MP Board Class 12th Economics Unit 8 Money and Banking Important Questions

MP Board Class 12th Economics Important Questions Unit 8 Money and Banking with pdf file solutions from latest MP Board Book.

Micro Economics Money and Banking Important Questions

Micro Economics Money and Banking Objective Type Questions

Question 1. Choose the correct answers:

Question 1. “Money is what money does”. Who said this:
(a) Hartley Withers
(b) Harte
(c) Prof. Thomas
(d) Keynes.
(a) Hartley Withers

Question 2. Function of money is:
(a) Medium of exchange
(b) Measure of value
(c) Store of value
(d) All of the above.
(a) Medium of exchange

Question 3. Meaning of money supply is:
(a) Money deposits in the bank
(b) Cash available with public
(c) Savings in the post office
(d) All of the above.
(d) All of the above.

Question 4. What is the Central Bank of India:
(a) Commercial Banks
(b) Central Bank
(c) Private Bank
(d) None of these.
(a) Commercial Banks

Question 5. Through which method we can withdraw money from the bank:
(a) Drawing letter
(b) Cheque
(c) A.T.M.
(d) All of the above.
(d) All of the above.

Question 6. Who is the guardian of Indian Banking System:
(a) Reserve Bank of India
(b) State Bank of India
(c) Unit Trust of India
(d) Life Insurance Company of India.
(a) Reserve Bank of India

Question 7. Narasimham Committee is related to what:
(a) Improvement in Taxation
(b) Improvement in Banking
(c) Improvement in Agriculture
(d) Improvement in Infrastructure.
(b) Improvement in Banking

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Question 2. Fill in the blanks:

  1. Central Bank of India is………………..
  2. Bank rate is also known as………………..
  3. The bank generates……………….. deposits in credit creation.
  4. When CRR decreases, credit creation………………..
  5. Measure of deferred payment is ……………….. function of money.
  6. Medium of exchange is ……………….. function of money.
  7. The static and dynamic function of money is divided by………………..


  1. Reserve Bank of India
  2. Redemption
  3. Derivative
  4. Increases
  5. Secondary
  6. Primary
  7. Paul Einzig.

Question 3. State true or false:

  1. Money is needed for day-to-day transactions.
  2. The precautionary demand for money increases with the proportionate increase in income.
  3. Reserve Bank of India provides loan to public.
  4. Along with the Reserve Bank of India, Commercial banks are also authorized to issue currency.
  5. Reliable money also include cheques.
  6. Reserve Bank of India cannot become the owner of any real estate.


  1. True
  2. True
  3. False
  4. False
  5. False
  6. True.

Question 4. Match the following:

  1. Primary function of money (a) Paper money
  2. Indian rupee is (b) Bad master
  3. An institution which deals with money (c) Measure of value
  4. Money is a good servent but (e) 1st April, 1935

1 – c
2 – a
3 – d
4 – e
5 – b

Question 5. Answer the following in one word / sentence:

  1. Name the bank that provides long term loans to the farmers.
  2. Trade cycle is which evil of money?
  3. By increasing liquid fund ratio, which will be the effect on money supply?
  4. “The Banks are not only generators of money but are also creators of money”.
  5. Who has the right to issues paper money?
  6. When was NABARD established?


  1. Agricultural or Cooperative banks
  2. Economic
  3. Decreases
  4. Sayer’s
  5. Central Bank
  6. 1982.

Micro Economics Money and Banking Very Short Answer Type Questions

Question 1. Write two taboo works of Reserve Bank of India.
Two taboo works of RBI are:

  1. Reserve Bank cannot accept deposits on interest from the public.
  2. Reserve Bank cannot provide loans for a fixed term.

Question 2. What do you mean by overdraft facility?
Clients who have current account with the bank are granted” the facility of withdrawing more money than actually lying in their accounts. It is called overdraft. This facility is available to reliable person for a short term.

Question 3. What is commercial bank?
Commercial banks are those banks who are established under the Indian Company Act, and they perform all the functions of banks.

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Question 4. Write the meaning of money.
According to Prof. J.M. Keynes, Money is that by the delivery of which debt contracts and price contracts are discharged and in the shape of which a store of general purchasing power is held.

Question 5. Write any two economic defects of Money.
Two economic defects of money are:

  1. Money gives birth to trade cycle.
  2. Currency is the trust worthy custodian of money.

Question 6. When was Reserve Bank of India nationalised?
Reserve Bank of India was nationalised on 1st January 1949.

Question 7. Which is the Central Bank of India? When was it established?
Central Bank of India is Reserve Bank of India. It was established on 1st April, 1935.

Question 8. What do you mean by Bank?
Nowadays, the word ‘Bank’ is very common and popular so, general public is acquainted with it. Generally, bank means that institution which deals with transactions of money.

According to Prof. Wicksell:
“Bank is the heart and central point of modem currency system”.

Question 9. Write definitions of money.
According to Prof. Hartley Withers, “Money is what money does”. According to Prof. Seligman, “Money is one thing that possesses general acceptability”.

Question 10. What is the problem of double coincidence of wants in barter exchange?
1. Problem of double coincidence:
In barter system, goods are to be exchanged for goods, hence, it is essential that both the parties should need the goods which other has in exchange of their goods, then only the exchange is possible.

2. For example, ‘A’ possesses a chair and ‘B’ possesses a table. Now if ‘A’ wants to exchange his change for a table then he has to search a person, who needs chair in exchange of table. Thus, becomes a complex process for him to find such man.

Question 11. ‘Money is the medium of exchange,’ Explain.
Medium of exchange:
This is the most important function of money. It acts as a medium of exchange. All the exchanges of goods and services are taken place in terms of money. ( By paying predetermined price, money can be exchanged with the desired goods and services. A money has the general acceptability, therefore, all the exchanges in an economy take place in terms of money. It is because of this reason that money has been defined as generally acceptable purchasing power.

Question 12. “Measure of value is the main function of money”. Explain.
“Measure of value is the main function of money”:
The main function of money is that it measures the value of goods and services. In other words, the prices of all goods and services are expressed in terms of money. In ancient times it was not possible to measure the value of clothes and wheat. With the introduction of money, this difficulty of measurement disappeared and it became very convinient to measure the value of money. Money acts as a unit of account for all goods, wages salaries, interests etc. The national income, capital formation and other are measured in terms of money.

Question 13. Write the importance of the money as the store of exchange value.
Money acts also as a store of value because:

  1. Money can be stored very easily. Money is a liquid form of capital. It require less place to store.
  2. Money has the merit of general acceptibility.
  3. It is convinient to store money.
  4. Value of money remains relatively stable. Due to all these reasons money is important.

Question 14. What is meant by money supply? What are its measures?
Money supply refers to the total volume of money held by the public at a particular point of time in an economy.
Measures of money supply are:
M1 = Currency and coins with public + Demand deposits of Commercial banks + Other Deposites with RBI.
M2 = M+ Savings deposits with post office Saving bank.
M3 = M+ Net time deposits with banks.
M4 = M3 + Total deposits with post office saving bank.

Question 15. Write the types of Commercial bank.
There are two types of Commercial banks:

1. Scheduled banks:
Scheduled banks are those banks whose names appear in the second schedule of RBI.

2. Non – scheduled banks:
Non – Scheduled banks are those, banks whose names do not appear in the second schedule of RBI. In other words, those banks which do not fulfill the requisite conditions as explained above are called non-scheduled banks.

Question 16. What do you mean by money supply?
Supply of money is a stock concept. It refers to total stock of money (of all types) held by the people of a country at a point of time.

Question 17. What do you mean by Fiat money or Legal tender money?
Fiat money which serves as money on the basis of fiat (order) of the government It is issued by authority of the government. It includes notes, coins.

Question 18. What do you mean by C.R.R.?
Commercial banks are required under law to keep a certain percentage of their total deposit in the Central bank in the form of cash reserves. This is called Cash Reserve Ratio (C.R.R.).

Question 19. What do you mean by credit money?
It refers to that money of which money value is more than commodity value.

Question 20. Why is paper money called the Legal tender money?
Paper money or Paper notes are called as legal tender money because nobody can refuse its acceptance as medium of exchange. It is legal tender. It means people have to accept it legally for different payments.

Question 21. What do you mean by high powered money?
It consist of currency (Notes and Coins in circulation with public and valt cash of commercial banks) and deposits held by the government of India and commercial banks with R.B.I.

Micro Economics Money and Banking Short Answer Type Questions

Question 1. “Money is a good servant but a bad master”. Explain.
Money is becoming essential part of life, it is controlling our activities in such a way that we are completely under it. It should be means but is has become end of life. Till money acts as servant it is useful for human being but as money goes out of control it becomes harmful for the entire economy. This situation arises when supply of money exceeds its demand. Money becomes master instead of servant. It has become the only means of satisfying our wants. We cannot think of our life without money that is why, it is said that “money is good servant but a bad master.”

Question 2. Define Central bank.
Central bank of any country is the highest financial institution of that country. All other banks of the country work under its guidance. According to bank of international settlements. “The central bank in any country is that which has been entrusted the duty of regulating the volume of currency and credit in the country”.

Question 3. What do you mean by clearing house of Central bank?
How Central bank does the work of clearing house?
Clearing house:
Representatives of different banks in a city meet at the clearing house of the Central bank. Payments from one bank to other bank are settled through a simple book of adjustments without involving transfers of funds. Daily differences in the clearing between the banks are adjusted by means of debit and credit entries in their respective account with the Central bank.

Question 4. Differentiate between Reserve Bank and Commercial Bank.
Answer: Differences between Reserve Bank and Commercial Bank:

Reserve Bank:

  • It is the highest bank of India. It is a controlling bank.
  • There is only one central bank (Reserve bank) in India.
  • It enjoys the monopoly right for note issue.
  • It has no dealing and direct relation with public.
  • The ownership of this bank is in the hands of central government.

Commercial Bank:

  • It is a part of banking system. It is con trolled by Reserve Bank of India.
  • There are many commercial banks in India.
  • A commercial bank does not have such right.
  • It has direct relation and dealing with public.
  • The ownership of this bank is in the hands of government or public.
Micro Economics Money and Banking Long Answer Type Questions

Question 1 What do you mean by stock of money and flow of money?
Write the differences between the stock of money and flow of money.
Differences between Stock of money and Flow of money:


  • Stock is related to a point of time.
  • A stock is a quantity measurable at a particular point of time such as 10:00 am etc.
  • It has no time dimension.
  • National capital is stock.
  • It is a static concept.


  • Flow is related to a period of time.
  • A flow is a quantity which is measured over a specific period of time such as an hour, a day, a week etc.
  • It has time dimension.
  • National income is a flow.
  • It is a dynamic concept.

Question 2. Explain five functions of RBI in detail.
Answer: Followings are the functions of Reserve Bank of India:

1. Issue of currency notes:
The Reserve Bank of India has been given the monopoly of issuing currency notes. At present, it is authorised to issue currency notes in the denomination of Rs. 5,10,20,50,100,500 and 2,000. One rupee note and coins are issued by government of India. The notes issued by R.B.I. are legal currency.

2. Credit control:
The main functions of R.B.I. is to control and regulate volume of credit and currency in India. It controls the credit granted by commercial banks. It controls the credit inflationary impact of the ever increasing development financing in five year plans. R.B.I. controls the credit by increasing or decreasing bank rates buying and selling government securities in the open market, by increasing the cash reserves, by issuing specific directions to banks etc.

3. Banker agent and advisor to government:
The reserve bank of India acts as banker, agent and advisor to the central and state governments. As a banker to government R.B.I. performs many functions. It manages the public debt, makes all payments, receives all the revenues in government account managing foreign exchange, etc. R.B.I. has appointed experts of all fields of specialization who gives proper advice to central and state governments in various matters from time-to-time.

4. Banker’s bank:
R.B.I. is banker to banks in India. It accepts deposits of commercial banks and lends of them from time – to – time. It extends short term loans and advances against eligible securities and promissory notes. It makes purchases and sales of foreign currencies also. The commercial and other banks have to deposit with R.B.I. a certain percentage of their total liabilities to enjoy various facilities from it.

5. Foreign exchange management:
R.B.I. controls all receipts and payments in foreign exchange under F.E.M. A. All payments to be made in foreign exchange exceeding the limit prescribed under the act must seek RBI’s permission.

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