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Karnataka 2nd PUC Economics Question Bank Chapter 9 Money and Banking
2nd PUC Economics Money and Banking One Mark Questions and Answers
1. Choose The Correct Answer.
Question 1.
Narrow Money refers to:
(a) M 4
(b) M 5
(c) M 1
(d) M 3
Answer:
(c) M 1
Question 2.
Which of the following agency is responsible for issuing Rs. 1 currency note in our country?
(a) Reserve Bank of India
(b) NitiAayog
(c) Ministry of Finance
(d) Ministry of Commerce
Answer:
(c) Ministry of Finance
Question 3.
Broad Money refers to:
(a) M1
(b) M3
(c) M2
(d) M4
Answer:
(b) M3
Question 4.
Quantitative instrument of RBI can be:
(a) CRR
(b) SLR
(c) Bank Rate
(d) All of the above
Answer:
(d) All of the above
Question 5.
Who is called the “bank of issue”?
(a) SBI
(b) RBI
(c) IDBI
(d) NABARD
Answer:
(b) RBI
Question 6.
The ratio of total deposits that a commercial bank has to keep with reserve bank of India is called
(a) Statutory liquidity Ratio
(b) Deposit ratio
(c) Cash reserve ratio
(d) Legal reserve ratio
Answer:
(c) Cash reserve ratio
Question 7.
Supply of money refers to the quantity of money
(a) During a financial year
(b) During any period of time
(c) As on 31st of march only
(d) As on any point of time
Answer:
(d) As on any point of time
Question 8.
…………… function of money has led to capital formation and economic development of the
economy
(a) Measure of value
(b) Medium of exchange
(c) Store of value
(d) Standard of deferred payment
Answer:
(d) Standard of deferred payment
Question 9.
Which of the following will reduce the money supply in the market.
(a) Rise in repo rate
(b) Sale of government securities in the markets
(c) Both (a) and (b)
(d) None of the above
Answer:
(c) Both (a) and (b)
Question 10.
What is the value of multiplier when CRR = 2% and SLR = 8%
(a) 17.3
(b) 50
(c) 10
(d) 12.5
Answer:
(c) 10
Question 11.
Measurement of value of all goods and services refers to which of the following functions of money
(a) Medium of exchange
(b) Unit of account
(c) Standard of deferred payments
(d) Store of value
Answer:
(a) Medium of exchange
Question 12.
Which deposit account has maximum rate of interest?
(a) Fixed deposits
(b) Savings deposits
(c) Current deposits
(d) Recurring deposits
Answer:
(a) Fixed deposits
Question 13.
Legal reserve ratio is also known as ………….
(a) Cash Reserve ratio
(b) Statutory liquidity ratio
(c) Variable reserve ratio
(d) Repo rate
Answer:
(c) Variable reserve ratio
Question 14.
In India suppliers of money are
(a) Government
(b) Banking system
(c) Both (a) and (b)
(d) None of these
Answer:
(c) Both (a) and (b)
Question 15.
Demand deposits include
(a) Saving account deposits and fixed deposits
(b) Saving account deposits and current account deposits
(c) Current account deposits and fixed deposits.
(d) All types of deposits
Answer:
(b) Saving account deposits and current account deposits
Question 16.
Money in traditional sense
(a) Serves as a medium of exchange
(b) Serves as a store of value.
(c) Serves as both medium of exchange and store of value
(d) Serves neither as medium of exchange and store of value
Answer:
(c) Serves as both medium of exchange and store of value
Question 17.
Mx in the money stock in India refers to
(a) post office saving deposits
(b) Total post office deposits
(c) Currency plus demand deposits plus other deposits with RBI.
(d) Tim’e deposits with banks
Answer:
(c) Currency plus demand deposits plus other deposits with RBI.
Question 18.
The basic distinction between narrow and broad monies is the
(a) Treatment of post office deposits
(b) Treatment of time deposits of banks
(c) Treatment of savings deposits of banks
(d) Treatment of currency
Answer:
(b) Treatment of time deposits of banks
Question 19.
Which is the central bank of India
(a) State Bank of India.
(b) Punjab and National Bank.
(c) Oriental Bank of Commerce
(d) Reserve Bank of India
Answer:
(d) Reserve Bank of India
Question 20.
……………. is the official minimum rate at which the Central Bank of a country is prepare to rediscount
approved bills held by banks.
(a) CRR
(b) SLR
(c) Bank Rate
(d) Repo Rate
Answer:
(c) Bank Rate
Question 21.
In order to control credit in the country, the RBI may
(a) Buy securities in the open market
(b) Sell securities in the open market
(c) Reduce CRR
(d) Reduce Bank Rate
Answer:
(b) Sell securities in the open market
Question 22.
In order to encourage investment in the country, the RBI may
(a) Reduce CRR
(b) IncreaseCRR
(c) Sell securities in the open market
(d) Increase Bank Rate
Answer:
(a) Reduce CRR
Question 23.
In order to discourage investment in the economy, the RBI may
(a) Increase Bank Rate
(b) Decrease Bank Rate
(c) Buy securities in the open market
(d) Decrease CRR
Answer:
(a) Increase Bank Rate
Question 24.
………….. controls affect indiscriminately all sectors of the economy.
(a) Selective credit
(b) Quantitative
(c) Margin requirements
(d) None of the above
Answer:
(b) Quantitative
Question 25.
During depression, it is advisable to
(a) Lower Bank Rate and purchase securities in the market
(b) Increase Bank Rate and purchase securities in the open market
(c) Decrease Bank Rate and sell securities in the open market
(d) Increase Bank Rate and sell securities in the open market
Answer:
(a) Lower Bank Rate and purchase securities in the market
Question 26.
‘The lender of last resort’ means
(a) The government coming to the rescue of poor farmers
(b) Central Bank coming to the rescue of other banks in times of financial crisis
(c) Commercial banks coming to the rescue of small industrial units
(d) None of the above
Answer:
(b) Central Bank coming to the rescue of other banks in times of financial crisis
Question 27.
Who is the custodian of monetary reserves in India?
(a) SBI
(b) SIDBI
(c) NABARD
(d) RBI
Answer:
(d) RBI
Question 28.
Banks not only accept deposits but also …………….. savings.
(a) distribute
(b) mobilise
(c) convert
(d) None of these
Answer:
(b) mobilise
Question 29.
Central Bank of a country does not deal with
(a) State Government
(b) General public
(c) Central Government
(d) Commercial Bank
Answer:
(b) General public
II. Fill in the Blanks
1. ________________ refers to that portion of total deposits of a commercial banks has to keep with RBI in the form of cash reserves.
Answer:
CRR
2…………….refers to that portion of total deposits of a commercial banks has to keep with
themselves in the form of liquid assets.
Answer:
SLR
3. ……………is the custodian of national reserves of international currency.
Answer:
RBI
4. Exchanging goods for goods is called as……………
Answer:
Barter system.
5. ……………is anything that is commonly accepted as a medium of exchange for goods and services
and also acts as a measure of value.
Answer:
Money
6. The two primary function of money are ……………and……………
Answer:
A medium of exchange and Measure of Value
7. ……………refers to people like to hold the money in the form of cash for various purposes.
Answer:
Demand for money
8. ……………refers to the money which is in circulation or held by the people in the form of currency
notes and coins at a particular point of time.
Answer:
Supply of money
9. ……………refers to the money held in the form of savings and net time deposits besides the currency and demand deposits.
Answer:
Broad money
10. ……………is the rate of interest at which the RBI lends loan to the banking system.
Answer:
Bank rate
11…………….is the rate at which the commercial banks have to keep certain reserves with RBI in the
form of reserve or balance.
Answer:
Cash Reserve Ratio
12. The ……………is the ratio of money held by the public in currency to that they
hold in bank deposits.
Answer:
Currency deposit ratio (CDR)
13. ……………is the proportion of the total deposits commercial banks keeps as reserves.
Answer:
Reserve deposit rati.o (RD R)
14. ……………is the rate at which the commercial bank has to maintain certain percentage of reserve
with themselves in the form of liquid assets.
Answer:
Statutory Liquidity Ratio
15. ……………refers to the place where the buying and selling of government securities takes place in
the open market.
Answer:
Open Market Operation
16. ……………refers to currency notes and coins issued by RBI and government as a legal medium of
exchange which cannot be refused by any citizen of the country for settlement of any kind of transactions.
Answer:
Legal tender.
III. Match the following
A | B |
1. Barter System | a. Narrow Money |
2. Ml supply of money | b. Varying Reserve Ratio |
3. M3 supply of money | c. Lender of last resort |
4. CDR | d. RBI |
5. Monetary Policy | e. Exchange of goods for goods |
6. CRR&SLR | f. Currency Deposit Ratio |
7. RBI | g. Broad money |
Answers:
- e. Exchange of goods for goods
- a. Narrow Money
- g. Broad money
- f. Currency Deposit Ratio
- d. RBI
- b. Varying Reserve Ratio
- c. Lender of last resort
IV. Answer the following questions in a sentence/word.
Question 1.
What are public goods?
Answer:
The goods which have two important features namely, non-rivalry and non-excludable in nature. For example, Public Parks, Roads, Street lights etc.
Question 2.
Who are ‘free-riders’?
Answer:
Non paying users of public goods are known as ‘free-riders’.
Question 3.
What do you meant by public provision?
Answer:
Public provision means that they are financed through the budget and can be used without any direct payment.
Question 4.
Give the meaning of progressive Tax.
Answer:
A progressive tax is a tax system in which the rate of tax increases as income increases.
Question 5.
What are Revenue receipts?
Answer:
Revenue receipts are receipts of the government which are non-redeemable, that is, they cannot be reclaimed from the government. Example, Tax and non-tax revenues.
Question 6.
Write the meaning of capital receipts.
Answer:
All those receipts of the government which create liability or reduce financial assets are termed as capital receipts. Example, borrowings (internal and external), borrowing from RBI, etc.
Question 7.
Give the meaning of Revenue expenditure.
Answer:
It is the expenditure incurred for purposes other than the creation of physical or financial assets of the government. Example, Interest payments, defence services, etc.
Question 8.
Answer:
It is the expenditure of the government which results in creation of physical or financial assets or reduction in financial liabilities. Example, buildings, machinery, etc.
Question 9.
Expand FRBMA.
Answer:
Fiscal Responsibility and Budget Management Act.
Question 10.
What is primary deficit?
Answer:
It refers to the excess of fiscal deficit over interest payments.
Primary Deficit = Fiscal Deficit – Net interest liabilities. (Net liabilities consist of interest payments minus interest receipts by the government on net domestic lending).
2nd PUC Economics Money and Banking Two Marks Questions and Answers
V. Answer the following Questions in 4 Sentences.
Question 1.
Write the difference between Public provision and Public production.
Answer:
Public provision means that they are financed through the budget and can be used without any direct payment.
When goods are produced directly by the government it is called public production.
Question 2.
Who are ‘Free riders’? Why are they called so?
Answer:
Some users do not pay for the public goods and it is difficult and sometimes impossible to collect fees for the public good. These non paying users are known as ‘free-riders’.
Question 3.
Distinguish between surplus budget and deficit budget.
Surplus Budget
If the anticipated revenue of the government exceeds its anticipated expenditure in a year, then it is known as surplus budget.
Usually governments of developed countries plan for a surplus budget.
Deficit Budget:
If the anticipated expenditure of the government exceeds its anticipated revenue in a year, then it is known as deficit budget.
Usually governments of developing countries plan for a deficit budget.
Question 4.
Why public goods must be provided by the Government?
Answer:
These goods must be provided by the government because of the following reasons:
i. The benefits of public goods can be easily enjoyed by anyone without affecting the consumption of other individuals.
ii. No individual can be excluded from using public goods as it is available to all.\
Question 5.
Mention the non-tax revenues of the Central Government.
Answer:
Non-tax revenues of the central government are Interest receipts on account of loans by the central government, dividends and profits on investment made by the government, fees and other receipts for services rendered by the government.
Question 6.
Why the proportional income tax acts as automatic stabiliser?
Answer:
The proportional tax acts as an automatic stabilizer because it makes disposable income, and thus consumer spending, less sensitive to fluctuations in GDP.
2nd PUC Economics Money and Banking Four Marks Questions and Answers
VI. Answer the following Questions in 12 Sentences.
Question 1.
Write the chart of the Government budget.
Answer:
Question 2.
Distinguish between Revenue expenditure and capital expenditure.
Answer:
Revenue Expenditure is expenditure incurred for purposes other than the creation of physical or financial assets of the central government. For example, interest payments on debt incurred by the government, and grants given to state governments and other parties.
It is classified into plan expenditure and non-plan expenditure.
Plan revenue expenditure relates to central plans and central assistance for state and union territory plans.
Non-plan expenditure, the more important component of revenue expenditure, covers a vast range of general, economic and social services of the government. The main items are interest payments, defence services, subsidies, salaries and pensions.
Capital Expenditure are the expenditures of the government which result in creation of physical or financial assets or reduction in financial liabilities. For example, Expenditure on land acquisition of land, building, machinery, equipment, investment in shares, etc.
It is classified into Plan expenditure and non-plan expenditure.
Plan capital expenditure relates to central plans and central assistance for state and union territory plans.
Non-plan capital expenditure covers various general, social and economic services provided by the government.
Question 3.
Briefly explain the revenue deficit and fiscal deficit.
Answer:
Revenue deficit: The revenue deficit refers to the excess of government’s revenue expenditure ‘ over revenue receipts.
Revenue deficit = Revenue expenditure – revenue receipts.
The revenue deficit includes only such transactions that affect the current income and expenditure of the government. When the government incurs a revenue deficit, it implies that the government is dissaving and is using up the savings of the other sectors of the economy to finance a part of its consumption expenditure.
This situation means that the government will have to borrow not only to finance its investment but also its consumption requirements. This will lead to a buildup of stock of debt and interest liabilities and force the government to cut expenditure. This would mean lower growth and adverse welfare implications.
Fiscal Deficit: It is the difference between the government’s total expenditure and its total receipts excluding borrowing.
Fiscal Deficit = Total Expenditure – (Revenue receipts + Non-debt creating capital receipts).
Non- debt creating capital receipts are those receipts which are not borrowings and, therefore, do not give rise to debt. Examples are recovery of loans and the proceeds from the sales of PSUs.
The fiscal deficit will have to be financed through borrowing. Thus, it indicates the total borrowing requirements of the government from all sources.
Fiscal Deficit = Net borrowing at home + Borrowing from RBI + Borrowing from abroad
The Gross Fiscal Deficit is a key variable in judging the financial health of the public sector and the stability of the economy.
Question 4.
Does public debt impose a burden? Explain.
Answer:
Public debt refers to the borrowings of the government to meet budget deficits. Yes it impose a burden.
It is used as an effective instrument of fiscal policy to control inflation and deflation.
Public debt and budget deficit are inter-related when the government goes on borrowing, debts accumulates and burden of interest increases. Then the government will have to impose higher taxes on the people. This will reduce disposable income, consumption, savings and national income. Therefore, debt will become a burden on the future generation.
Question 5.
Write a short note on the Ricardian equivalence.
Answer:
David Ricardo, who first argued that is the face of high deficits, people saves more. It is called as ‘equivalence’ because it argues that taxation and borrowing are equivalent means of financing expenditure.
When the government increases spending by borrowing today, which will be repaid by taxes in the future, it will have the same impact on the economy as an increase in government expenditure that is financed by a tax increase body.
It has often been argued that ‘debt does not matter because we owe it to ourselves’. This is because although there is a transfer of resources between generations, purchasing power remains within the nation. However, any debt that is owed to foreigners involves a burden since we have to send goods abroad corresponding to the interest payments.
2nd PUC Economics Money and Banking Six Marks Questions and Answers
VII. Answer the following Questions in 20 Sentences.
Question 1.
Explain the dassiflcation of receipts.
Answer:
The receipts are classified into two:
(a) Revenue Receipts: Revenue receipts are receipts of the government which are non- redeemable, that is, they cannot be reclaimed from the government. Example, Tax and non-tax revenues.
Tax revenues, an important component divided into two namely direct taxes (personal income tax, corporation tax) and indirect taxes (excise duties, customs duties, and GST). Other taxes like wealth tax, gift taxes have never brought in large amount of revenue and thus have been referred to as ‘paper taxes’.
Non- tax revenue of the central; government mainly consists of interest receipts on account of loans by the central government, dividends and profits on investment made by the government, fees and other receipts for services rendered by the government.
(b) Capital Receipts: the government also receives money by way of loans or from the sale of its assets. All those receipts of the government which create liability or reduce financial assets are termed as capital receipts. Example, borrowings (internal and external), borrowing from RBI, etc.
When government takes fresh loans it will mean that in future these loans will have to be returned and interest will have to be paid on these loans. Similarly, when government sells an asset, then it means that in future its earnings from that asset will disappear. Thus these receipts can be debt creating or non-debt creating.
Question 2.
Explain the classification of expenditure.
Answer:
Revenue Expenditure is expenditure incurred for purposes other than the creation of physical or financial assets of the central government. For example, interest payments on debt incurred by the government, and grants given to state governments and other parties.
It is classified into plan expenditure and non-plan expenditure.
Plan revenue expenditure relates to central plans and central assistance for state and union territory plans.
Non-plan expenditure, the more important component of revenue expenditure, covers a vast range of general, economic and social services of the government. The main items are interest payments, defence services, subsidies, salaries and pensions.
Capital Expenditure are the expenditures of the government which result in creation of physical or financial assets or reduction in financial liabilities. For example, Expenditure on land acquisition of land, building, machinery, equipment, investment in shares, etc.
It is classified into Plan expenditure and non-plan expenditure.
Plan capital expenditure relates to central plans and central assistance for state and union territory plans.
Non-plan capital expenditure covers various general, social and economic services provided by the government.
Question 3.
The fiscal deficit gives borrowing requirements of the government’. Elucidate.
Answer:
Fiscal Deficit: It is the difference between the government’s total expenditure and its total receipts excluding borrowing.
The fiscal deficit will have to be financed through borrowing. Thus, it indicates the total borrowing requirements of the government from all sources.
Fiscal Deficit = Net borrowing at home + Borrowing from RBI + Borrowing from abroad
Net borrowing at home includes that directly borrowed from the public through debt instruments [for example, the various small savings schemes] and indirectly from commercial banks through Statutory Liquidity Ratio (SLR).
The Gross Fiscal Deficit is a key variable in judging the financial health of the public sector and the stability of the economy.
From the way gross fiscal deficit is measured as given below, it can be seen that revenue deficit is a part of fiscal deficit [Fiscal Deficit = Revenue Deficit + Capital Expenditure – non-debt creating capital receipts).
A large share of revenue deficit is fiscal deficit indicated that a large part of borrowing is being used to meet its consumption expenditure needs rather than investment.
Question 4.
Discuss the issue of deficit reduction.
Answer:
Deficit Reduction :
(a) Government deficit can be reduced by an increase in taxes or reduction in expenditure.
(b) There has also been an attempt to raise receipts through the sale of shares in PSUs.
(c) Major thrust has been towards reduction in government expenditure. This could be achieved through making government activities more efficient through better planning of programmes and better administration.
(d) A recent study by the Planning Commission has estimated that to transfer ?1 to the poor, government spends ?3.65 in the form of subsidy, showing the cash transfers would lead to increase in welfare. The other way is to change the scope of the government by withdrawing from some of the areas where it operated before.
[e) Cutting back government programmes in vital areas like agriculture, education, health, poverty alleviation, etc. would adversely affect the economy.
(f) It must be noted that larger deficit do not always signify a more need of expanding fiscal policy. The same fiscal policies give rise to a large or small deficit, depending on the state of the economy.
Question 5.
Explain the changes in taxes with the help a diagram.
Answer:
We find that a cut is taxes increases disposable income (Y – TJ at each level of income. This shifts the aggregate expenditure schedule upwards by a fraction c of the decrease in taxes. This can be shown with the help of diagram.
In the above diagram on OX axis we measure Income and on OY axis we measure AD/AS. It is very clear that when the tax increases, the disposable income reduces from OY1 to OY which leads to decrease in the level of AD. The AD curve shifts downwards and with the decrease in AD, the level of income also decreases as shown in the diagram.
Question 6.
Write the story of Gold smith LaLa on the process of deposit and loan (credit) creation by commercial banks.
Answer:
The process of deposit and loan (credit) creation by banks is explained below. In order to understand this process, let us discuss a story.
Once there was a goldsmith named LaLa in a village. In this village people used gold and other precious metals in order to buy goods and services. For the gold deposit with LaLa, they were receiving a paper receipts by paying a small fee. Slowly the paper receipt began to circulate as money. And the paper receipt was accepted as a medium of exchange.
Now, let us suppose that LaLa had 100 kgs of gold deposits and he has issued receipts corresponding to 100 kgs of gold. At this timeRamu comes to LaLa and asks for a loan of 25 kgs of gold. Can LaLa give the loan? The 100 kgs of gold with him already has claimants. However, LaLa could decide that everyone with gold deposits will not come to withdraw their deposits at the same time and so he may as well give the loan to Ramu and charge him for it. If LaLa gives the loan of 25kgs of gold, Ramu could also pay Ali with these 25 kgs of gold and Ali could keep the 25 kgs of gold with LaLa in return for a paper receipt. In effect, the paper receipts, acting as money, would have risen to 125 kgs now. It means that LaLa has created money out of thin air
The modern banking system works precisely the way LaLa behaves in this example.
Question 7.
Explain the open market operation.
Answer:
Open Market Operation refers to buying and selling of bonds issued by the government in the open market.
This purchase and sale is entrusted to the central bank on behalf of the government.
When RBI buys a government bond in the open market, it pays for it by giving a cheque. This cheque increases the total amount of reserves in the economy and thus increases the money supply. Selling of a bond by RBI leads to reduction in quantity of reserves and hence the money supply.
There are two types of open market operations:
(a) Outright open market operations are permanent in nature: when the central bank buys these securities, it is without any promise to sell them later. Similarly, when the central bank sells these securities, it is without any promise to buy them later. As a result, the injection/ absorption of the money are of permanent in nature.
(b) The other type of operation in which when the central bank buys the security, this agreement of purchase also has specification about date and price of resale of this security. This type of agreement is called a repurchase agreement or repo. The interest rate at which the money is lent in this way is called Repo rate.
Similarly, instead of outright sale of securities the central bank may sell the securities through an agreement which has a specification about the date and price at which it will be repurchased. This type of agreement is called as reverse repurchase agreement or reverse repo. The rate at which the money is withdrawn in this manner is called Reverse Repo rate.
Question 8.
Requirement of reserves acts as a limit to money (credit) creation. Explain.
Answer:
Requirement of reserves acts as a limit to money (credit) creation. This is determined by the central Bank (RBI). The RBI decides a certain percentage of deposits which every bank must keep as reserves. This is done to ensure that no bank is ‘over lending’. This is a legal requirement and is binding on the banks. This is called the ‘Required Reserve Ratio’ of the ‘Reserve Ratio’ or ‘Cash Reserve Ratio’ (CRR).
CRR is the percentage of deposits which a bank has to maintain with the RBI and Certain portion of reserves it has to keep with itself in the form of liquid assets which is also called as Statutory Liquidity Ratio (SLR).
For example, if a Bank receives ₹100 as deposit and CRR is 20%, then with deposit of ₹100, the bank will need to keep ₹20 as cash reserve. Only the remaining amount of deposits ₹80 can be used to give loans.
These tools play an important role today for controlling the supply of money in the economy and to have a price stabilization and stability in the economy.