X_Economics_Ch-3_Money and Credit_Practice Set - 2

Class X           Chapter – 3

Money and Credit  -  Practice Questions (2)

Ques. What are the functions of Money?

Ans. The major functions of Money are as follows:

1.            Money as the Medium of Exchange:

This is the primary function of money. People exchange different goods and services through the medium of Money. By serving this way, money has solved the problems faced in barter system.

2.            Money as a Unit of Account:

Money serves as a unit of account or measure of value. Different commodities are measured in different units e.g. milk in liters, cloth in meters, potatoes in kg. Therefore, the exchange of goods for each other had been difficult. But money has given them a single measuring rod i.e. now, the value of these goods can be expressed in common unit of money.

3.            Standard of Deferred Payments:

Deferred payments are payments which are made some time in future. Debts are now expressed in terms of money. Money has made it easier to borrow and repay the loans because the value of money generally maintains a constant value through time.

4.            Money as a Store of Value:

Wealth can be stored in terms of money for future. Thus, the value is stored in most liquid asset form i.e. money. By spending money, we can quickly get any commodity in future.

Ques. What is ‘Liquidity of Money’?

Ans. Liquidity of Money: Liquidity means convertibility into cash. The ability to convert an asset into money quickly without any loss in its value is called liquidity of the asset. Money is the most liquid asset of all. One can convert money into any commodity or any other asset easily, quickly and without any loss at any point of time.

Ques. Define Bank.

Ans. Bank: Any institution which accepts deposits from the public and advances loans is called a bank. Thus, a bank acts as a financial intermediary.

Ques. What is banking?

Ans. Banking: Banking means the accepting deposits of money from the public (repayable on demand or otherwise, and withdrawable by cheques, draft etc.) for the purpose of lending.

Ques. What do you mean by Commercial Bank?

Ans. Commercial Bank: The financial institution which performs the function of accepting deposits from general public and giving loans for investment with the aim of earning profit.

Ques. What are the primary functions of a bank.

Ans. The primary functions of a bank are as follows:

1.            Bank accepts deposits: A commercial bank accepts deposits in the form of current, saving and fixed deposits. Bank collects savings of individuals and firms. Deposits are the lifeline of a bank.

2.            Bank gives loans and advances: Bank gives loans particularly to the businessmen and entrepreneurs and thereby earns interest. This is the main source of bank’s income. Bank keeps certain amount of deposits as reserves and gives the balance amount as loans and advances.

Ques. What is a Central Bank? Name the central bank of India.

Ans. Central Bank: The central bank is apex institution of monetary system of a country. It organizes, supervises, regulates and develops the monetary system of the country.

            In India, the name of central bank is Reserve Bank of India (RBI). At present, the governor of RBI is Urjit Patel (took the charge in Sep, 2016), preceded by Raghuram Rajan.

Ques. What are the functions of the central bank of a country?

Ans. The functions of central bank are as follow:

1.            Issue of Currency: The central bank is given the sole monopoly of issuing currency in order to secure the volume of currency and credit in the economy. In India, all currency notes except one rupee note and coins are issued by RBI. One rupee notes and coins are issued by government mints.

2.            Banker to the Government: Central bank functions as a banker to the government -  both central and state governments. It carries out all banking business of the govt. Government keep their money in the current account with central bank. Central bank accepts receipts and makes payments on behalf of the governments.

3.            Banker’s Bank and Supervisor: The central bank regulates and supervises the functioning of all banks of the country. Central bank acts as banker’s bank in three capacities:

(a)          Custodian of the cash reserves of banks.

(b)          Lender of last resort.

(c)          Acts as a bank of central clearance, settlements and transfers.

4.            Controller of Credit and Money Supply: Central bank controls the credit and money supply through its monetary policy which consists of two parts – currency and credit. It serves this purpose through different monetary policy instruments.

Ques. Differentiate between central bank and commercial banks.

 Ans.

Central Bank	Commercial Bank
·                     It is the apex bank in the money                    market of the country.	·                     It is merely a unit in the banking                    structure of the country.
·                     Its primary aim is public welfare.	·                     Its primary aim is to make profit.
·                     It has the sole monopoly to                    currency notes.	·                     Its not authorized to issue                    currency notes.
·                     It cannot deal with public.	·                     It directly deals with the public                    and business firms.
·                     It acts as a banker to the govt.	·                     It has no such responsibility to govt.
·                     It is a custodian of nation’s Gold                    and Foreign Exchange Reserves.	·                     It does not perform such function.
·                     It decides the monetary policy to                    stabilize the economy.	·                     It plays supplementary role in that                    & is regulated by the central bank.