion money; vault cash
Explanation: cushion money; vault cash
30. (c) if the vault cash is higher, its money-creating capacity will be lower
Explanation: Besides the CRR (cash which the commercial banks ought to keep), the banks may hold excess reserves, as
'vault cash'. The higher the vault cash, the lower would be the capacity to create money.
Section B
31.
(b) Both A and R are true but R is not the correct explanation of A.
Explanation: Exchange is a sign of interdependence. In economics, the need for change arises when what you possess or what
you produce is more than what you need or when you lack something which you desire to possess.
32. (a) Both A and R are true and R is the correct explanation of A.
Explanation: Both A and R are true and R is the correct explanation of A.
33. (a) Both A and R are true and R is the correct explanation of A.
Explanation: Both A and R are true and R is the correct explanation of A.
34. (a) Both A and R are true and R is the correct explanation of A.
Explanation: Both A and R are true and R is the correct explanation of A.
35. (a) Both A and R are true and R is the correct explanation of A.
Explanation: Both A and R are true and R is the correct explanation of A.
36.
(b) Both A and R are true but R is not the correct explanation of A.
Explanation: Both A and R are true but R is not the correct explanation of A.
37.
(b) Both A and R are true but R is not the correct explanation of A.
Explanation: Both A and R are true but R is not the correct explanation of A.
38. (a) Both A and R are true and R is the correct explanation of A.
Explanation: Both A and R are true and R is the correct explanation of A.
39.
(b) Both A and R are true but R is not the correct explanation of A.
Explanation: The collection of statistics is useful in making policies and plans of growth and development. The central bank
collects statistical information relating to banking, currency, and foreign exchange.

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40.
(d) A is false but R is true.
Explanation: A is false but R is true.
Section C
41. State True or False:
(i) (a) True
Explanation: Because no one can refuse to accept it as non-acceptance is an offense.
(ii) (b) False
Explanation: As fiat money is the money backed by the order (fiat) of the government but fiduciary money is the
money backed by mutual trust between the payer and the payee example (bill of exchange).
(iii) (b) False
Explanation: False
(iv) (a) True
Explanation: Money as a 'Medium of Exchange' enables a person to buy or sell at different points of time.
(v) (a) True
Explanation: Because commercial banks can only increase the supply of money by creating credit.
(vi) (b) False
Explanation: False
(vii) (b) False
Explanation: Bank rate is the rate at which the Central Bank makes available finance to commercial banks. A rise in
bank rate implies that the cost of money would go up. As a result, there would be less demand for credit. Therefore,
to reduce the volume of credit, bank rate should be increased and not reduced.
(viii) (b) False
Explanation: False
(ix) (b) False
Explanation: False. Open market operations are performed by the central bank. Open market operations refer to the
sale and purchase of securities in the open market by the RBI on behalf of the government.
(x) (b) False
Explanation: False. Reserve Bank of India does not maintain a direct relationship with the people. RBI maintains a
direct relationship with the commercial banks.
Section D
42. 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.
43. Time deposits are not as liquid as demand deposits, because the time deposits are not chequeable (i.e., these cannot be withdrawn
through cheques drawn on them). The time deposits are for a fixed period of time and it can be withdrawn only after the fixed
period. Whereas in case of demand deposits, the customers can withdraw the money whenever they want. They are chequable
deposits. Cheques can be issued whenever there is a need. As such it is equivalent to cash as the demand deposits can be
converted into cash easily. If someone wants to withdraw the time deposits, they have to foego the interest. The bank will not give
interest if one does premature withdrawal. As such the M1 measure of money is more liquid as compared to M3 measure of
money ,i .e. the time deposits.
44. Generally, people have a tendency to save a certain portion of their income in form of savings and to accumulate wealth. Under
the Barter system, such storage of wealth was not possible due to the perishable nature of certain commodities. As against this,
wealth can be easily stored in the form of money without any loss in its value. Thus, a store of value as a function of money
implies that money can be easily saved and used for future needs. The store of value function of money can be justified because of
the following reasons:
i. Money is the most widely accepted as a medium of exchange.
ii. There is no loss in the value of money over time (though there exists a loss of value of money due to inflation it is negligible).
iii. Money can be stored conveniently and does not involve any cost.

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 Under the Barter system, it was difficult for individuals to save, invest or accumulate wealth in terms of commodities. Money
overcame this problem as it is neither a perishable commodity nor the value of money depreciates (negligible depreciation due to
inflation). Therefore, money facilitates store of wealth.
45. i. Cash Reserve Ratio or CRR is the portion of total deposits that banks are required to keep with the central bank.
ii. SLR stands for Statutory Liquidity Ratio. The minimum percentage of deposits that the bank has to maintain in form of gold,
cash or other approved securities.
iii. Bank rate is the rate at which the central bank lends money to commercial banks as the lender of the last resort.
iv. Legal reserves include CRR and SLR. Lowering of CRR and SLR increases the credit creating power of commercial banks
which adds more liquidity in the market.
v. A general increase in the price level of goods and services.
vi. Lower the production of crops higher the inflation.
46. The central bank is the sole authority for the issue of currency in the country. It promotes efficiency in the financial system. It
leads to uniformity in the issue of currency, and it gives Central Bank control over money supply. The Central bank is legally
bound to back currency with assets of equal value in the form og gold, foreign securities and local currency securities.
47. i. The Central Bank acts as the lender of the last resort.
ii. When commercial banks fail to meet their financial requirements from other sources, they can approach the Central Bank
which provides the loan and advances as lender of the last resort.
iii. The Central Bank provides this facility to protect the interest of the depositors and to prevent possible failure of the bank.
iv. The commercial banks can borrow on the basis of eligible securities.

Basis of
Loan Overdraft
48. Distinction

(i) Security The loan is given against security or without security. Overdraft is granted without security

Interest is payable on the full amount of the loan, Interest is payable on the amount actually
(ii) Interest
whether withdrawn or not. withdrawn by the borrower

It does not require a current account or saving account of It requires the current account of borrowers with
(iii) Nature
the borrower. lender banks.

(iv) Time
It is generally for a long period or short periods. It is for short period.
Period
49. The most important function of money is that it serves as a medium of exchange between the parties involved in the transaction.
In the barter economy there were the problems of wastage of time and resources, money avoids these problems and 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. This function of money has also solved the problem of 'double
coincidence of wants' created by the barter system of exchange. In the barter system, the difficulty was experienced in the
exchange of goods as the exchange in barter system required a double coincidence of wants. Money has removed this difficulty.
Now a person can sell his goods to any other person for money and then he can use that money to buy the goods he wants from
others who have these goods. So, the 'medium of exchange' function of money has solved the problem of 'double coincidence of
wants' related to the barter system of exchange.
50. Demand deposits are the deposits which can be withdrawn on demand at any point of time. Also these are chequable deposits
(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,( one cannot draw cheques against such deposits).
It includes following deposits:
i. Fixed deposits
ii. Recurring deposits
51. The central bank is a banker, agent and financial advisor to the government.
i. As the Government’s banker, it manages accounts of the government.
ii. As an agent to the government, it manages public debt on behalf of the government and buys and sells securities on behalf of
the government.
iii. As an advisor to the government, it frames policies to regulate the money market.
52. 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

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 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.
53. It is one of the most important activities of commercial banks. Through the process of money creation, commercial banks are able
to create credit, which is in far excess of the initial deposits. However, it is legally compulsory for the banks to keep a certain
minimum fraction of their deposits as reserves. The fraction is called the Legal Reserve Ratio (LRR) and is fixed by the central
bank. Banks do not keep 100% reserves against the deposits. They keep reserves only to the extent indicated by the Central Bank.
Now coming to the money creation process of commercial banks, it can be ascertained by using the given formula
Money Creation = Initial Deposits × .1

LRR

For example, let the LRR be 20% and Initial deposits = Rs.10,000. As required, the banks keep 20% i.e. Rs. 2,000 as cash and
lend the remaining amount of Rs. 8,000.
Further, it is also assumed that persons receiving the debt will deposit the amount in the bank. This will result in banks receiving
fresh deposits of Rs. 8,000. The banks again keep Rs. 1,600 as cash and lend Rs. 6,400, which is also 80% of the last deposit, this
money also comes back to the banks leading to a fresh deposit of Rs. 6,400. In this way, the money goes on multiplying and
ultimately, total money creation according to the formula, will be
Money Creation =10, 000 × 1

20%

=Rs. 50,000.
54. The monetary policy (credit policy) of RBI involves the two instruments given in the flow chart below:

Quantitative Measures: Quantitative measures refer to those measures that affect the variables, which in turn affect the overall
money supply in the economy. It directly affect the money supply of an economy and Either it is expansionary monetary policy or
Contractionary monetary policy
Instruments of quantitative measures:
a. Bank rate- The rate at which the central bank provides a loan to commercial banks is called the bank rate. This instrument is a
key at the hands of RBI to control the money supply.
b. Varying reserve ratios: The reserve ratio determines the reserve requirements, wherein banks are liable to maintain reserves
with the central bank.
The three main ratios are:
i. Cash Reserve Ratio (CRR): It refers to the minimum amount of funds that a commercial bank has to maintain with the
Reserve Bank of India, in the form of deposits.
ii. Statuary Liquidity Ratio (SLR): SLR is concerned with maintaining the minimum reserve of assets with RBI, whereas
the cash reserve ratio is concerned with maintaining cash balance (reserve) with RBI.
c. Open Market Operations (OMO): Open Market operations refer to the buying and selling of securities in an open market, in
order to affect the money supply in the economy.
d. Repo Rate is the rate of interest at which central bank lends to commercial banks for a short period.
Qualitative Measures : These Measures affect allocation of credit between alternative uses. These are:
a. Marginal Requirements: The commercial banks' function to grant loan rests upon the value of the security being mortgaged.
b. Moral Suasions: A persuasion technique followed by the central bank to pressurize the commercial banks to abide by the
monetary policy is termed as moral suasion.

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