AP Inter 1st Year Economics Important Questions Chapter 9 Money, Banking and Inflation

Students must practice these AP Inter 1st Year Economics Important Questions 9th Lesson Money, Banking and Inflation to boost their exam preparation.

AP Inter 1st Year Economics Important Questions 9th Lesson Money, Banking and Inflation

Long Answer Questions

Question 1.
Examine the difficulties of the barter system.
Answer:
Prior to the introduction of money, people can exchange one commodity for another commodity. This method of exchanging good is called “barter system”. This system consists of several difficulties.

These are as follows:
1. Lack of coincidence of wants: Under the barter system, the buyer must be willing to accept the commodity that the seller is willing to offer in exchange. The wants of both buyer and seller must coincide. This is called the coincidence of wants.
E.g: Suppose the seller has a goat and he is willing to exchange it for rice. Then the buyer must have rice and he must be willing to exchange rice for goat.

2. Lack of store value: Some commodities are perishable. They perish within a short time. It was not possible to store the value of such goods in their original form under barter system.

3. Lack of divisibility of commodities: Exchange of goods or commodities was possible when we divide the goods into small units. But in reality all commodities are not divisible. This is particularly true in the case of animals.

4. Lack of common measure value: Under the barter system, there was no common measure of value. To make exchange is possible, it was necessary to determine the value of every commodity in terms of every other commodity.

5. Difficulty in making deferred payments: Deferred payments means, payments to be paid in future for present transaction. But it is not possible in barter system. Because future exchange involved some difficulties.

E.g: Suppose it was agreed to sell specific quantity of rice in exchange for a goat on a future date keeping in view that present value of the goat. But the value of goat may decrease Or increase by that date.

Question 2.
Explain the functions of money.
Answer:
The term “Money” was derived from the name of Goddess Juno Moneta of Rome. Prior to the introduction of money, the barter system was introduced. To eliminate difficulties in barter system, money was introduced. Money plays a key role in Modern Economics, A modern economy is rightly known as Monetary Economy.

Definitions of Money: Several economists have defined money.in several ways. Some are given below:

According to Seligman, “Money is one that possesses general acceptability”..
According to Walker “Money is what money does”.

Functions of Money: The functions of money may be classified into 4 types.

Primary functions
Secondary functions
Contingent functions
Static and dynamic functions

1) Primary functions: The primary functions of money are really the technical and important functions of money. They are two types.
a) Medium of exchange: The most important function of money is to serve as a medium of exchange. It removes the inconveniences of the barter system in which the exchange of goods was possible If only there was a double coincidence of wants.

Money serves as a medium of exchange and facilitates the buying and selling of goods. People can exchange goods and services through the medium of exchange.

b) Measure of value: Money serves as a measure of the value of goods and services. The value of goods and services is expressed in terms of money. If has removed the difficulty of the barter system and has made transactions simple and easy. The value of each commodity is expressed in units of money. We call it the price.

2) Secondary functions: The secondary functions of money has been classified into “3 types”.
a) Store of value: The value of goods and services can be stored in the form of money. Certain commodities are perishable. If they are exchanged for money before they perish, their value can be preserved in the form of money.

b) Standard of deferred payments: Money serves as a standard of deferred payments. In modern economics, most of business transactions take place on in the form of Credit. An individual consumer may now purchase a commodity and pay for it in future because it is possible to express future payments in terms of money.

c) Transfer of money: Money can be easily transferred from one person to another at any time and at any place.

3) Contingent functions: Besides the primary and secondary functions, money has certain contingent functions also. These are classified into 4 types.

a) Measurement and distribution of national income: National income of a country can be measured in terms of money by aggregating the value of all commodities.
It is not possible in a barter system. In the same manner, national income can be distributed to different factors of production like (N, L, K, O) by making payments to them (rent, wage, interest, profit) in money terms.

b) Money equalizes marginal utilities: The consumer can measure utilities of goods in money terms and he can equalize the marginal utilities of different commodities which are purchased by them with the help of money.

c) Basic for credit: Credit is created by banks from out of primary deposits of money. It is the basis of modern economic progress. The supply of credit in an economy depends on the supply of nominal money.

d) Liquidity: Money is the most important liquid asset. All types of properties can be converted into money easily. Money is 100% liquid.

4) Static and dynamic functions of money: “Paul Engig ” classified the functions of money as static and dynamic functions.
a) Static functions: The functions like a medium of exchange, measure value, store of ‘ value and deferred payment are the traditional functions or technical functions of money. In the point of Engig all these are called static functions of money. These functions do not show any effect on economic development.

b) Dynamic functions: The functions of money which influence output, consumption, distribution, and general price level are called dynamic functions of money. The contingent functions come under dynamic functions.

Question 3.
Write a note on the supply of money, (or) Components of money supply.
Answer:
Money supply includes all money in the economy. It is a stock concept. There may be increase or decrease in the money stpck over a period of time. The components of money supply may vary from country to country.

Money supply consists of the following:
1) Currency issued by the Central Bank: In any country the Central Bank issues currency. It consists of paper notes, and coins. In India RBI, which is the Central Bank of the country, issues notes in the denominations of 2000,1000, 500,100, 50, 20,10, 5 and 2 rupees. The one rupee note and coins are issued by the Finance Ministry of the Government of India.

2) Demand deposits created by Commercial Banks: Bank deposits are a prominent component of the money supply. Commercial banks create credit from the primary deposits of money received from the public. Credit is created in the form of deposits called derived or secondary deposits. In developed countries, they constitute nearly 80% of money supply.

Monetary aggregates: In India money supply is measured in terms of the following monetary aggregates.
M₁ = Currency + demand deposits + other deposits
M₂ = M₁ + time liability portion of savings deposits with banks + certificates of deposits issued by banks + term deposits maturing within one year. .
M₃ = M₂ + term deposits over one year maturity + call / term borrowing of banks.

Question 4.
Describe the functions of Commercial Banks.
Answer:
Commercial banks play a very important role in the economic growth of a country. It is a financial institution. It is a profit-making business firm dealing with money. Modern banks in India are joint stock companies registered under the Indian Companies Act.

Definitions of Bank:

According to Sayers “we can define a bank as an institution whose debts are widely accepted in settlement of other people’s debts.”
According to Crowther “a bank collects money from those who have it to spare or who are saving it out of their incomes, and lends this money to those who require it.”

Functions of Commercial Banks: Functions of Commercial Banks have been classified into various types as mentioned below.

Primary functions
Secondary functions
Creation of credit
Agency functions
General utility services

1. Acceptance of Deposits: One of the primary functions of a commercial bank is to accept deposits from the public. The deposits accepted by the banks are of the following types.
a) Savings deposits: These deposits ate made into a savings account of a bank. These deposits encourage savings habit among the public. These are most convenient to small businessmen, salaried employees, artisans, etc. The rate of interest paid on these deposits is comparatively low and it is around 4% per annum.

b) Current deposits: These are the deposits made into the current account of a bank. These are most convenient to the business people, public authorities, and joint stock companies, because there are no restrictions On the number and the amount of withdrawals. Bank do not pay any interest on these deposits.

c) Term deposits: These are also called fixed deposits because the money is deposited with the bank for a fixed period of time. These deposits can be withdrawn after the expiry of maturity period. These deposits carry more interest than the saving deposits. The rate of interest varies from 6% to 12% per annum depending on the period of deposits.

d) Recurring or Cumulative deposits: These are the variants of fixed deposits. These deposits are very convenient to those who can’t save huge amount at a time. These are the monthly installments for a fixed period of time. A fixed amount in the multiples of Rs. 10 may bp deposited every month for a period one or more years. These deposits carry rate of interest at a rate more than that of savings bank and less than that of a term deposit.

2. Payment of Loans and Advances: Another primary function of the commercial bank is to give loans and advances to different sections of the public like traders, industrialists, farmers, artisans, etc.
a) Demand loans / Call loans: A demand loan is a loan that should be repaid on demand by the bank. The entire loan amount is credited to the account of the borrower in a lump sum. The entire amount carries rate of interest from the date of credit. This loan is a kind of advance made with or without security. These are also called call loans.

Short term loans: These loans are given for a specified short period. They are sanctioned to businessmen and farmers, etc. to finance working capital. Individuals may also receive such loans as personal loans. They are given against security.

Cash credits: Banks give cash credit to business firms and industries against current assets such as shares, stocks, bonds, etc. up to a specified limit. The customer need not withdraw the entire amount in one installment. He may withdraw as and when he needs and interest is charged on the amount of actual withdrawal.

Overdraft: This is a facility allowed by the bank to current account holders. Sometimes they are allowed to withdraw amount above the balances in their account up to a limit. Interest is charged on the amount of actual withdrawal.

Discountingof bills of exchange: The most useful and popular form of bonding is by discounting “bills of exchange”. These are undertakings written by the buyers and given to sellers when the transaction is made on credit basis. The buyer undertakes to make payment after a specified period or on a specified future date.

Credit cards: Nowadays banks devised new methods of giving loans to the customers. One such popular method is issuance of the credit card. A credit cardholder can use his card to purchase goods on credit from specified firms and shops subject to certain regulations. The card holder pays the amount to the bank on a later date with interest.

3. Creation of Credit: The unique function of commercial banks is creation of credit. This type of credit is created from out of the primary deposits of money received from the public. Part of the total amount of these deposits is given as loans and advances to its customers.

4. Agency Functions: Along with above functions commercial banks perform certain agency functions also. Some of the important agency functions are

Collection of cheques, drafts, bills of exchange, etc. of their customers from other banks.
Collection of dividends and interest from business and industrial firms.
Purchase and sale of securities, shares, debentures, and government securities on behalf of the customers.
Acting as trustees and keeping their funds in safe custody.
Making payments such as insurance premium, income tax, etc. on the behalf of their customers as per their advice.

5. General Utility Functions: Besides the above agency functions, commercial banks provide certain utility services to their customers.

They provide locker facility for the safe custody of the silver, gold ornaments, etc.
They transfer money of the customers from one bank to the other by way of demand drafts, mail transfer, etc. by collecting commission from them.
With the use of computers and internet facility, nowadays the banks are facilitating online transfer of money from one bank to the other.
They issue letters of credit to help the traders and businessmen.
Traveller’s cheques are issued by the commercial banks to avoid the risk of carrying of cash.
They provide foreign exchange to the customers for exports and imports in connection with their business.
They convey information on behalf of their customers to businessmen operating in other places.
Recently the commercial banks have been establishing ATMs at different – locations to enable their customers to withdraw cash from their accounts.

Question 5.
Explain the functions of Central bank.
(Or)
Describe the role played by the Reserve Bank of India. [Mar. 19 (AP)]
Answer:
Reserve Bank of India is the Central bank of India. It was established in April 1935 with a share capital of Rs. 5 crores. It was originally owned by private shareholders but it was nationalized in 1949. It performs all the Central bank functions under RBI Act, 1934.

Functions of RBI: RBI performs the following functions.
1. Note Issue: RBI has the monopoly of note issue in the country. It maintains gold and foreign exchange reserves of a minimum Rs. 200 crores of which gold should be worth of 115 cores. RBI issues currency notes of the denomination of Rs. 2000,1000, Rs. 500, Rs. 100, Rs. 50, Rs. 20, and Rs. 5, Rs. 2, one rupee note and other coins are issued by the Finance Ministry of the Government of India but circulated by the RBI.

2. Banker of Government: RBI acts as the banker, ageht and advisor to the Government of India. It is the igent of the Government of India and all the State governments except the Government of Jammu and Kashmir. It receives money and makes payments on behalf of the Government and keeps the cash balances as deposits without any interest.

3. Bankers’ Bank: RBI serves as a Banker not only to the Government but also to the banks.
a) All the scheduled banks are bound by the state to maintain with RBI a part of their total deposit amount as cash balances. This ratio is called the Cash Reserve Ratio (CRR).

b) RBI provides financial assistance to the commercial banks in times of their financial stringency or crisis / problems by giving loans or rediscounting the bills of exchange.

c) It acts as a clearing house for settlement of inter-bank accounts.

4. Lender of last resort: In times of financial crisis the schedule banks can approach the RBI as a last resort. The RBI grants them loans against the securities such as treasury bonds, treasury bills and other approved securities. The RBI may also provide financial assistance by rediscounting the eligible bills of exchange.

5. Clearing House: Businessmen and other customers issue cheques towards -payment for their transactions. A businessman or customer may get a cheque issued on a bank in which he has no account. He has to deposit it in his bank and which collects the amount from the bank on which the cheque is issued.

6. Custodian of foreign exchange reserves: The RBI acts as a custodian of foreign exchange reserves for the country. It has also the responsibility of maintaining the v stability of foreign exchange rate. As a member of the International Monetary Fund, it maintains the stability of the exchange rate between the Indian currency and currencies of the member countries.

7. Credit controller: It is the responsibility of RBI to control the volume of credit in * the country. In controls credit through different quantitative and qualitative control methods. RBI announces a credit policy for every six months suitable to the credit needs of the country.

8. Supervisory functions: The RBI, being the apex institution of the banking system, exercises wide powers of supervision and control over all the commercial banks and the cooperative banks through the system of licensing, inspection and amalgamation of banks.

9. Promotional and developmental functions: It performs certain promotional and developmental functions also in order to achieve economic development.

Takes steps for the establishment of banks throughout the country and expansion of their branches.
Refinances the state cooperative banks and the financial institutions which give agriculture credit.
Promotes different financial institutions to provide industrial finance.

Question 7.
Define Inflation. Explain the causes of Inflation.
Answer:
Introduction: Inflation is one of the serious macro-economic problems confronting all the economies in the world today. It affects the economic lives and the welfare of the people in many ways.

Inflation: Inflation means a general rise in prices. It is a continuous rise in the general price level rather than once for all rise in it.

Definitions:

According to Samuelson, “Inflation denotes a rise in the general level of prices”.
According to Ackley, “Inflation is a persistent and appreciable rise in the general level or average of prices”.

Causes of Inflation: Inflation may occur due to the following reasons.

Excess demand
Supply shortage or increased cost of production

1. Factors causing increase in the aggregate demand for commodities:

High rate of population growth
Increase in non-plan and plan expenditure of government
Rise in government expenditure on employment and welfare schemes
Rise in the per capita income of the people due to economic development
Heavy investment on development projects with long gestation period
Increase in the money supply in the economy
Liberal availability of credit for unproductive economic activities
Deficit financing by the government
Reduction in direct tax rates.

2. Factors that raise the cost of production:

Increase in cost of factors of production
Rise in the prices of capital equipment
Increase in the tax rates
Excessive wear and tear of machinery
Import of machinery and equipment at higher prices
Devaluation of domestic currency
Inefficiency in management
Lack of optimum allocation of resources

3. Factors causing inadequate supply:

Failure of monsoons, floods, etc. in agriculture.
Shortage of investment
Non-availability of inputs and raw materials
Under-utilization of productive capacity
Long gestation period of certain industries
Exports at the cost of domestic supply
Artificial scarcity due to black-marketing

Question 8.
Discuss the impact of Inflation.
Answer:
Introduction: Inflation is one of the serious macro-economic problems confronting all the economies in the world today. It affects the economic lives and the welfare of the people in many ways.

Inflation: Inflation means a general rise in prices. It is a continuous rise in the general price level rather than once for all rise in it.
Definitions:

According to Samuelson, “Inflation denotes a rise in the general level of prices”.
According to Ackley, “Inflation is a persistent and appreciable rise in the general level or average of prices.”

Effects of inflation: Inflation has effects on all economic activities in the economy. These may be explained as follows.
A. On production: There may be positive and negative impact of inflation on production. It depends on the rate of inflation or type of inflation.

Mild inflation stimulates production as it increases the profit margin of entrepreneurs.
High inflation rate or hyper inflation hinders production.
Inflation discourages savings. This affects capital formation which in turn affects production.

B) On distribution: The impact of inflation is not uniform on all sections of people. It affects certain sections of the people adversely while certain other sections gain because of inflation.
1) Fixed income groups: People belonging to fixed income groups suffer due to inflation because their incomes do not increase as prices of commodities rise. E.g: Pensioners.

2) Working class: Workers and wage-earners in the informal sector normally work for fixed incomes. Even otherwise their wages do not rise as and when prices rises Such people suffer because of inflation.

3) Debtors and creditors: Inflation results in a decline in the value of money.
Therefore creditors lose as the value of money is higher when they have lent and less when they are repaid.
But debtor gains because the value of money is high when they borrowed but low when they repay.

4) Consumers and entrepreneurs: Because of inflation consumers lose but entreprenuers gain.

C) Social impact: Economic inequalities lead to unequal opportunities in matters of health, education and employment. This results in social injustice.

D) Political effect: Inflation widens social and economic disparities which cause frustration among the sufferers. This provides an opportunity for political movements and if the government is not responsive, the movements may threaten the stability of governments.

E) Measures to control inflation: Government has to take several steps as given below to control inflation.

Importing the goods which are in short supply in the country.
Introducing rationing and quota system in the case of mass consumption goods whose supply is inadequate.
Controlling prices and eliminating black markets.
Taking steps to increase production in the long run.
Reducing the supply of money and credit by way of implementing appropriate monetary and fiscal policies.

Question 9.
State the types of inflation. [Mar. 19 (AP)]
Answer:
Inflation is divided into different types based on the rate of inflation and causes of inflation. They are as follows:
A) Based on the rate of inflation it may be divided into four types as follows:

Creeping inflation: When rise in prices is very slow and small, it is called creeping inflation.
Walking inflation: This is the second stage of inflation. The inflation rate will be between 2 and 4%.
Running inflation: When the rate of inflation is in the range of 4 -10% per annum, it is called running inflation.
Galloping inflation or Hyper inflation: When the inflation rate exceeds 10%, galloping inflation occurs.

B) On the basis of the cause: Inflation is classified into two types.

Demand-pull inflation: If inflation occurs due to raise in the aggregate demand for commodities over the aggregate supply, it is called demand-pull inflation.
Cost-push inflation: Inflation caused by the increase in the cost of production is called cost-push inflation.

Short Answer Questions

Question 1.
State any three definitions of money. Which definition do you consider better and Why?
Answer:
Prior to the introduction of money, barter system is there. It consists of number of defects. Money overcomes all these shortcomings. When we observed history, Money was used a medium of exchange since Sindu civilization in the form of gold, silver, copper, etc.

Definitions:

Seligman: “Money is one that possesses general acceptability.”
Walker: “Money is what money does.”
Robertson: “Anything which is widely accepted in payment for goods or in the discharge of other kinds of business obligations.”
Crowther:* “Anything that is generally acceptable as a medium of exchange and ‘ which at the same time acts as a measure and store of value.”
Keynes: He defined money as “that delivery of which debt-contracts and prices are discharged and in the shape of which a store of general purchasing power is held.”

From the above all definitions, the central point of the definition is general acceptancy as a medium of exchange. Because money is a unit to measure of the value of all goods. So from the above definitions, Crowther’s definition is the better one.

Question 2.
Distinguish between different types of money.
Answer:
Different names are given to money on the basis of its value, the material used and its legal status, thus there are different types of money which are detailed below.
1) Commodity Money and Representative Money:

Commodity Money: It includes metallic coins whose face value and intrinsic value is the same. It is also called full-bodied money.
Representative Money: It includes coins and paper money whose intrinsic value is less than their face value.

2) Legal Tender Money and Optional Money:

Legal Tender Money: Money that must be accepted by everyone as per law towards payment for commodities and services and settlement of debt is called legal tender money. Legal tender money is again classified into limited and unlimited legal tender money.
Optional Money: It is a non-legal tender. Nobody is bound by law to accept such money. Therefore the public may generally accept it optionally. E.g: cheques.

3) Metallic Money and Paper Money:

Metallic Money: It is made up of metals such as silver, nickel, steel, etc. All coins are metallic money.
Paper money: It is money printed on paper, E.g: Currency notes.

4) Standard Money and Token Money:

Standard Money: It is money whose face value and intrinsic value are the same.
Token Money: It is money whose face value is higher than the intrinsic value.

5) Credit Money: This is also called bank money. This is created by commercial banks. This refers to the bank deposits that are repayable on demand and which can be transferred from one individual to the other through cheques.

Question 3.
Explain the concept of legal tender money.
Answer:
Because of legal tendency money can be used as a medium of exchange. As per Seligman, money is one that possesses general acceptability.
Different names are given to money on the basis of it’s value, the material used and its legal status, on the basis of legality. Money is divided into legal tender money and optional money.

Legal tender Money: Legal Tender Money is the money that must be accepted by everyone as per law towards payment for commodities and services and settlement of the debt.

Legal tender money is again classified into 2 types like

Limited legal tender money,
Unlimited legal tender money.

1) Limited Legal Tender Money: Money is that which no person can be forced to accept beyond a certain limit. The maximum limit for acceptance is decided by Govt.

In India, earlier the small coins viz. 5 paise, 10 paise, 25 paise are limited legal tender beyond the maximum limit of Rs.25. No one is bound to accept if such small coins are given for an amount beyond Rs. 25 in payment for goods and services.

2) Unlimited Legal Tender Money: It is that money that everyone should accept without any limit in payment for goods and services. In India paper notes, 5 rupee coins, 2 rupee coins, 1 rupee coins, 50 paise coins are unlimited legal tender.

Question 4.
State the contingent functions of money.
Answer:
Contingent functions of money: Besides the primary and secondary functions, money has certain contingent functions also. These are classified into 4 types.

a) Measurement and distribution of national income: National income of a country can be measured in terms of money by aggregating the value of all commodities. It is not possible in a barter system. In the same manner, national income can be distributed to different factors of production like (N, L, K, O) by making payments to them (rent, wage, interest, profit) in money.

c) Basic for credit: Credit is created by banks from out of primary deposits of money.
It is the basis of modern economic progress. The supply of credit in an economy depends on the supply of nominal money.

d) Liquidity: Money is the most important liquid asset. All types of properties can be converted into money easily. Money is 100% liquid.

Question 5.
Explain different kinds of deposits accepted by commercial banks. [Mar. 19 (TS); May 2016]
Answer:
Commercial banks play*a very important role in the economic growth of a country. It is a financial institution. It is a profit-making business firm dealing with money. Modern banks in India are joint stock companies registered under the Indian Companies Act.

Definitions of Bank:

According to Sayers “we can define bank as an institution whose debts are widely accepted in settlement of other people’s debts.”
According to Crowther “a bank collects money from those who have it to spare or who are saving it out of their incomes, and lends this money to those who require it.”

Functions of Commercial Banks: Functions of Commercial Banks have been classified into various types as mentioned below.

Primary functions
Secondary functions
Creation of credit
Agency functions
General utility services

Acceptance of Deposits: One of the primary functions of a commercial bank is to accept deposits from the public. The deposits accepted by the banks are of the following types.
a) Savings deposits: These deposits are made into savings account of a bank. These deposits encourage savings habit among the public. These are most convenient to small businessmen, salaried employees, artisans, etc. The rate of interest paid on these deposits is comparatively low and it is around 4% per annum.

b) Current deposits: These are the deposits made into the current account of a bank. These are most convenient to business people, public authorities, and joint stock companies because there are no restriction on the number and the amount of withdrawals. Bank do not pay any interest on these deposits.

c) Term deposits: These are also called fixed deposits because the money is deposited with the bank for a fixed period of time. These deposits can be withdrawn after the expiry of the maturity period. These deposits carry more interest than the saving deposits. The rate of interest varies from 6% to 12% per annum depending on the period of deposits.

d) Recurring or Cumulative deposits: These are the variants of fixed deposits.

These deposits are very convenient to those who can’t save huge amounts at a time. These are the monthly installments for a fixed period of time. A fixed amount in the multiples of Rs. 10 may be deposited every month for a period one or more years. These deposits carry rate of interest at a rate more than that of a savings bank and less than that of a term deposit.

Question 6.
Explain different types of loans and advances paid by commercial banks.
Answer:
Commercial banks play a very important role in the economic growth of a country. It is a financial institution. It is a profit-making business firm dealing with money. Modern banks in India are joint stock companies registered under the Indian Companies Act.

Definitions of Bank:

According to Sayers, “we can define bank an, institution whose debts are widely accepted in settlement of other people’s debts. ,
According to Crowther, “a bank collects money from those who have if to spare or who are saving it out of their incomes, and lends this money to those who require it.”

Functions of Commercial Banks: Functions of Commercial Banks have been classified into various types like as follows:

Primary functions
Secondary functions
Creation of credit
Agency functions
General utility services

Payment of Loans and Advances: Another primary function of the commercial bank is to give loans and advances to different sections of the public like traders, industrialists, farmers, artisans, etc.

a) Demand loans / Call loans: A demand loan is a loan that should be repaid on demand by the bank. The entire loan amount is credited to the account of the borrower in a lump sum. The entire amount carries rate of interest from the date of credit. This loan is a kind of advance made with or without security. These are also called call loans.

b) Short-term loans: These loans are given for a specified short period. They are sanctioned to businessmen and farmers, etc. to finance working capital. Individuals may also receive such loans as personal loans, they are given against security.

c) Cash credits: Banks give cash credit to business firms and industries against current assets such as shares, stocks, bonds, etc. up to a specified limit. The customer need not withdraw the entire amount in one installment. He may withdraw as and when he needs and interest is charged on the amount of actual withdrawal.

d) Overdraft: This is a facility allowed by the bank to current account holders. Sometimes they are allowed to withdraw amounts above the balances in their account upto a limit. Interest is charged on the amount of actual withdrawal.

e) Discounting of bills of exchange: The most useful and popular form of bonding is by discounting “bills of exchange”. These are undertakings written by the buyers and given to sellers when the transaction is made on credit basis. The buyer undertakes to make payment after a specified period or on a specified future date.

f) Credit cards: Nowadays banks devised new methods of giving loans to the – customers. One such popular method is the issuance of a credit card. A credit cardholder can use his card to purchase goods on credit from specified firms and shops subject to certain regulations. The cardholder pays the amount to the bank on a later date with interest.

Question 7.
Distinguish between the roles of a commercial bank and a central bank with reference to credit.
Answer:
Every country has a central bank. It plays key role in economic, and monetary activities. It is the Apex Bank of the banking system in India. It controls, regulates and supervises the activities of the banks and the country’s banking system.

A commercial bank is a financial institution. It is a profit-making business firm dealing with money. It collects money from public in the form of deposits, and loans are given to the businessman, industrialists, etc.

There are many differences between the functions of commercial banks and central bank.

Commercial Banks	Central Banks
1) The number of commercial banks is large.	1) Every country has one central bank, except few countries.
2) These banks are collecting deposits from public, and lending money to them.	2) These banks do not collect deposits from the public and these banks do not provide loans to public directly.
3) Commercial banks create credit.	3) Central bank controls the credit and institution which create c credit.
4) These banks have no right to print the currency.	4) It has a monopoly power to print and circulate money.
5) It is the profit motive organisation.	5) It is not a profit motive organisation.
6) Commercial banks work in private sector as well as public sector.	6) Central banks work only in public sector.
7) These banks work under rules and regulations of government, central bank.	7) It acts as an adviser, agent to government.

Question 8.
Explain why the central bank is called a bankers’ bank.
Answer:
The Reserve Bank of India is the Central bank of India. It was established in April 1935 with share capital of Rs. 5 crores. It was originally owned by private shareholders but it was nationalized in 1949. It performs all the Central bank functions under RBI Act, 1934.

Functions of RBI: RBI performs the following functions.
1. Bankers’ Bank: RBI serves as a Banker not only to the Government but also to the banks.

All the scheduled banks are bound by the state to maintain with RBI a part of their total deposit amount as cash balances. This ratio is called the Cash Reserve Ratio (CRR).
RBI provides financial assistance to commercial banks in times of their financial stringency or crisis/problems by giving loans or rediscounting the bills of exchange.
It acts as a clearing house for the settlement of Interbank accounts.

2. Lender of last resort: In times of financial crisis the schedule banks can approach the RBI as a last resort. The RBI grants- them loans against the securities such as treasury bonds, treasury bills and other approved securities. The RBI may also provide financial assistance by rediscounting the eligible bills of exchange.

3. Clearing House: Businessmen and other customers issue cheques towards payment for their transactions. A businessman or customer may get a cheque issued on a bank in which he has no account. He has to deposit it in his bank and which collects the amount from the bank on which the cheque is issued.

Question 9.
What do you understand by Tender of last resort?
Answer:
Reserve Bank of India is the Central bank of India. It was established in April 1935 with a share capital of Rs. 5 crores. It was originally owned.by private shareholders but it was nationalized in 1949. It performs all the Central bank functions under RBI Act, 1934.
RBI acts as a lender of last resort.

Lender of last resort: In times of financial crisis the schedule banks can approach the RBI as a last resort. The RBI grants them loans against the securities such as treasury bonds, treasury bills and other approved securities. The RBI may also provide financial assistance by rediscounting the eligible bills of exchange.

Question 10.
State the objectives of a Central Bank.
Answer:
Central Bank is the apex of the banking system in a country. It controls, regulates and supervises the activities of the banks and country’s banking system. RBI is the central bank of India.

Objectives of central Bank / RBI:

Regulating the issue of currency notes
Achieving the monetary stability in the economy
Controlling the credit system
Providing guidance to the commercial banks
Evolving and implementation uniform credit policy throughout the country.

Question 11.
Write a note on the Reserve Bank of India.
Answer:
RBI is the Central bank of India. It was established in April 1935 with a share capital of Rs. 5 crores. Originally it was established and owned by private shareholders. But it was nationalized by the Government of India in 1949. It performs all the important functions of Central bank under Reserve Bank of India Act, 1934.

RBI acts as banker, adviser to Central Government. RBI is the only one institution which has a power to issue currency and circulate the currency, RBI provides credit facility to bankers, by discounting the bills of commercial banks, and satisfies the needs of public indirectly.

RBI controls credit through different quantitative and qualitative control methods. It coordinates and controls the Commercial banks’ functions.

Question 12.
Explain any three definitions of inflation.
Answer:
Inflation is one of the serious macro – economic problems confronting all economies in th§ world today. It affects the economic lives and the welfare of the people in many ways.

In general sense, inflation means, a continuous rise in general price levels of goods and services in the long period.

Definitions: According to Pigou,” inflation exists when money income is expanding. more than in proportion to increase in earning activity.”

Crowther: According to Crowther, “a s’tate in which the value of money is falling, that is the prices are rising.”

Ackley: “Inflation is a persistent and appreciable rise in the general level or average of prices.” –

Features of Inflation:

Continuous rise in general price levels
Money supply rises because of inflation
At the time of inflation money demand rises more than money supply
There may be a wage-price spiral.

Question 13.
Distinguish between demand-pull and cost-push inflation.
Answer:
The word “Inflation” can be used in different contexts. Inflation may exit in the economy because of many causes. Inflation means a general rise in price levels of goods and services over a long period.

Based on the cause of inflation, it may be classified into 2 types.

Demand-pull Inflation
Cost-push Inflation

Demand-pull Inflation: Inflation, caused by an increase in aggregate demand for commodities over aggregate supply is called demand-pull inflation.

In a market, there is an interaction between the flow of money and flow of goods and services. When more money chases relatively less quantity of goods and services, the excess of demand relative to supply perches up the prices of goods and services. Such inflation leads to the Result of increased money expenditure is called demand-pull inflation.

Cost-push Inflation: Prices of the commodities may increase due to an increase in the cost of production. Inflation caused by the rise in cost of production is called cost-push inflation.

A rise in the prices leads to a rise in the total cost of production and consequently a rise in the price level.

Question 14.
State the types of inflation. [Mar. 19 (TS); Mar. 17 : May ’16]
Answer:
Inflation is divided in to different types based on the rate of inflations and causes of inflation. They are as follows:
A) Based on the rate of inflation it may be divided into four types as follows:

Creeping inflation: When rise in the prices is very slow and small, it is called \ creeping Inflation.
Walking inflation: This is the second stage of inflation. The inflation rate will be between 2 and 4%.
Running inflation: When the rate of inflation is the range of 4 -10% per annum, it is called running inflation.
Galloping inflation or Hyper inflation: When the inflation rate exceeds 10%, galloping inflation occurs.

B) On the basis of the cause: Inflation is classified into two types.

Demand-pull Inflation: If inflation occurs due to raise in the aggregate demand for commodities over the aggregate supply, it is called demand-pull inflation.
Cost-push Inflation: Inflation caused by the increase in the cost of production is .called cost-push inflation.

Question 15.
Explain the effects of inflation on distribution.
Answer:
Introduction: Inflation is one of the serious macro-economic problems confronting all the economies in the world today. It affects the economic lives and the welfare of the people in many ways.

Inflation: Inflation means a general rise in prices. It is a continuous rise in the general price level rather than once for all rise in it.

Definitions:

According to Samuelson, “Inflation denotes a rise in the general level of prices.’
According to Ackley, Inflation is a persistent and appreciable rise in the general level or average of prices.

Effects of inflation: Inflation has effects on ah economic activities in the economy. These may be explained as fallows.

Effects of inflation on distribution: The impact of inflation is not uniform on all sections of people. It affects the certain sections of the people adversely while certain other sections gain because of inflation.
1) Fixed – income groups: People belonging to fixed income groups suffer due to inflation because their incomes do not increase as prices of commodities rise. E.g: Pensioners.

2) Working class: Workers and wage-earners in the informal sector normally work for fixed incomes. Even otherwise their wages do not rise as and when prices rise. Such people suffer because of inflation.

3) Debtors and creditors: Inflation results in a decline in the value of money. Therefore creditors lose as the value of money is higher when they have lent and less when they are repaid.
But debtor gains because the value of money is high when they borrowed but low when they rapay.

4) Consumers and entrepreneurs: Because of inflation consumers lose but entrepreneurs gain.

Question 16.
Enumerate the measures for control of inflation. [May, March 2017; May 2017]
Answer:
Measures to control inflation: Government has to take several steps as given below to control inflation:

Importing the goods which are in short supply in the country.
Introducing rationing and quota system in the case of mass consumption goods whose is inadequate.
Controlling prices and eliminating black markets.
Taking steps to increase production in the long run.
Reducing the supply of money and credit by way of implementing appropriate monetary and fiscal policies.

Very Short Answer Questions

Question 1.
Double coincidence of wants.
Answer:
Under the barter system, the buyer must be willing to accept the commodity which the seller is willing to offer in exchange. The wants of both the buyer and the seller must coincide. This is called double coincidence of wants.

Question 2.
Standard of deferred payments.
Answer:
Money serves as a standard of deferred payments. In modern economics, most of the business transactions take place on the basis of credit. It makes possible in the exchange of present goods against future goods. One can borrow certain amount of money now and repay it in future.

Question 3.
Store of value. [Mar. 19(AP); May 2018]
Answer:
Serving as a store of value of commodities is the secondary function of money. The value of commodities and services can be stored in the form of money. The value of money remains stable for a reasonably long period.

Question 4.
Liquidity. [March 2018, 2017; May 2016]
Answer:
Liquidity can be defined as the ability of any asset to act as a direct medium of exchange. Money is the most liquid asset. The degree of liquidity differs from one asset to another asset.

Question 5.
Currency. [Mar. 19 (AP); May, Mar. – ’18, 17]
Answer:
Currency consists of paper notes and coins. In India, RBI which is the apex bank issues currency notes of all denominations except one rupee note. The Government of India issues them. Coins are metallic tokens and are produced in the mints of the government.

Question 6.
Near money. [Mar. T9 (AP): May, Mar. 17: May ’18. 16]
Answer:
The term near money refers to those highly liquid assets which are not accepted as money, i.e., they are not accepted but be easily converted into money within a short period.

Question 7.
Credit money.
Answer:
This is also called bank money. This is created by commercial banks. This refers to the bank deposits that are repayable on demand and which can be transferred from one individual to the other through cheques.

Question 8.
Limited legal tender.
Answer:
It is that money that no person can be forced to accept beyond a certain limit. The maximum limit your acceptance is decided by the Govt. In India, earlier the small coins viz., 5 paise, 10 paise, 25 paise are limited legal tender money beyond the maximum limit of Rs. 25.

Question 9.
Token money.
Answer:
Token money is the money or unit of currency whose face value is higher than the intrinsic value. It is not convertible. It facilitates transactions and accepted by the public as medium of exchange.

Question 10.
Time deposits.
Answer:
Time deposits are deposits that are not payable on demand. They are repayable only after their maturity period i.e., after the expiry of the period for which they are deposited. Term deposits are time deposits.

Question 11.
Recurring deposits.
There are variants of fixed deposits. These deposits are very convenient to those who cannot save huge amounts at a time. These deposits carry interest at a rate more than that of a savings bank and less than that of term deposit.

Question 12.
Demand deposits.
Answer:
The deposits are payable without any prior notice to the bank. They are payable by cheque or otherwise. They can be transferred from person to person through cheques. Thus they serve as a medium of exchange.

Question 13.
Cash credit.
Answer:
A cash credit refers to an arrangement by which the bank allows its customers to borrow money up to a specified limit from an account opened for the purpose. The customers need not withdraw the entire amount in one installment. He may withdraw as and when he needs and interest is charged on the amount of actual withdrawal.

Question 14.
Overdraft. [Mar. 19 (AP); May. Mar. 18. 17 ; May 16]
Answer:
This is a facility allowed by the bank to the current account Holders. They are allowed to withdraw money in excess of the balance available in their accounts. Interest is charged on the amount of actual withdrawal. This facility is Helpful to the borrowers as a measure to meet their short-term needs in case of shortage of regular funds.

Question 15.
Discounting of bills of exchange.
Answer:
The most useful and popular form of lending is by discounting the bills of exchange. Bills of exchange are undertaking returned by the buyers and given to sellers when the transaction is made on credit base. The bank credits the net amount to the customer’s account after deducting certain percent of the bills.

Question 16.
Creation of credit.
Answer:
The Commercial bank creates credit. This is a unique function of Commercial banks. Credit is created from out of the primary deposits of money the customers received from the public. Part of the total amount of these deposits is given as loans and advances to its customers.

Question 17.
Clearance house.
Answer:
All Commercial banks maintain deposit accounts with RBI. It clears all cheques to settle the interbank transactions. For this purpose RBI establishes clearing houses at different places.

Question 18.
Lender of last resort.
Answer:
In times of financial stringency, the scheduled banks can approach the RBI as a last resort. The RBI grants loans against the securities such as the treasury bonds, treasury bills, etc. This acts as the lender* of last resort.

Question 19.
Reserve money.
Answer:
Reserve money is the basis of credit. Credit is created by the banks out of the primary deposits of money. The supply of credit in an economy is dependent on the supply of nominal money. It is not possible to create credit if there is no reserve money.

Question 20.
Reserve Bank of India.
Answer:
RBI is the Central Bank of India. It is established in April 1935 with a share capital of Rs. 5 crores, as a shareholders bank. It was nationalized in 1949. It performs all the important functions of Central bank under the Reserve Bank of India Act, 1934.

Question 21.
Meaning of inflation.
Answer:
Inflation refers to persistent rise in the general price level over a long period of time.

Question 22.
Consumer Price Index (CPI).
Answer:
C.P.I. is one of the price indices to know about inflation. This is the index of prices of a given basket of commodities which are brought by the representative consumer. It is generally expressed in percentage terms. Here we calculate the cost of purchase of. a given basket of commodities for both base year and current year.
The CPI therefore will be:

Question 23.
Wholesale Price Index (WPI).
Answer:
Wholesale price is that, price at which goods are traded in bulk. Like CPI, the Index for wholsale prices is called Wholesale Price Index (WPI). It can be calculated like CPI.

In India, the prices of 435 commodities are included in WPI from 1993 – 94, onwards. They include 98 primary commodities, 19 commodities relating to fuel, light, and lubricants and 318 manufactured goods.

Question 24.
Demand-pull inflation.
Answer:
Inflation, caused by an increase in the aggregate demand for commodities over — aggregate supply is called demand-pull inflation.

Question 25.
Cost-push inflation.
Answer:
The rise in the general price level caused by an increase in the production costs is called cost-push inflation. Increase in the rent, interest rates, wages, raw materials results in the increase in cost of production.

Question 26.
Hyper inflation. [May 2018, 2017]
Answer:
If the inflation rate exceeds 10%, galloping or hyper inflation occurs. It is the extreme form of inflation and the rate of inflation goes up to 100% or even more. This is highly dangerous and totally upsets.the Economics. This occurred in Germany, Russia and Hungary.

Question 27.
Inflation and value of money.
Answer:
Inflation refers to persistent rise in the general price level over a long period of lime. This results in the decrease in the value of money. Growtjier defined inflation as a state in which the value of money is falling that is, the prices are raising.

AP Inter 1st Year Economics Important Questions 9th Lesson Money, Banking and Inflation

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