{"id":17012,"date":"2021-01-12T14:32:56","date_gmt":"2021-01-12T09:02:56","guid":{"rendered":"https:\/\/mcq-questions.com\/?p=17012"},"modified":"2022-03-02T11:16:08","modified_gmt":"2022-03-02T05:46:08","slug":"ncert-solutions-for-class-12-economics-chapter-3","status":"publish","type":"post","link":"https:\/\/mcq-questions.com\/ncert-solutions-for-class-12-economics-chapter-3\/","title":{"rendered":"NCERT Solutions for Class 12 Economics Chapter 3 Money and Banking"},"content":{"rendered":"

Detailed, Step-by-Step NCERT Solutions for Class 12 Economics<\/a> Chapter 3\u00a0Money and Banking were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.<\/p>\n

Money and Banking NCERT Solutions for Class 12 Economics Chapter 3<\/h2>\n

Money and Banking Questions and Answers <\/span>Class 12 Economics Chapter 3<\/h3>\n

Question 1.
\nWhat is a barter system? What are its drawbacks?
\nAnswer:
\nEconomic exchanges without the mediation of money are referred as barter system. In other words, barter system is a system under which goods are exchanged for goods.<\/p>\n

Following are the drawbacks of barter system:<\/p>\n

(i) Lack of Double Co-incidence of Wants: The barter system requires that a person having a surplus of one commodity should be able to find another person who wants that commodity as well as has something acceptable to offer in exchange. This is called double coincidence of wants, which is hard to find.<\/p>\n

(ii) Lack of Common Measure ofValue: Different commodities are of different value. There is no common unit of measuring value under the barter system. It is difficult to decide the proportion in which the two goods are to be exchanged.<\/p>\n

(iii) Lack of Standard of Deferred Payments: The barter system lacks any satisfactory unit to engage in contracts involving future (deferred) payments. It may be due to disagreement regarding the specific commodity and its quality. Moreover, there is a risk of an increase or decrease in the value of the good over time, thus benefitting the lender or borrower of the good respectively.<\/p>\n

\"NCERT<\/p>\n

(iv) Difficulty of Storage of value: It is difficult to store wealth for further use. Most of the goods like wheat, rice, cattle, etc. deteriorate with the passage of time or involve heavy storage cost.<\/p>\n

(v) Difficulty of Transfer of Value: Under barter system, wealth in the form of goods cannot be transferred from one place to another. It is a difficult task as it requires a lot of time and resources.<\/p>\n

Question 2.
\nWhat are the main functions of money? How does money overcome the shortcomings of a barter system? (C.B.S.E Outside Delhi 2011 Comp.)
\nAnswer:
\nThe following are the important functions of money:
\n(i) Medium of Exchange: Money acts as an intermediary in the exchange transactions of goods and services. Money solves the problem of double coincidence of wants by acting as a medium of exchange for all goods and services.<\/p>\n

(ii) Unit of value: Money acts as a convenient unit of account The value of all the goods and services can be expressed in monetary units. Money as a unit of value helps in measuring the value of exchange for various goods and services.<\/p>\n

(iii) Store of value: Money is not a perishable item and its storage costs are also considerably low. Moreover, it is acceptable to anyone at any point of time. Thus, money acts as a store of value for individuals. Under barter system, wealth in the form of goods like wheat, rice, cattle, etc. deteriorate with the passage of time or involve heavy storage cost. However, wealth can easily be stored in the form of money for future use.<\/p>\n

(iv) Standard of Deferred Payments: Money acts as standard in terms of which future or deferred payments are stated because money maintains a constant value o\\ c a period of time. Under barter system, goods could not be used for future contracts due to the risk associated with type, quality and value of the goods. Money exchange has no such problem.<\/p>\n

\"NCERT<\/p>\n

Question 3.
\nWhat is transaction demand for money? How it is related to the value of transactions over a specified period of time?
\nAnswer:
\nTransaction demand for money is a measure of the money held by the public to carry out ordinary day to day transactions. People tend to hold their incomes to undertake transactions over a certain period of time. The relationship between transaction demand for money and value of transactions can be expressed as:
\n\\(\\begin{aligned}
\nM_{T}^{\\phi} &=k \\cdot T \\\\
\n\\frac{1}{k} M_{T}^{d} &=T \\\\
\nv_{0} M_{T}^{d} &=T
\n\\end{aligned}\\)<\/p>\n

where \\(M_{T}^{d}Md\\)= Transaction Demand for Money
\nv =\\(\\frac{1}{k}= \\) Velocity of Circulation of Money (k being a positive fraction)
\nT = Total Value of Nominal Transactions in the economy over a time period<\/p>\n

The transaction demand for money is positively related to total value of transactions and negatively related to the velocity with which the money is circulated in the economy.<\/p>\n

Question 4.
\nWhat are the alternative definitions of money supply in India?
\nAnswer:
\nMoney supply is a stock variable. It is the total stock of different types of money (currency in circulation and deposits) available in an economy at a specific point of time. In India,-‘M(, M2, M3, M4 are the four alternative measures of money supply.
\nThey are defined as follows:<\/p>\n

M1<\/sub> = CU + DD
\nM2<\/sub>= M1<\/sub> Savings deposits with post office saving banks
\nM3<\/sub> = M1<\/sub> + Time deposits of commercial banks
\nM4 <\/sub>= M3<\/sub> + Total deposits with post office savings organisations (excluding National Savings Certificates)
\nCU = Currency (notes and coins held by public)
\nDD = Net demand deposits held by the commercial banks<\/p>\n

Question 5.
\nWhat is a \u2018legal tender? What is \u2018fiat money\u2019?
\nAnswer:
\nLegal tender is the money that, by law, must be accepted as a medium of exchange and payment for debt by the citizens of a country. It cannot be refused by any person against the payment for transactions. Everyone is bound to accept it because its non-acceptance is an offence. Example of legal tender is currency notes issued by Reserve Bank of India. Fiat money refers to the currency notes and coins made legal tender by the order of the government. They do not have intrinsic value like a gold or silver coin.<\/p>\n

\"NCERT<\/p>\n

Question 6.
\nWhat is high powered money?
\nAnswer:
\nThe total liability of the monetary authority of the country (RBI in India) is called the monetary base or high powered money. It consists of currency (notes and coins in circulation with the public and vault cash of commercial banks) and deposits held by the government of India and commercial banks with RBI. High powered money can be expressed with the help of equation:
\nH = CU +R
\n= cdr x DD + rdr x DD
\n= (cdr + rdr) DD<\/p>\n

Where, H = High powered money
\ncdr= Currency Deposit Ratio
\nrdr= Reserve Deposit Ratio<\/p>\n

Question 7.
\nExplain the functions of a commercial bank.
\nAnswer:
\nThe functions of a commercial bank are classified below:
\nI. Primary Functions: Following are the primary functions of a commercial bank:<\/p>\n

(i) Acceptance Deposits: Commercial banks accept deposits from the public and lend this money to companies and other people for investment projects. The banks offer interests on deposits to the deposit holders. Deposits are broadly into:<\/p>\n