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KEY POINTS TO REMEMBER
Money is anything which is commonly accepted as a medium of exchange. It has been invented to overcome the difficulties of barter system of exchange.
Barter System of Exchange is the system in which commodities are exchanged for commodities. This is also called commodity for commodity exchange economy or ‘ C- C economy’.
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Drawbacks (i) It requires double coincidence of wants which is hard to find.
(ii) It lacks a common unit of exchange.
(iii) It lacks the system of future payments or deferred payments.
(iv) It lacks the system of storage and transfer of value.
Forms of Money
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Fiat Money is that money which is issued by order (authority) of the government.
Fiduciary Money is that money which is accepted as a medium of exchange because of the trust between the payer and the payee.
Full Bodied Money: Money value = Commodity value of money.
Credit Money: Money value of coins and notes > Commodity value of coins and notes.
Supply of Money is a stock concept. It refers to stock of money available with the public/people at a point of time.
Stock of Money with the government and the banking system of the country is not considered as a part of money supply.
Components of Money Supply: Currency with Public + Demand Deposits with Commercial Banks + Other Deposits with the Reserve Bank.
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Table of Contents
MONEY FOR CLASS 12 CBSE QUESTIONS
Choose the correct option:
1. Barter system refers to that system wherein
(a) goods are changed for goods
(b) goods are not exchanged at all
(c) goods are exchanged for domestic currency
(d) goods are exchanged for foreign currency
2. Which of the following is a typical characteristic of the barter system?
(a) A common medium of exchange
(b) Double coincidence of wants
(c) A common unit of account
(d) A standard for deferred payments
3. Which of the following is a commonly accepted definition of money?
(a) Any good which is commonly used as a store of value
(b) Any good which is exchanged for gold at a fixed rate
(c) Any good which is acceptable to a bank
(d) Any good which is commonly accepted as a medium of exchange
4. Money which is accepted as a medium of exchange because of the trust between the payer and the payee is called:
(a) full bodied money
(b) credit money
(c) fait money
(d) fiduciary money
5. Full bodied money is that money whose money value and commodity value are:
(a) equal in the market
(b) declared as equal by the government
(c) different in the market
(d) declared as equal by the RBI
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6. Money that is issued by the authority of the government is called:
(a) full bodied money
(b) credit money
(c) fait money
(d) fiduciary money
7. When money value of money exceeds commodity value of money, it is called :
(a) full bodied money
(b) credit money
(c) fiat money
(d) fiduciary money
8. Money as a standard for deferred payments has led to the emergence of :
(a) commodity market
(b) financial market
(c) both (a) and (b)
(d) none of these
9. Which of the following is the component of
(a) Term deposit
(b) Demand deposits
(c) Cash reserves of the commercial banks
(d) None of these
10. Bank money is that money which is
(a) printed by
(b) printed by the government
(c) generated in the form of credit creation
(d) none of these
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11. Who supplies money in India?
(a) The RB
(b) The commercial bank
(c) The government
(d) All of these
12. Demand deposits include :
(a) Cheque able deposits
(b) depots which can be withdraw demand
(c) fixed deposits for a period of time
(d) both (a) and (b)
13. In India, there are four alternative measures of money supply:
(a) Currency with people
(b) Currency with people + Demand deposits
(c) Currency with people + Demand deposits + Other deposits with the Reserve Bank
(d) None of these
14. Supply of money is a :
(a) flow variable
(b) stock variable
(c) real flow
(d) none of these
15. In India, coins are issued by:
(a) State Bank of India
(b) Reserve Bank of India
(c) Ministry of Finance
(d) Ministry of Urban Development
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16. Introduction of money has:
(a) separated the acts of sale and purchase of an individual
(b) combined the acts of sale and purchase of an individual
(c) expanded the scope of sale and purchase
(d) both (a) and (c)
17. Which of the following systems is followed by Reserve Bank of India for issuing currency?
(A) Proportionate system
(b) Simple deposit system
(c) Minimum reserve system
(d) Fixed fiduciary issue system
18. High powered money is equal to
(a) money supplied by the Ali only
(b) total supply of money in the economy
(c) notes and coins held by the people
(d) money incites and coins) held by the people, vault cash of the commercial banks as well as cash reserves of the commercial banks with the RBI.
Answers
| 1. (a) | 9. (b) | 17. (c) |
| 2. (b) | 10. (c) | 18 (d) |
| 3. (d) | 11. (d) | |
| 4. (d) | 12 (d) | |
| 5. (a) | 13. (c) | |
| 6. (d) | 14. (b) | |
| 7. (b) | 15 (c) | |
| 8. (b) | 16. (d) |
D. Matching the Correct Statements
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I. From the set of statements given in Column I and Column II, choose the correct pair of statements :
| Column I | Column II |
| (a) Full bodied money | (i) Money value > Commodity value of money |
| (b) Term deposits | (ii) Cheque able deposits |
| (c) Barter system of exchange | (iii) Goods are exchanged for money |
| (d) Gross demand deposits | (iv) Does not include inter-banking dam |
| (e) High powered money | (v) Base money in the economy |
Answer :
(e) High powered money- – (v) Base money in the economy
II. Identify the correct sequence of alternatives given in Colum II by matching them with respective items in Column I :
| Column I | Column II |
| (a) Government of a country | (i) Legal tenders |
| (b) Supply of money | (ii) Cheques |
| (c) RBI | (iii) Supplier of money |
| (d) Fiduciary money | (iv) Principal supplier of money |
| (e) Notes and coins | (v) A stock concept |
Answers
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(a)-(iii), (b) – (v), (c) – (iv), (d) – (ii), (e)-(i)
E. Very Short Answer Objective Type Questions
1. What is barter system of exchange?
Ans. Barter ten of exchange is a votes which goods are exchanged for goods. Money as a medium of exchange does not exist.
2. Define C-C economy.
Ans. C-C economy refers to that economy in which commodities are exchanged for commodities or in which goods are exchanged for goods.
3. What do you mean by double coincidence of wants?
Ans. Double coincidence of wants means that goods in possession of two different individuals are needed by each other at the same time.
4. What is meant by money?
Ans. Money can be defined as something that is generally accepted as a medium of exchange and acts as a measure and a store of value.
5. What is fiat money?
Ans. Fiat money refers to money backed with order (authority) of the government.
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6. What is fiduciary money?
Ans. Fiduciary money is the money backed with mutual trust between the payer and the payee.
7. Define full bodied money?
Ans. Full bodied money refers to money in terms of coins whose commodity value is equal to the money value as and when these are issued.
8. What is credit money?
Ans. Credit money is the money of which money value (face value) is more than commodity value (intrinsic value).
9. What is bank money?
Ans. Bank money as the money created by the commercial banks in the form of demand deposits over and above cash deposits of the people with the banks.
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10. Define high powered money.
Ans. High powered money refers to monetary base or base money in the country. It includes (i) currency held by the people, (ii) vault cash of the commercial banks, and (iii) cash reserves of the commercial banks with the RBI.
11. Define money supply.
Ans. Money supply refers to the total quantity or stock of money available in the economy at a point of time.
12. Write the components of money supply
Ans. (i) Currency with the people
(ii) Demand deposits with commercial banks, and
(iii) Other deposits
13. Who are the suppliers of money in India?
Ans. (i) The government of the country
(ii) The central bank of the country and
(iii) The commercial banks
14. Define demand deposits.
Ans. Demand deposits of commercial banks are those deposits which can be withdrawn from the bank a demand or by writing a cheque any time.
15. Define term deposits.
Ans. Term deposits are those deposits which cannot be withdrawn from the tank as and when needed f by writing a cheque any time. These deposits involve a lock in period.
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2. Reason-based Questions (Comprehension of the Subject matter)
Read the following statements carefully. Write True or False with a reason.
1. Double coincidence of wants is an essential requirement of exchange.
Ans. False. Though it is an essential requirement for the barter economy in a money economy exchange can take place without double coincidence of want.
2. Face value of money is always greater than its intrinsic value.
Ans. False. In case coins are made of gold and silver, intrinsic value of money may over time exceed its face value.
3. Stock of money with the money issuing authorities is an important component of money supply.
Ans. False Supply of money does not include the stock of it with the money issuing authorities.
4. Fiat money is the same as fiduciary money.
Ans. False Fiat money is the money backed with order of the government whereas fiduciary money is the money backed with the mutual trust between the payer and the payee.
5. Money supply includes demand deposits of the people with the commercial banks.
Ans. True. Demand deposits of the people with the commercial banks is a component of money supply. Because, these deposits are converted in cash just by writing a cheque.
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6. Double coincidence of wants is a typical feature of monetary system of exchange.
Ans. False Double coincidence of wants is a typical feature of barter system of exchange.
7. Money has separated the acts of sale and purchase.
Ans. True With the introduction of money, an individual can buy or sell a thing without selling or buying anything in return.
8. There is no medium of exchange in the barter system.
Ans. False. Under barter system, goods themselves are the mediums of exchange for goods. Of course, there is no common medium of exchange like money.
9. There is no common unit of value in barter system.
Ans. True. There is a lack of common unit of exchange in barter system. Evolution of money offered a common unit of value.
10. Money may be used as a commodity.
Ans. True it happens when intrinsic value (commodity value) of money exceeds its face value (money value).
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11. Credit money is the money received as a credit from the banks.
Ans. False Credit money is money whose money value is more than its commodity value.
12. Monetary system of exchange facilitates much greater exchange than the barter system.
Ans. True. Because monetary system (unlike barter system) does not require double coincidence of wants.
13.
Ans. False
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14. Money supply in the economy refers to only the fat money issued by the RBI.
Ans. False. Money supply in the economy includes both fiat money (backed by authority of the RBI) as well as fiduciary money (backed by mutual trust between the payer and the payee).
15. Commercial banks play no role in the stock of money supply in the economy.
Ans. False Commercial banks contribute to the stock of money supply in the economy by way of credit creation.
16. Cash reserves with the banks are an important component of money supply.
Ans. False Cash reserves with the banks are not a component of money supply. Because cash reserves the suppliers of money is not treated as a part of money supply.
Q. Introduction of money has separated the acts of ‘sale’ and ‘purchase. How?
Ans. Under the barter system of exchange, acts of sale and purchase of an individual must occur at the same point of time. To buy a thing, an individual must at the same time self something needed by the other person. Also, sale and purchase by an individual must be of equal value.
With the introduction of money (as a medium of exchange), an individual can buy a thing with money without selling anything at the same time. Likewise, he can sell a thing for money without buying anything at the same time. Thus, with the introduction of money, acts of sale and purchase have been separated.
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Q. Distinguish between money value of money and commodity value of money.
Ans. Money value of money refers to the value which is inscribed on a coin or written on a paper note Thus, money value of a paper note is what is written on it one hundred rupees, two hundred rupees, etc. With a two hundred rupee note, you can buy goods and services worth two hundred rupees in the market.
Commodity value of money refers to value of the commodity (like metal) that the money is made of Thus, if coins are made of gold or silver (as was the practice in old days), commodity value of money. refers to the market value of the gold or silver contained in the coin.
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Q. Can you think of a situation when money plays no role whatsoever?
Ans. Money plays no role in a situation when there is no exchange. Example: An individual or a family surviving on an island without any exchange for sale and purchase of goods and services).
Q. Why people hold notes and coins when it is clear that the intrinsic value (commodity value) of notes and coins is almost negligible?
Ans. Because notes and coins are legal tenders. These are fiat money or the money backed with authority of the government. It is unlawful not to accept notes and coins for receipts/payments.
Q. Who are the producers of money?
Ans. Producers of money refer to suppliers of money. They include:
(i) the government of the country, and
(ii) the banking system of a country, including both the central bank (which is the note issuing authority) and the commercial banks (who add to the supply of money through demand deposits).
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Q. State the principal components of money supply.
Ans. The principal components of money supply are
(i) Currency (notes + coins) held by the public.
(ii) Demand deposits of the people with the commercial banks, and
(iii) Other deposits (demand deposits with RBI of domestic and foreign institutions other than of the government of the country and commercial banks within the country).
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Q. Why are cash deposits of the government and of the commercial banks with the RB not treated as a part of money supply?
Ans. Because government and commercial banks are creators/suppliers of money. And, money held by the creators/suppliers of money is never treated as a part of money supply.
3. HOTS & Applications
1. What is meant by an ideal supply of money?
Ans. Ideal money supply is that amount of money supply which keeps the total purchasing power in a state of balance with the supply of goods and services in the economy, so that the economy does not slip into inflationary or deflationary situations.
2. Commodity value of money has never been greater than the face value for money value). Is it true?
Ans. No, the given statement is false, in good old days when coins were made of gold and silver, commodity value of money (referring to the value of metal contained in the coins) would sometimes exceed the face value of coins which is why coins were sometimes melted and sold as a metal.
3. Is it true that high powered money refers to cash reserves of the commercial banks with the central bank?
Ans. No, it is incorrect. High powered money refers to (i) currency with public, (ii) vault cash of the commercial banks, and (iii) cash reserves of the commercial banks with the RBI.
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4. Money becomes a commodity when intrinsic value of money exceeds its face value. Defend or refute.
Ans. Yes, the above statement is correct. Because when intrinsic value exceeds face value of money (as it often happened in case of gold and silver coins) money is used as a commodity (implying meta content of money is sold as a commodity).
5. A curb on high powered money will lead to a curb on the creation of credit by the commercial banks in the economy. Do you agree?
Ans. Yes, the given statement is correct. This is because high powered money includes currency with the public as well as cash reserves of the commercial banks with the RBL it serves as a monetary base for the creation of credit in the economy. A curb on high powered money will definitely lead to a curb on the creation of credit by the commercial banks.
4. Analysis & Evaluation
1. Explain how introduction of money has led to the expansion of markets.
Ans. Following observations may be noted in this regard :
(i) Introduction of money has led to the expansion of markets through the expansion of exchange .Because, barter stem of exchange requires double coincidence of wants le the monetary system does not.
(ii) Money has led to the emergence of financial market and financial intermediaries (banks and other financial institutions) Availability of funds both for purpose of consumption and investment has substantially increased. Consequently markets have expanded.
(iii) Introduction of money has boosted the mobility of capital across different parts of the world. This has led to the expansion of global markets through FD (foreign direct investment)
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2. Do you agree with the view that the excess of money supply hinders the process of economic growth? Give reasons.
Ans. Yes, it is correct to say that the excess of money supply hinders the process of economic growth The following reasons explain this point of view
(i) Excess of money supply a situation when purchasing power (also called liquidity with the people is more than the existing market value of the goods and services available in the economy Consequently, pressure of demand mounts up on the available supply of goods and services. This leads to a rise in the general price level.
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(ii) if excess supply of money continues to persist, the situation of ring price level also continues to persist. This is called a situation of inflation-a situation of price spiral.
(iii) Persistent inflation leads to a rise in the rate of interest Implying that the cost of investment tends to rise.
(iv) High cost of investment leads to a cut in the volume of investment.
(v) When investment declines, the GDP growth also declines.
Thus, excess supply of money tends to hinder the process of economic growth, it lowers the growth rate of real GDP.
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ALSO VISIT : BASIC CONCEPTS OF ECONOMICS
METHODS OF CALCULATING NATIONAL INCOME CLASS 12
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