Q:- Define money
Ans: — Money is anything which served as a medium of exchange and at the same time
acts as a measure and store of value.
Q. What is Barter system Exchange? What are its drawbacks?
Ans: – Barter system exchange means exchange of goods for goods.
Drawback of Barter system Exchange:-
1. Absence of common unit of measure
2. Lack of double coincidence of wants
3. Lack of deferred payments
4. Lack of strong generalized purching power
Q.What is the functions of money?
Ans: 1. Money as a unit of value
2. Money as a medium of exchange
3. Money as a standard of deferred payments
4. Money as a store of value.
1. Money as a medium of exchange:-
It means that money acts as an intermediary for the exchange of goods and services. It
is because money is generally accepted by the people and backed by the government. It
has removed the major difficult of double coincidence of wants in the barter system.
Now people can buy and sell goods and services using money without any difficulty.
2. Money as a unit value:-
It means that the value of each goods or services is measured in the monetary unit.
Measurement of value was the main difficult of the barter system. Introduction of
money measure the value of everything in terms of the price. All goods and services can
be expressed in terms of money; money determines the price relatives between different
goods which show their mutual exchange values.
3. Standard of deferred payments:-
It refers to those payments, which are made sometimes in the future. Money is accepted as a standard of deferred payments because:-
(i). Its price remains relatively stable compared to other
commodities.
(ii) It has the merit of general acceptability.
(iii) It is more durable compared to other commodity.
4. Store of value:-
Money can be stored for a longer period of time for immediate exchange
of goods and services. It was not possible to store value in the
barter system, because goods tend to wear- out or perish. It is
convenient to store value in terms of money because:-
(i) It has the merit of general acceptability.
(ii) It is convenient to store money without much space.
(iii) Value of money remains relatively stable.
Q. Explain the process of credit creation by commercial banks.
A. Money creation or deposit creation or credit creation by the bank is determine by (1)
the amount of the initial fresh deposits and (2) the Legal Reserve Ratio (LRR),
the minimum ratio of deposit legally required to be kept as cash by banks. It is
assumed that all the money that goes out of bank is re deposited in to the banks.
Let the LRR be 20% and there is a fresh deposit of Rs. 10000. As required, the
banks keep 20% i.e. Rs. 2000 as cash. Suppose the bank lend the remaining Rs.8000. Those who borrow use this money for making payments. As assumed who
receive payments put the money back in to the bank. In this way bank receive
fresh deposit of Rs, 8000. The bank again keep the 20% i.e. Rs. 1600 as cash and
lend Rs. 6400, which is also 80% of the last deposit. The money again comes back
to the banks leading to a fresh deposit of Rs. 6400. The money goes on in
multiplying in this way, and ultimately total money creation is Rs. 50000. Given
the amount of fresh deposit and the LRR, the total money creation is:

Total Money Creation = (1 /LRR)* INITIAL DEPOSIT

Money Creation = 1/20%X10000 =100/20X10000 = 500000

Q. Define central bank. Explain its main functions. 

Ans:- The central bank is the apex institution of a country’s monetary system. The
design and the control of the country’s monetary policy is its main responsibility.
Function of central bank
1. Currency authority:-
It is the sole authority for the- issue of currency in the country. All the currency issued
the central bank is its monetary liability since it is obliged to back the currency with
assets of equal value in the gold, silver, foreign securities & local securities.
2. Banker to the government:-
It acts as a banker to the both central as well as state government. It carries out all the
banking business of the government and the government keeps its cash balances in
current account with central bank.
3. Banker’s bank and Lender of last resort:-
As the banker to bank, the central bank holds a part of the cash reserves of the
commercial banks and lends them short term funds as a lender of last resort. It also
provides them with centralized clearing and remittance facilities. For these commercial
banks are required to keep certain percentage of their total deposit in the form of CRR
with the central bank.
4. Control of money supply and credit: – The Central Bank control the
money supply and credit through two ways:- 

(A) QUANTITATIVE CREDIT CONTROL: –
1.Cash reserve ratio: – It refers to the minimum percentage of a bank’ total
deposit that is required to be kept with the central bank.
During excess demand reserve ratio can be increased in order to control the
money supply. On the other hand during deficient demand reserve ratio can
be decreased
2. Statutory liquidity ratio:-It refers to minimum percentage of total deposit
which commercial banks required to maintain with themselves in the form
of liquid assets.
During excess demand reserve ratio can be increased in order to control
the money supply. On the other hand during deficient demand reserve
ratio can be decreased.
3.Bank Rate/Repo rate: – The bank rate refers to the rate of interest at which
central bank gives loans and advance to the commercial banks. 

During excess demand bank rate is increased in order to control the money
supply. On the other hand, during deficient demand, bank rate in decreased
in order to increase the money supply.
4.Reverse Repo rate :- It refers to the rate at which commercial bank park
their surplus money with the central bank.
During excess demand bank rate is increased in order to control the money
supply. On the other hand, during deficient demand, bank rate in decreased
in order to increase the money supply.
5.Open market operators: – It refers to the purchase and sale of securities in
the open market by the central bank.
During excess demand, central bank sale the securities in the open market
in order to control the money supply. On the other hand, during deficient
demand, central bank buys the securities in the open market in order to
increase the money supply. 

(B) Qualitative or selective credit control: – 

 1. Change in margin requirements of loans: A margin is the difference
between the amounts of the loan and market value of the security offered
by the Borrower against the loan.
During excess demand margin is increased in order to control the
money supply. On the other hand, during deficient demand, margin is
decreased in order to increase the money supply. 

2. Rationing of credit: it is a measure to channel credit to particulars section
and also to restrict the flow of credit to particulars sections.
During excess demand credit is given only to productive purposes and during
deficient demand credit is provided to both productive and non productive
purposes. 

3. Direct action: The central bank may take action against those member
banks who fails to comply with its directives. 

 4. Moral suasion: This is a combination of persuasion and pressure that
the central bank applies on the other banks in order to get them to fall in
line with its policy. 

Q. What is money supply? Mention the measurement of money supply in India. 

Ans. It refers to total stock of money held by the people of a country at a point of time. It
is a stock concept.
Measurement of money supply in India:-
M1 = CD + DD + OD
Where C=Coins & paper notes held by the public
DD=Demand Deposits of the people with the commercial banks.
OD=other deposits held with the RBI.