UNIT 6
MONEY AND BANKING
PART I
WEIGHTAGE IN CBSE XII 8 MARKS
WRITE THESE QUESTIONS AND ANSWERS IN MACRO ECONOMICS
REGISTER.
1. Define Barter System.
Ans. The system in which goods are exchanged with goods in the absence of
money is called Barter system of exchange.
2. Define C.C. Economy.
Ans. An economy based on Barter system (i.e. exchange of commodity for
commodity) is called C.C. economy.
3. What do you mean by double coincidence of wants?
Ans. Simultaneous fulfillment of mutual wants by buyers and sellers is known as
double coincidence of wants. it also means that two persons must be exactly in
need of in each others goods.
4. What is barter system? What are its difficulties?
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.
Difficulties of Barter System of Exchange:i. It requires double coincidence of wants which is a rare occurrence.
The alternative to money is direct exchange of goods for goods. This system
requires double coincidence of wants. It means two people must be exactly in
need of each other’s goods. Which is always not possible. It requires lot of time
energy and resources to find such people.
ii. It lacks a common unit of exchange.
It means at what rate any exchange is to be made. The price of each commodity
would have to be quoted in terms of every other commodity. Which is very
difficult , not all goods are divisible and not is not possible to evaluate every good
in terms of other good.
iii. It lacks the system of future payments or deferred payments.
Credit can not be created in barter system. No future payments can be made
because if a person borrows he may not be in a position to arrange exactly the
same goods and in same quality at the time of repayment. Thus it is very difficult
for any good to serve as a standard o deferred payments.
iv. It lacks the system of storage
Storing wealth means storing the purchasing power for the use in future. No good
can serve as a convenient asset for use in future. For storing purpose as asset
must have certain characteristics. It should not be perishable. It should be easily
be portable. It rerequires less space. It must be readily acceptable for exchange
with other goods. No good meets all these requirement for using as an asset.
.
5. How does Money help in removing draw back of Barter system.
OR
Describe importance of Money in Modern economy.
Ans. 1. It helps in removing drawbacks of Barter system in the following
Ways;
A. Money as a unit of value
B. Money as measures of value.
C. Money as a standard of deferred payments
D. Money as a store of value
2. It facilitates exchange of goods and services and helps in carrying on trade
smoothly
3. Money helps in maximizing consumer’s satisfaction and
producer’s profits.
4. Money promotes specialization which increases productivity and efficiency.
5. It facilitates planning of both production and consumption.
6. Define Money.
Money is anything declared by law and is generally acceptable, and acts as a
medium of exchange, measure of value, store of value and standard for deferred
payments
7. What is the measure of money supply?
MONEY SUPPLY: refers to total volume of money held by public at a particular
point of time in an economy.
M1=currency held by public + Demand deposits + other deposits with Reserve
Bank of India.
M1= C+DD+OD
M2=M1+saving deposits with post office saving bank
M3=M1+net time deposit with the bank
M4=M3 + total deposits with post office saving bank excluding national saving
certificate.
8. What are the components of money supply?
Supply of money is defined as the total stock of all the currency and demand
deposits which are held with public on a specific day.
It is a stock variable.
Components
1. Currency with public: in India we add
a. Currency notes in circulation issued by RBI
b. The number of one rupee notes and all coins in circulation
2. Demand deposits: are those deposits in banks which are payable on
demand and on which cheques can be written. These are chequable
deposits and can be withdrawn through cheques.
9. Define fiat money.
Fiat money is defined as the money which under law, must be accfepted for
all debts. It consists of currency notes and coins.
10.Define near money.
Assets which are close substitute of money are near money. Near money
assets are not used as medium of exchange. for example time deposits.
11. What are the main functions of money in an economy?
Ans: The main function of money in an economic system is to facilitate the
exchange of goods and services.
FUNCTIONS OF MONEY: Functions of money can be classified into Primary and
Secondary
Primary/Basic functions:(i) Money as a Unit of Value:
It helps in measuring the value of goods and services. The value is usually
called as price. After knowing the value of goods in single unit (price) exchanges
become easy.
In other words, money works as unit of value or standard of value. In barter
economy it was very difficult to decide as to how much volume of goods should
be given in exchange of a given quantity of a commodity.
Money, by performing the function of common measure of value, has saved us
from this difficulty. Now the value of various goods and services are expressed in
terms of money such as Rs. 10 per metre, Rs. 8/- per kilogram etc. In this way,
money works as common measure of value by expressing exchange value of all
goods and services in money in the exchange market. By working as a unit of
value, money has facilitated modern business and trade.
(ii) Medium of Exchange:
Money has been performing an important function as medium of exchange in the
society. Money facilitates transactions of goods and service as a medium of
exchange. Producers sell their goods in exchange of money.
In the same way, all sections of society sell their services in exchange of money
and with that buy goods and services which they need. Money, working as
medium of exchange, has eliminated inconvenience of double co-incidence of
wants which was faced in barter transactions. Money has made act of sale and
purchase easy and possible.
Secondary functions:iii) Standard of deferred payments:
Deferred payments referred to those payments which are to be made in near
future.
Money acts as a standard deferred payment due to the following reasons:
a) Value of money remains more or less constant compared to other
commodities.
b) Money has the merit of general acceptability.
c) Money is more durable compare to other commodity.
Modem economic setup is based on credit and credit is paid in the form of money
only. Only money is such a commodity in whose form accounts of deferred
payments can be maintained in such a way so that both creditors and debtors do
not stand to lose.
(iv) Store of Value:
Money can be stored and does not lose value
Money acts as a store of value due to the following reasons:
a) It is easy and economical to store.
c) Value of money remains relatively constant
It was impossible to store surplus value under barter economy; the discovery of
money has removed this difficulty. With the help of money, people can store
surplus purchasing power and use it whenever they want. Saving in money is not
only secure but its possibility of being destroyed is very less. Besides, it can be
used whenever need be. By facilitating accumulation of money, money has
become the only basis of promoting capital formation.