NIOS Economics (318) Notes/Answer| Chapter-22|Money supply and its regulation

NIOS Economics (318) Notes/Answer| Chapter-22|Money supply and its regulation. Important questions for NIOS Economics (318) Questions Answers brings you latest queries and solutions with accordance to the most recent pointers SOS . Students will clear all their doubts with regard to every chapter by active these necessary chapter queries and elaborate explanations that area unit provided by our specialists so as to assist you higher. These queries can facilitate students prepare well for the exams thanks to time constraint . NIOS Economics (318) Notes/Answer| Chapter-22|Money supply and its regulation

HS 2nd years Solutions (English Medium)

NIOS Economics (318) Notes/Answer| Chapter-22|Money supply and its regulation

Intext Questions

1. Fill in the blanks with appropriate words out of those given in the brackets: 

(a) Money is ________ (wanted, not wanted) for its own sake.

Ans. not wanted

(b) Cash can be withdrawn by writing a cheque from ________ (time, demand) deposits. 

Ans. demand

(c) Payment by notes and coins is________ (the only, not the only) mode of money payment.

Ans. not the only 

(d) Demand deposits ________ (are, are not) legal tender money.

Ans. are not

2. Choose the correct alternative:

(a) Currency notes are issued by: 

  1. the Commercial banks
  2. the Central bank 
  3. the Government
  4. All of the above 

Ans. (2) the Central bank

(b) Coins are issued by 

  1. the Commercial banks
  2. the Central bank
  3. the Government 
  4. All of the above

Ans. (3) the Government

(c) The nation’s stock of money includes: 

  1. Notes and coins with public and banks
  2. Demand deposits with commercial banks
  3. Deposits of commercial banks with central bank
  4. All of the above 

Ans. (4) All of the above

(d) The nation’s money supply includes:

  1. Notes and coins with public only
  2. Demand deposits with commercial banks
  3. Both (1) and (2)
  4. Neither (1) and (2)

Ans. (3) Both (1) and (2)

(e) The minimum percentage of deposits which commercial banks are required to keep in the form of reserve are:

  1. Legal reserve ratio 
  2. Cash reserve ratio
  3. Statutory liquidity ratio
  4. Lending ratio

Ans. (1) Legal reserve ratio

Terminal Exercise

1. What is the need of money?

Ans. We need money to buy goods and services either for consumption or for use in production.

The fact of life is that money is not wanted for its own sake. It is wanted because it gives us the power to obtain goods and services. The more money a person has, the greater is his power to obtain goods and services.

2. Distinguish between demand deposits and time deposits of commercial banks. Which of the two is money and why?

Ans. The deposits in banks with instant withdrawal facility are called demand deposits because money from these deposits can be withdrawn on demand. On the other hand, the deposits without instant withdrawal facility are called time deposits because money from these accounts can be withdrawn only after the manually agreed upon time period expires.

Only money deposited in demand deposits is ready money. 

3. Describe the way in which we can make monetary payments.

Ans. We make money payment in two ways:

  1.  By currency notes and coins 
  2. By issuing cheques on banks

4. State who issue currency notes and coins in the country. 

Ans. The Central Bank issues currency notes and coins in the Country. 

Every central bank of an economy is the sole authority to issue currency. The currency issued by the central bank is backed by minimum receipt of assets like gold coins, gold bullions and foreign exchange etc. kept with the central bank. 

5. Explain briefly the conflict between lending activity of commercial banks and depositors’ interest. 

Ans. Every commercial bank accepts deposits from different sections of society including the general public, business entities and other institutions. In India people make deposits in savings accounts. Firm and institution deposit in current account. The bank gives some token interest on deposits in saving account. No interest is paid on deposits in the current account. The bank provides instant cash withdrawal facility to both types of account holders. In addition to this bank provides the facility of collection and transfer of funds of account holders from one bank to another. The bank issues a statement of account periodically on demand to the depositors. In command usage these are called pass books. For providing these services a bank normally does not charge any fee. So the bank pays some token interest and alongwith provides many services free of charge. The bank has to incur expenditure on all this. In addition, banks promise instant withdrawal facilities.

Now, to meet its expenditure on interest and free services to depositors, bank must earn income. Banks can do so only by lending depositors, funds and earn ‘interest’ income. This leads us to a dilemma. The bank promises instant withdrawal facility to its depositors. It means that the bank must be ready to pay the money to the depositors on demand. The dilemma is that if a bank lends the funds of depositors how will it meet its promise of instant payment on demand. On the other hand, if the bank doesn’t lend any money and keeps all the deposit money as cash-in-hand, the bank will not be able to earn any income. Then from where will the bank meet its expenditure on interest payment and free services to depositors. How can a bank lend depositors money and at the same time be ready to pay back to the depositors their money on demand?

The dilemma is resolved by a practical assumption about the banking habits of the depositors. The assumption is that not all depositors will turn up at the same time to withdraw money. Only a few depositors will turn up at any one point of time. Furthermore, those who turn up to withdraw will not withdraw the whole of their deposits. They will withdraw only a part of their deposit. Deposits by the account holders continuously flow in. So there is a continuous inflow into and outflow of cash from the bank. All these assumptions, which so far have been found to be very practical, reduce requirements of the people. A bank learns from experience how much ready money it should keep to meet the withdrawal demand of depositors.

NIOS Class 12th Economics (318) Notes/Question Answer

Chapter Chapters NameLink
Chapter 1Economy and Its ProcessClick Here
Chapter 2Basic Problems of an EconomyClick Here
Chapter 3Economic Development and Indian EconomyClick Here
Chapter 4Statistics: Meaning and ScopeClick Here
Chapter 5Making Statistical Data MeaningfulClick Here
Chapter 6Presentation of Statistical DataClick Here
Chapter 7Statistical MethodsClick Here
Chapter 8Index Numbers (Meanings and Its Construction)Click Here
Chapter 9Index Numbers (Problem and Uses)Click Here
Chapter 10Income FlowsClick Here
Chapter 11National Income: ConceptsClick Here
Chapter 12National Income: MeasurementClick Here
Chapter 13Uses of National Income EstimatesClick Here
Chapter 14What micro EconomicsClick Here
Chapter 15What affects demandClick Here
Chapter 16What affects supplyClick Here
Chapter 17Price determinationClick Here
Chapter 18CostClick Here
Chapter 19RevenueClick Here
Chapter 20Profit maximizationClick Here
Chapter 21Government budgetingClick Here
Chapter 22Money supply and its regulationClick Here
Chapter 23Need for planning in IndiaClick Here
Chapter 24Achievements of planning in IndiaClick Here
Chapter 25Recent economic reforms and the role of planningClick Here

Optical Module – I

Chapter 26AgricultureClick Here
Chapter 27IndustryClick Here
Chapter 28Independence of Agriculture and IndustryClick Here
Chapter 29Transport and CommunicationClick Here
Chapter 30EnergyClick Here
Chapter 31Financial InstitutionsClick Here
Chapter 32Social Infrastructure (Housing, Health and Education)Click Here

Optical Module – II

Chapter 33Direction and composition of India’s Foreign tradeClick Here
Chapter 34Foreign exchange rateClick Here
Chapter 35Balance of trade and balance of paymentsClick Here
Chapter 36Inflow of capital (Foreign Capital and Foreign Aid)Click Here
Chapter 37New trade policy and its implicationsClick Here
Chapter 38Population and economic developmentClick Here
Chapter 39Population of IndiaClick Here

6. Explain how the ‘legal reserve requirement’ keeps a check on lending by commercial banks. 

Ans. Legal reserve is the minimum per cent of depositors’ money which banks are legally required to keep. The remaining they can lend. The lending power or the deposit creating or money creating power of the commercial banks depends on legal reserve requirements. Higher the legal reserve ratio lowers the lending, or the money creating, power of the commercial banks. The legal reserve ratio is determined by our central bank (RBI). If RBI raises this ratio, the lending capacity of banks decreases. If it reduces the ratio, the capacity increases. In this way, the legal reserve ratio becomes a tool in the hands of the central bank to regulate the stock of money in the country.

7. State the component of a nation’s stock of money. 

Ans. The total stock of money in an economic system has for components:

  1.  Notes and coin with public (other than banks)
  2. Notes and coin with commercial banks 
  3. Deposits of the commercial banks with the central bank
  4. Demand deposits with commercial banks. 

8. State the component of the nation’s supply of money.

Ans. Nation’s supply of money includes two components:

  1.  Notes and coin with public (other than banks) 
  2. Demand deposits with commercial banks. 

9. Explain the need for keeping a check on the supply of money. 

Ans. Money supply includes notes and coins outside banks and demand deposits with banks. Money represents command over goods and services. More, the money more the command. By holding money, and not spending it, one denies himself the satisfaction he could derive by spending it on goods and services.

Now what one does when his money holding becomes more than what he would like to keep. He will consider spending the excess on goods and services. It is because by holding more money than he needs for daily transactions, he is denying himself the satisfaction which he can derive by spending money. He spends it either on consumption or invests the same. So if money supply in the country is increased and people have excess balance they will have to spend on consumption and investment. This raises demand for goods and services and pushes the general price level in the economy.

If money holding becomes less than average because money supply is decreased people refrain from spending the money they receive to raise their money back to the average level. This reduces demand for goods and services and in turn leads to fall in prices. So reducing money supply leads to fall in prices.

Large fluctuations in prices, continuous rise or continuous fall, are not good for an economy. Changes in money supply affect prices. So by keeping a watch on money supply with the people we can check large scale fluctuations in prices.

10. How does ‘Open Market Operation’ keep a check on money supply?

Ans. Lending capacity or the deposit creating capacity of the banks can also be checked through the depositors’ route. The depositors themselves may not show interest in depositing less in banks. But the central bank creates conditions which may induce depositors to reduce their deposits in banks. The central bank sells securities (loan instruments) to the public. To buy these securities, the public withdraws money from their deposits either in cash or by issuing a cheque in favour of the central bank. In this way total deposits are reduced and the currency flows into the central bank and goes out of circulation. Reduction in deposits curtails the lending power of banks. Reduction in deposits by one rupee curtails lending and deposit creation by banks several rupees. Similarly if the central bank desires to increase money supply it buys securities from the public and makes them payment by writing cheques in favour of the buyers. The public deposits this amount in banks. Deposits in banks increase and so there is multiple increases in lending and deposit creating power of commercial banks. This technique of controlling money supply by the central bank is, in technical language, called open market operations. 

11. What is the bank rate? How is it used to keep a check on money supply?

Ans. Bank rate is the rate at which the central bank discounts the securities of the commercial banks. It is also the rate at which commercial banks borrow money from the central bank. To check excess demand, the central bank increases the bank rate in order to control the borrowing capacity of the commercial banks so that they do not indulge in distribution of loans to the customers. As a result credit or money supply is checked. On the other hand, the central bank can decrease the bank rate to cure deflation.

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