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    Money & Banking

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    Money & Banking

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    15 views5 pages

    Money & Banking

    Uploaded by

    richiksharma10

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 5

    BUSINESS ECONOMICS

    MONEY & BANKING


    ID-201001104025
    NAME – DIPTENDU GHOSH
    BATCH – B.COM (2020-2023) DATE- 28.01.2021
    Q1. What are the functions of Money ?
    Ans:

    Functions of money can be broadly


    categorised into two types:
    (a) Primary functions
    FUNCTIONS OF MONEY
    (b) Secondary functions

    I) MEDIUM OF EXCHANGE:

     It means that money can be used


    to make payments for all
    (A) PRIMARY FUNCTIONS transactions of goods and
    services.
     A buyer can buy goods through
    money, and a seller can sell goods
    for money.
     It is an essential function of
    money.
    ii) MEASURE OF VALUE:

     Money serves as a measure of


    value.
     Value of all goods and services is
    expressed in terms of money.

    i) STANDARD OF DEFERRED
    (B) SECONDARY FUNCTIONS PAYMENTS:
     It means that money acts as a
    ‘standard’ for making future
    payments.
     It has made deferred payments
    much easier than before.
     Example: When we borrow money
    from somebody, we have to return
    both the principal as well as
    interest amount in the future.
     Money is a convenient mode of
    calculation & payment of interest
    amount to be paid in the future.
     This function has facilitated
    borrowing and lending.
     It has also led to the creation of
    financial institutions.
    ii) STORE OF VALUE:

     Store of value implies a store of


    wealth.
     Money can be easily stored for
    future use.
     It is the most convenient and
    economical means of storing
    earnings and wealth.
    iii)TRANSFER OF VALUE:

     Money also serves for transfer of


    value.
     It facilitates buying and selling of
    goods not only in the domestic
    country but also in other parts of
    the world.

    Q2. What are the limitations of barter system?


    Ans: The major limitations of Barter system are:

    1. Lack of Double Coincidence of Wants :Barter system can work only when both
    buyer and seller are ready to exchange each other’s goods e.g if a farmer wants to
    sell his wheat in exchange of shirt he has to find. a shirt owner who
    wants to exchange shirt for wheat.
    2. Lack of Common Measure of Value : In the barter system, all commodities are not

    of equal value and there is no common measure (unit) of value of goods and services, in

    which exchange ratios can be expressed. For example, if A has wheat and B has rice, then

    it is difficult to decide, how much wheat is needed to exchange with one kilogram of rice.

    In the absence of common measure, the exchange ratio is fixed randomly, in which one

    of the party generally suffers.


    3. Lack of Standard of Deferred Payment :Under barter system, contracts
    involving future payments or credit transactions cannot take place with ease because of
    following reasons:
    (a) The borrower may not be able to arrange goods of exactly same quality at the
    time of repayment.
    (b) There may be conflicts regarding which specific commodity is to be used for
    repayment.
    (c) The commodity to be repaid may be lose or gain its value at the time of
    repayment.
    So, it is very difficult to make deferred payments in the form of goods.

    4. Lack of Store of Value: (a) Most of the goods (like wheat, rice, vegetables, etc.) do

    not possess durability, i.e. their quality deteriorates with passage of time.

    (b) Storage of goods requires time and efforts.

    Q3. What is M1, M2, M3 of Money supply?


    Ans:
    Narrow money (M1) –M1 = Currency with public + Demand deposits with the Banking
    system (current account, saving account) + Other deposits with RBI.

     M1 is a narrow measure of the money supply that includes physical


    currency, demand deposits, traveler’s checks, and other checkable
    deposits.
     M1 does not include financial assets, such as savings accounts and
    bonds.
     The M1 is no longer used as a guide for monetary policy in the United
    States due to the lack of correlation between it and other economic
    variables

    M2 - M2 = M1 + Savings deposits of post office savings banks.


     M2 is a measure of the money supply that includes cash, checking
    deposits, and easily convertible near money.
     M2 is a broader measure of the money supply than M1, which just includes
    cash and checking deposits.
     M2 is closely watched as an indicator of money supply and future inflation,
    and as a target of central bank monetary policy.

    Broad Money (M3) - M3 = M1 + Time deposits with the banking system.

     M3 is a collection of the money supply that includes M2 money as well as


    large time deposits, institutional money market funds, short-term
    repurchase agreements, and larger liquid funds.
     M3 is closely associated with larger financial institutions and corporations
    than with small businesses and individuals.
     M3 was traditionally used by economists to estimate the entire money
    supply within an economy and by governments to direct policy and control
    inflation over medium and long-term periods.
     As a measure of money supply, M3 has largely been replaced by money
    zero maturity (MZM).
     M3 is still published as a source of economic data, but mostly for ease of
    historical comparisons.

    Q4. Differentiate between Commercial and Central Bank?

    Ans:

    BASIS FOR CENTRAL BANK COMMERCIAL BANK


    COMPARISON
    Meaning The bank which looks The establishment,
    after the monetary which provides
    system of the country banking services to
    is known as Central the public is known as
    Bank. Commercial Bank.
    What is it? It is a banker to the It is the banker to the
    banks and the citizens of the nation.
    government of the
    country.
    Governing Statute Reserve Bank of India Banking Regulation
    Act, 1934. Act, 1949.
    Profit motive It does not exist for It exist for making
    making profit for its profit for its owners.
    owners
    Monetary Authority It is the supreme No such authority.
    monetary authority
    with wide powers.
    Money supply Ultimate source of No such function is
    money supply in the performed by it.
    economy.
    Deals with and How Banks and General Public
    many banks are Governments
    there? Many
    Only one

    Q5. Explain credit creation by central bank?

    Ans: The central bank uses the tool of bank rate to control volume of credit in an
    economy in such a way that when bank rate is low, the commercial banks borrow more
    from the central bank which increases the liquidity of commercial banks and they lend
    more money to the general public .They are required to keep a certain percentage of
    amount as reserve with the Central Bank for serving the cash requirements of
    depositors. After keeping the required amount of reserves, commercial banks lend the
    remaining portion of public deposits as loans.

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